OF SUBSTANCE AND SPIRIT
If some members of Congress continue to collaborate in undermining the positive role of the national budget in promoting economic growth, we should not be surprised if, in the next five years, we would still be struggling in breaking out of the so-called lower middle-income trap. True, public spending on average accounts for only around 15 percent of our gross domestic product but it drives investment and, to a large extent, household consumption, which contribute 25 percent and 70 percent, respectively, of our total output. And because we remain import dependent, our external trade sucks out part of our domestic production.
Budget politics is undeniably entrenched in this country. Courting political favor and winning the next election appear more primordial than allocating the budget to ensure a more strategic implementation of our development plan. We don’t seem to realize the importance of using the budget to build stronger, modern infrastructure on which to anchor our industrial policy. We are certain our people would benefit more from higher-quality educational system funded by the budget to equip and challenge our young people to be many times more competent, more conscious of the community. Better and more universal health system costs money but if it receives priority in the budget now, we would have a healthy nation with reasonable cost in the future because medical needs would be minimized.
What is not going great for us is our preoccupation with taglines and images rather than putting flesh into those taglines and images to make them more real and more substantive, something that even the least of our citizens could see improving their lives. And their destiny.
But if the government would rather launch a sovereign investment fund that earmarks public money away from infrastructure and social services, for instance, rather than prepare the country for a new industrial policy and the digital shift, we certainly should expect that the edge of many countries in the region over us could only widen.
We pointed this out in our comments to last week’s provocative presentation of UP Economics Professor Emeritus Dante Canlas entitled “Avoiding a Low Middle-Income Trap: Lessons Learned from the NEDA and the Academe.” China reached upper middle-income status in 2010 from a lower middle-income level as late as 1999, a gap of only 11 years. Indonesia swung from low to lower middle-income in the 1990s but finally consistently made it to a lower middle-income country in 2003 and upper middle-income category in 2019, a 16-year gap.
Malaysia, the Philippines and Thailand were all classified as lower middle-income countries in 1987 but Malaysia graduated to upper middle-income in 1992, or a short gap of only five years. Thailand joined the higher category after 13 years or in 2010. But “the Philippines appears to have a perpetual engagement with the lower middle-income category and has remained as such until today.” That is close to four decades.
The case of Vietnam is even more glaring. It achieved a per capita income higher than the Philippines’ just a few years ago. Yet Vietnam’s history had been more of war than peace until about 50 years ago. This country of resilient people may not rank high in various freedom indices and English speaking, but they know how to ease doing business. One foreign consultant in Vietnam takes pride in being able to register one’s business in eight weeks and bank account opening in four weeks. Business policy is business-friendly because it is said to be stable.
Like us, they have free trade zones and industrial parks scattered all over the country with global connections. They are magnets for foreign investments because full ownership is allowed with tremendous infrastructure support of global standards.
As a result, Vietnam’s exports have surged, and now worth as much as its GDP. Based on the World Economic Forum, “anything from Nike sportwear to Samsung smartphones are manufactured” here. So much is owed to Vietnam’s strong record in public investment in human and physical capital.
What about the Philippines?
We seem to have failed to take full advantage of globalization. Twenty years after the World Trade Organization started in 1995, real exports rose by 290 percent in the Philippines but 315 percent in Thailand and more than 1,600 percent in Vietnam. Our efforts to invite foreign direct investment (FDI) paled in comparison with our neighbors. In the 10 years before the pandemic, average annual FDI net inflows stood at $5.9 billion for the Philippines, $9.1 billion for Thailand, $11.2 billion for Vietnam, and $19.4 billion for Indonesia.
While we were busy debating which slogans and logos made lasting impression on foreign tourists and businessmen, our neighbors did not exactly sit still. They wisely used their budget to elevate the quality of their infrastructure, rationalize their power, water and other public facilities. If ever there were leakages due to poor governance, they could not be as substantial as in the Philippines because the evidence of economic growth and development is just too apparent. Our country’s poverty incidence and subsistence incidence even deteriorated during the pandemic.
We have never been short of medium- and long-term development plans. In fact, the current Philippine Development Plan 2023-2028 is so different from previous development plans because it is abundantly clear as to its goals, very specific on what legislative actions are required to institutionalize policy measures, complete with metrics of performance. But we lack focus and determination; we are more than eager to incorporate some programs which happened to have been thought out just yesterday. Read that as non-strategic, non-intentional, or just politically expedient.
There we have it: we are hamstrung by poor governance and weak institutions. Singapore’s experience shows that good governance, not less governance, is a successful approach in addressing the challenges of promoting high economic growth and mitigating economic inequality. Strong institutions create checks and balances among government branches, incentives for people to innovate, enable productivity growth through education and infrastructure, and maintain peace and order which are all essential in creating an environment that is conducive to sustainable growth. (Next week: A possible exit from lower middle-income trap)