“The economy is doing well, even though he’s really incompetent.”
That was how a multinational executive summed up the Philippines and its leader in a talk with a Southeast Asian business and political consultant visiting Manila recently on his regular assessment trips around the region. Despite the failings of President Benigno Aquino 3rd, growth is high, macroeconomic fundamentals are sound, and businesses are upbeat. The executive says he can’t explain the discrepancy.
Let’s give it a try.
In the decade-long Arroyo administration, the Philippines broke out of the mediocre gross domestic product growth of below four percent a year, accelerating to five to seven percent in 2007-10, excluding the global recession year of 2009. Hence, when President Aquino took over in mid-2010, the economy was already doing well.
From perennial GDP laggard in the Association of Southeast Asian Nations, the country was among the leaders since 2007, even managing to grow nearly one percent in 2009 while most major ASEAN economies shrank. And since that slowdown, the economic momentum as resumed.
Aquino inherited a healthy economy
One big reason for the GDP turnaround were the painful fiscal reforms enacted despite the Hello Garci political turmoil and global oil price spiral in 2005. The higher value-added tax rate of 12 percent and the imposition of VAT on oil and electricity, along with other revenue measures, cut the once-burgeoning budget deficit to near-zero in 2008.
That boosted investor confidence, the peso and the economy. And it would have eliminated the budget shortfall in 2009 or 2010, but for the global recession, which required deficit spending to maintain growth, as urged by development institutions.
Besides improving public finances, the Arroyo administration expanded infrastructure and instituted policies to boost agriculture as well as two major dollar-earning sectors: tourism and business process outsourcing.
In the 2004-2010 Medium Term Philippine Development Plan (MTPDP), no less than then-President Gloria Arroyo herself toiled overnight to recast the road-building program, shifting billions of pesos in outlays to the Mindanao countryside. That spurred more crop production by linking farms to markets.
Even more growth-boosting than farm-to-market roads, however, was the nationwide Nautical Highway of roll-on-roll-off ports linked by first-class tarmac. Besides laying the groundwork for unprecedented levels of domestic tourism, which continue to set records today, the RO-RO system enabled islands to trade directly with one another.
By cutting out Metro Manila middlemen, producers got higher prices for their goods while buyers in nearby islands enjoyed lower costs. The 30-40 percent drop in transport costs thanks to RO-RO also lifted agriculture, industry, and the overall economy, while curbing inflation.
Arroyo BPO spurs Aquino property
On business process outsourcing, at the start of the Arroyo administration in 2001, the entire call center industry had about 2,000 seats. By 2010, all of BPO employed some half a million Filipinos and generated foreign exchange earnings of $7 billion a year, while creating mammoth demand for office, retail and residential property.
And one big boost to the industry was Arroyo’s push for less costly international telecom connections and her Cyber Corridor plan to encourage BPO hubs in cities outside Metro Manila. Moreover, the National Competitiveness Council created in 2007 brought together public and private sectors to make the country more attractive to business.
Foreign policy was also geared to lift the economy. Among its tenets: enhancing ties with ASEAN and the rest of Asia, including China; forging agreements to protect the rights and incomes of overseas Filipino workers; and pitching the country to investors all over the world, including the World Economic Forum in Davos.
Net foreign direct investment hit a record of nearly $3 billion, a level the current administration has yet to reach. It helped that despite political unrest, the economy showed itself largely unaffected. And come 2010, media and opposition warnings of failed elections proved unfounded.
Even rice production was engineered toward self-sufficiency by 2013. That was the target of the five-year FIELDS program begun in response to the spike in international grain prices in 2008.
Indeed, rice imports would have declined year after year if the main Luzon harvest in September 2009 had not been destroyed by Ondoy and Pepeng floods, forcing the country to import over two million tons the following year.
Thus, when President Aquino succeeded Arroyo on June 30, 2010, he took over an economy that was on a robust growth path with healthy fundamentals and shielded from political winds.
While counter-cyclical spending bloated the deficit, it was bound to fall as GDP rose with the global recovery. And BPO, tourism, and overall economic expansion were spurring the stock and property markets as well as construction—a leading source of growth in the past three years.
Building on past gains
Despite his well-known disdain for the past administration, President Aquino made sure to build its economic strengths. He reappointed Bangko Sentral Governor Amado Tetangco and tapped Arroyo-era Finance Secretary Cesar Purisima.
Rather than scrapping the increased VAT much maligned by the opposition, Aquino named Kim Henares to head the Bureau of Internal Revenue, where she was a leading official in the past government, and boost VAT and other collections.
One time in 2011, Aquino tried to tinker with the economy by slashing public spending in 2011 in a bid to zero the deficit and win credit rating upgrades. It backfired. Growth halved, and PNoy learned his lesson, leaving the economy and the deficit to the technocrats. With government spending no longer presidentially constrained, Philippine growth resumed its upward trajectory since 2007.
Bequeathed a healthy economy he did not need to fix, President Aquino had a great opportunity to focus on his two campaign thrusts: fighting corruption and eradicating poverty. Sadly, smuggling and pork barrel have trebled under his watch, and anti-graft cases have focused on political rivals. Meanwhile, poverty, hunger and unemployment have improved little despite high growth.
Still, the Aquino administration continues to enjoy mostly positive media coverage which lifts their survey ratings. Now, that’s a discrepancy tough to explain.