By Gil R. Ramos Ph.d.
Perspectives on Prez-elect Noynoy’s preparation for his first 100 days as president.
The first 100 days of an incoming Presidency is the most important period in a presidential term. It is generally characterized by a set of initiatives both in policy direction and implementation that sets the tone of what happens next in the new president’s exercise of leadership as he carries out the new mandate that he now realizes rest solely upon his shoulders and nobody elses.
Amid the residual noise from the past political campaign the task of statesmanship and nation building has to be pursued. Despite tendencies to the contrary towards a carpetbagging and a ‘division of the spoils mentality’ the clamor of the nation for immediate response to its critical state must be heeded. Hence Prez-elect Noynoy’s inauguration and his actions in his first 100 days is much awaited by an eager and expectant Filipino nation both in domicile as well as those in diaspora.
One hundred days from July 1 would run through to mid-October 2010 thereabouts. That is a very short time. For those days to set a positive tonal direction that would last through most of the Prez-Noynoy’s term before ‘lame duck’ status sets in , initiatives and decisions made should be consistent with longer term plans. In the business world short term planning is identified with circumstances where certain factors important to the plan are fixed with the recognition that these factors cannot be immediately altered given the limited time duration. Longer term planning connotes more flexibility since factors involved are seen to be mostly variable since there is a longer time period to alter them. What is true in the business world also holds true for the practice of statecraft. A statesman’s actions and decisions should always be posterity conscious as well as constantly being tactically aware.
Since 100 days is the first salvo consistent with longer term goals it becomes important to have a first approximation of what the Noynoy presidency would want to realistically achieve in six years. This set of goals is necessarily a first approximation since the benchmark information that the transition team of the outgoing administration shares may not give a totally accurate picture of what obtains in reality. However using the best estimates of the current state of the nation some tentative six year objectives must be set and consistent 100 day initiatives must be accordingly devised. Six years translates into 2,190 days; so what can Prez-Noynoy achieve in 2,000 days ( we are assuming here lame duck status in the last six months).
There are several important clusters of decisions which Prez-Noynoy should pay attention to ahead of all other areas of governance. Among these are the defense and security cluster; the foreign affairs cluster; the finance cluster; the economic cluster; the education and social services cluster; and the justice cluster. Perhaps a non-traditional decision cluster can be introduced which would be the OFW cluster (this will be explained later).
The Defense Cluster
The principal objective of the defense cluster is to ensure as soon as possible that the use and application of armed force is solely the domain of the AFP and the PNP and other civilian peace keeping forces like the NBI. This would mean dismantling and disarming all illegal armed groups and insurgencies within the territory of the Philippine Republic. Other corollary objectives can include the following: modernization and self reliance in our armed services which includes the capability to manufacture our own arms and munitions, small navy craft like PT-Boats, and small single engine aircraft; Naval and aerial reconnaissance capability to protect our coastal waters and inland seas within the parameters of the UN laws of the seas and thus preserving for Filipinos exclusive exploitation of our marine resources; Promoting and strengthening cooperation with international police enforcement institutions.
A strong capability for Peace and Order enforcement is a pre-requisite for economic progress. While the peace process should be pursued with rebel groups these talks should always be carried out from a position of strength. Private armies should be immediately disarmed and monetary rewards should be given to people with information that could lead to the recovery and confiscation of the armed cache of these groups . Prosecution of the elements in the peace and order agencies that have been involved in human rights violations and murders must be pursued. These objectives should be included in the mission statement of whoever heads the security cluster in the cabinet . Since it would be most likely the defense chief then whoever is nominated to this portfolio should understand that he should achieve these objectives within a thousand days.
The Foreign Affairs Cluster
For the Foreign affairs cluster, maintaining a harmonious and mutually beneficial relationship with our existing allies is important while we aim to build a more self_reliant defense posture. Achieving treaty based non-visa entry to the widest possible group of countries all around the world will benefit job-seeking OFW's and hence should be an important initiative that must be pursued by the DFA.
While attention to the development of Philippine local employment should be emphasized overseas employment will have to be resorted to until the labor absorptive capacity of the country is enhanced with more vigorous economic activity. It is also possible to save and trim the foreign affairs official deployment abroad by using members of the Overseas Filipino Communities as honorary consuls and to the greatest extent possible this should be explored and piloted (maybe ofw community based consuls woud be a better and more apt term). This would at least save on expenses if that person could take care of living expenses which were usually provided for to regular consuls in the foreign service. A good and secure internet service site complemented with an expeditious messengerial service if faxed documents would not suffice can service most of the needs of the Filipino communities abroad. Since the honorary consuls are members of the community that they are interacting with and are in touch with local business entities (not just Filipino owned enterprises) in their respective host countries the missions of promoting Philippine exports and encouraging tourist visits tothe Philippines(tourism is a form of export); enticing direct and portfolio investments to the Philippines ; seeking jobs for Filipino job seekers; and the coordination of international relief efforts (that seems to have become a regular fixture of the DFA missions - more on these later) can be effectively carried out by these honorary consuls. The larger group of career consuls that will be displaced can be seconded to the state educational institutions in the Philippines where they can lecture and orient potential overseas job seeking Filipinos until they are retired.
With the speedy development of digital communications technology the globe has become a smaller place. The logical consequence of this is that our government should be able to spend less in relating to such a 'smaller' global place. In this contrext downsizing the DFA seems to be a sensible strategy since a complement of community based consuls in a growing Filipino presence globally can be tapped until such time that a more prosperous Philippines can afford larger budget allocations for the foreign service again. It must be remembered that the traditions and usual budgetary allocations of our foreign service were set up in the time of Carlos P. Romulo when we were relatively wealthier and economically number two to Japan in our part of the world. Now that we are number two from the bottom rung - a review of the way we conduct and spend for our foreign service is in order. Back then in the fifties we did not have a huge presence of global Filipinos all over as we do now. At the present time our foreign service officers have mostly become bag carrying and umbrella tending glorified butlers for our junketing officialdom -- and that is something that a poor and hungry nation can ill afford.
