Rebuilding the Philippine Economy*

Posted on Posted in 2012-2013
By Edsel L. Beja, Jr.**


Following the adage “a picture is worth a thousand words,” a collage of statistics, graphs, and sentences that highlight the key points are presented in this article to challenge the reader’s impressions of the Philippine economy. This historical macroeconomic perspective can lead to an understanding of why the Philippines is performing the way it does today.

In terms of economic size, measured in terms of gross domestic product (GDP), data from the late economic historian Angus Maddison show that the Philippines ranked third after Japan in 1950 (Table 1), but Japan was not the largest economy in East Asia either. When the official statistics first appeared in 1950, the Philippines emerged as second to Japan only because data for the other “economies” in East Asia had yet to be collected. The Maddison data in Table 1 also show that the largest economy in the region in 1950 was that of China, followed by Japan and Indonesia. The Philippines ranked fourth.

In terms GDP per capita, Table 2 indicates that the Philippines ranked third to Japan in 1950. It is remarkable that Singapore, Hong Kong, and Malaysia were already more affluent on average than the Philippines in 1950. In fact, the Maddison data reveal (not shown in the table) that Taiwan became more affluent than the Philippines in 1965. South Korea accomplished the same thing in 1968.

Period of industrialization

A defining feature of the economic development of both the advanced and newly industrialized countries is a period of sustained industrialization—that is, an increasing share of industry output to total economy output and of industry employment to total employment. It did not matter if import-substitution was pursued first then export-oriented afterwards or vice versa or some combination. What mattered at least for the East Asian successful economies was that industrialization was pursued in a strategic way. The goal was to attain domestic economic progress and internal strength in order to overcome external threats and vulnerability.

From 1946 to 1984, the Philippine economy experienced a period of steady industrialization, albeit it was not the strategic type. Since the mid-1980s, the Philippine economy has been already experiencing steady deindustrialization (notice the descending solid line in Figure 1). Another sign that deindustrialization has been occurring is the declining employment share of the industry sector to total employment of the economy (shown as the black area in Figure 2). Notice also the declining employment share of agriculture and the rising employment share of the service sector.

The consequence of deindustrialization is that the service sector had become the dominant sector in the Philippine economy. Now, agriculture and industry play the supporting roles rather than the leading roles. Thus, the Philippine experience—becoming a service sector-led economy without undergoing real industrialization—deviates from the typical pattern that characterizes economic

advancement. It is a problematic pattern because the service sector cannot generate sufficient economic surplus to back up an industrialization program. It cannot generate enough jobs to absorb the large army of unemployed Filipinos who have different skill levels and educational attainment. Moreover, it cannot on its own push the large number of poor Filipinos out of poverty. Ultimately, a service sector-led economy is not the kind that can produce an economic take-off, or a robust economic expansion that is sustained over decades.

Deindustrialization also coincided with the fall in investments in the domestic economy especially since the 1980s. Figure 3 shows that the GDP share of capital formation in 2010 is comparable to that in 1986—the figures for the recent decade are generally lower compared to figures in the earlier periods. All things the same, falling domestic investments over an extended period hollowed out the economy.

The “remedy” to the problem came in the form of a systematic deregulation and liberalization program that was implemented from about the mid-1980s to the mid-1990s. Of course, it had to be done, but in some ways deregulation and liberalization contributed to the further hollowing out of the economy. The irony of the situation is that the weakened domestic economic base cannot reap large gains from economic openness.

If the Philippines wishes to embark on a re-industrialization program, then the “steering wheel” of the economy must be swung toward the right direction and the “economic engines” pushed to full throttle in order to reverse the recent trends shown in Figures 1, 2, and 3.

The Philippines is not anymore the “sick man” of Asia

Figure 4 is clear that the trauma of the 1983-1984 Debt Crisis of the Philippines was conquered only in 2003-2004. In this regard, the Philippine economy is not anymore the “sick man” of Asia. The “recovery” would have been earlier (in 1997) if not for the 1997-1998 Asian Financial Crisis. What is more significant is that the two-decade struggle is equivalent to losing a generation worth of economic progress.

But the Philippines has not graduated from a “boom-and-bust” cycle of economic performance.

Modern economies undergo a form of “boom-and-bust” cycle. The character of the cycle for the Philippines is shown in Figure 6. Notice that the pattern coincides with the six-year term of a president in the post-1986 period with the turning point around the mid-term of the presidency. That is, each government loses ground in pushing reforms by the mid-term.

Arguably, the pattern in Figure 6 is consistent with the end-is-near psychology that produces an attitude similar to an expression like “there is not much that can be done in the remaining time.” In the same fashion, a leader that counts its remaining months in office can be a bane to economy management.

Notice also that the low point of each cycle in Figure 6 coincides with an external economic shock: 1990-1991, 1997-1998, 2001, and 2008. This pattern implies that the Philippines does not do well with external economic shocks. Arguably, because of its weak domestic economic base, the Philippines would not be able to endure an internally generated economic shock.

Whither Philippines?

A reindustrialization program is necessary to rebuild the Philippine economy. Every initiative—individual, private domestic enterprise (both local and foreign investors), and public sector—must be geared toward the goal of rebuilding the economy even as each pursues one’s self-interest. It is a challenging project given the present configuration of the economy. The crucial element in such pursuit is a vision of a Philippines that Filipinos wish to achieve as a people. The government needs to spearhead the formulation of that vision. Of course, decades of sustained hard work are necessary to accomplish the project.

Filipinos should not be deceived with pronouncements like ‘the Philippines is one of the “Breakout Nations”’ because, as the data show, the Philippines is not.

*An article originally published in the Talk of the Town section of the Philippine Daily Inquirer. (See: Reprinted here with permission from the author.

**Dr. Edsel L. Beja Jr. is associate professor of economics at Ateneo de Manila University.

EconENGAGE is a space devoted to discussions about Philippine society in general and economic issues in particular.

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