Slower

If it is any consolation, the Philippines remains the third fastest growing economy in Asia. But the third quarter growth figure of 6.1% does disappoint. In the same quarter last year, the economy grew by an inspiring 7.2%.

In the days leading up to the final announcement, economists at the Department of Finance were bullish about hitting a 6.5% quarterly growth rate. Private sector economists were even more bullish, predicting a heft 6.7% growth.

All of them very likely expected the inflation rate to drop dramatically. The inflation rate is discounted from the nominal growth rate to produce the real growth figure.

The inflation rate, announced a day before the growth rate, remained pegged at 6.7%. Economists expected that rate to drop significantly since rice prices have begun to stabilize and oil prices have retreated.

We are now told that 6.7% is a promising number. It suggests inflationary pressures are abating. Surely, if inflation abates, this will produce (in only mathematically) a more impressive growth rate in the closing months of this year.

 Two others things restrain our ability to grow the economy at a faster pace: our stagnant agriculture and a higher interest rate regime.

In the third quarter of this year, our agricultural and fisheries output contracted instead of expanded. Our economy cannot gallop if our agriculture and fisheries remain hobbled.

Both our agriculture and fisheries have been drags on our economic growth for many years. There are many structural reasons why this is so. There has been little effort to forced march both sectors into modernity. Our existing policies keep us wedded to subsistence farms and municipal fisheries.

If we had moved to pull out our agriculture and fisheries from stagnation, our economy would have grown at a faster rate and we might have reduced the poverty numbers more drastically. But both sectors are weighed down by old orthodoxies, by weak infrastructure and by scarce opportunities for investment.

Although our agriculture and fisheries face challenges that are both ancient and complex, those are not excuses to fail to come up with a strategic plan to pump up productivity. We have yet to hear from our Agriculture Secretary anything approximating a bold and daring plan to increase productivity in the stagnant sectors he oversees. Importing food may help bring down the inflation rate, but it contributes nothing to save our agriculture and fisheries from chronic stagnation.

Over the first nine months of this year, our monetary authorities have raised interest rates by a total of 150 basis points. By raising interest rates, our monetary authorities are trying to arrest the inflationary surge and reinforce the peso’s exchange rate.

There has been success on both goals. Inflationary pressures have been reduced. The peso has recovered a bit against the US dollar.

But higher interest rates have a side effect. They discourage investment and slow down economic expansion. In fact, raising interest rate is an effective tool for preventing an economy from overheating.

Both as a consequence of steep price increases and higher interest rates, consumer demand softened in the third quarter. This further restrained the overall growth rate.

There are other transient factors to consider. Our exports remain weak, partly explaining the yawning balance of trade deficit we deal with. Also contributing to that deficit is the massive imports of capital goods in anticipation of the ambitious infrastructure program government has initiated.

There are also promising developments. Higher investment flows into our economy brings us closer to the goal of investments-led growth. That characteristic will make our economy more inclusive and our poverty reduction efforts more effective.

The Holy Grail of the economic strategy this administration pursues is a growth rate of 7% or better. Considering all the domestic and international headwinds, this will not be achievable this year or the next.   

But it remains a worthy target. It is certainly feasible if we manage the inflation rate better and pass the laws (such as putting rice under a tariff regime) we need to stabilize domestic food supply.

Unease

It does not help our growth aspirations that the country’s ranking in the Ease of Doing Business Index fell so dramatically.

Our economic managers were quick to raise methodological questions about this year’s Index. But that could not be more important than those aspects of the report that accurately depict the problems businesses encounter in our context.

For instance, businesses complain about the tedious procedures required to pass our ports. In this age of Just-in-Time deliveries, both the congestion in our ports and archaic procedures adopted to process cargo stand as anachronisms.

The new leadership of the Bureau of Customs must be reminded the agency’s mission is two-fold: to collect the right duties and to facilitate trade. In the effort to quash smuggling, the Bureau could end up choking our trade. Achieving both goals is the full challenge.

The Index probably understates what everyone doing business here knows: local government corruption adds immeasurable costs to enterprises. With the added powers acquired by local governments through the Local Government Code, many of them have taken to shaking down investors.

The new law promoting greater ease of doing business focuses largely on cutting down red tape for the national agencies. But hardly anything is said in the law about the duly elected pirates who man many of our local governments.

If some of our local governments have perfected the art of extortion using powers devolved to them, imagine how much worse things will be if they acquire more power from a transition to federalism?