After I wrote Perfect Storm: Why the Philippines Faces Prolonged Economic Pain for a leading business daily, a reader commented that the article didn’tmake any recommendations.
To satisfy the reader and others who may be wondering how the Philippines can get out of its present pandemic-induced economic rut, here are my suggestions:
- Depreciate the peso —Depreciating the peso will put extra money in the pockets of OFW families, stimulate the badly hit industries of exports and tourism, and protect local industries and domestic agriculture. It will act as an economic stimulus without an incompetent bureaucracy to deliver the monetary goods because OFWs, BPOs, exporters, and hotels and tourist establishments will see an immediate increase in the peso value of their foreign currencies by the mere depreciation of the peso.
There’s little risk that aggressive weakening of the peso by the Bangko Sentral ng Pilipinas (BSP) will lead to inflation. Global and local inflation has been tame and will continue to be tame in the face of a global demand shock and economic contraction.
As National Scientist Raul Fabella says, the BSP is fighting the last war. Massive unemployment and underemployment, with the accompanying hunger they create, is the No. 1 problem facing the Philippine economy. No, not inflation, but a humanitarian crisis stemming from massive joblessness, including from among returning OFWs.
Weakening the peso is within the government’s power. The BSP can aggressively purchase dollars in the open market. At the same time, the executive department can go on an aggressive fiscal spending directed toward infrastructure and health spending to stimulate demand for capital imports.
The lame excuse of the BSP is that it’s just following the market. However, that’s because the BSP is boxed by its inflation targeting mindset. The standard monetary policy tools like quantitative easing and interest rate cuts are ineffective in a demand-shock recession. As John Maynard Keyes said, monetary policy to fight a recession is like pushing on a piece of string.
Last August, the US threatened Vietnam for being a “currency manipulator” for undervaluing its currency. That’s a huge compliment to Vietnam, which has now overtaken the Philippines in GDP per capita and is bound to outrace it. Here, our monetary and fiscal authorities are fixated on monetary and fiscal conservatism that has done little to combat joblessness and accelerate economic growth.
- Liberalize mining and tree plantation —Mining is a natural and logical industry to promote amid the pandemic. The Philippines has a competitive advantage in mining, being one of the top five most mineralized countries in the world. Mining generates hefty tax revenues, which are badly needed since the government’s fiscal base has been eroded by the recession. It also generates dollar revenues that will help offset the reduced export revenues from traditional sources like copra or electronics. Finally, it will generate badly needed jobs in the countryside, where poverty is widespread and endemic.
Unfortunately, mining has been demonized, partly due to the misdeeds of irresponsible, unregulated, small–scale miners. But a total ban isn’t the answer. Government should remove all constraints to the development of the mining industry, including the ban on open pit mining, but require them to comply with international ISO standards for environmental compliance.
Like mining, tree plantation has been a victim of the government’s blunt instrument of banning. Planted forests have been lumped with natural forests in the government’s desire to regulate tree cutting. The result is that the Philippine wood industry is nearly at death’s door with about 80% of domestic needs for wood being met by imports, a far cry from when the country used to export lumber and other wood products.
The benefits of promoting planted forests are enormous: it can substitute for imports and someday may lead to exports; it will lead to the revival of the wood and other allied industries like furniture; it will promote water conservation and thereby benefit agriculture; it will generate jobs in the uplands, where one in five people ekes out a living and live in poverty.
The floods caused by the recent typhoons in Cagayan, Cantanduanes, and other provinces have shown the urgent need to reforest. Government can’t be relied on to plant trees. The government’s PHP 12 billion tree planting program has been a failure. The government must harness the private sector for a massive reforestation program.
What’s the problem? Regulatory overreach. The government is treating planted forests like natural forests. Permits are required for everything: from planting to inventory, from harvesting to transporting trees to the processing plants and then to the market. The result is just more corruption at the local level and uncertainty on the part of investors.
To solve this problem, the Department of Environment and Natural Resources should immediately issue a Department Administrative Order (DAO) to distinguish between planted forests and natural forests and liberalize the plantation, harvest, processing and transport of planted trees.
- Forge a social contract with Labor —Labor rigitidies—high minimum wages relative to productivity and security of tenure—are a big constraint to growth, especially for MSMEs, which generate the most employment.
Entry level wages should be low enough to encourage employment, unlike at present when the entry level or minimum wage is close to average wages.
