THE 5.3-percent gross domestic product growth posted by the Philippines in the third quarter of 2014 was its lowest since 2011. As a result, many are anxious about the sustainability of the country’s economic growth.
The reason for the decrease was the obvious decline in government expenditures by 2.6 percent from a growth of 7 percent in the same period last year. Thos resulted from the delays in the disbursement of major expenditures for salaries and wages, as well as the maintenance and other expenses for the implementation of major government programs. This could have also caused an upward pressure in interest rates as liquidity problems arose, particularly for private companies with government projects.
Another significant factor is the problem of port congestion, which may have increased consumer prices and constrained the Philippines’s capacity to export, as some shipping lines have suspended operations in the country. Total exports slowed down to 9.8 percent, compared with the 12.4-percent growth recorded in the July-to-September period in 2013.
What needs to stressed, though, is that these factors are temporary, and solutions can be implemented in the short term. In the case of government expenditures, new budgetary procedures, made after the Disbursement Acceleration Program (DAP) was abolished, have been introduced. Regarding the port congestion, the truck ban, which aimed to easy traffic in Manila, had been scrapped. In addition, shipping firms have been encouraged to use underutilized seaports outside of Metro Manila that are closer to economic zones.
In determining the robustness of the country’s economic growth, one must observe structural transformation, which is defined as the reallocation of economic activity across broad sectors, such as agriculture, manufacturing and services. Structural or industrial changes make economic growth sustainable, because it leads a reallocation of the labor force to other sectors where value-added and positive externalities are greater. On the other hand, economic growth without structural transformation only benefits the prime movers (mainly through technological innovation) and can cause unemployment and low productivity in sectors that have been left behind. This results in an unsustainable “enclave situation”.
Hence, structural transformation involves transferring people from an already efficient agricultural sector to a more productive and labor-intensive manufacturing sector. Once manufacturing increases its scale of production, the broader development of services, as well as of agriculture, would be expected. Such structural or industrial transformations underpin long-term economic growth and results in greater inclusivity.
The evidence of structural change in the third quarter can be found in the following:
First, industry posted a growth of 7.6 percent, slightly lower that last year’s 7.7 percent. Manufacturing continues to steer the industry sector, even as the services sector continues to drive the economy, contributing 3.1 percentage points to GDP growth.
Second, investments in fixed-capital formation grew by 10.1 percent from 9.5 percent last year.
Third, employment levels in October increased by 2.8 percent year-on-year, with most of the jobs coming from the growth in the industry and service sectors, thereby compensating the slowdown in agriculture. The quality of jobs seems to have also improved, given an increasing share of wage and salary workers.
Certainly, structural transformation is not an easy task, and it still needs to be pursued. Agricultural development, for instance, is a key element in this framework, but has been given limited attention. Nevertheless, in previous administrations, a drop in government expenditures would have been disastrous. Instead, with the abolition of the DAP and the Priority Development Assistance Fund, the private sector initiated much of the economic activity, created jobs and accumulated wealth. The engine of growth became the private sector, as the state—both at the national and local level—has been limited to merely create the enabling environment for this to happen. Theoretically, a private sector-led growth is more efficient than a state-produced one.
Transformation presupposes the emergence of new firms making new goods in new ways, and old or inefficient ones innovating and reorganizing or being dissolved. This is possible because of the continued remittances of our overseas Filipino workers, and the government’s sound financial and economic management. These, plus the lower gasoline prices and the political will of the Aquino administration, should result in higher economic growth in the coming year.
Thus, from a seemingly hopeless situation, we see signs of hope and the promise of greater prosperity. Merry Christmas and a Happy New Year to one and all!
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For more of our views on and forecasts for the Philippine economy and the financial markets in 2015 and beyond, we would like to invite you to attend the Eagle Watch Economic Briefing at the Justitia Room of the Ateneo Rockwell Campus in Makati City, from 9 to 11:30 a.m. on January 22, 2015. For inquiries, call (632) 263-3221 or send an e-mail to info@ifpmphilippines.org.
Leonardo A. Lanzona Jr., PhD, is the director of the Ateneo de Manila University’s Ateneo Center for Economic Research and Development, and a senior fellow of Eagle Watch, the school’s macroeconomic research and forecasting unit.