This is a re-posted opinion piece.
“Why is it,” former Socio-economic Planning Secretary Felipe Medalla remarked to friends aloud, “that for a country with so many shortages — good roads, school buildings, and the like — there are not many who want to invest?”
Former Socio-economic Planning Secretary “Philip” Medalla has put his finger on the pulse: investment spending, paradoxically for a country beset with shortages, is low. This refers not only to public investment spending, constrained as it is by limited public finances, corruption, and bureaucratic delays, but also to private investment spending.
This paradox is highlighted by the fact that Chinese-Filipino investors like Carlos Chan, Henry Sy, and Lucio Tan are putting more capital investments in China, which suffers no lack of capital, than they are in the Philippines.
Indeed, the single biggest challenge of the Aquino administration is to convert the country’s past consumption-driven growth to an investment-driven growth. Only an investment-driven growth can increase the country’s productive capacity, generate millions in employment, and make a real dent on poverty.
According to the Philippine Institute of Development Studies (PIDS), the government think tank, the country has one of the lowest Gross Domestic Investment rates as a percentage of GDP in Asia, far lower than Indonesia whose per GDP per capita is below the Philippines. In 2009, the Gross Domestic Investment Rate of the Philippines was 14%, compared to Indonesia’s 31%, and Thailand’s 21.9%. (A recalculation to include military expenditures as investment spending has raised the GDI rate a few points, but doesn’t alter the big picture.)
The problem can’t be explained by the lack of investible funds or savings. The banking system is awash with liquidity, with about 1.5 trillion pesos deposited by banks in low-yielding special deposit accounts with the Bangko Sentral. The country’s savings rate now exceeds its investment rate as shown by its current account surplus. Part of the reason why the peso is strong is that the demand for capital equipment, and therefore dollars for imports, remains so low.
This then is the investment conundrum: shortages abound, capital is plenty and available, returns should be high, but investment spending remains low. Why?
Way back in 2008, an Italian World Bank economist, Alexander Magnoli Bocchi, attempted to answer this question in a paper entitled, “Rising Growth, Declining Investment: The Puzzle of the Philippines.”
According to Bocchi, first, the public sector cannot invest because of poor revenue performance, weighty debt burden, and high cost of inputs.
Second, “the capital intensive private sector expects low returns and does not want to expand investment at the economy’s fast pace. MPK (marginal productivity of capital) is low, for two reasons: a) the public sector does not invest enough to provide incentives for private investment (as the return to private investment depends on both quantity and quality of public capital spending); and b) inputs are expensive because of elite-capture in the traditional sectors of the economy (agriculture, sea and air transport, power, cement, mining, banking, etc.) There, the politically connected conglomerates, protected by favorable rules and regulations, enjoy barriers to entry and market power, and hence sell at a high price their products (agricultural commodities, transport services, electricity, cement, etc.), which are critical inputs for both upstream and downstream sectors.”
Third, Bocchi states that “the fast-growing businesses in the service sector (electronics assembly, voice-based BPO, and ICT) do not need to increase their investment at GDP growth rates to enjoy fast-rising profits.”
The investment conundrum clearly lies in the realm of political economy. In a paper this year entitled, “The Philippines: Weak institutions a drag on economic performance,” PIDS President Josef Yap stated that “the corporate conglomerates are symptoms of an oligarchy in the Philippines. Weak institutions and an oligarchic private sector are two symptoms of the same coin. A gridlock has evolved wherein stronger institutions are required to loosen the grip of the oligarchs, but at the same time the grip of the oligarchs has to be reduced to strengthen institutions.”
“Crafting appropriate development policies in the Philippines requires a political economy framework supported by a variant of new institutional economics.”
Is the Aquino administration listening to its own think tank?
It doesn’t seem so. Aside from the open skies policy (whose architect, Alberto Lim, was pressured into resigning by negative comments from the President himself), designed to break the monopoly in the aviation sector, the administration doesn’t seem to have the mind nor the will to tackle the investment conundrum. Its legislative agenda is, frankly, laughable, with no attempt to address the structural problems besetting the country. (Exhibit A is that An Act Providing for Additional Benefits and Protection to Househelpers and An Act Amending Republic Act No. 7306 or the People’s Television Network are in the list of priority measures.)
In contrast to the legislature which has just initiated moves to amend the economic provisions of the Constitution, the administration resists constitutional change to liberalize foreign ownership to lessen the oligarchy’s hold on the country, stating “it’s not a priority.” The Aquino government hasn’t even taken steps to dismantle the biggest monopoly in the agricultural industry, the government-owned National Food Authority.
Being diffident about the investment problem just won’t cut it. The looming global recession will take the wind out of the current consumption-driven growth. Already, the government’s fighting target of 7% per annum represents wishful thinking on the back of current forecasts of 4%.
If the Aquino administration fails to solve the investment conundrum and continues to rely on a remittance- and consumption-led growth by the end of its term, it can be judged a failure.
Calixto V. Chikiamco is a board member of the Institute for Development and Econometric Analysis.
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By: Calixto V. Chikiamco
Source: Business World, Oct. 2, 2011
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