The Sabah question also has to be addressed in conjunction with the defense cluster . Because of the Sabah question the Malaysian government cannot be an honest broker in the peace talks in Muslim Mindanao. Malaysia should be taken out of the picture.
The third leg (the first two are Defense and Foreign Affairs) in the tripod of essential functions characterizing a state is Finance. Issuing money and coinage of the realm is inherent in the exercise of sovereignty and this implies the ability to pay for the cost of governance through the imposition of taxes and other revenue raising levies. That function is handled by the finance cluster and in charge of this is the Secretary of finance. The Central Bank Governor is also part of this cluster and some students of public finance would say that this BSP position is more crucial than anyone else in the cluster.
Being Secretary of Finance or head of the Central Bank are not positions where you would need the grey matter of a rocket scientist. These posts however are no place for a dumbos either. A government needs money to run and it is the job of the Secretary of Finance to find the money required. Or else government will have to go into that very familiar phrase to most Filipinos called ‘deficit spending’.
When you are in deficit it just means that your government spending has gone beyond its capability to raise revenues to match such spending. When the BIR and Customs experience shortfalls in their revenue targets and the revenue they have targeted were already pigeon holed for programmed spending then deficits are incurred because the business of government has to go on. Throughout the years of the GMA presidency our government has consistently been in deficit. A record high was reached in the year 2002 when the deficit for that year checked in at 5.3 percent of GDP. When we go into deficit we either monetize it ( that’s the polite term for printing money and that is where the BSP comes in) or we go into more borrowing which increases the stock of our public debt. Such deficits that are absorbed into the stock of public debt become merely future taxes that are pushed forward for future generations to take care of.
In planning for the 2009 budget for instance the initial targeted deficit was just P 173.3 Billion. As the fiscal year wore on this target crept up to P 250 Billion. The actual deficit finally became 293 billion in 2009. In 2010 reports have surfaced that we will be overshooting the deficit targets again and have a deficit close to 300 billion pesos. This means that our actual expenditures for running the government would be much more than the P 1.54 Trillion budget. Everytime we overshoot our budget and go into deficit we go into debt – either from private domestic sources or from international institutions or international private banks.
Our government has been running deficits ever since the post marcos period. In 1990 when the world bank initiated their debt management program the first ever debt management loan was granted to the Philippines . At that time our debt stock stood at 28 Billion US dollars. It has now ballooned to 95 Billion US dollars (estimate). Fifity –five percent of the total debt stock had been sourced locally and the other 45 percent were foreign loans.
It has been pointed out that the fastest expansion of this debt stock occurred in the time of Prez Arroyo. The Cory administration from 1987-1991 increased our public debt stock by 338 billion pesos; In Ramos time from 1992 – 1997 we added another 401 billion; During the Estrada period we increased our public debt by 725 billion; from 2001 to the present the GMA administration increase our public debt stock to about 5 Trillion pesos (my estimate).
It has been reported that in September of 2009 our public debt stock stood at about 4.3 Trillion. In the first quarter of 2010 the GMA administration floated new dollar denominated bonds and these new loans breached the 5 Trillion mark in our total debt stock. While her three predecessors tallied a total of just 1.564 Trillion pesos addition to our debt stock from 1987 to 2000 (13 years), GMA from 2001 to the present (just 9 years), added another P 3.5 Trillion pesos to our public debt all by her lonesome self.
Just for a sense of scale, we must realize that five trillion pesos in debt stock is more than half of our estimated 2009 GDP. It would just be a natural reaction to ask GMA where these monies went and what she has to show for it. Comparisons with our neighbor countries during this period showed that we had a relatively weak rate of GDCF ( gross domestic capital formation) which should have grown dramatically given the borrowing binge that we indulged in.
As a result, the 94 Million Filipinos now owe about a thousand two hundred dollars each to the Philippine government’s creditors at the present time. At a debt service rate of approximately 8.5 percent (interest and principal payments) we will have to pay 425 billion pesos ( US 9.043 billion) for debt service alone. Even if only interest are paid here at say 5 percent the debt service will still amount to 250 billion pesos (US 5.319 billion). A 9 billion dollar debt service would mean 5 percent of our projected GDP of 180 Billion US dollars while a 5 billion debt service would mean about 3 percent of a 180 Billion GDP. If GDP do not reach 180 US billions and BIR and Customs collections fall below the 1.40 Trillion peso target revenues then the year end economic picture could be much worse.
For the year 2011 what is being proposed is a budget of P 1.68 Trillion. Premised on a collection effort of P 1.40 trillion the present economic managers are hoping to keep deficit targets at P 285 billion. However, no less than the Secretary of Finance himself is saying that unless the eVat is adjusted upwards to 15 percent then we may be looking at a 4.4 percent deficit ratio to GDP in 2011. This is indeed bound to happen if shortfalls in collection efforts continue; programmed spending and government fat is not mitigated; multiplier impact of government spending is diluted due to corruption leakages resulting in a shortfall in targeted GDP growth; also this pessimism goes with the assumption that no form of re-structuring is possible in the current components of our stock of public debt. For sure raising the eVat will allow upward adjustments in collection targets but right now it looks like the easy way out. And of course the incoming administration has promised no increases in taxes.
While the estimated prospective debt service of 425 billion pesos would be 25 percent of the budget which is way below the 32 percent ratio in 1990 when the world bank gave the Philippines the go ahead for a debt management loan that was used for re-structuring ( refinancing at lower rates of interest and a buy back of about 1.5 billion dollars in debt notes at 50 % of value) it would be good to explore the possibility of doing this immediately with the IMF and the World bank. If debt restructuring is possible, budget resources can be freed to be spent on capital/output ratio reducing actions and higher second round multiplier effects (next year effect) in aggregate spending can be achieved.
