Time to get to work, Mr. President
Greece will most likely default on its debts soon. With the resulting hit its creditor banks in Europe will take, a European financial crisis will break out, triggering a global economic slowdown just a few notches lower in intensity than the 2008 global financial crisis.
A slowdown is no longer a forecast but is already a reality. As a Citi Private Bank regular economic briefing dated 29 Sept. 2011 put it: “Global growth is slowing and systemic risk is rising… Parts of the global economy are probably already in recession; the question for us is how much will it spread and how bad will it get.”
“The US has already slowed sharply; China is starting to,” the Citibank brief noted. That’s our two biggest export markets.
With a solicitous media, President Aquino may have gotten away with cocooning at home on a mini-vacation while two deadly storms made life miserable for hundreds of thousands of Filipinos. When the middle class’ purses get hit though as a result of a global financial crisis, the media won’t be as sympathetic.
It’s certainly fun to get excited about buko juice (check out www.trigger.ph on this) or to get on China’s nerves over the Spratlys issue. With the coming economic typhoon from the West though, it’s time for the President to hunker down to work.
Other than our episodes of political instability, it has been the impact of global financial crises that explain much of our economic backwardness.
Combined with the outrage over the assassination of Benigno Aquino Jr., the 1983 global debt crisis, triggered by the Latin American default, led to the worst recession in Philippine history – a steep 7 percent annual contraction of the economy in 1984 and 1985 – that prodded the elite and the middle class to revolt against the Marcos dictatorship.
Starting mid-1997, the contagion effect of the Asian financial crisis cut short the boom years under President Fidel Ramos and caused the GDP to decline by 0.5 percent. Similarly, the accelerating momentum of economic growth under President Gloria Macapagal-Arroyo – from 4 percent GDP growth in 2002 to 7 percent by 2007 – was disrupted by the 2008 global financial crisis resulting in just a 1 percent GDP growth in 2009.
A rigorous 2010 study by a five-man team led by economist Arsenio Balisacan for the Asian Development Bank, “The Social Impact of the Global Financial Crisis,” quantified the effects of that financial typhoon: “The crisis pushed down GDP growth rate from its long-term potential (4.7 percent a year) by 1.0 percentage points in 2008 and 3.8 percentage points in 2009,” the study concluded.
That means that if the global crisis had not erupted, GDP growth rate would not have been just 4.2 percent in 2008 and 1.1 percent in 2009. It would have been 5.1 percent and 4.9 percent, respectively, which would have put the average GDP growth rate under Arroyo at a high 5.2 percent, the highest among the five presidents since 1972.
The Balisacan study sets the record straight with regard to claims that poverty worsened under Arroyo’s watch. Official data indeed shows that while poverty incidence in the country went down from 33 percent in 2006 to 28.1 percent in 2008, it expanded to 29.7 percent in 2009.
However, the calculations made by the Balisacan study concluded that if not for the global financial crisis, and because of the momentum of growth in the past seven years as well as the administration’s pro-poor measures, poverty incidence would have further gone down to 27.7 percent in 2009, from 28.1 percent.
The poverty incidence would have been worse if the country went into recession. Indeed, even if GDP slowed down to 1.1 percent in 2009, this was actually an achievement, as most countries went into recession because of the global crisis.
The Balisacan study attributed this achievement to the comprehensive response of Arroyo’s administration to the emerging global crisis. This was in the form of the so-called “Economic Resiliency Plan” which Arroyo ordered the National Economic Development Authority (then headed by Ralph Recto) to formulate and execute fast when the global crisis started to emerge in 2008. The Balisacan study explained: “With a total budget of P330 billion or an estimated 4 percent of GDP, the ERP aimed to stimulate the economy through tax cuts, increased government spending, and public-private sector projects.”
The study noted that the increase in public infrastructure projects substantially boosted the GDP, since private economic activity – especially in exports, as the US market contracted – had slowed down.
Unfortunately, such an aggressive plan to weather a global crisis may be beyond the intellectual grasp of this administration. In fact, in its obsession to prove corruption in the previous government, projects on the pipeline have been suspended or seriously delayed, resulting in the underspending that slowed down the economy. What is required in weathering the financial storm would be the opposite: stimulating growth through government “overspending.”
Aquino’s flagship project, the Conditional Cash Transfer Program, is essentially designed for income redistribution in relatively rich nations like Mexico, whose GDP is seven times bigger than ours. According to a World Bank study, while this program may be successful in reducing poverty, it contributes little to an economy’s efforts to weather an external shock. Indeed, despite its expansion of its massive cash transfer program, the Mexican economy slumped by a steep 6 percent in 2009.
If Mr. Aquino is averse to consulting Arroyo on how her government weathered the global financial crisis, I am sure his former colleague and fellow smoker, Sen. Ralph Recto, would be glad to tutor him right in his cocoon in Malacanang, with packs of Marlboro Lights on hand.
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