25 1977 2002
PHILIPPINE INSTITUTE FOR DEVELOPMENT STUDIES Surian sa mga Pag-aaral Pangkaunlaran ng Pilipinas
Vol. XX No. 1
T
wo key events circumscribed the performance of the global economy in 2001. One was a synchronized deceleration, particularly in industrialized economies, that was broader and deeper than expected. And two was the aggravation of the economic downturn by the September 11 terrorist attacks on the United States (US). The global economic slowdown was led by the US, which was officially declared in recession in November 2001. Excess capacity resulting from the boom in the information, communication and telecommunication (ICT) sector led to a sharp fall in investment spending. The European Union (EU) has been hobbled by inflationary pressure, which kept a lid on consumer spending. The weak euro, higher fuel prices and the rise in food prices that stemmed from prolonged effects of animal epidemics contributed to the increase in inflation. Meanwhile, Japan’s economy continues to be mired in a decade-old slump. Weak exports, anemic consumer spending and the muted response to the government’s pump-
January - February 2002
Economic forecast for 2002
Where to now, Philippines? by Josef T. Yap, Ph.D. PIDS Senior Research Fellow
priming measures are the primary factors behind the recession last year. Of course, the EU and Japan were both affected by the slowdown of the US economy. Emerging market economies were naturally affected by these developments but to varying degrees. The economies that are more dependent on trade and have greater integration with the world economy experienced sharper slowdowns. For example, Singapore’s gross domestic product
What's Inside 6 10
Books! Books! CPE--Filipino workers' best weapon to survive international competition
12
ISSN 0115-9097
Government housing programs fail to subsidize the poor
(GDP) is likely to have contracted last year due to the dominance of its external sector in economic activity. The Philippines was spared the harshest effects because of the dichotomy between its export sector and the domestic economy. However, other factors constrained her economic growth. Many analysts believe that the worst is over and the global economy should recover in 2002. However, the timing and extent of the recovery has been adversely affected by the September 11 attacks. The latest forecasts of the International Monetary Fund (IMF, December 2001) show lower growth for 2001 and 2002 for all industrialized economies compared to the forecasts published last October 2001 (Table 1). The US economy is expected to lead the recovery due mainly to the impact of the monetary and fiscal stimulus packages that have been page 3
DEVELOPMENT RESEARCH NEWS
DEVELOPMENT RESEARCH NEWS Vol. XX No. 1 January - February 2002 ISSN 0115-9097
Editorial Board: Dr. Mario B. Lamberte, President; Dr. Gilberto M. Llanto, VicePresident; Mr. Mario C. Feranil, Director for Project Services and Development; Ms. Jennifer P.T. Liguton, Director for Research Information; Ms. Andrea S. Agcaoili, Director for Operations and Finance; Atty. Roque A. Sorioso, Legal Consultant. Staff: Jennifer P.T. Liguton, Editor-in-Chief; Ma. Gizelle R. Gutierrez, Issue Editor; Sheila V. Siar, Genna J. Estrabon, Jane C. Alcantara, Liza P. Sonico and Edwin S. Martin, Contributing Editors; Valentina V. Tolentino and Rossana P. Cleofas, Exchange; Delia S. Romero, Galicano A. Godes, Necita Z. Aquino and Alejandro P. Manalili, Circulation and Subscription; Genna J. Estrabon, Layout and Design.
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January - February 2002
DEVELOPMENT RESEARCH NEWS is a bimonthly publication of the PHILIPPINE INSTITUTE FOR DEVELOPMENT STUDIES (PIDS). It highlights the findings and recommendations of PIDS research projects and important policy issues discussed during PIDS seminars. PIDS is a nonstock, nonprofit government research institution engaged in longterm, policy-oriented research. This publication is part of the Institute's program to disseminate information to promote the use of research findings. The views and opinions expressed here are those of the authors and do not necessarily reflect those of the Institute. Inquiries regarding any of the studies contained in this publication, or any of the PIDS papers, as well as suggestions or comments are welcome. Please address all correspondence and inquiries to: Research Information Staff Philippine Institute for Development Studies Room 304, NEDA sa Makati Building, 106 Amorsolo Street, Legaspi Village, 1229 Makati City, Philippines Telephone numbers 892-4059 and 893-5705 Telefax numbers (632) 893-9589 and 816-1091 E-mail address: publications@pidsnet.pids.gov.ph Reentered as second class mail at the Makati Central Post Office on April 27, 1987. Annual subscription rates are: P200.00 for local subscribers; and US$20.00 for foreign subscribers. All rates are inclusive of mailing and handling costs. Prices may change without prior notice.
