Economic missteps in 2019, hope for 2020

January 4, 2020

by IBON Foundation

The last debris from the fireworks and firecrackers have been cleaned up. Now everyone is starting to look ahead to what’s up for the economy and the people in 2020. What are the prospects based on the Duterte administration’s policies and how the economy performed in 2019?

The traditional optimism at the start of every New Year is all-important because problems chronically pile up in the course of the Old Year. It is a vital defense mechanism rekindling hope and renewing strength. Both are needed, more than ever.

The Duterte administration has been busy making the economy even more pro-business and pro-profit, notwithstanding some yearend anti-oligarch posturing. This was at the expense of the people and their welfare. A few populist social measures were a smokescreen to a weakening economy, persistent structural poverty, and deteriorating social services.

Slowing growth

The economy has been on a downward slide since the start of the Duterte watch. Gross domestic product (GDP) growth of 6.9% in 2016 slowed to 6.7% in 2017, 6.2% in 2018, and then just 5.8% in the first three quarters of 2019.

Economic growth is falling further and further below the administration’s original target 7-8% in its Philippine Development Plan (2017-2022). The target was lowered to 6-7% but growth is still not reaching even that. Growth had averaged 6.2% over the 2010-2015 period under the previous Aquino administration.

The economy is slowing despite the best efforts of the economic managers at debt-driven pump-priming. Public spending keeps increasing and, measured relative to GDP, is already at its highest in over 15 years. The Php3.4 trillion in national government expenditure in 2018 was equivalent to 19.6% of GDP or the highest level since 2002.

Part of the increased spending is financed by higher taxes on the poor from the Duterte administration’s regressive Tax Reform for Acceleration and Inclusion (TRAIN) program. These have not been enough though and the fiscal deficit is still slowly increasing. The Php558 billion deficit last year was equivalent to 3.2% of GDP or the highest in almost a decade.

The deficit is financed by growing debt. On average, the Duterte government is borrowing almost three times as much as the Aquino government and over twice as much as the Arroyo government per month. The outstanding debt of the national government is growing at an average of Php49 billion monthly – compared to Php19 billion under Aquino and Php21.2 billion under Arroyo – and was Php7.9 trillion already as of October 2019.

Growing spending

The biggest driver of economic growth is government spending. The most visible and hyped is for infrastructure development. Public infrastructure disbursements have soared from Php537 billion in 2016 to Php890 billion in 2018, reaching the equivalent of 5.1% of GDP. Appropriations for infrastructure are even higher at some Php900 billion in 2019 and Php1.2 trillion in 2020.

But the government has also been putting money into the economy in other ways. These include some Php125 billion in cash transfers for the country’s poorest households – consisting of the Pantawid Pamilyang Pilipino Program (4Ps) conditional cash transfers and the TRAIN-related unconditional cash transfers. Hiked public hiring and salary increases have increased government personnel expenses to Php1.1 trillion in 2019.

Government spending is however a short-term measure and unsustainable. It is dependent on the availability of revenues. Debt-financing also has it limits. Moreover, spending on infrastructure cannot go on indefinitely. At some point, additional infrastructure spending is no longer financially or economically viable.

Weaker production

On the other hand, strong agriculture and robust Filipino industry are the more reliable and sustainable sources of growth. They expand employment, increase the purchasing power of the vast working classes, and can build domestic productive capacity for future growth.

Yet agriculture and manufacturing are both weakening. Though it slightly recovered to 1.5% growth in the first three quarters in 2019 from the 0.9% slowdown in 2018, the agriculture sector continues its general decline in terms of its share in the economy and employment. There was an increase in fishing and aquaculture work but the agriculture, hunting and forestry subsector continued to shrink.

This will only worsen with the implementation of the rice liberalization law last year. Designed to drive rice prices down to discourage rice farmers from planting and harvesting, the law threatens to displace as much as 250,000 to 350,000 of the country’s least productive farmers. Millions of rice farmers and their families are already suffering collapsing incomes from drastically lower palay buying prices. Rice imports are growing and food security is eroding.

The so-called manufacturing resurgence has apparently petered out. Manufacturing slowed drastically from 8.4% growth in 2017 to 4.9% in 2018 and just 3.7% in the first three quarters of 2019. The sector even shed around 56,000 jobs by the end of the year, falling to 3.6 million employed.

The chances of a manufacturing recovery are slim. The sector is overly dependent on foreign firms producing for a global market. The world is however still grappling with a protracted slowdown and increasing protectionism. Government’s industrial policy is meanwhile still oriented to attracting low value-adding foreign investors instead of strengthening Filipino industry.

