No Free Lunch

More housing in BBB

/ 05:05 AM September 03, 2019

Our continuing overall economic slowdown since 2016 suggests that government’s “Build, build, build” (BBB) program has so far failed to give us the economic stimulus it was meant to provide. Public construction had already slowed down from a 28-percent annual growth in 2016 to 19.7 percent last year, and the budget impasse swung it into negative (-22.1 percent) this year so far. Heaven forbid, but the “Build, build, bust” I expressed apprehension about early on might yet play out, unless we do things differently.

I’ve already written of absorptive capacity issues in our major infrastructure agencies, which appear to be an underlying drag on BBB, with or without budget delays. For this reason, many are urging government to revisit public-private partnerships in infrastructure, which was set aside on the seemingly misplaced premise that government could speed things up. Well, the numbers now belie this, and it matters not whether we point the finger at Congress or the implementing agencies.


Apart from the economic boost from improved infrastructure, BBB aimed to directly stimulate our economy via the textbook multiplier effect. That is, a one-off expenditure by government would actually raise total production and incomes by several times the amount of the original spending. If government spends P100 million to, say, build a new road, that same amount becomes incomes received by contractors, engineers, equipment suppliers, construction workers and more. But that’s not the end of it. Those various people now have money to spend or save as they choose. Ignoring taxes, if Filipinos on average save P10 of every additional P100 income they receive, then the original P100 million spent by government turns into a new round of P90 million in spending on various things such as food, clothing, appliances, etc. that those construction industry people would spend their incomes on.

But someone’s spending is someone else’s income, so that second-round spending of P90 million turns into a third round of spending amounting to P81 million, which becomes yet another round of incomes to spur yet another round of spending, and so on and so forth. When it all plays out, the P100 million originally spent by government would have created 10 times as much (P1 billion) total production and incomes. Mathematically, if the saving rate is 10 percent or 0.1, the multiplier works out to be one divided by that, or 10. The lower the saving rate, the higher will be the multiplier effect.


How can government maximize the efficacy of its spending? First, it must spend it on things most beneficial to society — more bridges versus new cars for government officials, more hospitals versus ornamental lampposts. Second, spending it on domestically produced goods and services keeps the multiplier effect within our own economy. If the money is spent to buy trains from China, it’s Chinese incomes that would be multiplied, not ours. Third, it is best spent on activities with widespread linkages to the rest of the domestic economy. For this reason, mass housing is a potent way to spend government money.

Mass housing not only directly responds to a long-standing need of our poorer citizens; it would also have a powerful multiplier effect. First, low-cost housing entails large numbers of construction workers, thereby creating many more jobs than a capital-intensive investment would. The money would circulate more among lower-income and lower-saving individuals, keeping more money moving around in the spending-income cycle and boosting the multiplier effect.

Second, low-cost housing would have much lower import content than other government expenditures (say, hybrid seeds from China), and thus keep the money circulating here at home. Third, housing links on to numerous domestic economic activities: home furnishings, utilities, household supplies and many more. All told, public spending on housing would permeate much more widely and more quickly across various industries and sectors within the Philippines.

I’d say a good way to avert a “Build, build, bust” is to focus more of it on mass housing, where our backlog is huge. It would also bring down poverty much faster.

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TAGS: Cielito F. Habito, infrastructure projects, No Free Lunch, public housing
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