No pain, no gain: legacy of Aquinomics?

Is “Aquinomics” losing steam? In the last four years, it appears to have led to a breakout in the country’s economic performance, seen especially in the growth of aggregate investment and manufacturing activity. Business confidence has been spurred by perceived improvements in governance, notably in the fight against corruption. The result has been economic growth that has averaged 6.4 percent annually in the last four years, after averaging only 4.9 percent in the preceding six years. Observers have come to believe that the Philippine economy has ascended to a new growth plane, and can sustain faster rates of growth in the years ahead.

Has it really? Recent events lead some to worry that the economic momentum of the past four years may be dissipating in the face of natural and manmade mishaps. The latest threat to the growth momentum is last week’s Supreme Court decision that declared certain “acts and practices under the Disbursement Acceleration Program (DAP)” unconstitutional. Prior to that, the pork barrel scandal had already slowed down government spending amid heightened cautiousness by government agencies. The first quarter slowdown was in fact partly attributable to this. The DAP decision will likely lead to even more caution, not just on the part of implementing agencies, but on the part of the Department of Budget and Management itself. Government’s leeway to “pump-prime” the economy with the DAP would effectively be curtailed, even as the Supreme Court actually acknowledged it to have stimulated economic growth.

Evidence of significant slowdown in government spending already shows in the numbers. From January to May, total government revenues grew 12.2 percent over the same period last year, and yet total expenditures rose by only 4.7 percent. The result has been an unusual budget surplus of P8.5 billion—not at all good news for a government that has a great deal of catching up to do in infrastructure and other vital public investments. Indeed, textbook macroeconomics teaches that deficit spending is a potent way to stimulate overall economic activity. The ongoing “cleansing” of government spending—ridding it of dubious transactions that line corrupt pockets, and now, of expenditures not authorized under constitutional limitations—has to come at the cost of slowing down economic growth.

This is certainly not the first time in recent memory that we’re seeing this happen. Barely three years ago, government’s efforts to clean up public works projects of erstwhile massive leakages dramatically slowed down economic growth from 7.1 percent in 2010 to only 3.7 percent in 2011. Public construction spending fell by nearly a third, and government came under fire for effectively choking the economy. That year, government revenues rose by 12.6 percent while expenditures only went up 2.3 percent. It was this situation that impelled the Development Budget Coordinating Committee to find ways to speed up spending, egged on by comfort that leakages in the Department of Public Works and Highways had mostly been plugged. Thus was born the DAP, and in the following year, expenditure growth (14.1 percent) well outpaced revenue growth (12.9 percent). By the second half of 2012, economic growth had surged beyond 7 percent.

Now the brakes on spending are being applied all over again, and the prospect of significant economic slowdown is again very real. Is this the price of finding our way to the daang matuwid? While I do believe we are moving in that direction, it has been a bumpy, and at times slow, road indeed. It seems we must really be prepared to see things get worse before they get better. No pain, no gain.

I see the same phenomenon in other efforts of government to pursue long-term change for the better. Over at the Bureau of Customs, the new leadership may be succeeding at curbing the smuggling of rice and other commodities, but the immediate impacts of this success have not been too palatable. In a market formerly awash with contraband rice, garlic and other commodities, prices will inevitably rise if smuggling is effectively curtailed, as we indeed see prices moving up lately. The benefit to local producers hurt by unfair competition from smuggled goods comes at the short-term cost of rising prices for all. Similarly, recently tightened accreditation requirements on importers, while lamented to be impeding commerce now, could ultimately curb the very practices that have traditionally raised the cost of doing business at Customs.

In a similar vein, the process of decongesting Metro Manila by getting more shippers to use nearby Batangas and Subic ports appears to have begun. Japanese shipping line NYK has just announced a direct service to the Port of Batangas from Japan beginning this week, providing an “option to shippers challenged by the Manila truck ban.” Hopefully, more shipping lines would follow suit. It’s obvious that achieving rationalization of shipping traffic among the three ports would not come easy. The ongoing squeeze on commerce forced by Manila’s audacious move could well be the inevitable short-term price of getting to the desired long-term outcome.

If Aquinomics is indeed about enduring short-term difficulties to secure its legacy of long-term gains, then things may not be as bad as they seem. Still, we all need to work together to get over the short-term pains as quickly as we could.

“Aquinomics: 2010-2014 and Beyond” is the theme of the Ateneo Center for Economic Research and Development’s Eagle Watch Forum on July 16, 8:30 a.m.-12:00 p.m. at the Ateneo Rockwell campus in Makati City. E-mail [email protected] or call 02-426-5661 for details.