Toward an investment-driven growth

Instead of commenting on the President’s fourth State of the Nation Address (SONA) delivered yesterday, I will discuss the Philippine economy’s long-term performance.

In this context, the Duterte administration has introduced investment-driven growth and has raised the growth rate. However, the quality of the economic growth still needs to improve so that the economy’s modern sector of industry and commercial services becomes highly productive.

Long-term growth. The Philippine economy has been on a long, uninterrupted growth run for a period of two decades now, at a pace of five percent per year GDP.

In recent years that average growth rate of domestic production has gained traction at six percent annually.

Over time, the country’s output expansion has been supported by the the economy’s expanding earnings from: (1) OFW remittances. (2) Exports of semi-conductors end electronics. (3) Operations of call centers and back office operations services.  And (4) Rising tourism sector.

These sources of international earnings have provided the fundamental basis for rising private consumption, domestic investments and government expenditures that fuel the national economic process of growth. As a result, the country’s balance of payments position over this long period has been sustained in relative health.

When, at times, the threat of inflation through rising fiscal deficits was felt, the government – from administration to administration – learned to raise the required changes in revenue position through tax and fiscal reforms that sustained the fiscal balance toward the desired levels (with allowance for an affordable level of fiscal deficit).

In the course of this period, therefore, the country’s macroeconomic fundamentals have remained relatively strong. The boom-bust episodes of the past have become distant and the nation’s sovereign credit rating has been improving toward the last notches to make it fully investment grade.

Duterte economic reforms. Under the Duterte administration which took power in mid-2016, the level of growth has taken a more pronounced investment-driven process.

The rise of the economy would follow from the continued increase of consumption (both in the private and public sectors). The rapid implementation of public investment projects through the Build Build Build program has accelerated the investment-driven pace of activities.

Removal of bottlenecks as infrastructure projects get finished will spell more efficient growth into the future.

The Duterte government, during its second year, significantly enacted a more revenue-productive tax system called Tax Reform for Acceleration and Inclusion (TRAIN).

This reformed tax system enhances revenue responsiveness as the economy grows. Increased revenues raises financing capability to embark on more public infrastructure projects. This works through “leverage.” Increased revenues actually strengthen the capacity to raise larger amounts of financing for long gestation investment projects. Access to borrowed funds, including economic development assistance, becomes easier because there is sufficient revenue-backup.

In this sense, new TRAIN revenues are a kind of multiplier for higher access to development financing.

TRAIN has also made possible more government expenditure support for certain groups in society. The government acquires more capacity to support a higher level of income transfers to the poor (the targeted 4Ps, or Pantawid program: the conditional cash grants to poor families), more public spending on education, including tertiary free tuition for enrollees; and more ability to support salary increases for upgrading government salaries, including those for teachers, policemen, and soldiers.

TRAIN is only the first component of a more Comprehensive Tax Reform Program under the Duterte administration. The next part of the Comprehensive Tax Reform Program is the TRABAHO package that seeks to reduce the corporate income tax and to correct and unify the complex investment incentives system.

Likely passage of the second tax reform in this legislative year would provide a shot in the arm to the investment promotion if structured correctly.

Laying the foundation for a more modern fiscal system to support the demands of sustained high economic growth and future development is at hand if the TRABAHO reforms are put into law.

One recent accomplishment of the Duterte government was the removal of the tight regulation on rice imports and allowing the tariffied entry of imported rice by private traders.

As a result, the country now has access to inexpensive rice. This will reduce the pressure to contain labor restiveness for wage demands.

This law enables the country to access ASEAN sources of inexpensive food that local rice growing cannot attain and opens the country to improve its agricultural advantage in other high valued agricultural crops.

Important reforms to raise the quality of growth. To improve the quality of our growth experience will facilitate the creation of good jobs within the economy.

Though the current record of employment has improved, in relative magnitude of the success it is less impressive than the experience of some of our immediate neighbors in Southeast Asia and in East Asia.

The East Asian formula is not unknown to us. In general, their economic policies with respect to domestic investments – and especially foreign direct investments – have been more permissive, while ours has been more restrictive.

Also, their labor market policies have been much more attuned to market realities, while ours have been less so.

My email is: [email protected]. For archives of previous Crossroads essays, go to: https://www.philstar.com/authors/1336383/gerardo-p-sicat. Visit this site for more information, feedback and commentary: http://econ.upd.edu.p h/gpsicat/