Editor's Notes The improved performance of the Philippine economy during the 4th quarter of 2001 has stirred analysts to forecast a more positive outlook for the country in 2002. However, economists also cautioned that unless structural problems and the constraint brought about by a lower stock of capital are solved, the Philippines is unlikely to attain in the medium term the speed of economic growth of its Asian neighbors during their peak. As a tradition, this year’s first issue of the DRN once again highlights the economic forecast of PIDS Senior Research Fellow Dr. Josef T. Yap. His article seeks to provide an objective and independent assessment of the overall performance of the Philippine economy in the previous year. At the same time, it puts forward some projections for the economy in 2002. In his conclusion, Dr. Yap made some recommendations that would serve as guidelines for our legislators and economic managers in solving the problems that have been hampering our economic growth for decades. Among others, he called for legislation that are related to improving the government revenue collection and strengthening the investor sentiment, which remains vulnerable to negative economic shocks and domestic political uncertainty. Hopefully, his calls will be heeded well.
Meanwhile, there are two major reasons why the newsletter is sporting a new and lighter look this year. One, the DRN is proudly on its 20th year of providing relevant and easy-to-read economic articles to the public and policymakers. And two, the Institute is celebrating its silver anniversary as an independent government research institution, thus the silver 25 logo in the newsletter's masthead. DRN
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DEVELOPMENT RESEARCH NEWS
January - February 2002
Forecast...from page 1 initiated. Inventories are also expected to be used up and business investment should recover. Recent Philippine Economic Performance The economic deceleration that began in the fourth quarter of 2000 continued into the first three quarters of 2001, with Philippine GDP growth falling to 2.9 percent in that period, compared to 4 percent for the entire 2000. However, a surprising surge in the fourth quarter of 2001 lifted output growth above the revised government target of 3.3 percent for 2001. While this beats the forecasts of foreign analysts—which ranged from 2.4 to 2.9 percent—the whole year GDP growth of 3.4 percent as shown in Table 2 is nonetheless still lower than that of 2000. Many factors contributed to the lower output growth in 2001. The global economic downturn and September 11 attacks had adverse effects on trade, consumer and investor confidence, and performance of specific sectors, particularly tourism. Added to these are the burgeoning fiscal deficit, capital outflows, higher inflation and continued weak private investment. Strong agriculture growth carried the economy in the first and last quarters of 2001. Buoyed by good weather all year long, this sector grew by 3.9 percent in 2001. In the second quarter, the slack in growth was picked up by the turnaround in the construction sector. The latter expanded by 6.6 percent in that threemonth period after five quarters of near-zero growth or decline. The rebound, however, is hardly
Table 1.
"Strong agriculture growth carried the economy in the first and last quarters of 2001. Buoyed by good weather all year long..." -J. Yap
encouraging since it was due to a surge in public construction, which, in turn, was attributable mostly to one large government project. For the whole year, construction expanded by only 0.7 percent, which is, however, an improvement over the 5 percent contraction in 2000. Meanwhile, the export crunch had an unfavorable impact on manufacturing sector activity, pulling down
growth to 2.2 percent last year from 5.6 percent in 2000. This filtered into the entire industry sector, the value added growth of which fell from 3.9 percent in 2000 to only 1.9 percent last year. The service sector continued to be spurred by value added in transport, communications and storage, which grew at a slower but still robust pace of 8.9 percent. The retail next page
GDP Growth for Selected Countries, 2000 actual and IMF Forecasts through 2001 (In percent) 2000
May 01
May 02
Oct. 01
Oct 02
United States
4.1
1.5
Japan
2.2
0.6
European Union
3.4
Philippines Singapore Thailand
2.5
1.3
2.2
1.0
0.7
1.5
-0.5
0.2
-0.4
-1.0
2.4
2.8
1.8
2.2
1.7
1.3
4.0
3.3
4.5
2.5
3.5
2.9
3.2
9.9
5.0
5.8
-0.2
4.0
-2.9
1.2
4.4
3.0
4.5
2.0
4.0
1.5
2.0
Source: IMF, World Economic Outlook, various issues.
Dec. 01
Dec 02
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DEVELOPMENT RESEARCH NEWS
Table 2.