The Justice Cluster
Because of our recent history and the manner of governance inflicted on the nation by the outgoing administration the incoming president will have to deal with loose ends that urgently needed to be tied up in this cluster. However, Prez Noynoy should make sure that his attention to problems in this cluster should not significantly erode the political capital which is better spent on growing the Philippine Economy rapidly. As a trained economist people would expect Prez Noynoy to perform well in promoting economic growth. Having said that the clamor for Justice before Mercy; Restitution before Reconciliation; and Correction before Cooperation just cannot be ignored.
The role of the Justice Secretary is to pursue members of society that has violated the law of the land. Relevant to these are activities which led to a lot of leakages in our nation building efforts because of acts of corruption. A simple definition of corruption is that it is the use of public power for private ends. The justice cluster should draft a conflict of interest law for certification to Congress which defines the ethics code required of a government employee.
Prez Noynoy should direct the Justice Secretary designate to do the following: a. Investigate the obstinate use of the Rule by Law/Selective application of the law over the Rule of law. Focus on large value cases and high profile personalities no matter how exalted the positions these personalities occupied in past administrations; b. Review of Comelec, its rules, regulations and transactions (9years), organization ( both national and regional ) to make it truly responsive to its constitutional mandate to safeguard the vote of the people. Uphold accountability of public officers, both past and present. Call all public figures who have info on syndicates to come out in the open and help. Comelec should not only be clean but also perceived as clean. Initiate investigation and if necessary, prosecute election fraud, including claims of those who say they were approached by people who offered to rigged the elections for them. In case of their refusal, hold them for obstruction of justice; c. Investigate all Government Financial Institutions and other GOCC's for the purpose of cutting the sinewy tentacles of criminal syndicates operating in these offices; d. OMBUDSMAN/SANDIGAN-revisit these agencies to make them real guardians of public and the anti-thesis of corruption in public office; e. Investigate POEA operations and related agencies e.g. OWWA, to streamline their rules for optimal delivery of their services and benefit to the OFW and to stop illegal operations involving POEA Personnel and illegal recruiters/criminal syndicates prying on Filipinos working and intending to work abroad e.g. Sentosa nurses and teachers stranded in Louisiana; f. Review of all pending contracts for the disposition/hypothecation of national patrimony e.g. Malampaya Oil and Gas company. Prevents profligate disposal of national patrimony at interest of few; g. Coordinate the 'Isumbong mo kay Noynoy' program through franking privileges from the Barangay level. Pre-paid postage envelops addressed to Malacanang - should be distributed to Barangay officials and any citizen can request for this envelops from Barangay officers and send to Prez. Noynoy cases of corruption and evironmental degradation that they see in their locality.
The head of the justice cluster should take the onus of dealing with the abuses of members of the past administration to minimize political capital erosion of Prez Noynoy's mandate. Going forward the Justice cluster should focus on actions that would support efforts to plug invesment leakages through corruption by bringing violators of the law to justice in the most expeditious and well publicized way possible.
The Economics cluster.
Important decisions that concern the material well being of every Filipino are covered in this cluster. Managing this cluster well would directly impact the urgent concerns of Poverty and Job creation. Perhaps it would even be a welcome development if Prez Noynoy also momentarily serve in a concurrent capacity as the NEDA Director-General to accent his role as the principal Economic Manager of the nation. However, to better understand the extent of the challenges that Prez-elect Noynoy faces in the decision sets belonging to this cluster, a review of some context information as regards economic developments in our part of the world is in order.
Taking data from the our own central bank, the IMF and the CIA fact books, I made an estimate of the gross domestic product and population data of a few relevant selected countries. Index scores are then computed to facilitate cross country comparisons. Computing index scores is a tool in geomatics to reduce comparison factors to pure numbers so that standardization across geographic regions is achieved. In the following table gross domestic product data is presented together with population figures for eleven countries. Although our immediate region is southeast Asia, the United States is included to get a related perspective benchmark on the largest and most progressive country in the world which also happens to be the residence of most Filipinos living outside the Philippines.
1. United States
Based on 2009 and 2008 data projected to 2010 values.
World Population 2010 (my estimates) 7 Billion.
World Product US 61 Trillion.
All GDP figures are in current US billion dollars.
World Population 2010 (my estimates) 7 Billion.
World Product US 61 Trillion.
All GDP figures are in current US billion dollars.
Our 2008 GDP (gross domestic product - goods and services produced domestically in the Philippines) according to bangko sentral figures is $166.9 Billion US dollars. Growth in 2009 was just 1 percent on account of the world economic contraction. And with the election spending upward adjustments for 2010 growth were made up to 3.8 percent. Lately with strong first quarter growth of 7.3 per cent, private international groups adjusted their annual growth estimates to above 4.2 percent for the years 2009 to 2010. I used a 5 percent growth rate and forecast Philippine GDP to be about $180 Billion dollars for 2010.
With a World Product estimate of about $ 61 Trillion in 2010 (my estimate) our GDP accounts for less than a third of one percent of total world product. Our own central bank estimates our share at .47 percent of world product after PPP (purchasing power parity) adjustments. I think there is a bit of window dressing here since PPP adjustments involves a lot of subjectivity. Without such adjustments, my own estimate places our share at just about .295 percent of world product. However, in terms of population share we account for 1.3 percent of the 7 billion world population. Contrast this with similar measures for the US we have the US share of world product at 25 percent while its share of world population is only 4.5 percent. Using the ratio of GDP share to Population share as an index ( we refer to this henceforth as a gross rates ratio index or GRR index), we get a score for the Philippines at .22 while the equivalent GRR index score for the US is 5.5 .
These GRR indexes of the US and the Philippines tell us that a person living in the united states is 25 times better off than a person living in the Philippines (0.22 divided into 5.5 = 25). Translated into a meaningful interpretation for US based Filipinos this index means that the average Filipino american is 25 times more economically potent than a Filipino in domecile in the Philippines. A downward adjustment may be called for here to account for the presence of a large undocumented segment among the Filipinos in the US. Undocumented US Filipinos usually land marginal jobs compared to those who are legally in the United States. However even if we cut this index factor to 15 that number is still dramatically significant. This US and Philippine comparison underscores the potency of economic leverage that US Filipinos can exert if they become minded to help Prez-elect Noynoy pull the country towards the goal towards attaining near-first world status within his term of six years.
