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THE Philippines’ recent economic performance is a source of both
encouragement and concern. Last year, the country’s gross domestic
product (GDP) grew at a 31-year record of 7.3 percent. The last time
it expanded at such a quick pace was in 1976, when the country was
in the throes of a dictatorship, which had used its authority to
borrow indiscriminately abroad for big public infrastructure
projects.
We all know what happened to that growth tack.
The country reeled under the weight of its huge foreign debt, as
servicing costs shot up even as dollar earnings—mostly from
mineral and farm exports—dwindled with the fall in commodity
prices. That episode began with the country defaulting on its loans
and closed with one of its worst economic crises and the end of the
authoritarian regime.
Last year’s growth run however was more
broad-based, as the government complemented business expansion and
consumer spending, which remains the main driver of economic
expansion. Emerging from its worst fiscal crisis in years, the
government ramped up spending on infrastructure and social services
on improved revenues and lower debt servicing costs, thanks to a
strong peso and low interest rates. The peso’s appreciation
allowed the government to unwind part of its foreign obligations,
while the low rates enabled it to refinance its more expensive debt.
The strong peso also helped mitigate record high
oil prices. Consequently, domestic price increases were kept at
single-digit rates. The benign inflation environment is largely
responsible for the low interest-rate regime, which has encouraged
more consumer and business spending. During an earlier era, strong
economic expansion had reared the ugly head of inflation, which
caused the central bank to put the breaks on growth by raising its
overnight rates—an action that cascaded throughout the financial
system by bidding up interest rate levels and slowing down economic
activity.
Apparently, years of trade liberalization had
partly alleviated domestic supply bottlenecks, which had previously
caused double-digit increases in inflation. This explains why the
Bangko Sentral ng Pilipinas (BSP) can afford to loosen monetary
policy (read: cut interest rates) even with the country’s record
economic expansion. But of course, the BSP last week still opted for
caution, reducing its policy rates by just 25 basis points, or lower
than the 50 basis points cut the financial markets had been
expecting.
Failure to act in the face of a series of cuts
in the US central bank’s Federal funds rate would have widened
further the difference between Philippine and US interest
rates—something that would have sent the peso shooting up as
investors flood the local financial system in search of every
income-earning peso-denominated asset. The excess money this could
have generated would accomplish what record oil prices failed to do
—bid up domestic prices back to the double-digit range, a sure
recipe for a government-engineered slowdown.
But the country’s encouraging episode of
record macroeconomic growth remains haunted by disturbing
developments at the level of the household. The 2006 Family Income
and Expenditure Survey (FIES), the preliminary results of which the
National Statistics Office (NSO) released early last month, painted
a picture different from what the macro data had portrayed.
Last year’s growth run began three years ago,
and so the 2006 FIES data is very telling. If we were to believe the
NSO, household incomes, especially of the bottom 30 percent of the
population, had dropped from levels seen in 2003. The question worth
asking at this point is, who hogged most of the new income the
economy generated?
To answer that question, we have to see that the
dramatic improvement at the macro level didn’t translate to a
corresponding reduction in income inequality. According to the NSO,
the Gini coefficient, an internationally recognized measure of
inequality, inched down but by a very small increment. This is
hardly the movement one expects to accompany the Philippines’
recent economic growth spurt. In short, there is dissonance between
the macro and micro data.
To illustrate the apparently worse state of the
bottom 30 percent of the population, spending for food and other
basic items has grown despite dwindling incomes. This only indicates
that the poor are spending a greater amount of their smaller incomes
on these items—hardly an indication of improving lifestyles.
If so, guess who is basking in the recovery of
new motor vehicle sales and the return of fashion and other
luxury-item boutiques. The question worth asking at this point is,
are we amid a new gilded age? The last time such great income
disparities plagued us, they fueled a Communist-inspired rebellion.
That rebellion has since ebbed (or has it?) The implications for
policy-makers are clear as day: something must be done about these
disparities.
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