OF SUBSTANCE AND SPIRIT

Last week, we concluded the first part of this column by arguing that we are hamstrung by poor governance and weak institutions in our bid to escape the lower middle-income trap. This is not to say that other factors are unimportant and they include demographics, industrial structure, trade profile, and income distribution. 

Poor governance is best shown by our inability to get the perennial rice problem behind us, no matter who leads the agriculture department, as if we could still afford to play trial and error this late in the day. We were on the right track when we finally liberalized rice importation and use the tariff duties to increase the productivity of the rice sector. But we fouled it up by imposing price controls with our economic managers supporting it on the ground that it was going to be temporary. 

To rub salt on our economic wound, we decided to subsidize rice retailers. Since funds are fungible, and we are borrowing left and right, we are subsidizing with borrowed funds. At least, there seems to be some policy consistency here because that’s under the same principle that we are launching the Maharlika Investment Fund. We shall invest with borrowed funds.   

We have weak institutions here because even the three branches of government could be seriously compromised. Foreign investors are more concerned about the stability of public policy than investment incentives. They all know too well that there is a price for everything in the Philippines, a situation that does not exactly inspire business activities. Transparency and accountability on the use of public money convince investors that we are intent on ensuring that every peso counts in funding public infrastructure and delivering economic and social services to our people. Many of our ASEAN neighbors enjoy some edge over us in this respect.

Therefore, the downgrade of the country’s growth prospects for 2023 simply reflects the corrosive impact of poor governance, or bad execution capability, and weak institutions, or shaky platform for growing the economy. These are the most formidable obstacles to defying the low growth path.

The signs are becoming more apparent that we could not sustain high economic growth.

ADB, last week, reduced its forecast of Philippine economic growth for 2023 from 6.0 percent to 5.7 percent due to “weakening in domestic demand, compared with last year’s performance with the opening of the economy.” Pantheon Macroeconomics this week announced that the country’s third quarter GDP growth would be the “weakest print since the Global Financial Crisis…” The think tank expected a further retreat from 4.3 percent in the second quarter to only 1.8 percent in the third quarter, asserting that the Philippines is already in the middle of a shallow technical recession. 

Standard & Poor’s shared this general sentiment about the Philippine GDP performance. While silent on the third quarter prospect, S&P brought down its projection for 2023 to only 5.2 percent from the June forecast of 5.9 percent, following high inflation and the lagged impact of BSP’s monetary tightening to address it. 

No matter how one works out the numbers, and if nothing is done with a deteriorating fiscal space, breaking out of the lower middle-income trap might just be wishful thinking for the Philippines’ bureaucracy.

But while addressing these fundamental policy issues, it should not hurt us as an economy if we start making inroads into the global value chains (GVCs) business. GVCs, following Baldwin and Lopez-Gonzalez (2015), denationalize comparative advantage that permits emerging markets to industrialize by joining the big economies “rather than by building their own.” As a follow up, Jakov Engel and Daria Taglioni (2017) proposed that integration into GVCs could be strategic in emerging markets’ drive toward greater competitiveness as they develop the skills and capital of their labor force and acquire technology to jump to higher value-added production.

This means that emerging markets and developing economies (EMDEs) could leverage on GVCs provided they also pursue a certain level of development and industrial capability as they go up the ladder of more sophisticated, higher-value added value chains in goods, services and information. If these prerequisites are secured, middle-income countries could therefore participate in GVCs while mitigating what keeps them stagnant and trapped. The point is to achieve productivity-driven growth, something that happens when a country is able to “build a national mindset and institutions that encourage constant upgrading of its human capital.”

The Philippines is immediately challenged here in its budget priority and allocation, that more should go to both the hard and soft infrastructure in the education and training sector. Pandemic scarring on the young Filipinos’ quality of education is just too serious. Enough of distractive subsidies, investment fund, confidential and intelligence spending, and what some would call embedded pork barrels in infrastructure allocation. In the literature, policy initiatives against poverty and income inequality like mitigation of urban-rural disparities, fiscal redistributive reforms and appropriate transfers are helpful.

GVCs therefore represent a new phase in globalization that could allow EMDEs to benefit more from it. They could capitalize on its lower cost of transport, information and communication; technological innovations; and lower barriers to movement of goods, capital and services. With the emergence of dominant vertically-integrated multinational firms with fragmented cross-border value chains, the prospects for EMDEs have broadened. This latest unbundling of globalization would require EMDEs to aim for functional, product and intersectoral upgrading through skills, capital and process restructuring (Taglioni and Winkler, 2016).

Participation in GVCs has been found to be highly correlated to the increase in gross domestic product. The challenge for EMDEs is to ascertain how to mainstream its participation in the GVCs’ production tasks: customized production; sequential production decisions going from the buyer to the suppliers; high contracting costs; and global matching of goods (Antras, 2015). Whatever is the decision, the modular feature of GVCs requires EMDEs to elevate its level of industrial production without going to its full length if they were to produce the product or the service by themselves. And being modular, GVCs don’t require EMDEs to cover all grounds at the same time. They can aspire for higher levels as their capacity increases. 

Definitely there are risks to the Philippines joining the GVCs and making them an important plank of development policy. But the attendant prerequisites to participation in GVCs and their positive impact on other macroeconomic concerns like education, digital shift and stronger and better governance and institutions could more than outweigh the risks.

It’s about time we stepped out of the trap. (Next week: Country experiences with GVCs)