If entry level wages remain high, employers will likely not hire in the face of massive idle labor and weak demand, more so if they will be saddled with employees on “permanent” status, i.e. they can’t fire them without substantial costs or documentation. Even if an employer is rigorous in following the law, he may still be dragged into labor arbitration that will increase his uncertainty and his legal costs.
The US threatened Vietnam for being a “currency manipulator” for undervaluing its currency. That’s a huge compliment to Vietnam.
These labor rigidities are one of the reasons light manufacturing has fled the Philippines to places like Vietnam and Bangladesh despite our having a large pool of unemployed and underemployed who otherwise could be working in these factories.
Labor market reform will be politically difficult, but not insurmountable because labor recognizes the breadth of unemployment caused by the pandemic. However, there is a divergence of interest between those currently employed and the unemployed because the unemployed would rather have a job rather than no job at all.
The way forward is a social contract. Perhaps, labor market reform can be tried in specific areas with high unemployment. In other words, the new policies will be ringfenced in those places with high joblessness, such as the North Harbor or in Calauan, Laguna, where many squatters have been relocated and hopelessness and joblessness are rampant.
In return, these special employment zones should be considered “closed shops,” i.e. all employees must be members of a union so they can collectively negotiate for higher wages or benefits when the firm becomes profitable. In this way, wages and benefits are set on a firm level (and based on productivity) rather than being nationwide, or regionwide as it is now.
Another very important labor market reform is reskilling for labor to move to new, rising industries and to cope with the displacing effects of the Fourth Industrial Revolution. Thus, there is an urgent need to pass an Apprenticeship Law. Under current Labor law, apprenticeship is allowed only for technical industries and only for six months. The Apprenticeship Law must extend the period to at least two years, enough time for the employer to teach and train the apprentice and decide whether he or she should be fully employed as a regular worker. Furthermore, enterprise-based education must not be restricted to technical industries alone for apprentice labor to benefit. In exchange for investing in the training and education of apprentices, the employer must be allowed to legally pay them 75% of the regular minimum wage.
- Open up the Telecommunications sector—The pandemic has shown the very critical role of telecommunications in society. Accessible and affordable broadband for households and businesses is a necessity as much as water and electricity are. Work from home won’t be feasible without good broadband. The same with remote learning. Likewise, mobile banking for consumers will be difficult if mobile broadband service continues to be erratic and spotty.
The key to getting better, faster, and cheaper internet is to inject competition in the sector. One way is to get government to pass the Public Service Act Amendment, which will remove transport and telecommunications among the protected “public utilities” subjected to majority Filipino ownership. This will enable big, highly capitalized foreign telecom firms to provide competition to the existing dominant duopoly.
Another is for government to pass the Open Access in Data Transmission Act which will do away with the franchise requirement in providing broadband and telecommunications services. This will spur innovation in the delivery of telecommunications and broadband services as all types of firms can enter across the telecommunications chain, from accessing the internet backhaul to last mile connectivity.
One immediate action that President Duterte can do to improve internet service is to sign an Executive Order classifying satellite broadband as a value-added service and therefore, won’t require firms to secure a congressional franchise first. The effect on accessible and affordable broadband would be immediate. There are already satellites in the sky with the Philippines as their footprint and therefore, can immediately serve the entire archipelago. Even the most distant barangay can be connected through satellite broadband.
Furthermore, satellite technology keeps improving. Elon Musk’s Starlink has demonstrated download speeds of up to 160 mbps. The only barrier for Filipinos to access the technology is legal, and President Duterte can solve this with an Executive Order.
- Pivot to PPP—President Duterte junked PPP or Private-Public Partnerships (PPP) in favor of ODA (Official Developmental Assistance) and GAA (General Appropriations Act) or the budget. However, the policy on relying on ODA assumed too much: that the Chinese will be generous in extending developmental loans and that they can execute the projects quickly. That has proven to be an illusion, and only a few small ones have been started.
As for the GAA, the assumption was that the Department of Public Works and Highways (DPWH) and the Department of Transportation (DOTr) can implement projects quickly and efficiently. Again, the assumption has proven to be wrong. DPWH and DOTr have consistently been underspending their respective budgets, up to only 33%.
