No Free Lunch

‘Aquinomics’: What difference has it made?

By: Cielito F. Habito
Philippine Daily Inquirer

5:33 am | Tuesday, June 21st, 2011


In a recent Inquirer Briefing attended by business leaders and other movers and shakers, I was asked to speak on the state of the Philippine economy one year into the Aquino administration. I titled it “A Year Under ‘Aquinomics’,” prompting someone to ask me if there was something to “Aquinomics” beyond playing on the President’s name. Not that I can claim to be a spokesman for the President’s economic team; I am not, and am not aspiring to be one, nor seeking to be part of his government. (It was “the other yellow candidate” whom I supported in the last two presidential elections, after all.)

Addressing the question, “Aquinomics” cannot be likened to, say, “Reaganomics” of the 1980s, which was defined by a distinct economic philosophy known at the time as “supply side economics.” This had challenged traditional demand-side or “Keynesian” economics, which until then was the mainstream thinking in macroeconomics. More recently, we heard of “Thaksinomics” espoused by the former leader ofThailand, which appeared to be defined by his business-friendly yet pro-poor approach to running the Thai economy.

What defines “Aquinomics,” then? One description that comes to mind is “economics of business confidence,” as that has been the driver of the economy under Aquino’s leadership so far. Over the past four quarters, growth in private domestic investment has been consistently surging, based on the quarterly National Income Accounts. This investment surge comes after many years of relative stagnation. Cross-country data from the Asian Development Bank reveal that in 2002-2007, our annual growth in total investment—that is, putting public and private, and foreign and domestic investments together—averaged zero percent. In contrast, our neighbors posted positive investment growth ranging from 3 to 19 percent per year. For most of the past decade, then, our neighbors were leaving us behind in building even greater productive capacity in their respective economies.

What is remarkable about the investment growth we are seeing lately is that it comes in the face of a significant drop in foreign direct investments (FDI). Latest Bangko Sentral ng Pilipinas data report that actual net FDI inflows so far this year are 17 percent lower than in the same period last year, a steep drop by any standard. Similarly, latest data on foreign investment approvals by the different investment bodies taken together (namely the Board of Investments, Philippine Economic Zone Authority, Subic Bay Metropolitan Authority and Clark Development Corporation) report a 53 percent drop from last year. And yet, overall investment has jumped 37 percent, implying that domestic investments must have jumped by much more, far overcoming the foreign investment decline.

What makes it even more remarkable is that the public component of domestic investment (government construction) also suffered a deep decline of 37.3 percent. Again, private domestic investments must have zoomed so much that not even this steep fall prevented total investment from surging the way it did.

At face value, the drop in government spending appears to be a downside to the Aquino government’s performance. Data from the Department of Budget and Management (DBM) indicate that disbursements in the first four months of the year were P60.5 billion or 11.6 percent lower than in the same period last year. Some observers now fault the new administration for “underspending,” for indeed, not only has it spent less than it did last year, it has also spent even farther less than what had been programmed to be spent by this time. But before casting this government as inept and lacking absorptive capacity, one must remember that this year’s budget was still drawn up by the previous administration. And if the current government has been more prudent about spending the money, it could well be because they have found that they don’t have to spend as much as the former government would have, to accomplish as much.

And it seems they have. The Department of Public Works and Highways is one of the biggest “culprits” in the underspending. It turns out that the agency has made dramatic changes in the way public works projects are costed out, leading to substantial savings. For one thing, Public Works Secretary Rogelio Singson has significantly reduced allowable “indirect costs,” including contractors’ profit margins (and quite likely the so-called “bukol”), in public works projects. Coupled with a strict policy on transparent public bidding, the agency boasts of more than P2 billion in savings from 2,797 projects over the past year.

Another reason for the underspending is that much of the large lump sums allocated by the previous government to various departments remain unspent. These are substantial amounts that the previous leadership gave department secretaries the discretion to allocate and spend—and it’s not hard to imagine how much of it must have gone to less than responsible uses. If the current department secretaries are slow in spending such sums, it could be because their predecessors had over-provided them in the first place. The new administration intends to cut these “lump sums” to a bare minimum in the 2012 budget, the first budget they truly own.

Aquinomics, then, might also stand for economics of fiscal responsibility—and the government now has a rare budget surplus to show for it. And while their underspending normally would have dragged the entire economy down, fortunately for them (and for us), the tremendous boost in private domestic investments that Aquinomics also brought about more than made up for the gap.