The government’s debt-driven stimulus is a weak boost to manufacturing. For instance, much of high-value construction inputs and even many related services are imported rather than produced locally by Filipino firms. The import-dependence of existing manufacturers and construction firms are the main reasons for the trade deficit reaching record highs under the Duterte administration.

A few service sectors are the biggest centers of wealth creation. The country’s oligarchs including the president’s closest big business allies continue to amass wealth not from production but from trading, real estate, hotels and restaurants, utilities, and related financial services. Yet these are not the sectors vital for long-term growth and development.

Disguised jobs crisis

Agriculture and manufacturing are falling and failing to create the jobs needed by the growing population. Tens of millions of Filipinos are instead forced either abroad or into all sorts of erratic and low-paying service work.

In the October 2019 labor force round, the government reported a surge of 1.8 million additional employed and unemployment falling to 2.1 million. Taken at face value, this is welcome but does not indicate long-term development taking place.

New jobs created were overwhelmingly in wholesale and retail trade, transportation and storage, and construction. These sectors can be profitable for a few economic elites but however do not create the economic base needed for long-term growth and development; agriculture and Filipino manufacturing are needed for that.

The quality of work created is revealing and reflects the limits especially of backward service sector work. Three of four new jobs were in part-time work of less than 40 hours per week; the number of those who worked without pay also continued to increase.

Official unemployment figures moreover underreport the true state of unemployment. IBON’s initial estimate is of some 4.1 million unemployed Filipinos or more than double the officially reported. This higher figure includes discouraged workers and others immediately unavailable for work that the government has stopped counting.

Disguised poverty

Among the biggest economic news last year was the reported decline in poverty in 2018 to just 12.1% of families and 16.6% of the population, corresponding to 3 million families and 17.6 million Filipinos.

This decline in poverty is however illusory in using a very low poverty threshold of Php71 per person per day on average, or just Php10,727 per month for a family of five. This is officially deemed enough for Filipinos to meet their food and non-food needs and no longer be poor.

Setting such a low income standard obscures how the conditions of tens of millions of Filipinos are not fundamentally improving. For instance, the same family income data would show that 12.4 million Filipino families or over half of the population actually tries to survive on just Php132 or much less per person per day.

The low ‘poverty threshold’ also does not capture so many other dimensions of poverty that tens of millions suffer: income insecurity, lack of decent work, lack of education, insufficient nutrition and poor health, inadequate housing, lack of clean water, sanitation and electricity, degraded ecology, lack of assets, exploitation and other vulnerabilities.

Official income poverty figures, like for unemployment, need to be revisited to reflect rather than obscure key socioeconomic realities especially for the country’s poorest and most vulnerable. Statistical misdirection will only reinforce economic problems.

Economic missteps

It is natural to expect the economy to serve the needs of the majority rather than of just a few. By that standard, the optimism of the economic managers that “the Philippine economy is strong and ready to soar” is misplaced.

The economy is slowing and its most important sectors are weakening. Poverty and unemployment are high but concealed by misleading official statistics.

Still, the administration has spent the past year, and will spend this year, pursuing the sorts of policies that distort the economy and thwart development. It is out to complete the liberalization of agriculture starting with rice last year and the sugar industry this year. Agricultural livelihoods and food security are at stake.

It is so keen on foreign investment that it is surrendering vital policy space for national industrial development. Amid growing worldwide protectionism, the Duterte government is still doggedly seeking foreign investment liberalization – in utilities, retail trade, and even wholesale charter change if it can.

There was a show of anti-oligarch rhetoric particularly around Metro Manila water services. But the government’s insistence on water privatization not just in the capital but the rest of the country means that water barons will remain and only get richer.

The government is also pressing to make the tax system even more regressive, pro-rich and pro-capital. The TRAIN law’s Package One burdening poor consumers with higher consumption taxes is entering its third year. The rich who TRAIN favored with lower taxes on their income and wealth are set to get even more tax cuts with subsequent packages lowering corporate income taxes and taxes on capital and financial investments, among others.

Optimism and hope

The Duterte administration knows that people sense if their conditions are really improving or not. That disappointment easily leads to restlessness and, eventually, greater protest, and even revolution. Last year, it started to pay more attention to managing unrest from an economy that was making a handful rich while keeping the majority poor and unemployed.

There were populist social measures to take the edge off underdevelopment. There was also insistent propaganda that the economy is getting better. There was also notably a crackdown on activists pointing out social problems and consistent in proposing the radical solutions needed but opposed by economic elites.

Organized groups have long been advocating concrete measures and far-reaching reforms to build an economy that keeps on improving the lives of the many. The economy is heading in many wrong directions but the possibilities of People Economics to replace bankrupt neoliberalism gives much reason to be optimistic. Things will not get better on their own, and the administration’s fears are well-founded – more and more Filipinos are going to spend the New Year standing up to change things for the better. ###