Selected Macroeconomic Indicators, Philippines, 1992-2001 and Forecasts for 2002 (Annual growth rates and share to GDP, with the latter shown in italics) 1992
Gross National Product Gross Domestic Product Agriculture, Fishery and Forestry
1.6 0.3 0.1 22.75 Agriculture and fishery 0.4 22.17 Forestry -12.0 0.58 Industry Sector -0.3 34.41 Mining and quarrying 8.1 1.60 Manufacturing -1.7 25.03 Construction 6.1 5.04 Electricity, Gas and Water 0.7 2.74 Service Sector 1.0 42.84 Transport, comm. and storage 1.4 5.82 Trade 1.6 15.27 Finance 0.4 4.06 Ownership of dwellings 0.7 and real estate 5.64 Private services 0.6 6.89 Government services 0.2 5.15 Personal Consumption Expenditure 3.3 78.10 Government Consumption -0.9 7.70 Capital Formation 8.5 21.46 Exports (nominal $) 11.1 Imports (nominal $) 20.5 Inflation (average) 8.6 91-Day Treasury Bill Rate (average) 16.0 Nominal Exchange Rate (average) 25.3 Sources:
January - February 2002
1993
1994
1995
1996
1997
1998
1999
2000
2001 Forecast
2.7 2.1 2.0 22.75 2.5 22.28 -15.7 0.48 1.6 34.25 1.1 1.58 0.7 24.69 5.7 5.22 2.8 2.76 2.5 42.99 2.5 5.85 2.4 15.32 2.4 4.07 1.8 5.62 2.9 6.94 2.9 5.18 3.0 78.81 6.2 8.00 7.9 22.67 15.8 21.2 7
4.6 4.4 3.4 22.36 3.8 21.98 -16.3 0.39 5.8 34.71 -7.2 1.40 5.0 24.84 9.4 5.45 13.9 3.01 4.3 42.93 4.2 5.84 4.0 15.26 5.5 4.12 2.9 5.54 4.3 6.94 5.5 5.24 3.7 78.31 6.1 8.13 9.0 23.59 18.5 21.2 8.3
4.9 4.7 1.2 21.55 1.9 21.32 -37.1 0.22 6.8 35.38 -5.6 1.25 6.8 25.34 6.6 5.55 13.0 3.25 5.0 43.07 5.8 5.90 5.6 15.39 7.3 4.22 3.1 5.46 4.3 6.91 3.8 5.19 3.8 77.66 5.6 8.20 3.7 23.33 29.4 23.7 8.0
7.2 5.8 3.9 21.13 3.9 20.91 7.7 0.22 6.4 35.58 1.4 1.20 5.6 25.27 10.9 5.81 7.6 3.30 6.4 43.29 7.4 5.99 5.5 15.34 13.7 4.54 4.2 5.37 5.0 6.86 5.9 5.19 4.6 76.76 4.1 8.07 13.3 24.78 17.7 20.8 9.1
5.3 5.2 2.8 20.71 3.3 20.56 -39.0 0.15 6.2 35.91 2.9 1.16 4.2 25.04 16.4 6.42 4.8 3.29 5.5 43.38 8.2 6.17 4.0 15.15 13.0 4.87 3.8 5.30 4.9 6.83 2.6 5.06 5.0 76.62 4.6 8.03 11.6 26.32 22.8 14.0 6.0
0.4 -0.6 -6.6 19.50 -6.5 19.35 -21.0 0.15 -1.8 35.35 3.3 1.20 -1.0 24.91 -8.5 5.83 3.4 3.41 3.5 45.15 6.5 6.60 2.5 15.61 4.5 5.12 1.6 5.41 4.7 7.19 2.6 5.21 3.5 79.73 -2.1 7.92 -16.4 22.16 16.9 -18.8 9.7
3.7 3.4 6.0 20.09 6.4 19.91 -45.5 0.19 0.9 34.49 -8.4 1.06 1.6 24.47 -1.6 5.55 3.1 3.40 4.1 45.42 5.3 6.72 4.9 15.84 1.9 5.04 0.6 5.27 5.8 7.36 3.7 5.19 2.6 79.13 5.3 8.17 -1.7 21.01 18.8 4.1 6.7
12.4
12.7
11.8
12.3
12.9
15.0
10.0
9.9
9.7
8.5
27.2
26.3
25.8
26.2
30.1
40.8
39.3
44.7
51.1
51.5
National Accounts of the Philippines, National Statistical Coordination Board Selected Philippine Economic Indicators, Bangko Sentral ng Pilipinas Forecast of J.T. Yap
4.5 3.7 4.0 3.4 3.3 3.9 19.96 20.1 3.6 4.0 19.82 19.93 -19.5 -8.3 0.14 0.1 3.9 1.9 34.45 34.0 10.0 -5.0 1.12 1.0 5.6 2.2 24.85 24.6 -5.0 0.7 5.07 4.9 4.2 3.8 3.41 2.54 4.4 4.3 45.59 46.0 10.4 8.9 7.14 7.5 5.2 5.6 16.01 16.4 0.9 0.6 4.89 4.8 0.0 -0.3 5.06 4.9 4.8 4.4 7.42 7.5 1.4 1.8 5.06 5.0 3.5 3.4 78.75 78.79 -1.1 0.1 7.77 7.52 2.3 4.3 20.66 20.84 8.7 -15.6 2.1 -6.0 4.3 6.1
4.5 4.1 2.0
4.5 0.0 4.5 6.0 4.0 4.8
4.0 1.0 5.0 12.0 8.0 4.5
DEVELOPMENT RESEARCH NEWS
trade sector experienced a slightly higher growth, lending support to legislation that liberalized regulations governing this sector. Overall, growth in the service sector declined slightly from 4.4 percent in 2000 to 4.3 percent last year. It should be noted that the production sectors hardest hit by the financial crisis—private sector construction, finance, and real estate—continue to be mired in a slump. Despite the resolution of the political crisis in the first half of 2001 and the fall in interest rates throughout the year, private sector investment has not returned to its pre-crisis levels and remains sluggish. Investment in durable equipment contracted by 2.7 percent last year after expanding by 3.6 percent in 2000. Private construction continued to shrink, falling by 0.7 percent in 2001. Only the increase in public construction and growth in the category Breeding Stock and Orchard Development, prevented further slippage in total fixed investment, which contracted by 0.6 percent. Meanwhile, a sharp improvement in inventory pushed total capital formation up by 4.3 percent.
