The Economy
On a Temporary Downturn?

While President Gloria Macapagal-Arroyo may claim the economic problems did not begin with her administration, she cannot escape the fact that she is presiding over an economy that is not on a mere temporary downturn, as government claims, but in an ever worsening state.

By Benjie Oliveros
Bulatlat

Socioeconomic Planning Secretary Augusto Santos announced Dec. 12 that the economy is on a temporary downturn.  Santos said in a statement that the economy is probably not at the take-off stage “but neither is it, by any stretch of imagination, on the road to a meltdown,” which implies a sustained decline.

He blamed the poor performance in agriculture, record high oil prices, lower government spending, decline in private sector construction activity, and the political turmoil for the slowdown during the third quarter.

But the slack was taken up by record-high remittances from overseas Filipinos pushing the gross national product to a 6.5 percent growth. Remittances have reached $8.8 billion by October. The government expects it to reach $10.3 billion by the end of the year. 

GDP growth is at 4.7 percent for the six months till June and 4.6 percent for the first nine months of 2005. Below is Table 1 indicating the growth rates for 2005. 

The government later reported that merchandise exports had slipped 3.2 percent in October due to weak global demand for electronics, which account for nearly 70 percent of overseas shipments.

Consistent with the report are the press releases of the National Statistical Coordination Board (NSCB) that cited higher oil and consumer prices, sluggish exports and reduced imports, and the decline in output from the farm and mining sectors as the factors that dampened economic growth from the first to the third quarter of the year.

Comparative Growth Rates

The growth rates for 2005 are consistent with that of previous years. (Please refer to the following table.

Except for 2004, GDP growth rates ranged from 3 to 4.7 percent.  GNP growth is at a much higher percentage mainly powered by Net Factor Income from Abroad, comprised mainly by the income of overseas Filipino workers (OFW). But the GNP growth rate for 2005 is still within the average range.

The exceptional growth in 2004, by Philippine standards, may be explained by the increase in economic activity caused by increased spending during elections.  It is public knowledge that money flows during elections.  If the numerous accusations regarding the use of government funds for the 2004 election campaign, such as the suspicious release of fertilizer funds, the production and mass distribution of PhilHealth cards, among others, were proven true then indeed a substantial amount of money flowed in 2004. 

The trend of slow economic growth therefore, is not caused mainly by external factors such as international oil prices or by the political turmoil as the Arroyo administration is wont to declare. The problem is the weak fundamentals of the economy.

And the Arroyo administration is as guilty as previous administrations for not altering the direction and priorities of the economy. Worse, it is now one of the leading implementers of the policies of liberalization, deregulation and privatization.  The Philippines in fact has one of the lowest tariff structures in Asia.

Wrong direction and priorities

Instead of working for national industrialization to enable the country to provide for the needs of the domestic market, the economy is geared towards the export of raw materials, minerals, and low value added semi-manufactures such as semiconductors and computer chips.  It is dependent on imports for steel, basic chemicals, petroleum, fuel, machines, consumer durables, processed raw materials and intermediate goods.

Both the traditional and non-traditional exports of the country are vulnerable to the monopoly pricing and operations, and manipulations of capitalist countries and their multinational corporations. Worse, these are in oversupply. Garments and electronics from the Philippines compete with those from China as well as those from Vietnam, Thailand, Korea, Central and South America, and other export-oriented, import dependent economies. 

The result is that payments for imports always exceed income from exports leading to chronic trade deficits. The Philippines incurred a deficit in its trade with the U.S., its main ally and trading partner, in the amount of $2.071 billion from January-October 2005.  In 2004, the country’s trade deficit with the U.S. amounted to $2.071 billion. Statistics of trade with the U.S. from 2000 reveal a consistent trend reaching as high as $5.135.5 billion. The overall trade deficit of the Philippines in September 2005 amounted to $516 million. 

The big players in the export sector, especially electronics, which comprise the bulk of Philippine exports, are not even Filipino-owned but are multinational corporations and their subsidiaries. These multinational corporations are given tax holidays; allowed to repatriate their profits and capital anytime; and able to siphon out their profits through the local subsidiaries’ “payment” to their mother companies.   

These multinational corporations contribute to the economy in terms of GDP growth without really adding to the accumulation of domestic wealth and capital. The only benefit the country derives from direct foreign investments is employment.

Foreign direct investments constitute merely 30 percent of foreign investments. The bulk comes from portfolio investments. In the eight months of 2005, foreign direct investments were valued at $929 million. Portfolio investments for the past 11 months amounted to $2 billion. Portfolio investments have no real contribution to the economy except the temporary infusion of dollars. But as soon as profit-taking opportunities are better abroad, it can be pulled out anytime. The massive outflow of portfolio investments is the immediate cause of the Asian financial crisis of 1997.