No Free Lunch

Tracking investments

By: Cielito F. Habito
Philippine Daily Inquirer

6:13 am | Tuesday, June 28th, 2011

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If responses to last week’s piece on “Aquinomics” are any reflection of the President’s approval rating, recent polls showing that those who are satisfied with his leadership still far outnumber those who are dissatisfied are confirmed by our readers. But there will always be a few who, because of innate pessimism or blind affinity to the previous leadership, still chose to focus on the negatives, and on that basis end up condemning the present state of events.

There were essentially two negative points that I mentioned last week: the decline in government construction spending (by 37.3 percent), and the decline in foreign direct investments (FDI, by 17 percent). I had made the observation that in spite of these, aggregate investment was still recorded to have jumped 37 percent. One need not be a math wizard to infer from this that the remaining component—domestic investments from the private sector—must have grown by far more than that, to have led to such a high growth rate when all three are combined. And because I had offered possible explanations for the first negative point, it was the drop in foreign direct investments that the doubters took me to task for. Hence I felt it useful to look more closely at what happened to investment spending in the past year under “Aquinomics.”

At the outset, it must be pointed out that the drop in foreign direct investments cannot be taken as any indictment of the current government. Two facts are relevant here: one,Japanwas the top source of foreign direct investments last year; and two, the three-way disaster that hitJapanin the first quarter must have dramatically reduced FDI flows therefrom. Having accounted for 28.7 percent of net FDI inflows in the country last year,Japancould very well have accounted for the bulk if not all of the 17 percent drop in FDI recorded by the Bangko Sentral ng Pilipinas (BSP). But aside fromJapan’s woes, the rich economies, especially theUnited States(the next biggest source of our FDI), have not quite bounced back from where they were before the recent global recession hit them. In short, the drop in FDI over the past year is not President Aquino’s black eye. If it were, we would not have received the unprecedented series of recent credit rating upgrades from Fitch Ratings, Standard & Poor’s, and Moody’s Investors Service, concrete manifestation of heightened confidence in the management of the economy under the new leadership.

But a reader was not satisfied. He wrote: “If you can say with certainty that neighboring countries also experienced a similar decline in FDI, and that the decrease in our FDI was not primary caused by discouraging words or acts of this administration, then I shall have no conflict with you.” Well, I can. I was moved to Google my way to the latest Thai FDI data from the Bank of Thailand (their counterpart to our BSP), and found that—guess what—Thailand’s cumulative net FDI inflows in the first quarter of this year fell a steep 95 percent (against our 17 percent drop), i.e., from $1.536 billion to only $69.5 million! IfThailand, long the darling of foreign investors who come to our neighborhood (also dominated by the Japanese, by the way), is seeing such drastic decline, I am willing to bet that our other Asean neighbors have suffered a similar fate. And so I decided to stop Googling for now.

I used to joke, every time our foreign investment trends moved the other way from those of private domestic investments, that “either the foreigners know something our own investor’s don’t—or it’s the other way around.” While I always felt that there is an element of truth to this half-joking observation, my little research tells me this is not what is happening this time. This suggests to me that the moment investment appetite in Japan, the US and other sources of our FDI returns to normal, we will see these ratings upgrades translate into actual inflows of FDI—lots of them. And if we can sustain the momentum of private domestic investment we are seeing right now, and then, with improved government finances, also reverse the decline in public sector investments, I am excited to imagine what our economy can achieve.

What have the private domestic investors been investing in? Indicative data are available on this from the same National Income Accounts that gave the GDP growth figures. The data reveal that the 16.7 percent rise in durable equipment investments went to things like pulp and paper machineries, farm machineries, textile machineries, metal working machineries, air conditioners and refrigeration equipment, mining and construction machineries, pumps and compressors, railway transport equipment, road vehicles, and other industrial equipment—all of which rose by double- up to triple-digit growth rates. In other words, real investments were growing almost all across the board. New factories are being built, or existing factories are being expanded. Even farms are seeing a surge in new investments at a rate not seen for many years. Some may not trust these aggregate data from government statistical bodies, but one doesn’t even need to rely on them entirely. We only need to note how publicly listed companies are announcing, one after another, substantial capital expansion programs within the year and in the years ahead.

To me, there’s no question that there is overwhelming confidence in “Aquinomics” at this time. This makes the challenge all the more daunting for President Aquino: he needs to get his act together and shun the many missteps he has made, lest he himself dissipate this confidence surge before we begin to see Filipinos’ lives get better irreversibly.