Compared to our Asian neighbors Thailand has a population of 66 Million and a GDP of US 300 Billion for a GRR index score of .52; Malaysia has a 26 million population and a GDP of US 215 Billion for an index score of .95 ; and Indonesia with a population of 238 Million and a GDP of US 530 Billion has an index score of .26 which is still better than the Philippines. China with 1.5 billion people and a GDP of US 4.758 Trillion gets an index score of .36; While India with a population of 1.15 billion and GDP at US 1.243 Trillion has an index score of .12 . Japan has a population of 129 million and a GDP of US 5.32 Trillion for an index score of 4.73 ; Singapore has a population of only 5 million but has a GDP of US 190 billion ( bigger than the Philippines in absolute terms) and has an index score of 4.4 ; Korea has a population of 54 million and a GDP of US 842 billion.for an index score of 1.79 ; Taiwan has a population of 30.3 Million and a GDP of US 360 Billion for an index of 1.38. The computed Gross Rates Ratio index shows the Philippines as a cellar dweller only better off than India in these current year 2010. Singapore occupies an exalted position next only to Japan - the honored place the Philippines had in the 1950's.
What the GRR index tells us is that given a nation's share of the world's population, a score that is close to one like that of Malaysia in the table means that Malaysia is getting a proportion of world income flows that is almost equal to its percentage share of the world's population. Hence Malaysia is close to Unitary Balance while Thailand, China, Indonesia, the Philippines and India are in a development deficit status. These latter countries mentioned are getting a much lesser share of world income flows when compared to their share of the world's population. Comparing the GRR index results to that given by the HDI - Human development index of the UN, the rankings were almost identical. However in the HDI using 2008 data the UN ranked Japan higher than the US and the Philippines ranked a bit higher than Indonesia with India remaining at the bottom.
Estimates of world product growth is placed at 4 percent a year. At this rate world product will be 77 trillion in 2016 at constant 2010 US dollars. The world’s population is also estimated to be 7.5 Billion people by 2016. Given these world data projections a very relevant question is how much should the Philippines have in population growth and GDP growth to achieve first world status? second world status? Using the GRR index we can roughly classify the eleven countries in our table as first world for those with an index above 1; second world for those close to 1 like Malaysia; and third world for those below .5 and close to 0. The answer to the question just posed is that the goal of attaining first world status would be quite a reach to aim for. Perhaps we can try to attain unitary balance where our percent share of world population equals our percent share of world product but as we will see even that would be quite difficult to achieve.
if Philippine population growth rates continue at 1.931 percent a year and GDP growth rates averages at only 5.4 a year (which seems to be what our economic managers was capable of achieving on average in the past 9 year period) then by 2016 Philippine GDP would be 247 Billion US in 2010 prices and our population will be 105 billion. Our 2016 GRR index would only slightly improve to .227 -- still very far from unitary balance and our level of development and accompanying problems will remain almost the same.- the only difference is that there will be more of them.
TO BE ABLE TO ACHIEVE UNITARY BALANCE or Malaysia level of development by 2016 we would have to reach 1.078 Trillion (2010 US constant dollars) in our GDP by 2016 if we continue to grow our population at the current rate of almost 2 percent a year. To reach 1.078 Trillion US GDP at 2010 prices in 2016 WE WILL NEED TO GROW our GDP at the rate of 35 per cent a year! This is quite impossible to achieve. The highest GDP growth rate ever recorded in the world was in QATAR from 2007 to 2008 when its GDP grew from 71 Billion US to 102.3 Billion US for a growth of 44 per cent. In that year new pipelines for natural gas went on line and Qatar produced 2.7 Trillion cubic feet of LPG (almost equivalent to our proven natural gas reserves in malampaya). Subsequent growth in Qatars GDP after the spurt of 2008 settled to single digits. And it is tragic that the outgoing administration is rushing the sale of the PNOC-EC stake in the malampaya natural gas project when this stake could maybe offer us a chance of attaining growth rates like that of Qatar.
It would seem that we would have to settle for growth rates that are not as dramatic as that attained by Qatar in 2008. And at the same time we will have to put the brakes on our runaway population growth.. THE REPRODUCTIVE HEALTH BILL or something similar IS SORELY NEEDED.
Macroeconomic growth targets that we in the Philippines can optimistically aim for would be like those experienced by China and Singapore. China whose policies we can imitate enjoyed an annualized monthly basis growth rate from Jan 2006 to Jan 2010 ranging from a low of 6.2 percent to a high of 13 per cent. Singapore had been growing at above average rates for the ASEAN region and explains why it has attained first world status by now. These countries also enjoyed very high savings rates which allowed them to support the accelerated growth in GDP in their respective countries. Singapore’s average yearly savings during its rapid growth was estimated to be at a yearly average of 51 percent. The comparative figure for China is 40 percent. In the Philippines these saving rates stands at a measly 19 percent of GDP.
WE HAVE to take stock and let the fact sink in -- that our nation is on the verge of becoming a fourth world country if the present way of managing the economy is not changed for the better.
We have to realize that indeed we are in deep trouble.and so this means that the incoming Noynoy presidency cannot be conducted on a business as usual basis.
So we beg the question – what can be done about it.
The first step is to set up realistic macroeconomic targets. Then manage the machinery of government to efficiently deliver on these targets. Such targets while long term in perspective must necessarily be framed with milestones within the Noynoy presidency ending on June 30, 2016.
And furthermore Prez-elect Nonoy should go beyond being just a manager of a 1.4 million strong government bureaucracy. He should be a transformative President that inspires and mobilizes all Filipino citizens both in domicile and in diaspora to assist him in carrying out his mandate of eradicating corruption and freeing the country from the malaise of poverty.
