Sustaining Economic Reforms : Is there a reform constituency?

Current challenges and Issues in project management

Paul N. JacobUST Graduate School

INTRODUCTION :

“Economic growth in the Philippines over the past three decadesHas been dominated by a boom-bust cycle” – Philippine economist

Boom & bust cycle is a type of cycle experienced by an economyCharacterized by alternating periods of economic growth and contraction.During booms, an economy will see an increase in its production andGDP. During busts, an economy will see a fall in production and anIncrease in Unemployment.

The Fiscal Crisis

Corazon Aquino Government : 1986 - 1992

• The Aquino Government addressed the Fiscal crisis by drastically cutting back on public spending and quickly raising resources through indirect taxes

• 10% levy across the board on virtually all imports was imposed

• Peso-per-liter tax on all petroleum imports

• Mandatory cuts in spending were also ordered for all government agencies

• Value added tax (VAT), 1986

•Economic Laws Enacted: Built-operate-transfer law, Foreign Investment Act & Consumer Protection and Welfare Act

The Tight money policy

Privatization and Deregulation

First Phase : Retention of corporation’s in the

public sector.

(e.g. Lopezes , Ayala’s & Soriano’s )

Second Phase :

Disposal of assets that had been traditionally owned or controlled by the Government

{ e.g. Privatization of the Philippine National Bank (PNB) through public listing and Petron, then the government owned oil company }

The rationale for the privatization was found in the need to raise revenue’s and bridge the fiscal gap.

Structural Reforms

The overall climate for investment has undergone dramatic changes, with formerly regulated, restricted or monopolized industries being opened to competition from new entrants.

Power Generation Telecommunication Inter-island shipping Passenger and Commercial Air Transport Banking Urban water & Sewerage Services Oil trading and Refining

The chances for a repetition of the Boom-Bust cycle are lessened by new investments entering industries, and firms that are competitive and earn enough exports

1991 : Congress passed Liberal Foreign Investment Law, removing minimum law, removing minimum nationality requirement in virtually all sectors of the economy.

Foreign Investment Act (R.A. 7042, 1991, amended by R.A. 8179, 1996) Liberalized the entry of foreign investment into the Philippines.

Businesses with Foreign Investment Restrictions :

Within the 1991 Foreign Investment Act (FIA) , there are 2 negative list also known as the “Foreign Investment Negative List” which defines the foreign investments which are limited or restricted by the constitution and specific laws.Negative List A & Negative List B

Fidel V. Ramos Government : 1992 - 1998

• Keeping the growth of government expenditures in line with the overall growth of the economy

• Reliance on the Build-Operate-Transfer schemes to implement significant infrastructures

• An Active resort to raising non-tax revenues, primarily in the form of proceeds from privatization

• Aggressive resort to non-tax revenues through the sale of public assets

• Rehabilitation of the central bank (1993)

“ The effects of having gained control over the deficit “

Lower nominal interest rates Moderation of Inflation Governments needs for new borrowing was reduced Pressure on interest rates was lessened and in turn reduced the debt service on old debt Appreciation of the Peso vs. Dollar

Year Exchange Rate Reserve ($ Million)1990 24.31PHP 661991 27.48PHP 2,1701992 25.51PHP 3,6611993 27.11PHP 3,4951994 26.42PHP 7,1211995 25.71PHP 7,7621996 26.20PHP 11,467

Source : Bank Sentra l ng Pi l ipinas

The first structural privatization was the power sector. To solve the power shortages that had become the principal obstacle to growth:

1992 – 1993 : Ramos Administration

Opened up the power-generation sector. Built-Operate-Transfer scheme to both Foreign and Domestic investors

Impact:** This measure solves the immediate problem of eliminating power outages.** This also gave the government and public sector a positive experience with private sector entry into utilities** The Foreign Direct Investors Conditions gradually improves** Stimulated domestic and foreign investor interest & allowed the government to bridge its fiscal deficits.