Aquinomics: Hopes up, infra down

By Riza T. Olchondra
Philippine Daily Inquirer

2:55 am | Friday, July 1st, 2011

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One year into the Aquino administration, much improvement is needed to support investor confidence like speeding up public-private partnership (PPP) projects and achieve government targets, economists said.

The Aquino administration inspired business confidence, resulting in increased private investment, according to five economists interviewed separately by the Inquirer.

But the economists said public spending and timely interventions must support business confidence or it would not translate into widespread economic gains.

Cielito F. Habito, a former socioeconomic planning secretary, said on the sidelines of a recent Inquirer forum that “Aquinomics” seemed good enough in the first three months of 2011 using an annualized quarter-on-quarter gross domestic product (GDP) growth as yardstick.

GDP rose 1.9 percent in the first three months of the year from 0.5 percent and 0.3 percent in the two preceding quarters.

An annualized quarter-on-quarter comparison takes away the so-called base effect from the first quarter of 2010, which Habito said was “warped” by election spending.

Using a year-on-year comparison, the first quarter GDP growth, however, slowed to 4.9 percent from 8.4 percent in the first quarter of 2010.

Habito attributed the good quarter-on-quarter GDP performance to aggressive private investment, which he said was fueled by investor confidence in Mr. Aquino and his administration’s drive for corruption-free and inclusive growth.

Slow-moving PPP

Yet, despite the gains, one particularly sticky issue is that PPP projects, a cornerstone of the administration’s strategy, are perceived to be moving slowly, Habito said.

For investor interest to be sustained, he said, the government must also invest in infrastructure even as it continues to push further reforms to curb red tape and corruption.

Gilbert M. Llanto, an economist with the Philippine Institute for Development Studies, a government think-tank, said the administration “needs a lot of improvement in performing the task of market coordination.”

Concrete interventions

The challenge lies in translating good ideas in the Philippine Development Plan into concrete interventions and measurable outputs, such as tax policy and industrial policy, Llanto said.

Cid Terosa, an economist from the University of Asia and the Pacific, said it was too early to tell if the country was better off than a year ago.

Terosa said the economy and economic management had been “good” so far, but from a scale of 1 to 10, he gave the Aquino administration a score of 7.

“A big letdown would be the seeming lack of authoritative actions on government officials who have not performed up to par. Also the slow realization of PPP projects is a letdown,” Terosa said. “Yes, I am optimistic but governance has to be stronger and more decisive.”

Arsenio M. Balisacan, dean of the University of the Philippines School of Economics (UPSE), said the economy was not doing too badly despite major challenges.

Balisacan said the administration sometimes seemed “distracted” with trying to clean up controversial deals and projects that came about in the previous administration.

However, this cannot be helped as the Aquino administration wants to drive home its anticorruption crusade, he said.

As for the seemingly slow pace of PPPs, Balisacan said it was understandable for the Aquino administration to be careful.

Sin taxes

Balisacan said Mr. Aquino should seriously consider raising taxes or focus on revenue measures like sin taxes that do not really hurt the poor.

The revenue raised should be promptly spent on infrastructure, rural health and education.

The UPSE dean said incentives for companies must be rationalized so that growth areas such asMindanao, where political and security risks need balancing, would benefit instead of established growth areas like Metro Manila.

“Incentives are not serving their purpose if we’re giving them to companies that would otherwise invest or expand, anyway, such as BPO (business process outsourcing) firms. We should give incentives in industries that are just starting out, or as growth boosters in areas with high risk, such asMindanao,” Balisacan said.

He said companies like La Frutera Inc. of Senen Bacani, which invested in the Autonomous Region in Muslim Mindanao, must be encouraged because they improve the livelihood and confidence of residents in the region.

“We don’t need to give incentives for companies putting up more high-rise buildings in Metro Manila under the label of ‘economic zones,’” Balisacan said.

Joblessness serious

The appropriate rating for the Aquino administration at this time is “NI (needs improvement),” said Benjamin E. Diokno, an economist with the University of thePhilippines, in an e-mail.

“After a year in office, the economy is slowing, joblessness remains serious, and poverty continues to deepen. Of course, it is unfair to expect him to solve these decade-long problems within a year. But after a year in office, Mr. Aquino has yet to unveil his vision and concrete road map of how he will solve these problems,” Diokno said.

He said that while the budget was approved on time, the administration failed to spend efficiently and speedily to perk up the economy.

Diokno said he was not optimistic that Mr. Aquino would meet the target of an average 7 to 8 percent economic growth during his entire term.

The economist noted that the expansion of the pork barrel system was inconsistent with the Aquino administration’s anticorruption crusade.