An unconventional growth agenda

Economists advocate raising domestic and foreign investment to sustain high economic growth. More financing to improve roads and bridges, expand energy and upgrade education and health services should be part of any growth strategy. But the changing obstacles and opportunities in energy, environment and equity in countries like the Philippines call for a focus on not just more investment but also better investment.

After decades of lackluster performance, the Philippines has recorded an average annual growth of 6 percent in the past five years, above the developing Asia average. The weak growth of the past explains some of this increase, as better policies and consensus building enabled the economy to tap more of its unrealized potential. The crucial policy question now is how to get right the mix of actions to sustain this growth and make its benefits accessible to all.

East Asia’s periods of high economic performance were marked by growth in productivity and substantial payoffs from public and private investments. Because high productivity has not featured much in Philippine growth, a major challenge for decision makers is to improve the returns to investment rather than just raising the level of investment—in three ways.

First, the prospect of increased spending in transport and energy needs to be underpinned by efforts to lessen delays and inefficiencies during implementation. It is vital to expand the access of the lower-income strata in projects, because income inequality in the Philippines is high and because lower-income groups use these investments—when made available to them—no less effectively than higher income groups. Indeed, making growth inclusive would be a powerful response to crime, violence and social instability. Projects in education, health and social protection are social investments that can help in this respect.  These projects should stress quality in addition to access.

Second, the quality of investment improves when pollution, traffic congestion and overcrowding—so-called public “bads”—are tackled. By one estimate, around 6.5 million deaths worldwide are linked to air pollution.  The health cost of air pollution in China is estimated at 2.5-5.0 percent of gross domestic product (GDP), and the Philippines may not be far behind. The bottlenecks in the country’s urban centers could be costing 1 percent of GDP a year, similar to the estimates for some industrialized countries.

A related agenda is having cleaner energy sources. The government’s plan to add more than two dozen new coal plants is unfortunately bucking the global trend of cutting back on this highly polluting energy source.  If the damage from pollution is factored in, changing course to add far more wind, solar and other renewable sources will be good for the economy. It will also be a small contribution to fighting global warming whose devastating effects hurt the Philippines more than most others.

Third, better governance improves productivity. Corruption results in societal losses in country after country, according to studies. In Brazil, for example, losses from corruption are estimated to amount to some 2 percent of GDP; one estimate for the Philippines puts this loss at 3 percent.

World Bank studies highlight the importance of changing society’s perception about its capacity to hold powerful actors accountable. Examples from Brazil, Guatemala and Italy show how better governance was used to prevent the escalation of political instability, enable grassroots participation in the political system, and empower people in their rights.

This threefold agenda has political ramifications because it touches on special interests who may lose out even if the economy gains. But this inclusive agenda can help the Philippines sustain a 6-percent-plus growth—and help its benefits to be shared far more widely.

Vinod Thomas ([email protected]) is visiting professor at Lee Kuan Yew School of Public Policy, Singapore, and Asian Institute of Management, Manila.