But first let us talk about macroeconomic targeting and how to set up the finances to support such targeted GDP growth rates. This exercise is necessary to get a feel for the extent and intensity of the challenges faced by the incoming Noynoy presidency.
Managing the Economy
The most important levers that an economic manager of a nation can impact to achieve desired GDP growth targets are the savings rate, and the capital output ratio. Here it is important to take note of the basic concepts of stock-flow analysis and the savings rate.
To put these concepts in basic layman’s terms a stock for example can be a bundle of money. If that bundle is deposited in a bank and yields an interest rate, that yield is the flow. Put another way if you buy a share of stock and receive a dividend then here clearly the share is the stock and the yearly dividend is the flow. GDP is a flow; it is the sum of all yields of all factors of production in a country like the Philippines. The asset valuation of those factors of production is a stock – here we will use wealth stock or capital stock of a nation interchangeably. A nation’s wealth stock consist of its natural resources; physical infrastructures (transport and communications); human capital; entrepreneurial talent pool; and embedded or capitalized technology and financial reserves (monetary claims against the rest of the world).
The savings rate is the portion of the GDP that we do not use for personal consumption, and business consumption, and government consumption expenditures. As an individual you can either spend all your income or save some of it perhaps to buy shares of stock that would yield you a dividend flow in you next income cycle. Government just like an individual can use its budget to buy equipment that could increase the level of service to its constituents or spend the money for paying expensive restaurant bills which do not improve or increase goverment service flow in the next time cycle.
The savings rate of the nation is important because with the higher the ratio of savings to total GDP there would be more of what is saved or not consumed which can be used to build a nations capital stock. A larger capital or wealth stock can produce higher yields of subsequent GDP. It is just like a businessman who does not consume all his profits and plows back what he does not consume back into the business. So by doing that he could expect a higher level of profit in the future because he now has a larger capital base, assuming that everything works out as expected in his business. The relation of capital to output as a ratio is important because it is a gauge of the effectivity of capital in producing output.
Effectivity can be interpreted to mean the presence of more profitable investment opportunities in a country or it could also be a measure of how efficiently the capital stock or wealth stock of the nation is being used. On the other hand it could also be a measure of the intensity of capital usage in a country’s productive processes. The empirical research of Simon Kuznets and Raymond Goldsmith show that more developed countries would have a higher capital output ratio than developing countries. Measuring things at the margin of new investment flows the concept of incremental capital output ratio (ICOR) is introduced.
While there is no firm theoretical or empirical justification for assuming that a short run proportional relationship exist between investment and economic growth the art of macroeconomic targeting assumes such a relationship. Hence an expected growth rate of GDP is derived from the savings rate and a given capital output ratio.
Increasing the savings rate or decreasing the capital output ratio can positively change the GDP growth rate to reach stated targets of GDP growth. To achieve higher levels of GDP growth an economic manager should therefore strive to increase the savings rate and decrease the capital output ratio.
The following table projects a feasible GDP growth target track from now to 2016.
GDP growth targets
GDP Savings Rate Capital/Output GDP growth rate
Start/Base 180 .190 4 5
2010 – 2011 189 .222 3.6 6.17
2011 – 2012 200 .244 3.2 7.6
2012 – 2013 216 .269 2.9 9.28
2013 – 2014 236 .296 2.6 11.38
2014 – 2015 263 .325 2.3 14.13
2015 – 2016 300 .358 2.1 17.05
In the preceeding GDP growth targets table we start from our present base situation where we have a savings rate of about 20 per cent and a capital output ratio of 4. This gives us a GDP growth rate of 5 percent which was actually the average GDP growth rate in the recent past 6 year period. GDP actually grew by only 0.9 percent in 2009 and is projected to grow by NEDA and interested International Institutions (ADB, WB, IMF) to only 3.8 percent to 2010 even with the slight stimulus effect of the past election spending. Capital output ratios were in the double digits for the Philippines in the early 1990’s but went down dramatically in 1994 to less than 5 and was at that level up to the late 90’s (Philippine Productivity Council). US AID figures gave an estimate of Philippine ICOR at 6.6 average for the period from 1998 to 2002 and determined its level to be just at 3.9 from 2001 to 2005. Our assumption of a capital output of 4 in our base period is within the ballpark of what other economic investigators have used.
Going into our projections an economic manager should strive to lower the ICOR and at the same time raise up the savings to GDP ratio. At the same time the conversion mechanism of savings into actual capital formation must be provided for - since empirical studies in development economics have shown that this does not automatically happen.
The goal of raising the savings rate from 20 at present to 36 percent by 2016 seems to be a modest and doable enough goal. Countries like China and Singapore had maintained savings rates of 40 and 50 percent respectively for sustained durations which had fueled their dramatic GDP growth. Likewise setting goals of gradually but systematically lowering the ICOR from the level of 4 to 2 by 2016 can be also be done.
Lowering our ICOR levels would mean plugging all the investment leakages that is caused by corruption, improving existing technology to practically the global state of the art in all aspects of production, exploring, discovering, and putting into production stream natural resources like .liquid petroleum gas and oil, systematically training the micro-businessmen in basic entrepreneurial skills, lowering transaction cost by building and reinventing a flat and service oriented and red-tape averse government bureaucracy both in the national as well as the local units, providing free constant and wherever possible internet based labor-skill enhancement continuing education to upgrade and maintain human capital quality up to global standards; adaptation of eco-friendly techniques for sustainable resource exploitation; promotion and enhancement of transportation and communication infrastructures to intensify economic interaction among Filipinos in domicile as well as those overseas; promoting universal access to health care to maintain a healthy and productive labor pool.
When programs like these which targets the lowering of our capital output ratio leading to a more efficient usage of our nation’s wealth or capital stock are launched by the Noynoy Presidency in its first hundred days and sustained through the following thousand days and then intensified in the next thousand days we may be able to achieve GDP rates of growth in the double digits by the mid term of Noynoy’s presidency. Is this impossible? Not quite – Singapore has done it; China has done it – and to borrow a popular phrase from someone -- ‘ Yes we can’.