Government has realized this, but too late to realize the lofty goals of BBB (Build Build Build). It has scrambled to do some PPP Projects, but has been forced to do unsolicited ones (which are prone to favoritism and corruption since there’s no actual bidding). It has given the green light to the San Miguel unsolicited offer to build a mega airport in Bulacan, even if it could pose a threat to Clark International Airport. The NAIA consortium dropped out of its unsolicited offer to upgrade NAIA and Megawide has since taken up the offer. Final negotiations are still pending.
To improve internet service, President Duterte can sign an Executive Order classifying satellite broadband as value-added service
The administration had chosen to ignore the benefits of PPPs. The private sector has the competence and incentive to complete projects on time because it’s risking its own money. That’s not the same with government projects. Government had laid the blame on the private sector for delays in PPP projects whereas it was actually the government’s inability to deliver on the right of way acquisitions that had caused the delays.
In PPPs, however, the government must conduct fair public biddings to get the best possible deal for the public to lessen the favoritism and corruption.
It may be too late in President Duterte’s term to do this pivot now, but the succeeding government should appoint a cabinet level officer to develop and supervise PPP projects.
Inasmuch as government health institutions, including the DOH and Philhealth, and agencies have proven themselves to be corrupt, inefficient, and incompetent, the PPP mode should be pursued in implementing Universal Health Insurance with an emphasis on disease prevention rather than treatments. There’s a great incentive to puff up treatment costs by both Philhealth and the private hospital company. Rather, the private sector should be mobilized and paid to achieve targeted health outcomes in terms of reduced mortality, disease prevention, and increased quality of health indicators rather than reimbursement of treatments. In other words, a PPP mode for the UHC should have a wholistic health approach rather than being focused on disease treatment.
- Use diplomacy—President Duterte embraced China and shunned the US in his foreign policy, but that has yielded few benefits to the country, except for a few grants for in To his credit, however, President Duterte has been making nuanced pivots toward a more balanced foreign policy. For example, he pardoned US Sergeant Joseph Scott Pembleton for the murder of a Filipino transgender, postponed the cancellation of the Visiting Forces Agreement, and announced in a UN Speech the firm stand of the Philippines in favor of the Arbitral Award on the West Philippine Seas. Despite President Duterte’s known pro-China stance, the US quietly gave over PHP 100 million in COVID-related assistance to the government, including the donation of 100 state–of–the–art ventilators.
This defter touch in foreign policy can also be seen in the recent approval by President Duterte to lift the moratorium on gas exploration in the West Philippine Sea that hasn’t drawn a rebuke from China. Increased gas exploration could lead to new oil and gas deposits inasmuch as the country’s sole domestic source of gas, Malampaya, is seen to be depleted in five years.
Further, the Philippines’ joining with 14 other nations, including China, Japan, and Australia, to form the biggest free trade bloc under the Regional Cooperation for Economic Partnership, just last November 15 is a big deal. It could lead to expanded markets for Philippine exports, including services, in which the country is competitive. It may also force the country to liberalize sectors which remain protected and remain under the control of monopolies. Officials have described it as an economic recovery program and rightly so. However, expanded markets should also be accompanied by increased domestic capacities, which would require the government to make the investment environment more attractive.
However, President Duterte faces more challenges in foreign policy which could affect the economy. The EU parliament has signalled that due to reports of alleged systemic human rights violations in the Philippines, it’s planning to remove the country’s GSP plus privileges to access the EU market, the loss of which could affect thousands of jobs. Many foreign companies that set up here to access the EU market would have to shut down if those trade access privileges were to be rescinded.
President Duterte would also have to deftly deal with US President-elect Joe Biden, whose Democratic Party is more vocal about raising human rights violations in the Philippines. However, if President Duterte can manage to handle that issue and leverage our strategic position in the US-China conflict, he should push for a bilateral free trade deal with the United States. A bilateral free trade deal with the US could be a game changer for some of our industries, including garments.
- Agriculture, agriculture, Agriculture–Agriculture has been the star sector in this year of the pandemic. Despite the lockdowns, agriculture managed a 1.2 % growth in the April–to–June lockdown period, the only sector to post positive numbers. This happened despite rice tariffication and the African swine fever outbreak in the hog industry.
However, agriculture can’t continue to grow unless its main structural problem is addressed, which is land fragmentation caused by the Comprehensive Agrarian Reform Program. Land fragmentation can’t be cured by land consolidation through ownership. Agricultural land ownership is prohibited beyond five hectares under the present Comprehensive Agrarian Reform Law. Successful farmers aren’t allowed to expand and buy out inefficient and unsuccessful farmers.
