Slower

When the politicians were squabbling among themselves, trading charges about “pork” inserted into the 2019 national budget, the economic managers warned that our economic growth could decelerate by as much as a percentage point because of the delay.

That is exactly what happened. We could have expanded our economy by 6.6% in the first quarter, says, Economic Planning Secretary Ernesto Pernia. Instead, our economy grew by only 5.6% – way below the expectations of bank economists and think tanks.

The 2019 national budget was signed into law only last month. Until that happened, pay increases for public sector workers, increments to the conditional cash transfer program and spending on public works had to be put on hold.

Finance Secretary Carlos Dominguez estimates the public sector was unable to spend a billion pesos a day because of the delay in passing the budget. President Duterte vetoed over P80 billion in congressional insertions, deeming them unconstitutional. That further reduces the volume of public spending in the pipeline.

Nevertheless, President Duterte’s economic team reassures the public that the full year growth expectation remains within the 6% to 7% range – as planned. To achieve that range of growth, public spending will have to go full blast for the remaining three quarters of the year. This will be a test of the absorptive capacity of the bureaucracy.

Recall that the bureaucracy’s poor absorptive capacity was the reason for the under-spending that characterized the six years of the Aquino administration. As part of the effort to speed up spending, the Aquino administration adopted the notorious Disbursement Acceleration Program (DAP).

This program was supposed to take funds from agencies unable to spend them and transfer them to agencies that could, sidestepping the problem of absorptive capacity in many sections of the bureaucracy. Instead, the DAP transformed into a huge pork barrel controlled by the Chief Executive and his Budget Secretary. It was disbursed to politicians and used to buy political support.

The Supreme Court found the DAP unconstitutional. It undermined Congress’ power over the purse as the executive branch freely transferred funds unilaterally and arbitrarily declaring allocated agency budgets as “savings.”

Worse, the DAP opened the doors to massive corruption as we saw in the Napoles scandal. Tens of millions were handed out to sitting senators in exchange for ousting Chief Justice Renato Corona.

The Aquino years brought us to the Golden Age of the pork barrel state. Funds allocated to legislators for their pet projects (a.k.a. milking cows) grew exponentially. The presidency became the fountain of patronage. Misuse of public funds was at its pinnacle.

Even during the depths of dictatorship, public funds were not handled so cavalierly as they were during the dark Aquino III years. It was like the Treasury was opened for happy hour. The politicians were happiest.

Dependence

The shocking drop in our growth rate underscores the irresponsibility of our politicians. It also demonstrates the extent to which our GDP growth is dependent on public spending.

The drop in GDP growth mirrors the drop in spending on public construction. In turn, the drop in public sector infra spending is mirrored in a sharp drop in private sector construction spending. The causality is clear.

The economic managers must move quickly to reverse this now that the budget has been signed. Speedy execution of public works projects is the key. That, in turn, should spur increased private sector spending.

It is easy to imagine the economy could quickly regain its footing and become a growth leader once more. The Build, Build, Build infrastructure modernization program has more and more shovel ready projects in the pipeline. Some of the key projects such as the subway line – the biggest single public works project in our history – have commenced.

Build, Build, Build is the major driver of the anticipated rapid pace of growth over the next few years. The strategic projects identified in this program will multiply investment opportunities in the economy. This will be the legacy of the Duterte administration.

Headwinds

Unfortunately, the problem is more complex than just unleashing public spending on what might seem to be a listless domestic economy.

The drop in first quarter growth is also due to a number of structural factors.

Poor performance of our agricultural sector dragged down aggregate growth. The anemic performance of this sector undermined our ability to grow for years. But the situation appears to have deteriorated even further.

There is no clear strategic plan to improve our agricultural productivity. The Department of Agriculture has been a chronic underperformer in this regard. We need a bold, energetic and visionary leader for this sector.

We should stop listening to the tired voices of the usual groups claiming to speak for the farmers who basically want more of the status quo plus a few palliative measures to make things more bearable. It is time to move this sector out of subsistence mode and encourage corporations to farm.

Our exports also declined significantly during the first quarter. This reflects the general slowdown of the global economy. That slowdown translates into weaker demand for our exports.

The Trump-initiated trade war with China and oil embargo on Iran will abet the global slowdown. With trade hampered, stagnation could set in.

Unfortunately, we are in no position to impeach Trump and recast his destructive trade policies. Those are things beyond our capacity to influence.

The best we can do is encourage diversification of our exports. This, however, will require long gestation. Meanwhile, our export sector remains vulnerable.