I have gotten accustomed to hearing some fairly outlandish assertions from apologists for the Aquino Administration, but this one really took the cake. In response to one of the cottage industry of critics pointing out that rosy economic indicators were a contradiction to rising unemployment and poverty rates and that without addressing those issues, consumption-based gross domestic product (GDP) growth is unsustainable, this particular Aquino supporter had this to say: “I suggest you take a look at specific accounts in the GDP numbers, where you will see impressive growth in non-consumption factors.”
It is rare to find anyone among observers of the Philippine economy who is not at least slightly uncomfortable with this country’s high proportion of consumption —specifically, the national account called Household Final Consumption Expenditure, or HFCE—in its GDP.
While there is no objectively “correct” formula of how much consumption should account for GDP, the best range seems to be between 55 and 60 percent; according to World Bank data, economies classified as “emerging Asia” (which includes the Philippines) are closer to the lower figure on average, while the highly-developed economies of the Organization for Economic Cooperation and Development (OECD) nations are closer to the higher figure.
In general, economic stability is associated with lower HFCE proportions in the GDP, because in order for that component to be smaller, one or more of the other components of the GDP—Government Final Consumption Expenditure (GFCE), Gross Capital Formation (GCF), and the Export-Import Balance—has to be larger. There are a large number of variables, of course, but a cursory look at the six biggest economies in Southeast Asia tends to lend credence to the notion that better overall economic performance corresponds to narrower ratios of HFCE to GCF. The Philippines with a ratio of 74/19 (HFCE/GCF, as a percentage of GDP) is more unbalanced than Vietnam (63/24), Indonesia (57/34), Thailand (56/29), Malaysia (49/26), and Singapore (41/24), and not surprisingly trails all those other countries in hard indicators such as foreign direct investment inflows, exports, industrial output, and even mundane but still important measures like tourist arrivals.
So has the Aquino Administration accomplished anything to improve this balance? Not at all, as a study of the government’s own National Accounts data reveals. As Ric Saludo explained in an interesting column last week (“The economy is strong–despite the President,” March 10), the Aquino economic program is essentially a continuation of the one built by former President Gloria Arroyo, characterized by a focus on keeping macroeconomic basics under control—the government’s revenue base (notwithstanding the apparent inability of the current managers of the Bureau of Customs or the Bureau of Internal Revenue to efficiently carry out procedures and collect it), its external debt burden, and exposure of the financial system to external shocks.
What the economic approach does not do, however, is address the consumption-non-consumption balance in a significant way. High consumption and relatively low capital formation dogged the Arroyo Administration for all of its nine-plus years, and since the Aquino Administration is following more or less the same blueprint—wisely, to be fair, because as Saludo also pointed out, Aquino’s attempt to put his personal stamp on the economy in 2011 was basically a disaster—things have not appreciably changed. Throughout Arroyo’s term, HFCE as a percentage of GDP increased from 73.9 percent to 75 percent between 2001 and 2005, retreated to 73.5 percent over the next two years before climbing back to 74.7 percent by 2009, whereupon it plummeted to 71.6 percent in 2010. Gross Capital Formation as a percentage of GDP generally declined during the same period, from a high point of 24.5 percent in 2002 to 16.6 percent in 2009, before jumping sharply to 20.5 percent in 2010. That particular figure represents the high point of the still-unfinished Aquino era as well; since then, despite an evident belief to the contrary among Aquino apologists, GCF has actually declined gradually, dipping to 18.5 percent in 2012 before recovering a bit to 19.4 percent last year. HFCE, on the other hand, soared from 71.6 percent of GDP in 2010 to 74.2 percent in 2012 before receding to 73.2 percent in 2013.
Consumption-led—and by implication, non-job-creating and non-productive—growth is entirely possible; spending one’s way out of a stagnant economic situation is not a new idea. But when the economy is largely driven by consumption, what will happen over time is either the government or a gradually narrower segment of the population—or in all likelihood, a combination of the two—will have to continuously spend more in order to maintain economic momentum. It is mathematically impossible for that not to reach a tipping point sooner or later if capital formation, which provides the resources that fuel spending, is insufficient.
For their part, the analysts at HSBC seem to think that point is approaching quickly; as reported last week, the banking giant revised its growth projections for the Philippines downward for the next three years, citing a lack of foreign investment and investment in infrastructure, characterized as “worse than Sri Lanka’s,” which would be insulting if it wasn’t true. And guess which component of GDP comprises foreign investment (direct investment, not equity investment, which are two different things the government’s economic experts seem to frequently confuse) and infrastructure.
What President B.S. Aquino 3rd has done is given us another interpretation of the “ampaw” he’s lately been fond of talking about—an economic legacy of merely being present while the medium-term component of an economic approach initiated by someone a whole lot smarter runs its course and provides impressive indicators, with not much of anything actually supporting them.