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January - February 2002
Despite the resolution of the political crisis in the first half of 2001 and the fall in interest rates throughout the year, private sector investment has not returned to its pre-crisis levels and remains sluggish.
The source of this increase in stocks was agriculture production and a rise in inventory of crude and petroleum products. Several factors can explain the continued sluggishness of private investment. One, there is still excess capacity in production. The average capacity utilization rate in the manufacturing sector for the first 11 months of 2001 was 77.8 percent compared to 80.3 percent in the corresponding period in 2000. Two, investor confidence, which had only barely recovered from the uncertainty created by domestic political
factors, was undermined by the adverse external climate and domestic peace and order concerns. And three, increasing nonperforming loan (NPL) ratio may have prevented banks from lending to the business sector. However, what is more relevant is the debt-overhang of private sector firms, which has constrained borrowing. Personal consumption expenditures grew at a marginally slower pace, from 3.5 percent in 2000 to 3.4 percent last year. This renders growth in 2001 to be consumption-led. The steady performance of the agriculture sector, which accounts for about 40 percent of employment, and the increase in the peso equivalent of overseas remittances can partly explain the resilience of personal consumption. As expected, the deficit in net exports widened in 2001 compared to its level in 2000 due to the decline in external demand. Exports contracted in nominal dollar terms for the first time since 1985. This led to a lower trade balance, which registered a surplus of $2,742 million in 2001 compared to a surplus of $6,911 million in 2000. Weak investment and lower exports led to a fall in imports. Key Issues Despite the upbeat mood of the country’s economic managers over the page 8 GDP performance, the
DEVELOPMENT RESEARCH NEWS
T
he Institute came out with seven new books last year focusing on various topics and each one promises to be a good read. Two of these books are a collection of studies completed under projects undertaken by the Institute in collaboration with the Philippine APEC Study Center Network (PASCN). The third focuses on a critical study of housing subsidies. The fourth one is a collection of studies by the Institute's research fellows and affiliates on issues related to the East Asian financial crisis. The two others are part of the publication series, the Research Paper Series (RPS) while the seventh is the Institute's newest publication series, the Annual Budget Analysis Series, whose 2001 title is the maiden issue. All these books are available at the PIDS Publications Division, the NEDA Bookstore, Solidaridad Bookstore and selected National Bookstore branches including Powerbooks. For orders, send an e-mail to publications@ pidsnet.pids.gov.ph. Economic crisis…once more Edited by Mario B. Lamberte This volume is a collection of 15 exhaustive studies on the recent East Asian financial crisis. It attempts to understand the nature and causes of the crisis, examines its impact on the domestic economy and recommends some measures to mitigate the negative impact on various sectors in the short run and reduce the vulnerability of the economy to another currency crisis in the long run as well. The lessons learned from this volume can certainly be useful in formulating policies and instituting measures to prevent the occurrence of another currency crisis, reduce its adverse effects should one occur, and better manage risks that may emerge as the country’s economy deepens its integration with the rest of the world. (ISBN 971-564-033-8. 458 pages. Php880. US$46.) The President’s budget for 2001: setting priorities amid depleted choices By Rosario G. Manasan This volume is the first of “The Annual Budget Analysis Series,” PIDS’ newest publication series that aims to inform the public of the nation’s fiscal health for the year by analyzing the President’s budget. As the title implies, the analysis of the President’s budget for 2001 underscores the tight financial rein that characterizes the nation’s fiscal position
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January - February 2002
Books! Books! for the year. Thus, the depleted choices the government faces in setting its priorities. The author shows how limited the choices have become—in terms of resource allocation. In doing so, she highlights what the tradeoffs are in terms of economic growth and social welfare. The book includes a special paper entitled "Regional budget determination and allocation: a policy revisit" written by Ruben G. Mercado. It tackles the subject of regional budget allocation and determination and provides a brief discussion of the evolution of policies and practices in regional budgeting during the last 30 years. The paper also analyzes trends in the regional budget allocation of economic and social government agencies and evaluates the responsiveness of their budgets to regional economic and social conditions, taking note of the impact of the use and nonuse of allocation criteria. Finally, the paper lays out policy recommendations to improve regional budgeting exercises and evaluation. (ISBN 971-564-040-0. 129 pages. Php286. US$15.) The Filipino worker in a global economy Edited by Leonardo A. Lanzona Globalization brings fears to the Filipino worker. The fall in protectionism and other barriers to trade contributes much to the uncertainties that workers face today. Greater openness to the world and to technological advances continues to change the condition of human resource development (HRD) and with it, the fate of hired hands in most countries hangs in the balance. This is a collection of six studies funded by the Philippine APEC Study Center Network (PASCN). It presents a wealth of information and insights on how globalization impacts on Philippine labor. Several issues are cited by the authors that may arise as a result of globalization and affect the condition of labor and HRD in the country. These issues pertain to wage inequality, labor migration, labor standards and institutions, and education. Even in the face of uncertainties and fears, however, this volume stresses that globalization should not be impeded. Rather, the authors recognize and emphasize the vital role that the State should play in promoting globalization and in developing the skills and improving the welfare of the Filipino workers for them to face globalization squarely. As aptly pointed out by the book, the Filipino worker cannot
