Economic responses to COVID-19 recession differ among countries (Continued from last week)

Countries differ in the flexibility of their economic structures and the level of their development. A highly advanced economy has much more important and effective policy tools at its command than a less developed, or emerging, economy.

The effectiveness of programs and policy response. But all other things are not equal. Some economies have better fundamentals than others, especially at the time when the coronavirus disease 2019 or COVID-19 struck. These fundamentals are the product of good and sometimes well-timed and careful, economic management.

Thus, their response energies could be focused on a sound program of recovery, and they could emerge even better off in the post-COVID-19 world. However, this requires a wise combination of the policy tools of fiscal affairs and a corresponding monetary framework that supports the program.

Much depends on how the government re-arranges its priorities and approach to the development challenges and realigns the set of critical economic reforms that could make a major difference in the outcome.

The weapons of choice for macroeconomic stabilization are fiscal and monetary policy tools. To ensure the outcomes, however, it is important to have sound economic development objectives which essentially uplift of the economy through jobs, income increases, widening markets, and rising standard of living.

Phl status before COVID-19. The Philippine economy before COVID-19 struck was in an enviable position. After years of slowly improving and sustaining those fundamentals, the Philippines rose to the rank of emerging economies seriously pushing for higher economic growth.

After holding the fiscal deficit level at around two percent of GDP (gross domestic product, the measure of total output) for years, it moved that parameter with more public spending.

In the last two years, the level of government spending went up, but government revenues (through a major tax reform) went up and held it at three percent of GDP. This was further strengthened by improved foreign exchange earnings that propped up the international position.

In fact, there is much more leg room to increase government spending, especially if undertaken to finance public investment in infrastructure and in education. Philippine debt-to-GDP in 2020 (latest) is only around 0.4, meaning only about 40 percent of total GDP. Thus the government could raise a direct dollar bond sale amounting to $1.5 billion handily.

Wealthier economies have often experienced higher ratios of debt-to-GDP. Japan has the highest, 2.84, meaning its public debt is almost three times the value of its GDP. No other major high income economy though has such a high debt ratio.

Most high income economies have ratios of public debt nearly equal to or a little higher than their GDP. The United States is in this league, along with France, United Kingdom and Canada. During World War II, the debt-to-income ratios of the warring major economies rose to levels like that of Japan.

Today in Europe, the most fiscally conservative economy is Germany; it has a debt to GDP ratio of 0.57. Germany is also the dynamo that drives growth within the European Union in our contemporary times.

Thus, the Philippine public debt is relatively light, and there is room toward making it bigger. So, if managed well, not poorly, it can really grow slowly to make a big difference in raising the living standards of Filipinos.

To maximize the contribution to growth and higher living standards, the fiscal program debt enlargement through the development program needs to be directed toward improving the country’s infrastructure assets and those in education and human capital.

The Economist magazine, in its May 2, issue, ranked 66 countries using four indicators of financial strength and put the Philippines 6th strongest in the list. The four indicators used were: size of public debt to GDP; size of foreign debt; cost of borrowing; and foreign exchange cover.

Recovery after lock-down. The economic recovery program, to generate the best outcome, needs to be buttressed by major reforms already suggested in the previous column.

This will happen in a changing and improving the environment for investments. Globalization itself has been under attack due to the trade war and political developments in which greater trade protection is happening.

The prospects for globalization are somewhat blurred by recent political developments in the post-COVID-19 world. More clarity in this regard could emerge after the presidential election cycle facing the United States this year.

It is noteworthy, however, that those countries that embraced bold economic reforms earlier are reaping their rewards as China’s economy is adjusting toward new directions. Foreign investors relocating from China have gone more to countries like India, Vietnam, Indonesia, and other ASEAN neighbors.

The Philippines is left again to observe those development opportunities go to other neighbors because it missed major development and investment reforms.

The needed economic reforms must get into the nation’s policy framework so that they are already in place, not still waiting to be legislated when new opportunities arise. The leadership and the Congress need to recognize the importance of these for the future as it contemplates getting out of the COVID-19 crisis.

Even if the world’s globalization economic machine is still hampered due to lack of economic stimulus from a growing world trade, the domestic investment programs could be accelerated in getting the required investments in infrastructure and in education.

There is room to undertake investments to expand housing for the working class. Singapore and other East Asian economies strengthened their domestic economies further by doing this during times as trying.

A reform late in arriving: the national ID system. An example of a reform that arrived late is the single national ID for each Filipino.

Passed only recently, it still has to be fully set up. What an opportunity missed in identifying recipients and using the ID as a means of efficiently and more quickly disbursing it to recipients via more modern means.

Instead, the government is using a cumbersome system of distribution that produces delays. It is also susceptible to leakage either through faulty processes, misdirection, or even appropriation by the wrong parties.

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/)