Caught between plunderers and saboteurs

It is not as if our economic managers did not have ample prior warning that the country’s economic performance for the second quarter was headed for a dive, so that they could take the proper countermeasures. Our statistical system precisely includes an early warning system, as it were, about such an eventuality, in the form of the so-called  Leading Economic Indicator System (LEIS), developed jointly by the National Statistical Coordination Board (NSCB) and the National Economic and Development Authority (Neda).

It is a simple enough device.  In essence, the two agencies chose 11 economic indicators that “consistently move upward or downward before the actual expansion or contraction of overall economic activity” to compute a composite index (the Composite LEI), thus providing “advance information on the direction of the country’s economic activity/performance in the short run” (the succeeding quarter). The economic performance is measured by the non-agriculture component of GDP, namely the gross value added (GVA) of the industry and services sectors. Why exclude the agriculture component of GDP? Because its cycle doesn’t have the same pattern as the GDP cycle.

These leading economic indicators are the consumer price index, electric energy consumption, exchange rate, hotel occupancy rate, money supply, number of new business incorporations, stock price index, terms of trade index, total merchandise imports, tourist arrivals, and the wholesale price index.

Having gotten a rough idea of the what and how and why of the LEIS, a visit to its website will confirm that last  March 1, the NSCB posted  as well as  issued a press release saying: “After six consecutive quarters of upswing that started in the fourth quarter of 2009, the composite leading economic indicators (LEI) slid slightly in the second quarter of 2011, to 0.103 from a revised 0.115 in the first quarter of 2011 indicating a possible slowdown of economic activity for the quarter.” It then proceeded to describe how the indicators contributed to that outcome: six of the eleven contributed negatively, while five contributed positively.

In other words, one month before the beginning of the second quarter of this year, the NSCB already issued a warning of a  possible economic slowdown (that’s about as close as a government agency can get to screaming and shouting and blowing the whistle).

But even without that formal warning from our statistical system, our economic managers (and the whole world) must have already known that the rough patches that the European and American economies (with Japan thrown in for good measure) were going through, not to mention the political instability and ongoing violence in the Arab world, spelt trouble for us, affecting as they would the demand for our exports (of services as well as goods) and the remittances of our overseas workers. Some, but certainly not all, of the effects were already captured by the LEIS.

The question is: If the danger signals telegraphed by our LEIS and the international situation had been taken seriously by the economic managers, could they have done something to soften the blow? And the answer is: Of course.

What could they have done? The usual prescription is  stimulus, using fiscal and monetary tools.  There are constraints, of course.  In the case of monetary policy, the Bangko Sentral ng Pilipinas didn’t have very much maneuvering room given inflationary pressures, exacerbated by the BSP’s need to keep the peso from appreciating too much. In the case of fiscal policy, there was also very little maneuvering room because of self-imposed deficit ceilings. But certainly, at the very least, our economic managers should have seen to it that the government’s programmed expenditures were spent. In other words, if deficit considerations prevented them from stimulating the economy by spending more than initially programmed, they must in no case spend less.

To illustrate:  Actual expenditures for the first quarter of this year were P82 billion less than what was scheduled to have been spent (one of the reasons for the slow growth in that quarter). You would think that the economic managers would see to it that they would make up for lost time—these are infrastructure expenditures—in the second quarter.

Did they do that? No.  And not only did they not spend the P82 billion that had not been spent in the first quarter, actual expenditures in the second quarter were P58 billion less than programmed. That adds up to a total underspending of P140 billion for the first half of 2011.

Bottom line:  Instead of trying to mitigate the expected slowdown, our government economic managers exacerbated it.  Per the national accounts, public construction expenditures decreased by 51 percent in the second quarter of 2011. And this pulled down the country’s GDP growth rate by 1.4 percentage points. The GDP would have expanded by 4.8 percent, rather than  3.4 percent, that it is.

Their defense? That it was all part of good governance. They wanted to make sure that there was no graft and corruption.

I accept that.  But surely it should take only six months for the reforms to be instituted? Public construction contracted by 23 percent in the third quarter of  2010 and 14 percent in the fourth quarter. Okay, that’s the price for trying to tighten procedures. But decreasing by 38 percent in the first quarter of 2011? And 51 percent in the second quarter?

Prevent plunder? Maybe. But there is economic sabotage  in the process. What a choice Filipinos are faced with: between ill-intentioned plunderers and well-intentioned saboteurs.