DEVELOPMENT RESEARCH NEWS
turn back the winds of change. Thus, he must have the necessary training and equipment to protect himself against the dislocations and uncertainties emerging from globalization. (ISBN 971-564-041-9. 277 pages. Php467. US$25.) Coalition-building and APEC Edited by Wilfrido V. Villacorta Established in 1989 as an informal group in response to the growing interdependence among Asia-Pacific economies, the Asia-Pacific Economic Cooperation (APEC) has since grown into a most significant vehicle for promoting trade, investment, and technical and economic cooperation in the region. This book, which is co-published with the Philippine APEC Study Center Network (PASCN) and the Yuchengco Institute for East Asia of the De La Salle University, centers on the concept of “coalition-building” as an instrument for the growth of APEC as an organization. It proposes that APEC be strengthened and transformed in order to meet its objectives and remain as an important instrument for economic cooperation and consolidation in the future. The five studies presented in this book recognize that the strength of APEC as an organization lies in its cohesive stance regarding trade, investments, and economic and technical cooperation. (ISBN 971-564-035-0. 240 pages. Php782. US$41.) The state of Philippine housing programs - a critical look at how Philippine housing subsidies work By Gilberto M. Llanto and Aniceto C. Orbeta, Jr. This book is a critical study on housing subsidies, one of the principal instruments the government uses to provide the lower income segment of the population access to decent housing. Each year, the government spends large fiscal resources to finance the subsidy programs. These resources have competing, alternative uses, and any misallocation imposes costs to society. And with the huge fiscal deficit that the country is currently facing, it is but utilitarian and timely to review the allocation and expenditure of scarce public resources, especially the various subsidies. Despite the provision of these housing subsidies, a large majority of the urban poor are still housed in overcrowded shanties within slum settlements or in makeshift dwellings. Does this mean that the housing subsidies have not been successful in helping their intended ben-
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January - February 2002
eficiaries get a decent shelter? Find out the answers from this book. (ISBN 971564-038-9. 127 pages. Php280. US$15.) (RPS 2001-01) An inquiry into the competitiveness of emerging Philippine cities By Raymund E. Magdaluyo et al. Co-published with the Philippine APEC Study Center Network (PASCN), An inquiry into the competitiveness of emerging Philippine cities attempts to approximate the competitiveness of the country’s 10 leading emerging urban centers: Angeles, Baguio, Cagayan de Oro, Davao City, General Santos, Iligan, Iloilo, San Fernando in La Union, Tacloban and Zamboanga. The study uses both ranking and scoring methods to rate the cities in eight major drivers: cost competitiveness, human resources endowment, infrastructure, dynamism and involvement of local business community, linkages with major urban centers and growth areas, quality of life, responsiveness of local government units, and dynamism of local economy. It best serves as a policy and urban management tool for concerned local officials and leaders of various private sector groups in identifying the cities’ strengths and areas of improvement. Insights on overall scores and rankings point to the importance of local leadership, emphasis on improving quality of lives in urban centers, and the role of surrounding local and/or international growth formations in enhancing urban competitiveness. Any combination of these factors actually explains the high rankings garnered by General Santos City, Angeles City and Baguio. (ISBN 971-564-039-7. 201 pages. Php299. US$16.) (RPS 2001-02) A review of the components of the Medium-Term National Action Agenda for Productivity (MNAAP) 2000-2004 By Epictetus E. Patalinghug This paper is part of the project “A Review of the Components of the Medium-Term National Action Agenda for Productivity (MNAAP)” by the Institute and the Development Academy of the Philippines. It summarizes the findings in the different components of the MNAAP, namely, productivity indicators, science and technology, research and development, human resources, agriculture, efficiency of product markets, infrastructure, and governance. The project’s main objective is to assess these different components of the MNAAP, which is envisioned to upgrade the productivity of the agriculture, industry and services sectors in the Philippines. (ISBN 971564-042-7. 44 pages. Php67. US$4.) DRN
DEVELOPMENT RESEARCH NEWS
