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Aquinomics: Is good governance leading to higher economic growth?

By: Fernando T. Aldaba, PhD

‘Kung walang corrupt, walang mahirap” was the battle cry of President Aquino’s campaign in 2010. But what is its logic? That good governance will eventually lead to economic growth and poverty eradication? After four years in power, can P-Noy attest that this is true and boast of his economic accomplishments?

Sustained Philippine economic growth actually started during the controversial nine-and-a-half-year administration of Gloria Macapagal-Arroyo (GMA), with real gross domestic product (GDP) growth already averaging a modest 4.3 percent, despite global economic difficulties and various political noises. Gov. Joey Salceda of Albay province, one of GMA’s trusted economic advisers, even contended that a “firewall” protected the economy then from negative political developments, and sheepishly said Mrs. Arroyo was one “lucky b_h” in one of the Eagle Watch’s economic briefings! 

It seems that the Aquino administration has stepped on the gas, so to speak, with real GDP growth rates now averaging 6.12 percent for the past three-and-a-half years, and only slowing down in the first quarter of 2014 because of the effects of Supertyphoon Yolanda (international code name Haiyan). However, the growth rate is expected to accelerate again in the remaining quarters, buttressed by massive spending for rehabilitation and the improving global economy. The economy has shifted its gears toward a higher level of economic expansion, but whether or not this will be sustained in the next three to five years remains a question. It is hoped that, this time, improvements in political and economic governance will fuel the momentum for a higher growth trajectory.

Obviously, the various credit-rating upgrades received by the country were the tangible indicators of these accomplishments in governance, especially in fiscal and monetary management. Revenue share to GDP was 13.3 percent in 2013, up from 12.1 percent in 2010, but still below the 15.3 percent posted during the Ramos administration. In Transparency International’s Corruption Perception Index, the Philippines moved up from the lowest 25 percent to the middle 50 percent in the hierarchy of the countries surveyed in 2013. This can go up further this year as resolutions to the current pork-barrel scams become clearer.

High level of growth

IN terms of the real economy, what has contributed to the shift to a higher level of growth?  While in GMA’s economy the drivers were remittances and the information-technology and business-process outsourcing sector, current growth has become relatively more diversified, thanks to tourism, the revival of manufacturing, and increased private and public spending for construction and infrastructure. Assuming that the government is successful in implementing its industrial road map for the critical sectors of the economy, manufacturing will underpin and sustain higher growth rates in the next few years.

As domestic investors increase their stakes in the manufacturing sector, foreign direct investments will follow. Thus, it is crucial for domestic investments to maintain its growth, as this provides a concrete signal of structural transformation that is relevant to their foreign counterparts. Reforms to improve the investment environment will bring in more foreign investments into the country. Reducing the cost of doing business, leveling the playing field and initiating labor-market reforms will augur well for continued increases in both domestic and foreign investments.

Another critical sector that is often neglected by the government and riddled with corruption is agriculture. This sector must reach higher levels, and its performance should not be mainly dependent on good weather, but on increased investments in physical capital and new technologies. Agriculture is the main backward linkage to food manufacturing, which, in turn, comprises almost 40 percent of the country’s manufacturing output. The Aquino administration’s recent moves to reform agricultural governance is a step in the right direction, although more reforms are needed to get this sector out of a low-level equilibrium trap.

Lack of ‘inclusivity

A KEY weakness of the current administration is this current growth momentum’s lack of “inclusivity.” Despite the reduction in poverty incidence by 3 percentage points in the first half of 2013, it remains high at more than a fifth of the population. Statistics for the entire 2013 will most probably show an uptick in poverty incidence, given the natural and man-made disasters that hit the country in the second half of last year. If the Aquino administration is serious enough to sustain the growth and revival of the manufacturing sector, renew agriculture and improve infrastructure to heighten economic activities, like tourism, more jobs will be created and the twin curse of unemployment and underemployment will be greatly managed.

Of course, all these possibilities require political will and continued improvements in economic governance. A case in point is manufacturing, where the right signals must be manifested to further heighten animal spirits. For example, the government must show resolve in implementing the road map for the automobile sector, which has multiple linkages to the economy. It must also transform the agricultural sector, starting with the bureaucracies involved, such as the Department of Agriculture, the National Irrigation Authority and the National Food Authority.  Uncertainties caused by the perennial extension of agrarian reform must also be settled. At the same time, efforts to continue sustaining the efficiencies in revenue collection and to hasten the implementation of public-private partnership projects will further strengthen the path toward higher growth.

If the economy is able to run on more than two legs (i.e., growth drivers are more diverse), then vulnerabilities to varied shocks are mitigated and the impetus for a higher level of growth can be easily sustained. But the foundation of all these is the ability to continue reforms in political and economic governance, which the Aquino administration claims as its hallmark. A bull run in the economy, then, must already be in the offing.

AQUINOMICS 2010-2014 and beyond Click here to view PDF Chart.