Commentary

What went wrong?

By Manuel Almario
Philippine Daily Inquirer

12:53 am | Saturday, February 22nd, 2014

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Last week the Inquirer headlined its main story as follows: “P-Noy: What went wrong?” The headline depicted the President’s exasperation and puzzlement, if not shock, over a survey conducted by the Social Weather Stations showing that the unemployment rate among Filipino adults soared to 27.5 percent in 2013.

 

The figure is much higher than the 16-percent unemployment rate found by SWS when it started the survey in 1993, and definitely much higher than the official 7.1 percent unemployment figure claimed by the National Statistical and Coordination Board.

 

The bafflement over the unemployment rate is understandable considering that only days earlier, the National Economic and Development Authority announced that the Philippines had achieved an unprecedented 7.2 percent GDP growth, second only to China’s 7.7 percent. If the Philippines’ employment rate had declined steeply, where then did its economic growth come from?

 

According to Robert Solow, who won the Nobel Prize for Economics in 1987, the three main drivers of economic growth are capital, labor and technology. If one of them, like labor, is wanting, then the potential for high economic growth is inadequate.

 

During the Great Depression in the United States, unemployment went as high as 25 percent of the labor force, and when it attained its highest prosperity after World War II, there was full employment. There was full employment in our country in the 1950s when it was considered “next to Japan” due to our government’s industrialization policies.  Unemployment in China, which has consistently enjoyed near double digit GDP growth for the past 30 years, is just 4 percent despite its population of 1.3 billion.

 

What then went wrong? A clue to what went wrong is to be found in the statistics of average economic growth in the Philippines in the past 50 years—not just two years—which were supplied by the economist Solita Monsod in her column titled “Read and weep” (Opinion, 2/1/14). Monsod wrote:

 

“For the period 1960-2009 [50 years], the Philippines’ per capita GDP (measured in 2005 PPP) grew by an average of 1.58 percent annually, which means that its 2009 per capita GDP was 2.18 times what it was in 1960.

 

“How did Indonesia fare? Its per capita income GDP growth rate was 3.69 percent, which means that by 2009, its per capita GDP was 5.88 times what it was in 1960. The statistics for Malaysia were 4.25 percent and 7.68 times. For Thailand it was 4.36 percent and 8.11 times. For South

Korea it was 5.54 percent and 14.05 times. And for China it was 6.185 percent and 18.94 times.

 

“Studies show that it is government policy and institutions that exert the most influence in explaining the difference in growth rates between countries.”

 

Deregulation

 

Indeed, it is true that it is government policy that determines economic development. And it is not only for a few years, but for decades. What were the policies that our government followed during these past five decades? What happened in 1960 that took us on the wrong path? There was an election and Diosdado Macapagal was elected president. In his inaugural address on Dec. 30, 1961, he proclaimed:

 

 

“I strongly believe in placing the burden of economic development in the hands of private enterprise with the least government interference while making the government assume the full responsibility for implementing the social and public welfare program.”

 

Forthwith, Macapagal scrapped the economic controls imposed by the government in the 1950s. These government interventions, composed primarily of exchange and import controls to promote industrialization, had pushed us second to Japan in economic growth. These also encouraged full employment and higher wages.

Ferdinand Marcos and succeeding presidents followed the principal policy adopted by Macapagal, encouraged and supported by foreign institutions like the US Agency for International Development, International Monetary Fund, World Bank and Asian Development Bank. Controls were scrapped, tariffs that protected local industries were zero-downgraded, agricultural subsidies were eliminated, and economic activity made more dependent on foreign investments.

 

We have seen, through the statistics supplied by Ms Monsod, that as a result of these policies, the Philippines has been left far behind by its neighbors. According to a wise saying, “Insanity is doing the same thing, over and over again, but expecting different results.” Our policymakers must do something different then if they are to be considered sane.

 

So what did the other countries—that were once poor—do that resulted differently from that which was experienced by the Philippines in the past half-century? A new book by noted author Joe Studwell, titled “How Asia Works, Success and Failure in the World’s Most Dynamic Region,” provides an answer.

 

The book relates how Japan, South Korea and Taiwan have been more successful than other countries in their economic development. It “argues that the answer comes down to three sets of policy choices: land tenure policies that support smallholder farmers, manufacturing policies that subsidize domestic industries yet demand internationally competitive results, and financial policies that support the above by resisting deregulation until it can be done safely” (from a review by Brendan Driscoll). Deregulating our economy after the 1950s was thus harmfully premature.

 

Intervention

In implementing the budgetary Disbursement Acceleration Program in October 2011, President Aquino intervened to stimulate economic growth. It consisted simply of accelerating public spending on government projects already approved by Congress and the executive branch.

 

This modest intervention most probably was responsible for the unprecedented GDP growth of 7.1 percent in 2012 and 7.2 percent in 2013, surpassing those of our Asian neighbors. If such a small stimulus in such a short period could produce unprecedented positive results, what could a bigger and longer term intervention do?

 

This is not to argue that the role of “private enterprise” in economic development is of slight significance. Even China, whose economy is mainly state-driven, has acknowledged the important role that the “market” and private enterprises play in economic growth.

 

But to ignore the decisive role that the state plays in economic development is equally disastrous, as shown by our GDP experience for the past 50 years. At least after half a century of failed policies, Mr. Aquino’s administration is seeing the light glimmer for a new path, and not just a straight path.

 

Manuel F. Almario (mfalmario@yahoo.com) is a semi-retired veteran journalist and spokesperson of the Movement for Truth in History, Rizal’s MOTH.

 

Whenever I think about why we have not prospered as a nation and as a people, I could hear my high school social studies teacher’s voice. Having asked the question herself rhetorically in our class, she answered it herself: “A farmer who does not own his land does not have the incentive to be as productive as he could.” And continuing: “To create wealth we need to produce a surplus so we can invest this surplus for more productive endeavors.” To segue her answer, she asked: “How can we produce a surplus when we have a population explosion?”

I can now attest that my social studies teacher is indeed better than our US-educated economists who shaped our policies that you eloquently explained in a historical perspective on “What went wrong?” Their belief in a “free market” economy, which is a myth even in the US, lead us astray as a developing country.

What is more interesting to me is that Joe Studwell, in his latest book, confirmed unequivocally that my teacher was correct: The first of his three sets of policy choices – land tenure policies that support smallholder farmers – was what my teacher was alluding to when she admonished “A farmer who does not own his land does not have the incentive to be as productive as he could.” That true land reform is the first government intervention that must be done in order to maximize agricultural output. (By the way, in his book “How Asia Works, Success and Failure in the World’s Most Dynamic Region”, Studwell criticized the Philippine land reform program as a farce, which is quite obvious to any sane person.)

On my teacher’s comment : “To create wealth we need to produce a surplus so we can invest this surplus for more productive endeavors. How can we produce a surplus when we have a population explosion?” alludes to Studwell’s second and third prescribed interventions. That is, “to direct investment and entrepreneurs toward manufacturing” is similar to my teacher’s “more productive endeavors”. And on his 3rd prescription on focusing capital, she mentioned surplus as a means to produce capital.

Well, at least some of our best and brightest are studying economics or political economy in Europe and the UK so I hope we would not be tied too much to the misguided concept of a “free market” economy.

Thank you for your profound article on what truly went wrong. Now that we know better, we can start rectifying decades of mistakes or at least walk on the correct path to our prosperity. The prosperity we need to alleviate the abject poverty of a large number of our countrymen.

I would further suggest that Joe Studwell’s latest book should be required reading for our students and leaders or those aspiring to be.

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February 22, 2014 · 8:15 am

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