The only solution is land consolidation via leasing. However, a lot of agricultural lands under CARP still can’t be leased out since farmer beneficiaries are restricted to rent or lease their lands if they have existing debts to the government arising from the land transfer. Therefore, to remove this restriction, government must condone the debt of agrarian reform beneficiaries because most of them (at least 75%) are unable to pay the debt.
Why condone? First, it’s a matter of social justice. The value of the land got degraded when the government cut up and fragmented the land to award it to the farmers yet the farmer beneficiaries are saddled with the debt arising from acquisition of the land at original, non-divided value. No wonder then that most of agrarian reform beneficiaries can’t afford to pay because their productivity went down when the lands were cut up.
Second, there’s no moral hazard involved. There won’t be another land reform program to incentivize farmers not to pay. Also, government gives out tax amnesties to tax payers yet the moral hazard argument hasn’t been raised against them. There’s more reason not to raise it against poor farmers who were saddled with unsustainable debt by the government.
Third, debt condonation will act as an economic stimulus in this ongoing recession. It’s much better than giving out social amelioration benefits or “ayuda” since there’s no corrupt or inefficient bureaucracy involved which will give out the benefits. Forgoing the debt will incentivize the farmers to spend to increase their productivity.
Last, it will be the politically feasible solution that will address the biggest constraint to agricultural growth, which is land fragmentation.
- Increase the amount of stimulus spending. The Philippines has the stingiest economic stimulus among Asian economies. Bayanihan 1 and 2 at PHP 375 Billion and 165 Billion, respectively, represent less than 3% of GDP, compared to other countries’ stimulus spending at 10% of GDP or more, e.g. Malaysia (22%), Thailand (15.9%), Indonesia (11.0%). The economic managers are touting bank guarantees and monetary stimulus but they can’t be included as they don’t stimulate spending per se.
However, the Philippines has the worst management of the pandemic in Asia with the highest cases per capita (about 3x Indonesia) despite having the strictest and longest lockdown in the world. Yet, it rolled out the stingiest economic stimulus.
The PHP 1.3 Trillion ARISE bill of Congress would have been more appropriate for the times but the Department of Finance has shot it down. The concern is that the stimulus amount will be wasted by corrupt and inefficient government agencies and that the government should “ keep its powder dry.” It’s a reasonable argument. However, there’s a humanitarian crisis in the country wherein millions are jobless and about 30.7% of the adult population or 7.6 million reporting involuntary hunger. Add to this the devastating effects of the typhoon and the government should not turn a blind eye to the plight of Filipinos in the name of preserving credit ratings.
Bayanihan 2 will expire in December and about PHP 40 billion reportedly has not been sent by the Department of Budget and Management to the respective government agencies. This aggravates the inadequacy of the stimulus. Perhaps a Bayanihan 3 may be called for in addition to the 2021 budget to increase health-related and welfare spending to counter the affects of the pandemic and to help the victims of the three typhoons that wrought devastation in vast areas of the country.
The pandemic has caused an economic crisis of biblical proportions. The economy will contract by about 9% this year, the highest on record. Furthermore, three devastating typhoons have savaged most of Luzon, exacerbating the people’s suffering.
In sum, it’s about time the country pivoted to a new trajectory, just like what China did after Deng Xiaoping took power in China. At that time, China was reeling from the negative effects of Mao’s socialist rule: a disastrous Great Leap Forward that spawned widespread famine and the Cultural Revolution that put its educated elite in menial work.
What did Deng do? He opened up the economy to foreign investments, mobilized the private sector in economic production under the guise of socialism with Chinese characteristics, unleashed private initiative by decollectivizing agriculture, devalued the Chinese yuan, and cheapened Chinese labor to attract labor-intensive industries, and expanded trade and diplomatic relations with the United States and the whole world.
In a similar vein, the Philippines should open up the economy to more foreign investments and competition, introduce more private capitalism in agriculture by allowing successful farmers to expand, mobilize the private sector in building infrastructure and providing public services through PPP, harness private initiative in planting forests and mining, depreciate the peso, and leverage foreign policy to advance the nation’s economic interest.
The old ways aren’t working. The pandemic-induced recession has exposed that. It’s time to pivot to a new economic and governance model to recover and prosper.
