Sustainability

We are supposed to get today the final numbers on our economic performance for 2012. The President, no less, advised us to fasten our seatbelts and prepare to be impressed.

Most analysts are betting the final GDP growth number will exceed 6%, the higher range forecast for the year just ended. On its own, that is a respectable number — until we remind ourselves of what economists call the “base effect.” Basically, this growth number is computed using the growth in the previous year as base.

2011 was a dismal year. The economy grew at just over 3%. The only factor that explains this gross underperformance is the administration’s inexplicable under-spending. Shovel-ready projects were scrapped. Hardly any economic investments were made.

That dismal year produced telling effects. The unemployment and poverty rates spiked, softened only by the expanded conditional cash transfer dole outs. The infrastructure gap widened, hampering our competitiveness.

It will take years to recover from the damage of 2011’s politically inflicted underperformance.

It is always more pleasant to see the glass as half-full. Expect the Palace propaganda machine to go into overdrive peddling the line that we are about to become a tiger economy.

True, our currency is strong. Credit that to the robust inflows from our 10-million strong expatriate labor force and the rapidly growing business process outsourcing sector (the technological equivalent of sweatshops).

While our remittance inflow is robust, our imports of capital goods dwindles. There are not enough investments to create demand for dollars (and provide the foundations for sustainable growth deep into the future). As a consequence, our gross international reserves are at an all-time high — uneconomically so, prompting us to lend $1 billion to the IMF to help save the Eurozone.

The ballooning of the gross international reserves is ultimately a bad sign. It underscores the weak investment picture plaguing our economy. The Philippines gets a pathetic share of direct investment inflows to the region, notwithstanding the President’s constant boasting about how good things have suddenly become.

A low investment rate widens poverty, which is exactly what has happened here. That tendency is sharpened by the rising inequality characterizing our economy, all the talk of “inclusive growth” notwithstanding. It has been conceded: we will not meet the Millennium Development Goals we committed to.

Consequently, we rate very low in the prosperity index, way below our ASEAN counterparts. The spanking new high-rises changing our urban landscape contrasts sharply with deepening rural poverty. That poverty is structurally ingrained and requires structural reforms (including rapid capitalization of our agriculture that is hampered by obsolete constitutional dictates) that are simply not getting done.

Expect the Palace propagandists to give us numbers without context, such as when they celebrated the fact we rose 10 slots in the Economic Freedom Index then failing to mention we remain well within the category of “least free” economies. We did move up the Transparency International Index as well, although we remain well within the category of the most corrupt countries. Our nearest neighbors and closest competitors have advanced substantially on both measures.

The strong peso presents us with a puzzling paradox. It penalizes the domestic purchasing power of remittances and undercuts the competitiveness of our business-processing sector, the two areas that generate the dollar inflows. That creates self-limiting economic prospects — unless we are able to lift investments out of the rut.

Forget about our tourism industry growing quick enough to make a dent on the poverty picture. The main tourist market today is China with 80 million potential tourists annually. We have just been retained on the Hongkong blacklist of tourist destinations. The only growing tourist market for us is closed into the foreseeable future given all the mishaps and diplomatic problems. For tourist arrivals, we will just have to continue relying on recession-plagued Europe and fiscal cliff-threatened America.

It is likewise true that our stock market is among the best performing in the region — even if our capital market is too small to matter. Our corporate sector is only a fraction of Thailand’s, which is why the Bangkok exchange is constantly featured on Bloomberg market updates and ours is ignored.

Without diminishing the credit our best companies deserve, the boom in the PSEI is in large part a function of the peso’s appreciation. Our market has become sanctuary for hot money flowing from markets with currently volatile prospects. Once the volatility due to Europe’s debt crisis and North America’s fiscal difficulties begin to settle, we will lose the safe harbor attractiveness we now enjoy.

Each time the peso appreciates and the PSEI spikes, the biggest profits are made by dollar investors with peso placements, the first ones to run away when things turn sour. They make money on the exchange rate and then on the stock price. This is why our stock market is so attractive at the moment: the opportunities for profit are double-bladed.

Hopefully, the boom in the capital market will eventually trickle down to improve the lives of the nation’s poor. That will happen only if the investment climate is improved. That improvement requires working at structural reforms, upgrading of the infra and modernizing the policy architecture. Very little of strategic value is being done in this regard.

When presented with the gross economic figures today, the first question we should ask is this: Will the modest growth posted be sustainable deep into the future?

Economic statesmanship, after all, is not about scoring fleeting political points but providing for the next generation.