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No Free Lunch

A broader-based economy?

/ 05:22 AM September 18, 2018

Are we finally moving away from the “narrow, shallow and hollow” characterization of our economic growth performance over the last 15-20 years?

Focusing on “narrow,” two particular questions are implied. First, is our economy now growing on a broader base, no longer driven dominantly by consumer spending on the demand side, and by services on the supply side, as we saw in the past? Second, is production and income growth more geographically diverse, and no longer dominantly concentrated in Metro Manila and its surrounding provinces in Calabarzon and Central Luzon?

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The quick answer is yes to the first, but no to the second. Let’s examine the evidence.

In the decade of the 1990s, 97 percent of our GDP growth was driven by growth in personal consumption expenditures (PCE), fueled prominently by overseas workers’ remittances to their families. The remaining 3 percent was jointly contributed by investment, government consumption expenditures, and exports (that is, foreigners’ expenditures on our products), each accounting for very little of our economy’s growth. Consumer spending in 1999 was nearly four times investment spending (“capital formation” in the data), with a ratio of 3.8 to 1. Ten years later (in 2009), this ratio had even slightly increased to 4.3 to 1.

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But the story changed in the last eight years (2010-2017), with the growth contribution of PCE going down to 68 percent of overall GDP growth. Investment in 2017 was already nearly half (0.42) of consumer spending. This is good news because, from the perspective of economic growth, spending on investment is more desirable spending compared to the latter. By definition, it represents expenditures that put in place greater productive capacity in the economy, unlike PCE, which represents one-off spending that goes no further. With investment now contributing much more to overall demand growth, one can rightly say that our economic growth is broader and its quality has improved, looking from the demand (expenditures) side.

The same can be said from the perspective of the supply or production side. In the decade of the ’90s, services contributed the bulk (65 percent) of the economy’s output growth, while industry, consisting prominently of manufacturing, contributed 26 percent. By the succeeding decade, the growth contribution of services had fallen to 57 percent, while that of industry had risen to 30 percent. After 2010, the contribution of industry to growth has risen further to 37 percent.

More industry-driven growth is better quality growth, considering that jobs in manufacturing tend to be more formal and stable, paying regular wages and salaries. Services sector jobs, on the other hand, are marked by large numbers of informal jobs and livelihoods of the self-employed and “pa-extra-extra” kind (“padyak” and tricycle drivers, fishball or “balut” vendors, and garbage scavengers are familiar examples). Thus, on the supply side, our GDP growth is broader and of better quality as well.

Is our economy growing on a more geographically broad base? The not-so-good news is that the dominance of Metro Manila and its two adjacent regions of Calabarzon and Central Luzon in overall GDP shares actually increased over the last two decades. In 1996, Metro Manila (National Capital Region) accounted for 30 percent of our overall GDP. Ten years later (in 2006), it went up to 33 percent. Another 10 years later (2016) up to last year, the share further rose to 37 percent. “Imperial Manila” is even more imperial now!

NCR, Calabarzon and Central Luzon together made up 53 percent of total GDP in 1996, 56 percent in 2006, and 63 percent now. The 7-percentage point increase since 2006 is more than twice the proportionate increase in the 10 years preceding that.

The one silver lining here is that, in 2017, all regions of the country grew positively, with three Mindanao regions growing even faster than the national average, including the Autonomous Region in Muslim Mindanao, which grew by 7.3 percent. If that trend holds, then perhaps the widening dominance of Metro Manila could eventually be moderated in favor of a geographically broader-based growth of the Philippine economy.

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TAGS: Cielito F. Habito, economic growth, GDP, No Free Lunch, Philippine economy
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