Attaining a 300 billion GDP in US dollars at 2010 constant prices in 2016, we will have a GDP share of world product at .389 percent. If we are able to lower our population growth rate gradually from 2 percent a year to 1 percent a year by 2016 we will have a population base of only about 100 million instead of 105 million people. Our share of the world’s population by then will be only 1.333 per cent which would be lower than the 1.343 percent share we have at the present time. This basis point movement in share of a 7.5 billion world population is quite significant. This would allow our GRR index to climb up towards unitary balance from .222 to .292 – an improvement of 32 per cent. This would mean an upward improvement in per capita income by 57 percent from US 1,915 in 2010 to US 3,000 at constant 2010 prices. If we can attain this target, the improvement in living conditions will be quite palpable. Furthermore, if we achieve near zero population growth during this period our savings rate would be greater and our GDP acceleration would be faster leading to much higher per capita incomes.
Meeting these stated income growth goals and hoping for attainment of higher economic growth targets by 2016 would mean the adoption of drastic measures that would put the brakes on our careening population growth rates. A version of the one or two child policy of China through material incentives like tax credits can be resorted to. Legalization of voluntary abortion and sterilization has to be done. Material incentives can be combined with a mixture of publicity, exhortation, and perhaps even disincentives. Policies known in Singapore as "population disincentives" can be instituted to raise the costs of bearing third, fourth, and subsequent children.
In Singapore large families received no extra consideration in public housing assignments, and top priority in the competition for enrollment in the most desirable primary schools was given to only children and to children whose parents had been sterilized before the age of forty. Civil servants received no paid maternity leave for third and subsequent children; maternity hospitals charged progressively higher fees for each additional birth; and income tax deductions for all but the first two children were eliminated. Voluntary sterilization was rewarded by seven days of paid sick leave and by priority in the allocation of such public goods as housing and education. The policies were accompanied by publicity campaigns urging parents to "Stop at Two" and arguing that large families threatened parents' present livelihood and future security. While the penalties weighed more heavily on the poor these were justified by the authorities as a means of encouraging the poor to concentrate their limited resources on adequately nurturing a few children who would be equipped to rise from poverty and become productive citizens.
Without controlling our rapid population growth average living standards cannot improve. As large numbers of children and young people overwhelm our schools and our currently inadequate medical services, our savings rate would deteriorate and the ability of the economy to generate employment will be jeopardized. Things can develop to a point where our republican democracy may not survive because political stability may only be maintained at a huge real cost in our liberties as rebels and anarchist propose a Jacobin type of societal renewal since our present setup could not muster the political resolve to provide a better deal for the common man.
Now !!! where do we get the money to finance these growth targets! Of course we have to fund government so that it could stimulate savings and promote and implement programs that would make our existing wealth or capital stock more productive by adding to it and at the same time lowering our capital output ratio. On top of the need for accelerated economic growth it has also been observed that our expenditures for education and social services like access to health is less than half of the two percent of GDP that our asian neighbors had been spending. The crushing weight of debt service which is estimated at more than 25 percent of the Philippine Budget has crowded out funds that could have been spent for social services.
The OFW Cluster
A way to source the massive funds required for our ambitous macro economic targets and to free the country from the debilitating effects of debt service is to ask for assistance from the virtual Filipino Nation in diaspora – more commonly known as Overseas Filipinos. To plan for the massive and intense participation of this transplanted Filipino nation we have to analyze its characteristics and capabilities.
The Commission on Overseas Filipinos estimate that there are about 11 million Filipinos working and residing overseas. Official BSP statistics record that the OFW remittances for 2009 was 17.3 billion US dollars. Projections for 2010 gives an estimate of about 18.5 billion US in remittances. Assuming the savings rate of 20 percent in 2008 the spending multiplier in the Philippine economy then would be 5. Using actual 2008 BSP figures which show that remittances for that year was US 16.4 billions The macroeconomic equation components in US billion dollars would be: y = 166.9; c + (x-m) = 108.8 ; I = 33.8; and G = 24.5. Y = the GDP; C is the consumption spending in the Philippine economy; and I is equal to savings estimated at 20 percent of GDP becomes 33.8 and G is government spending. The assumption is that we have a perfect transmission mechanism and everything saved is invested. The equations’ values would be: 166.9 = 108.6 + 33.8 + 24.5. Net Exports (x-m) another expenditure item is included in 108.8. With a spending multiplier of 5 and if we assume that the 16.4 billion remittances do not exists we have to substract (16.4 times 5 = 82) 82 billion US dollars from the 2008 GDP. We end up with a 2008 GDP of only $ US 84.9 billion. In per capita GDP that would mean an amount of only US 944 instead of US 1,854.
Without the OFW remittances Philippine per capita income would be cut down to almost half. Even if we take Cayetano Paderanga’s suggestion that the spending multiplier from OFW remittances are really dampened by weak governance, as well as leakages, and poor financial intermediation then we can assume that such a multiplier is just half as potent. With this assumption our GDP in 2008 would only be reduced to US 126 billion and our per capita income would go down to US 1,399. This would then represent a reduction of about 33 percent in our per capita GDP for that year. This what if exercise underscores the potency of OFW remittances in its impact on our economy. In 2010 figures this would mean that without the OFW remittances our estimated 1,900 in per capita GDP would be reduced ranging from a minimum of 33 percent to maximum reduction of 45 percent.
The question then that the Noynoy Presidency should explore is whether the level of OFW remittances can be significantly increased up to a point where it can provide a way for the Philippine economy to grow at rates similar to that of Singapore and China in the past decade. At the moment the existing OFW inflows are in effect substantially consumption remittances. What has to be increased in a dramatic fashion are OFW investment remittances. For this imperative scenario to sink in as well as to be able to operationalize it, let us go into an exercise of estimating just how big the economic potency of this Filipino Nation in diaspora is.
