Introspective
Business World, 16 January 2017

 

The economic cluster of the Duterte watch has been making noises about the revival of Manufacturing and bringing its poverty reducing bonanza to the regions. That is unequivocably a correct strategy. The recent past points to its validity. That recent past is the poverty reduction performance of the Aquino watch. We compared the comparative performance of Manufacturing and Services of the different past presidents of the Republic and noted a peculiarity.

Among all the past presidents since the 1970s, only in Aquino Jr.’s watch did Manufacturing manage to grow faster than Services (see Figure 1).

Manufacturing growing faster than Services is what we call “quality growth.” To put this in proper perspective, we compared the average annual growth rate (AAGR) of Services and Manufacturing for the four decades from 1973 to 2016 for three countries, Philippines, Thailand, and South Korea (see Figure 2).

What comes out in sharp relief is that in South Korea and Thailand, countries that left the Philippines to eat their dust, Manufacturing growth outstripped Services growth by a mile in those four decades; the opposite was true of the Philippines. The poverty outcome is no less dramatic! By 2012, poverty incidence in South Korea was 5% while in Thailand it was 7.8% compared with 27% in the Philippines. Quality growth is as potent as quantity growth for poverty reduction!

The Philippines’ growth trajectory is what we have called development progeria elsewhere (Fabella, 2013; Daway and Fabella, 2015): the premature advance and dominance of the service sector in a low income country. Development progeria produces slow economic growth, persistent poverty, and low investment rate. In Ducanes et al. (2016), we show that Manufacturing dominates other large sectors in terms of average wage and stability of employment. More telling, Manufacturing’s new hires include a higher fraction from the poorest quintile of households and from the least educated. The message: Manufacturing and poverty reduction are fellow travelers in the development landscape.

The Aquino watch, as wimpy as it seems now in comparison to its immediate fire-and-brimstone successor, bucked the stubborn tide of progeria as no president has done before, not the much-admired Ramos administration, not the Martial Law-muscled Marcos watch. Was it just luck or did his early gains in governance clear some poisons in the underbrush? Clearly six years is hardly enough to erase all the blights of 40 years of development progeria. But it is a mighty good start.

How about the poverty reduction record of the Aquino watch?

Poverty incidence hardly budged from 2010 to 2015; our conjecture on the Manufacturing-poverty reduction nexus seemed a nonstarter.

Nonetheless, we know that long time lags govern the relationship between the rise in Manufacturing share and poverty reduction. Then in November 2016, glad tidings from the Philippine Statistical Authority: poverty incidence dropped dramatically from 25.2% in 2015 to 21.6% in 2016! The Manufacturing-poverty reduction nexus may not be too far off after all! A startling development that the Duterte administration would do well to match, if not exceed.

If Duterte’s watch manages to maintain the pushback on progeria began by Aquino, poverty incidence will further wane. If, God forbid, Duterte’s watch returns the Philippines back to the embrace of development progeria, a drug-free Philippines will only be a tad, but not much better.

After all, as one wit quipped in the run-up to the May election: “There is no drug problem in North Korea; but there is poverty and starvation.”

Duterte’s economic team displays a firm grasp of the economic problem facing the country. The proposed tax reform program is compelling.

Who can argue against raising the infrastructure spending to 8% of GDP? Who can go against higher tax on soft drinks and recouping foregone tax revenue from oil products? Who can argue against bringing Manufacturing jobs into the regions? Who can argue against raising the government capital outlay to 5%-7%? The program deserves the support of every Filipino, Dutertards or not.

But all this can be blindsided if political capital is spread too thin.

To work, the program must draw in private investment, both local and foreign, into the regions. There’s the huge devil in the detail! The regional waters are poisoned: the most important economic sectors in the regions — namely Agriculture, Industrial Farming, Mining and Forestry — are virtually “no-go zones” for private capital. Banks would rather pay the penalty (about P1.5 billion) for non-compliance with Agri-agra loan program than lend because qualified farmer borrowers are slim pickings. Excessive farmland fragmentation and noneconomic farm sizes is behind this.

PRC and Taiwan, the erstwhile models of land reform, have now moved towards farm consolidation (see Fabella, “The Liuzhuan System”). The government seems bent on CSR (corporate social responsibility)-type access to credit rather than on a sustainable market-type access. Those who dare dip into the regional waters, as did the San Miguel Foods Corp. with the industrial swinery project in Sumilao, Bukidnon, run into a gamut of legal hurdles. No wonder, private capital has been fleeing rather than flocking the regions.

The regions need to be first cleared of these toxins before an investor pivot called for by the program. But the toxins for investors are honey for the Maoist branch of the Duterte government.

Deng Xiaoping was chased into exile by the Maoists for trying to clear the farm sector of state-mandated landmines to free enterprise and markets like collective farming. Maoists will insist on artificial life support for their cherished but clinically dead ideological horse. The market is anathema to Maoists. Only after Deng Xiaoping finally routed the Maoists in the 1990s did China firmly turn the corner towards quality economic growth and poverty reduction.

The question of the sphinx: Will Duterte emerge as a Deng Xiaoping who routed the Maoists and set the markets free? Or a Mao Zedong who routed the market in route to shared poverty?

 

References

Fabella, Raul V. “Development progeria: malady and remedy.” Transactions 35 (2013), no. 1: 191-192.

Fabella, Raul V. “Liuzhuan: small steps to farm efficiency.” BusinessWorld Introspective article, December 16, 2014. .

Daway, Sarah Lynne S. and Raul V. Fabella, “Development progeria: the role of institutions and the exchange rate,” Philippine Review of Economics (2015), vol. 52, issue 2, pages 84-99.

Ducanes, Geoffrey, Sarah Lynne S. Daway, Majah-Leah Ravago, Raul V. Fabella. “Blameless in stratosphere: CO2 emission reduction, manufacturing growth and poverty reduction in the Philippines.” Forthcoming UP School of Economics Discussion Paper.