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No Free Lunch

Our economy in 2016 and beyond

/ 12:10 AM January 05, 2016

SINCE 2000, election years in the Philippines saw the economy grow at an average annual growth rate of 7 percent, against only 4.5 percent in nonelection years. Elections always bring a lot of money into circulation, coming out of bank accounts held here and abroad, hidden or unhidden. It also comes out of government coffers, or from cartons of cash stashed away in people’s homes (yes, there are lots of it out there—and the demonetization of the old series of Philippine currency notes this year will bring them all out of hiding, regardless of the election).

All that money buys radio, TV and newspaper ads, streamers, tarps and posters; transport services along with accommodations for candidates and their entourage; T-shirts, caps and fans emblazoned with candidates’ names; show business personalities’ talent fees; salaries and wages of various campaign workers; food and meals consumed and given away during the campaign, and many more. This alone suggests that 2016 should see a further pick-up in the economy’s growth from the past year’s 6 percent.

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Meanwhile, government is expected to rally on its long-delayed infrastructure projects under the public-private partnerships program, which are exempt from the election ban, being private sector activities. New private investments will generally be on a wait-and-see mode pending the outcome of the national elections in May. But major investments already lined up since last year, especially in anticipation of the Asean Economic Community, will continue bringing up total investment spending in the economy.

All these must be put against the wider international context, where economic growth will continue to be challenged by persistent threats coming from the world’s largest economies, especially China and Europe. While economists at the International Monetary Fund (IMF) project global economic growth to speed up somewhat (to 3.6 percent from 3.1 percent in the past year), the general mood appears to anticipate continuing drags to growth.

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A dominant factor is China, which is expected to slow down further after its annual gross domestic product growth rate fell below 7 percent in the third quarter of 2015, the lowest since the 2008-2009 world financial crisis. The IMF projects that China’s growth will slow to 6.3 percent in 2016, from 6.8 percent this year. Financial news media company Bloomberg notes: “…the world’s appetite for Chinese goods isn’t growing at the same pace anymore, and China has no urgent need for more of the infrastructure it’s been furiously building…” Citigroup’s chief economist Willem Buiter is even more pessimistic, and sees a high and rapidly rising risk of a hard landing for China, citing its substantial excess capacity and high debt loads. He warns that with Russia and Brazil already in recession, a sharp slowdown in China would drag other emerging markets down. Bloomberg also notes that a number of key developing economies, including Brazil, Chile, Indonesia, Malaysia, the Philippines, South Africa, Thailand, and Vietnam have come to depend heavily on China as a buyer of their resources. It stands to reason that these emerging economies will be negatively affected by China’s slowdown.

Asian Century Institute’s John West sees this as a long-term trend. He in fact declares that we are now in the midst of the “Great Asian Slowdown” that is being driven by aging populations and by the failure to compensate this with productivity-boosting structural reforms. He observes how China, due in part to its decades-old one-child policy, saw its working age population peak in 2012 and begin declining since. While China recently decided to shift from a one-child policy into a two-child policy, West sees it as “too little, too late” and unlikely to have an impact for at least two decades. This could in fact have a negative effect in the near term, as additional children impose a burden on public finances. “In contrast to Japan, China faces the risk of becoming old before it becomes rich,” he notes, adding that the average income of the Chinese is only one-fifth that of Americans.

It’s not only China that is headed for a longer-term slowdown. “Japan’s working population started declining in 1995, and has been falling ever since,” West notes. “As a result, Japan’s annual potential economic growth rate fell from over 3 percent in the early 1990s, to less than 1 percent. Today, the Bank of Japan puts Japan’s potential growth rate at just 0.5 percent. Japan shifted from being a demographic dividend to a demographic tax country. Its aging population is pulling its potential growth down.” Korea is heading in the same direction, with its population aging at the fastest rate among the richer countries, as fertility rates are even lower than in Japan and China. Its working age population is projected to start falling in a few years’ time. Thailand, Singapore, Hong Kong and Taiwan, erstwhile among the region’s fastest-growing economies, similarly see the same prospects.

But defying these demographic trends are the Philippines, Indonesia, Bangladesh and India, where large youth bulges are now entering the labor market. But this could be either a demographic dividend or time bomb, West asserts, depending on whether or not these economies invest enough in the productivity of their youth and undertake structural reforms that will generate the jobs to employ them.

So what’s in store for the Philippine economy this year and beyond? It should be better in 2016 and, given our peculiar demographic advantage, could be even better beyond that. But it all hinges on the decisions and moves we make in 2016 itself.

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TAGS: 2016, Asean, business, economy, Elections, Growth, Investment, opinion
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