Privatization deals that have caught the most attention :

• Sale of idle government properties:

• Fort Bonifacio• Stockyards in Alabang• Reclaimed properties XXXXXX

The hope underlying privatization and deregulation has been that these should provide new stimuli for both domestic and foreign investors, especially as compared with investment by government-owned or controlled corporations, which are typically indebted and strapped for cash.

International Competitiveness

Logical moves the government can take in 3 pivotal areas:

• Industrial relation• Trade and Production• Infrastructure Investment

Partly reflecting the large gap between domestic savings and investment has been the worsening of the trade balance ( the difference between exports and imports of goods), nonetheless, the current account deficit has declined owing to the large inflows of factor earning from overseas. (e.g. earnings from contract workers abroad )

The worsening trade performance is merely due to the necessarily heavy imports the country must undertake in the course of industrialization and its catch-up on infrastructure.

There are signs that some of the country’s export are losing competitiveness. This is true for agriculture-based commodities ( Coconut oil, sugar, fruits & vegetables), processed foods, furniture’s and other’s. The country was being edge out by other suppliers with lower labor cost such as Vietnam, China and Bangladesh.

2 factors bear on the question of current competitiveness

1. Exchange rate2. Productivity

Neither of which can easily be addressed

The politically correct opinion about solving the trade deficit has now become that of raising productivity in the export sector

Agriculture and Poverty

The Philippine agriculture sector has been growing erratically since the 1980’s, with overall annual productivity growth averaging 1.1%. There has been very little intensification and little expansion in the area under cultivation. There are also market distortions and Other structural deficiencies.

The price support and trade barriers in the case of rice have meant higher prices for both urban and rural consumers and limited benefits to larger farmers. The National Food Authority procures a fraction of the country’s rice production, and hence only a few can enjoy the higher support prices. The smaller rice producers are either net buyers of rice or have little marketable surplus to benefit from higher prices.

The fate of Agriculture in Philippines remains unclear. One of the clear disadvantage in its export drive is its loss of competitiveness in labor-intensive products, because wages have become high in dollar terms, relative to what other countries offer. The current inefficiency of agriculture and the high cost of food relative to prices from abroad represents a severe drag on industrialization. But importing food would definitely cause severe dislocations among those employed in traditional Agriculture.

Opposition and Policy Instability:

Recent economic growth distinguishes itself from past episodes by drawing in large sectors of the population both in terms of social strata (e.g. the middle classes) and geographically (e.g. the development of regional centers other than the metropolitan area). As a result, the recent growth episode has built a constituency for measures that will sustain that growth.

Nonetheless, this is far from saying there has been or will be no opposition to reforms.

There is, owing to extremely uneven distribution of the gains from liberalization programs. The first source of opposition is from those sectors of the economy that are being left behind. Wealth has been concentrated in the services sector specially finance, real estate, retail and whole sale trade, telecommunications and construction.

The grievances and interest involved are disparate and sectional, but more importantly because the ideological and organizational split in the Left leaves no workable ideology to reunite, the resulting protest have delayed but not prevented the growth.

Corazon Aquino Admisnistration 3.8% averageRamos Administration 3.7% averageEstrada Administration 3.7% averageArroyo Administration 5.0% averageSource : NEDA (Nat'l Economic & Development Authority

Average Economic growth in terms of GDP

Philippines business confidence deteriorated to 31.8 in the second quarter of 2011 from47.5 in the first quarter of 2011.

Result of BES (Business Expectation Survey) provide advance indication of the direction of theChange in the over all business activity in the economy and in the various measures of Companies operations as well as in selected economy indicators

Thank You.

Sustaining Economic Reforms : Is there a reform constituency?

References:

• Social Impact of the Global Financial Crisis in the Philippines, 2010 Asian Development Bank

• Impact of the Global Financial and Economic Crisis on the Philippines, 2009, Phil. Inst. For Dev’t Studies

• Philippine Economic Growth, Emmanuel S. De Dios

• www.NSCB.gov.ph (National Statistical Coordination Board)

• business.inquirer.net

• www.tradingeconomics.com

• National Statistics Office (NSO)