‘Strong macroeconomic fundamentals’?

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MIKE WOOTTON

MIKE WOOTTON

The phrase “our strong macroeconomic fundamentals” is frequently repeated, most recently as the safeguard against the effects of changes in the US dollar/peso exchange rate. I find the claim a bit baffling really. This sort of statement along with quotes, including one from the World Bank recently that the Philippine economy has grown miraculously, conflicts with unemployment, poverty, low levels of government spending and foreign investment statistics. There is an apparent dramatic disconnect.

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What exactly are macroeconomic fundamentals anyway? They include unemployment, GDP, inflation (consumer price indices), interest rates and fiscal and monetary policy and balance of payments. Well, according to much of the media, inflation is at a low level, GDP is growing at Olympic gold-medal levels, interest rates are low (only 36 percent to 48 percent a year for credit card interest!) and fiscal and monetary policy is on a tight rein. So if the macroeconomic fundamentals are really strong, why is the job market not reducing the unemployment numbers significantly, if at all?

The Chinese are a frugal race in general, historically, at least since the revolution when the state has provided all, people have had little in the way of disposable free cash and in any event there was nothing much on which to spend it. But things have now changed. For some of the population, consumer goods are more readily available and there are greater opportunities for making money for the individual. Despite this, the inbuilt frugality remains.

They save what they can and many find it psychologically challenging to spend despite the marketing efforts that are directed at them. Many apparently “poor” Chinese will have substantial amounts tucked away somewhere. If this money is not spent, it will not contribute to the growth of the Chinese economy and will do no more than provide some feeling of security, albeit depreciating, to its owners. There seems to be some similarities between this Chinese frugality and the Philippines’ management of fiscal and monetary policy.

The Philippines is not a “poor” country, given an annual government budget of more than P3 trillion, remittances from overseas Filipinos of about P9 trillion a year and the highest tax rates in Asia. But the government finds it so difficult to spend its money, seemingly preferring to hoard it like the Chinese people in order to gain glowing compliments on its macroeconomic fundamentals, fiscal and monetary policy and protecting the value of the peso. No matter unemployment figures, high interest rates (yes they are high, and will remain so), lack of infrastructure, poverty incidence and the drive to get work abroad.

Admittedly the bureaucratic nightmare that all but kills off any development investment also inhibits the government’s own attempts to spend and develop investor-attractive infrastructure. If there were a strong will to undertake development investment and through that attract more private investment, then it could be made to happen at the expense of using some of the “security money” sitting doing nothing in the government’s coffers as well as the risk of opening up some of the almost impossible to satisfy procedural requirements.

Not too difficult is it really—high unemployment and consequent poverty incidence and skills drain to overseas–to spend government money to create jobs and build infrastructure, which then attracts investment, creates more jobs and lowers poverty incidence. The private sector, even in regulation-captive Philippines, is not going to do all this by itself as it has no formal right to do so and you just never know when the government may wake up to its responsibilities.

The government should start spending money, wisely and strategically rather than for personal ambitions, and it can be done—look at Subic for example and the PEZA. To prioritize credit rating upgrades and media headlines that say how well everybody thinks the Philippines is doing economically is to repel foreign direct as well as local investment, keep the macroeconomic fundamentals in a condition that does not withstand too much close scrutiny, retain high unemployment levels and poverty incidence and encourage continuance of the skills drain. If the government leads with a strong will, the private sector will follow but, for now, the private sector can’t seem to think of too much to do beyond developing land, where opportunities are severely limited, thanks to a lack of decent transportation infrastructure itself leading to overbuilding and unrealistic price levels [not to mention the awful traffic snarls]in those areas that are accessible.

Mike can be contacted at mawootton@gmail.com.

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