The need of using a better economic measure

Using GDP to measure the economic development of the country may be more appropriate for a developed country than one like the Philippines where a lot of poverty and lack of jobs still exist. Maybe the government should consider using a more appropriate measures like those that more jobs, wages and prices as suggested by this article.

From BusinessWorld Philippines

December 05, 2012

Growth without change

GROSS DOMESTIC product (GDP) grew 7.1% in the third quarter of 2012. And with a GDP growth of 6.5% in the first nine months of the year, an annual growth of 6.0% is easily within reach. But the next question is whether this year’s expansion would be the beginning of a sustained, inclusive, growth or would it fit right into the pattern of stop-and-go expansion that we’ve experienced in recent years.

The immediate risk of these seemingly good numbers is complacency. Our nation’s leaders might think that these kind of growth can be sustained without further fundamental reforms. That kind of thinking would be a tragedy.

They ought to be reminded that the economy grew much faster than 7.1%, as recent as two years ago. In the first three quarters of 2010, the economy grew 8.4%, 8.9% and 7.3%, respectively. But, as in the past, such spectacular expansion was not sustained. In 2011, GDP slowed to 3.9%.

Let’s face reality. Growth without major reforms is not sustainable. The present administration has done nothing yet that would ensure strong, sustained, and inclusive growth in the future. For example, the government has to invest more heavily in public infrastructure. To date, its record has been dismal.

Government leaders have to do much more to establish credibility, policy consistency, and public accountability. Foreign investors, based on poor foreign direct investment inflows, remain unimpressed with what the Aquino government has done after two and a half years in office.

The government has to reform the tax system — by broadening the base and simplifying the tax system. The grant of fiscal incentives have to be rationalized. Right now, the favored few get away with murder, while the rest of private enterprises suffer in silence.

Monetary and fiscal authorities have to do something with the rapid appreciation of the peso, which I believe is the most serious policy issue that needs to be addressed now.

Monetary authorities are fighting a different war: our country’s major problem is the avalanche of hot money, not the scarcity of foreign exchange. Fiscal authorities should be a bit more aggressive in spending in public infrastructure, rather than overly obsessed with investment grade rating.

The growth of population has to be managed consistent with the preferences of individual families. The poor should be given access to modern methods of family planning. The short-term impact of an aggressive population policy may be limited, but it promises to be a game-changer in the long-term.

The three recent economic peaks — 2004, 2007, and 2010, were preceded by weak or modest economic performance, followed by a significant slowdown. The economic growth of 6.7% in 2004 was preceded by a modest growth of 3.6% in 2002 and 5.0% growth in 2003. It was followed by a slow growth of 4.8% in 2005.

The economic expansion of 6.6% in 2007 was preceded by a modest growth of 5.2% in 2006. It was followed by an economic slowdown of 4.2% in 2007.

The strong GDP growth of 7.2% in 2010 was preceded by a sharp downturn of 1.1% growth in 2009 largely because of the Great Recession. The 7.2% growth in 2010 was followed by a modest GDP growth of 3.9% in 2011.

The Philippine economy may grow by 6% this year. This year’s seemingly impressive growth is, to a great extent, because of the mild economic expansion in 2011. Public construction was a big winner during the first three quarters of 2012 with growth of 62.2% in the first quarter, 45.7% in the second quarter and 23.7% in the third quarter.

But these outstanding expansion rates appear impressive only because of the sharp contraction in public construction during the same period last year — negative 37.3% in the first quarter, negative 51.2% in the second quarter, and negative 21.3% in the third quarter.

The outlook for a similar expansion in public infrastructure next year — in the vicinity of 43.9% — is dim. One can’t spend what has not been authorized by Congress. The proposed budget for public infrastructure in 2013 is ₱237 billion, only 24.1 % higher than the ₱191 billion authorized in 2012. And this assumes that the infrastructure departments would be able to implement projects authorized by Congress.

In order to catch up with our ASEAN-5 neighbors, the Philippine government has to invest more for public infrastructure — in the neighborhood of 5% of GDP or around P500 billion annually — for the next seven to 10 years.

The sad reality is that the Philippine government failed to do so in the past. As percent of GDP, public infrastructure was 1.49 in 2006, 1.92 in 2007, 1.90 in 2008, and 2.24 in 2009. In 2010, it went down further to its lowest level of 1.83%.

In order to make economic growth sustainable, we need to invest more heavily. Yet, public capital formation was not only low, it continues to deteriorate.

In the last seven quarters, public capital formation as percent of gross national income (GNI) was a poor 15.6%. Ideally it should be around 25% to 30%. It averaged 17% in 2011 and then edged down further to 13.9% in the first three quarters of 2012. How can an economy sustain growth of 6% to 7% in the next 7 years with a such a low level of public capital formation?

The most pressing question that I have to answer in public conversation, is this: if the economy is doing so well as the numbers suggest, why is unemployment still high and poverty still widespread? My reply: the GDP number as a measure of economic health is of limited value. And because of the enormous complexity in its calculation, as a statistic it is not perfect. How can one statistic represent all the activities that took place in an economy.

A 7.1% GDP growth for the whole economy, does not mean 7.1% growth for all Filipinos — young or old, men or women, educated or uneducated. It may mean more than 100% growth for owners of big firms or for stock brokers, zero growth for many who were able to keep up with inflation, and negative growth of those who lost their jobs or can’t find gainful employment.

The GDP growth rate is a good guide for policy makers, but it shouldn’t be the only guide. For a labor surplus economy like the Philippines, unemployment and underemployment numbers are perhaps more important.

Inflation numbers are important, and so are measures of poverty. The Millennium Development Goals indicators are important, especially the health and education indicators.

Government spokesmen will choose to exaggerate statistics that may put the current government in a good light and downplay those they feel are politically unpopular. But, the ordinary man on the street will only recognize factual evidence that directly affect his stomach — jobs, wages, and prices.

Benjamin Diokno is former secretary of budget and management and is Professor of Economics at the UP School of Economics.

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