The 2004 US census estimated that Filipinos in the US had an average income of $ 65,700 annually. The number of Filipinos in the US was also estimated to be about 4 million. Multiplying this number into the average income figures we get US $ 262.8 Billions as the total income of Filipinos in the US . If we assume that the other 7 million Overseas Filipinos outside the US have only one half of the average income of Filipinos in the US we come up with a total income of 229.95 Billions in US dollars for this group. Using the income approach in GDP computation ( the other is the expenditure approach which we have used earlier) we arrive at a total GDP for this virtual Overseas Filipino Nation of $492.75 US Billion. Since we are using six year old figures for this estimate the OFN (Overseas Filipino Nation) GDP can actually be much more than $500 US billions in current prices. The OFN actually has a GDP that is more than double that of the Philippines at present (2010). Our projected Philippine GDP of $180 billion US for 2010 is just 37 percent of $493 billions.
And how does our virtual country of OFN compare with the rest of the world. Let us see!
In terms of the GDP levels of the world using 2008 data, the OFN would be niched between 19th ranked Switzerland with a US $ 494.62 Billion GDP and 20th ranked Belgium with US $ 470.4 billion GDP. In per capita terms OFN residents have an income of US $44,795.45 each in 2004 prices. Compared with the per capita income of the Philippines in 2010 prices which we estimated to be about US $1,915 dollars OFN per capita income is 23 times greater. Compared to OFN residents in the US Philippine per capita income would have to be multiplied 34 times to achieve parity. ( These comparisons validates the indications given by the GRR Index. ) Compared with the rest of the world in per capita terms the OFN fared better than comparisons with just GDP levels. The OFN per capita ranks higher than Finland with a US $ 44,492 per capita and follows 11th ranked Australia which has a US $ 45,989 per capita income. The OFN has a defacto rank of 12th in world per capita incomes.
It has been reported that the propensity to save in the US is just 11 percent of income. Although it would be safe to assume that residents of OFN will tend to have a higher propensity to save let us approach our exercise conservatively and assume that OFN residents also save at 11 percent of income.
With a GDP of 494 billion US dollars – 11 percent of that is 54 billion US dollars. Right now OFN remittances to the Philippines just stands at about $ 20 Billion US dollars. At the assumed savings rate of 11 percent the OFN can potentially add another 34 billion to remittances into the Philipines. Assuming further that only half of this potential is realized because OFN’s may want to keep some of their saving in their host countries then there is still that potential of doubling remittance inflows if OFN residents are properly motivated.
The challenge to the Noynoy presidency is how to mobilize this potential of the OFN residents to assists economic growth in the Philippines. If President Noynoy is able to add 17 billions in OFN inflows into the Philippines by the end of his term in 2016 then his economic efforts would meet with great success. The problem is how will he do it.
Leaving the question of OFW motivation for later let us go to the scenario that can be possible with significant increases in OFW remittances.
Based on trends the remittance inflows expected for 2010 is forecast at US $ 19 Billions. By just using the trend of remittance growth, we can expect to have a remittance inflow of about US 25 billions in 2010 constant prices by the year 2016. The GDP projections made earlier where the impact of increasing savings rate and decreasing capital output ratios were examined assumed that the trend of about 6 percent rate of growth in remittances remained consistent to the year 2010. Using these remittance levels we have determined that we can reach a GDP level of US 300 billion for 2016 at 2010 constant prices if we are able to sustain growth rates through efforts at increasing savings and making more efficient usage of our wealth or capital stock. Here we assumed efficient financial intermediation between savings and investments levels. Since we did not inject any intervention to deliberately increase remittance inflows at that GDP 300 level, we will now consider this our low estimate. We now do a scenario with a medium and high projection of GDP growth premised on the fact that with proper policy and programs an Aquino Presidency could increase remittances flows dramatically above its trend growth. Our medium estimate will aim for a 2016 GDP of 400 US billion dollars at 2010 constant prices. Our high target will aim for a 2016 US $500 billion GDP at 2010 constant prices.
The following table shows the remittance inflows required for our low , medium, and high GDP targets.
|Trend Level||Target +||Target +|
GDP is in US 2010 constant billion dollars.
The column for trend level remittance shows how OFW remittances are expected to grow yearly through 2016. These remittances as already mentioned are mostly consumption remittances i.e. this are being sent by OFW’s to their dependents for their dependent’s current consumption needs. Lately a portion of these inflows are used to buy real estate properties and hence most real estate development in the Philippines relied on a significant portion of their sales on OFW markets. This presumes that current government efforts at OFW deployment will have to continue until we are able to develop our local labor absorptive capacity as new jobs are created within the country. The planning premise here is that if initiatives can be made to offer OFN residents stakes in portfolio as well as direct investments opportunities in the Philippines , OFN residents will open their pocket books and thus generate the targeted investment remittance inflows on top of trend consumer remittance growth. Such additional investment remittance flows will generate dramatic increases in the Philippine GDP. At the present time the NEDA seems to adopt a spending multiplier that is close to 2 or thereabouts (that was the multiplier NEDA used in assessing the impact of election related spending on the economy). We can use this as a baseline and ignore trailing multiplier lag effects that impacts the economy in the succeeding years. We assume that the economic managers address structural inefficiencies to the effect that the Philippine economy’s spending multiplier evolves from 2 in 2011, to 2.5 in 2012, 3 in 2013, 3.5 in 2014, 4 in 2015, and 4.5 by 2016. Such inefficiencies include shortcomings in our financial intermediation systems since our banking industry is characterized as one of the most risk-averse compared to our neighbor countries. The second level impact of an improving incremental capital ouput ratio was also included in this scenario building exercise to complete the assumptions made in projecting the GDP levels for the medium as well as the high target assumptions. Compensatory public stimulus investment spending is also assumed here as the savings rate naturally creeps upward with increases in projected income beyond the year 2014.