Forecast...from page 5 goal of high and sustainable output growth seems to be as elusive as ever. Poor investment in the past four years implies that future growth will be constrained and it will be very difficult to mimic the high growth rates of our Southeast Asian neighbors that took place in the period between 1985 and 1997. Hence, it is important that private investment gets back on track. Even with lower interest rates, domestic credit growth to the private sector remained in negative territory in 2001, in both nominal and real terms. The rising NPL ratio has constrained bank lending, but the outcome is more a result of weak investment leading to low demand for credit. Sluggish demand for credit since the onset of the 1997 crisis has been used by policymakers as an argument that episodes of monetary tightening from late 2000 up to October 2001 did not have a negative impact on investment. However, once private investment recovers, monetary policy has to be calibrated to support the recovery. Lower interest rates in the industrialized economies should provide more leeway for further easing of monetary policy. The NPL ratio of commercial banks continued to climb steadily, reaching 18.76 percent in November 2001, from only 12.1 percent in January 1999. While the NPL ratio remains at a manageable level, what is worrisome is its rising trend. Unlike many of the crisis countries in the Asian region, the Philippines did not set up a governmentfunded asset management company (AMC) primarily because the financial sector escaped the crisis relatively unscathed. However, due to the rise in the NPL ratio, several banks have publicly endorsed a state-organized AMC. This has been resisted by the government which has cited fiscal constraints and
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January - February 2002
Sluggish demand for credit since the onset of the 1997 crisis has been used by policymakers as an argument that episodes of monetary tightening from late 2000 up to October 2001 did not have a negative impact on investment.
moral hazard issues as its reasons for maintaining an arms-length approach. Instead, policymakers have encouraged local banks to establish their own-shared AMC. Another proposal being floated is for foreign investment banks and accounting firms to either set up a private sector AMC or purchase local banks’ NPLs outright. Possible legislative measures to support private initiatives are included in the National Socioeconomic Pact of 2001. The fiscal deficit again exceeded the government target, but fell to 3.8 percent of GNP compared to 3.9 percent last year. While still manageable, there should be concern over the recurrence of the deficit after a surplus in the consolidated public accounts was recorded in 1996. Moreover, the deficit has been accompanied by a structural—as opposed to cyclical—downturn in tax effort.
private investment. The most effective way to deal with this problem would be to improve the tax effort—tax revenue as a percentage of GDP—which, in 2000, has already fallen below the 1990 level. One measure that the government has considered is the indexing of the specific rates on excise taxes to inflation since indirect taxes have been the main source of the deterioration in tax effort. However, improvements in tax administration, elimination of leaks and loopholes, and stricter enforcement of existing tax laws, could go a long way toward improving the revenue base. Efforts to reduce the onerous conditions of build-operate-and-transfer (BOT) contracts should also be pursued.
Domestic borrowing has been the favored means of financing the deficit since high international bond spreads have discouraged foreign borrowing, even if international interest rates have fallen until January 2002. In the context of low credit demand by private investors, crowding-out has been minimal and Treasury Bill rates have even gone down.
The Bangko Sentral ng Pilipinas (BSP) has recently put into practice inflation targeting as its monetary policy framework. Many of the necessary ingredients for a successful transition are in place, particularly the credibility of the BSP as an independent institution. However, there are still concerns about its commitment toward a more flexible exchange rate system. While the exchange rate has experienced more volatility since the 1997 financial crisis, there were occasions when interest rate increases coincided with a sharp depreciation of the peso.
However, persistently high fiscal deficits may undermine the recovery of
The deterioration in the poverty situation between 1997 and 2000 only
DEVELOPMENT RESEARCH NEWS
serves to underscore the need to improve the antipoverty programs in the Philippines. It should be recognized that three of every four people considered poor live in rural areas and a large majority of them are dependent on agriculture and agriculture-related industries for employment and income. Moreover, economic growth, and not specific programs, explains a significant percentage of poverty reduction in the past. Thus, in terms of fiscal tools, the government can focus on rural infrastructure and primary education. Meanwhile, the government can improve the policy environment that will encourage private efforts in the provision of microfinance and low-income housing programs. The National Socioeconomic Pact of 2001 also delves on measures related to these. Prospects for 2002 Rather than put emphasis on numbers, the center of discussion should revolve around scenarios. The macroeconomic factors that are important include the fiscal deficit, behavior of interest rates, and exchange rate stability. Structural factors will also influence the direction of the economy. For example, the transition in the energy sector following the passage of the Philippine Electric Power Industry Reform Act will be closely monitored. Inflation targeting has also been implemented beginning this year. Peace and order concerns, and governance issues, in general, will also figure prominently in the analysis. Meanwhile, the external environment would continue to have an impact on the economic performance of the Philippines. Contrary to earlier analysis and expectations, the Philippines was not as hard hit by the recession in the US. Hence, the outcome in 2002 will not be too dependent on the extent of the recovery of the global economy. The more important factors would be the behavior of the yen vis-Ă vis other major currencies, the fall in
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January - February 2002
risk aversion of foreign investors and related recovery of capital flows, particularly portfolio investment, and the rebound in the global electronics market.
be similarly affected. What should be of more concern is the possible adverse impact of a weaker yen on foreign direct investment from Japan.