With no real earnings in trade and in local industry, the economy is heavily dependent on remittances from overseas Filipino workers (OFWs) to increase the country’s income from abroad and its much-needed dollar reserves, push consumer spending and stimulate growth. The export of labor, originally intended to be a temporary measure to stave the increasing unemployment in the ‘70s, has now become an important vehicle for the economy. The government anticipates an inflow of $10.3 billion in remittances this year. Thus, the Philippine government delegation raised hell when a proposal to limit the movement of migrant labor was raised during the recent WTO Ministerial meeting in Hong Kong.

The services sector accounts for 47 percent of the economy’s output in 2004 and around 48 percent of the GDP during the first three quarters of 2005.  Within the services sector, the drivers of growth are telecommunications, business process outsourcing, and tourism. Business process outsourcing and other IT investments in the service sector include call centers, medical transcriptions, digital animation, and software development. 

Business process outsourcing companies such as call centers and medical transcription companies have become major contributors to the economy’s output as well as an employment opportunity for graduates of top level exclusive schools. The Philippines has thus become a major source of cheap labor for factories and companies locally and internationally. 

Tourism is another non-productive activity in the economy. Worse, according to a study commissioned by the United Nations Children’s Fund entitled “Child Pornography in the Philippines” released in August 2005, prostitution has become a multi-million dollar industry and the fourth largest source for the country’s GNP.  

Worsening poverty

The backward and agricultural state of the economy as well as its unequal foreign and trade relations with industrialized countries, especially the U.S., is pushing the Filipino deeper into poverty.

The NSCB put the poverty incidence at 24.3 percent. But this is based on a very low P33.60 ($.60) per day poverty level, which everybody knows is not even enough to provide a person with three meals a day.  Around 90 percent of the population lives on around $3 dollars a day.  The poverty threshold for a family of six is at P479.06 ($9.05). And yet the minimum wage is pegged at P250 ($4.71) per day and the government refuses the demand for a P125 across-the-board increase to provide immediate relief to workers and employees.  

Inflation is at 7.1 percent. The purchasing power of the peso has dropped to P.56 ($.01) based on 1994 prices. 

Since the privatization and deregulation of public utilities in the 1990s, the price of oil products has increased on average by 160 percent; electricity, 175 percent; and water services, 450 percent.

Unemployment and underemployment is at 7.4 percent and 21.2 percent representing 2.6 million and 7 million workers respectively. This is expected to worsen as the liberalized and deregulated regime and the impending retrenchment of government employees continue to be implemented.

Surveys reveal that more Filipinos think their situation will not change and even worsen next year. No wonder why personal consumption is muted even as Christmas is approaching. The Christmas season is the traditional peak season for the manufacturing and retail sectors.    

Economic gains?

Even as the Philippine Chamber of Commerce and Industry (PCCI) gave the Arroyo administration a passing mark in economic management, the it cannot claim any substantial contribution to improving the economy. 

The strengthening of the peso is mainly due to record increases in dollar remittances.  It is not a result of improvements in the economy in general, and trade in particular.

The same is true with the Balance of Payments (BOP) surplus of $2.16 billion for the 11-month period of 2005. This was caused by foreign exchange build up this year.  The government attributes this to strong remittances from OFWs, foreign investment inflows, improved balance of trade, higher government external borrowings, and improved investment income. With the balance of trade at a deficit and considering the mobility of portfolio investments, the surplus can be mainly attributed to additional loans and remittances.

The country’s heavy reliance on OFW remittances, loans, foreign investments especially portfolio investments, tourism, and the promotion of business process outsourcing for investments and employment reveal the sorry state of the economy. 

It cannot claim any gain but in increasing the national government debt to P4.02 trillion of which P 1.87 trillion or 47 percent are owed to foreign creditors while P2.15 trillion or 53 percent from domestic lenders.    

Meanwhile, the Arroyo government reduced tariffs on imports at an average of 20 percent every year, including the agricultural tariff that went down from an average of 17.94 percent in 1996 to 6.81 percent in 2002. This deprives the government of annual revenues of P100 billion and allows the influx of imported goods and produce. The latter has caused the bankruptcy of local capitalists and producers and worsened the trade deficit. 

In addition, the government provided fiscal and tax incentives and exemptions to foreign investors and lost annual revenues of around P170.8 billion. 

To compensate for the revenue loss, it raised the tax burden of the people by implementing the expanded value-added tax (EVAT).  The government declares the enactment of the EVAT as its centerpiece fiscal reform program. But the EVAT will amount to nothing but improve the credit rating of the debt-ridden government to enable it to contract more loans.  

While President Gloria Macapagal-Arroyo may claim that the problems of the economy did not begin with her administration, she cannot escape the fact that she is presiding over the economy that is not merely on a temporary downturn but in a worsening state. The low growth rates do not even reflect the extent of the problems of the economy.  Bulatlat

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