As mentioned earlier, if we are able to control population growth so as to bring this to a rate of 1 per cent increase per year in 2016 we could expect a population level of just about 100 million in six years. If our high GDP projections are realized our per capita income will be US $5,000 in 2016. Our GRR index will then dramatically increase to 0.487062 or almost half of Unitary Balance. The leap from the US $ 1,915 per capita in 2010 to this projected 2016 level meant a yearly per capita income growth of almost 20 percent – which we sorely need. To attain this kind of growth it means that our OFW remittances should be as follows:
|Year||OFN Remittance||OFN GDP||Remittance Ratio|
OFN and GDP are in billions US $ 2010 constant values.
As we can see from the preceeding table, even with our high projections in increasing remittances the resulting remittance ratio for OFN is just 8 percent which is well below our conservative savings rate assumption of 11 percent. This means that if properly motivated and given stakes in Philippine development which is meaningful and also profitable for them then OFN residents can afford to support such projected investment inflows. The challenge to the Noynoy presidency is how to mobilize this potential of the OFN residents to assists economic growth in the Philippines . How will OFN residents be motivated and mobilized to assist and be a positive players in the Philippine economy.
Indeed how can this be done !
We have at the moment about US $50 Billion in external debt. These are loans from different international banks. As these loans mature the Noynoy administration can issue peso denominated sovereign bonds to be sold through the different Philippine embassies and consulates abroad through branches of the Philippine Postal savings bank in these consulates. If such sovereign bonds are to be issued in the nominal amount of 4 billion dollars a year the external debt will be cut down by half at the end of his term and will be in effect shifted to domestic debt papers. That way the debt service allocations are in effect internalized in the Philippine economy through the OFN communities. $ 4 billions would translate into about 200,000,000 peso denominated 1,000 bonds. If these bonds are sold in lots of 10 that is 10,000 pesos and if on average OFWs get 5 lots each of 50,000 pesos, the whole 4 billion dollar issuance will be covered by about 4 million OFN residents. This is one way.
There are many other ways to encourage more remittance inflows. By having a double savings passbook system in a rejuvenated Postal savings bank that would have a branch in each Philippine Mission abroad. Issue GFI bonds to OFW’s for the purpose of microfinance in all public markets of the Phililppines. Target about 2 billion dollars a year and let Mr. Palengke take charge of this. Issue GFI bonds to OFWs for the purpose of promoting public school teachers credit unions all over the country. Another 2 billion dollars. The GFI will help the teachers free themselves from the clutches of informal lenders – when they join the credit unions and have their salary deductions in payment for their loans taken by the credit union instead of the informal lenders. Train the informal lenders that will be displaced to become formal investors by involving them in government privatization efforts.
Other ways to motivate OFN residents would be to create combination of foundations and corporations to tap TBG (to be generated) OFW inflows for specific targeted purposes: A hospital foundation and/or Philippine Hospital Corporation to provide a network of Hospitals in the Philippines; An education foundation and or Philippine community college corporation to supplement the education needs of the nation; Streamlining all the soldier related foundations to take care of retired and disabled soldier needs; Creating a Philippine Armed Forces Modenization Foundation; Creating a Philippine Microfinance Commission; Creating a Teachers foundation to take care of retired and disabled teacher needs.
The process of mobilizing huge OFW investment inflows will require some sort of coordinative mechanism. At the moment we have the POEA, OWWA, TESDA, the Commission of Overseas Filipinos, and the Philippine missions abroad and prospectively a rejuvenated Postal Savings Bank, on the side of government. Perhaps a quasi private Foundation or corporation should be created to take care of the private side of OFW investment inflows. A Overseas Bayanihan Fund or corporation can be created with minority government participation at ten percent can be initiated. The 90 percent can be subscribed by the local private business sector and OFW organizations in different countries. Government can seed the process by releasing 100 million pesos as ten percent of its participation and immediately appointing two directors to begin organizing and recruiting the rest of the subscribers. The organization can have a full board of 7 or 11 depending on how the Overseas Bayanihan Fund will be finally structured. The important thing is that these remains majority controlled by the OFW private sector.
A Philippine Marshall Plan.
So the pieces can fall into their proper places. However that does not guarantee that things would work and the desired effects achieved. What is being proposed is no less than an OFN sponsored investment inflow that is much larger than the European Marshall Plan in relative terms. In the original Marshall Plan some 13 billion dollars flowed from the US to Europe in economic and technical assistance for a period of 4 years from 1947-1951. On an annualized basis the 13 billions represented 1.3 percent of US GDP for the period. The comparative ratio for our OFN investment inflow on top of consumer remittances would be about 3 to 4 percent on an annual basis on top of consumer remittance trends. The European Marshall Plan was considered a great success. By 1952 as the funding ended, the economy of every participant state had surpassed pre-war levels; for all Marshall plan recipients, output in 1951 was 35% higher than in 1938.
There is no doubt that if Prez Noynoy can inspire OFN residents to invest in the Philippines in significant amounts our Philippine 'marshall plan' will also be a success. However, this would mean that he would have held the ugly head of corruption at bay; develop efficient methods of production to decrease our capital output ratios; increase our savings rate dramatically; and jawboned significant factions of the Philippine economic and business elite to share wealth building business opportunities with OFN residents. With Prez Noynoy providing inspired leadership and with a very positive and sustained response from the OFN residents then perhaps the Philippines may have a chance -- a good chance at finally realizing the economic potential that we always had.
- A Partnership for Progress
- Mobilizing Overseas Filipino Investment Remittance Through a Philippine "Marshall Plan"
- Get the picture? The Philippine DEBT - from EDSA to the stolen election of 2004!
- Gloria Arroyo's Lies Not Even Close!
- The First 100 Days of Pres. Benigno C. AQUINO III
- Expectations from a Noynoy Aquino Presidency.
Gil R. Ramos Ph.d. finished his Doctorate in Monetary Economics and Masters in Population Economics at the University of Hawaii. He did his AB Economics and also a Masters in Urban Regional Planning both at the University of the Philippines. He currently teaches MBA students at the (New Jersey City University) NJCU in Managerial Economics, Corporate Financial Management, and Managerial Information Systems. He runs his own consulting firm GRR Analytics based in the New York / New Jersey area.
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