The most likely scenario would be improved fiscal performance, an accommodating monetary policy and a flexible but stable exchange rate. The Macapagal-Arroyo administration is expected to continue to tackle the deficit problem head on and several measures are pending with Congress that are aimed to boost revenue collections. The more crucial proposals are included in the National Socioeconomic Pact of 2001. The downtrend in inflation and lower international interest rates will allow the BSP to cut domestic interest rates further. Moreover, the Philippine outlook was upgraded from negative to stable, indicating lower risk premia.
Meanwhile, lower international interest rates should lead to a rise in portfolio flows into emerging markets including the Philippines. This will help stabilize the peso, which will feel pressure from a depreciating yen. The fall in international rates has been accompanied by a reduction in the risk premium charged to Philippine debt, which is measured by the sovereign bond spread over US treasuries (Figure 1). The sharp decline since November 2001 is indicative of improved sentiment over the country's prospects.
The recent depreciation of the yen will have mixed effects on the economy. On the one hand, it will lower the dollar value of yen-denominated debt. On the other hand, it will lead to an appreciation of the real effective exchange rate. The latter, however, will have little impact on our competitiveness since our main competitors (i.e., Thailand, Malaysia and Indonesia) will
The momentum generated in the fourth quarter of 2001 will be sufficient to propel the economy to a higher GDP growth rate in 2002. This would be in the vicinity of 4.1 percent. The more favorable external environment, at least in the US, will do away with one obstacle to improved consumer and investor confidence. A more conducive macroeconomic backdrop would also send a positive signal to investors. The combination of these factors would make it page 11 very likely that the long
Figure 1: Sovereign Bond Spreads for the Philippines
Source: Asia Recovery Information Center
DEVELOPMENT RESEARCH NEWS
C
ontinuing professional education (CPE) must be a constant concern of the Filipino worker, the business enterprise and professional associations to help them cope up with the changes in the labor market and meet international competition. Thus contends Dr. Zenon Udani, a professor at the School of EducationUniversity of Asia and the Pacific (UA&P), in his paper entitled “CPE: Training and Developing Filipino Professionals Amid Globalization.” Udani presented the findings of his study during the 6th annual symposium of the Philippine APEC Study Center Network (PASCN) held last January 28 at the UA&P, Pasig City. The study is part of the PASCN-funded project “Education and Globalization.” CPE—can it be sustained without legal framework? Udani noted that the scrapping of the CPE credits requirement for the renewal of professional licenses under the Philippine Regulatory Commission (PRC) Modernization Act of 2000 or Republic Act (RA) 8981 is likely to weaken the drive among professionals to engage in CPE. He therefore suggested that CPE should become an initiative, which professionals must assume as a personal commitment, particularly nowadays when jobs are very demanding, competitive and scarce.
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January - February 2002
CPE—Filipino workers’ best weapon to survive international competition “With or without the CPE requirement, continuing education among professionals should continue. And notwithstanding the limitations of professional associations, they can still be of effective service to the professions,” Udani stressed. CPE, he said, will keep workers useful and productive in their present jobs, competitive in their skills, talents and knowledge vis-à-vis their foreign counterparts, and potentially employable should the risk of losing their jobs loom in the picture. CPE in professional organizations The author likewise concluded that organizations and business enterprises stand to gain from investing in their people. He stressed that by doing so, they can enhance the competence and productivity of their people, thereby empowering their organizations to be competitive in the global market.
CPE...will keep workers useful and productive in their present jobs, competitive in their skills, talents and knowledge vis-à-vis their foreign counterparts, and potentially employable should the risk of losing their jobs loom in the picture.
“To further encourage business enterprises to invest resources in training and developing their people, appropriate incentives must be given to them. However, in the absence of external incentives, firms should still be duty-bound to develop their people for the sake of the viability and growth of the enterprise, “ Udani recommended. Meanwhile, CPE in professional associations, according to Udani, must not only be oriented toward improving professional competence but also toward developing the personal character. “CPE in professional organizations must go beyond updating members of professional associations on current issues in their fields. Competencebuilding and performance enhancement must also be encouraged. This requires creativity, vision and diligence from the leadership of the professional associations,” he explained. Thus, professional organizations and CPE providers must be genuinely concerned about the people they train and develop. They must engage in honest-to-goodness education that draws out the best in people. Keeping CPEs relevant to professions To keep CPEs relevant to the professions, certain challenges must be considered. For instance, another study presented by Dr. Tereso Tullao Jr., professor at the College of Business and
DEVELOPMENT RESEARCH NEWS
Economics, De La Salle University, in the same symposium, underlines the need to refocus CPE programs toward research, graduate education, inventions and publications. Tullao added that professional organizations should have their own journals reviewed by national or international experts. “They should also sponsor professional lectures where their distinguished members or outside experts are asked to discuss topics of their expertise. Similar to the quest of higher educational institutions to make research outputs of their professors published in international journals, professional organizations should encourage their members to publish in refereed international journals,” Tullao said. Meanwhile, Udani suggested that colleges and universities can also help in the professional development of the future workforce by aligning their curricula to the needs of companies and industries. He explained that strategic alliances with professional or industry associations in the curricular design of courses will enhance the "employability” of graduates and empower professionals in the workplace. The author also recommended that CPE activities of business associations like the Philippine Chamber of Commerce and Industry (PCCI) and their regional counterparts include a similar study on the CPE activities. Best practices can be drawn from this research and a better awareness of CPE in these business associations can spur more investment in professional development. Another interesting area for future research in the field of CPE is the collaboration of Asia-Pacific Economic Cooperation (APEC) countries in the training and development of professionals in the financial services sector. This matter has grown in relevance and importance amid globalization. DRN
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Forecast...from page 9 awaited recovery in private investment will materialize this year. This would translate into a relatively strong growth in fixed investment, particularly construction. The forecasts for 2002 for selected macro indicators are presented in Table 2. Agriculture, for one, is expected to be affected by the El Niño weather disturbance and should grow by 2 percent. This may derail the recovery of the food manufacturing sector, but the recovery in the export sector and domestic investment should enable manufacturing value added to expand by 4.5 percent. The service sector is usually the prime beneficiary of an upturn in economic growth. Value added in services should grow by at least 4.8 percent. Inflation will likely decelerate further in the first half of the year. The trend will reverse once the effects of lower agriculture output will kick in. The whole year average will be between 4 and 4.5 percent.
January - February 2002
Downside risks, of course, still exist which could readily hamper economic performance. Legislation related to improving government revenue may, for instance, be stalled, thereby impeding the reduction in the fiscal deficit. Private investor sentiment is still vulnerable to negative economic shocks and domestic political uncertainty. The former would include the emergence of complications in the implementation of the privatization of the energy sector. Finally, Japan’s economic woes may translate into lower foreign aid, investment, and imports. Nevertheless, even if these events are realized, GDP growth will still likely be higher in 2002. Economic managers, however, should not be content with these relatively mediocre numbers. Thereupon, their focus should be redirected to structural problems that have constrained our economic growth for more than two decades. The issues are not new and neither are the policy recommendations. What may have changed are the politicians and economic managers who conveniently ignore them. DRN
DEVELOPMENT RESEARCH NEWS
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January - February 2002
T
he government’s housing programs provide implicit and explicit subsidies that do not reach the target clientele—the low-income households. Thus concluded Dr. Gilberto Llanto, Deputy Director-General of the National Economic and Development Authority, and Dr. Aniceto C. Orbeta Jr., senior research fellow at the Philippine Institute for Development Studies, in their analysis of the state of the Philippine housing subsidies program under the Aquino and Ramos Administrations. In their study entitled “The State of Philippine Housing Program,” Llanto and Orbeta indicated that there is evidence that the housing subsidies have mostly benefited the high-income group. The only exception, they said, is the Community Mortgage Program (CMP) which seems to effectively target the poor. “To avoid the leakage of the subsidies, government housing efforts should focus mainly at the bottom 40 percent of the income distribution. Likewise, housing units must be appropriate to the requirements of a low-income household,” they emphasized. Llanto and Orbeta also questioned the use of contributions of the
Government housing programs fail to subsidize the poor Home Development Mutual Fund (HDMF) or Pag-Ibig Fund members to fund the government’s social responsibility. They pointed out that under the HDMF approach, members’ funds are not paid a competitive yield. As a result, low income members who cannot afford a housing loan are the ones subsidizing the high-income members who are qualified for a loan.
Decent houses are out of the poor's reach. What is left to them are shanties in perilous areas. And who gets to own a unit in tenement buildings like the one above? Not them but others who may be outside of the bottom 40 percent in terms of income distribution.
The authors likewise observed that the housing market is inefficient due to the very heavy government intervention that tends to exclude private effort quite effectively. Private financial institutions, they said, should be allowed to offer adjustable mortgage loans to socialized housing clients even as the government provides well-targeted subsidies to poor households. “Unless private resources are effectively and efficiently harnessed and unless public sector resources are directed in a transparent and measurable way to the households most in need, the government will continue to experience tremendous pressure to produce the resources to satisfy the huge unmet demand,” the authors cautioned. They therefore suggested that the government carefully consider the empirical results of their study in designing its housing program. DRN