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PHILLIPINE INSTITUTE FOR DEVELOPMENT STUDIES Surian sa mga Pag-aaral Pangkaunlaran ng Pilipinas

Vol. XXII No. 1

Editor's Notes

DEVEL O PMENT RESEARCH NEWS January - February 2004

ISSN 0115-9097

The Malampaya Natural Gas Project is predicted to contribute to a higher GDP growth in 2004.

It has been a tradition for the DRN to feature a forecast on the Philippine economy in its first issue of the year. The forecast provides answers to the question foremost on everybody's mind at the start of the year: What's in store for us this year?

Inside the DRN 7

10

Improving labor productivity The cornerstone for better competitiveness and income distribution in the Philppines Announcements

Philippines 2004, a 2003 replay The Philippine economy showed remarkable resilience by posting a gross domestic product (GDP) growth rate of 4.5 percent in 2003 despite early problems with El Niño, the unfavorable global impact of the SARS scare and the war in Iraq, the slowdown in the pace of economic reform—punctuated by cases of policy reversals—and the uncertainty spawned by political crises. However, the growth rate is not even close to the 8-10 percent needed to push the economy out of its moribund state. As stated in last year’s report (see Where now, Philippines? in the January-February 2003 issue of this newsletter), the lack of significant

Businessworld Anniversary Report 2001

For several years now, Dr. Josef Yap, a senior research fellow at PIDS, has been projecting our future for at least in the next 12 months by doing some careful analyses of the previous year's performance based on economic indicators, the current political scenario in the Philippines, and developments in the global scene which may affect the local situation. In each forecast, he had stressed the need for the country to address some very serious structural problems if the economy is to surge ahead. And while he maintains that said problems basically remain, this year, he focuses on the more short-term issues. Will we be better off? Dr. Yap provides some answers. DRN

by Josef T. Yap changes in the economic policy will cause output growth to level off. In this scenario, GDP growth will hover between 3.5 and 5 percent, relegating the economy to a low-equilibrium growth trap. The performance in 2004 will be determined mainly by the recovery in the global economy, the outlook for agriculture and electronics manufacturing, the steady expansion of services, and the impact of the May elections on investor confidence. Structural problems—e.g.,


DEVELOPMENT RESEARCH NEWS

Global prospects are more encouraging this year than in 2003. However, the rapid spread of avian flu is threatening to replicate the damage wrought by the SARS epidemic. What is of great interest is the emerging consensus regarding the macroeconomic imbalances in the United States.

2

January - February 2004

the burgeoning fiscal deficit and government debt and sluggish private investment—while constraining short-term growth, are more relevant for medium-tolong term prospects and will not take center stage in this paper. Moreover, these issues have been discussed extensively in previous outlook papers.

high growth in corporate profits and stimulative fiscal and monetary conditions. However, recent events have tempered the outlook for 2004. GDP growth in the fourth quarter of 2003 was lower than expected and the number of new jobs generated is far from commensurate to the increase in economic activity.

Global prospects are more encouraging this year than in 2003. However, the rapid spread of avian flu is threatening to replicate the damage wrought by the SARS epidemic. What is of great interest is the emerging consensus regarding the macroeconomic imbalances in the United States. This will be discussed in the next section. A description of the Philippines' recent macroeconomic performance is then presented in Section III while the last section deals with prospects and policy issues.

The disappointing employment picture is attributed to a rise in outsourcing activities by US firms, which means that a significant part of the increase in investment was done by their affiliates in other countries. The lower than expected employment rates may dampen consumer spending in 2004. The Federal Reserve Board has also hinted at the possibility of raising interest rates within the year. While Consensus Economics forecasts a 4.4 percent GDP growth rate, other analysts have predictions as low as 3.7 percent in 2004.

Global economic prospects Data in Table 1 indicate that the major industrialized economies were able to withstand the adverse impact of the war in Iraq and weak global economic conditions in the first quarter of 2003. However, there was a slight slowdown in the aggregate performance of the European Union (EU) last year. Part of this deceleration— which started in 2001—is due to the continuing adjustment to the requirements of a single currency in a subset of countries of the EU. There were some EU countries, though, such as Spain and the UK, where GDP growth was higher last year compared to 2002. The recent strength of the euro is expected to lead to a cut in interest rates by the European Central Table 1. GDP growth for major industrialized Bank. This is the countries and regions main reason why GDP growth in the 2000 2001 2002 2003e 2004 f EU-15 is forecast US 4.1 0.5 2.2 3.1 4.4 to be higher in Japan 2.8 0.4 -0.4 2.3 2.1 2004 compared to EU-15 3.7 1.7 1.0 0.8 2.0 2003. Business investment growth e – estimate; f – forecast was particularly Source: Consensus Economics, January 2004 strong in the US in 2003 owing to

Meanwhile, Japan also experienced a turnaround in business investment. The jobless rate of 4.9 percent in December 2003 was the lowest since June 2001. Nevertheless, the specter of deflation has not diminished, contributing to weak household spending. The strong yen is also expected to cut into export growth, which has benefited from the strong US recovery and increased trade with China. As a result, the forecast of Consensus Economics is for slightly lower output growth in 2004. The favorable global economic climate is threatened though by worsening macroeconomic balances in the US. The aspect related to the widening current account deficit was characterized as the dollar dilemma in last year’s outlook. A view of the situation that is sympathetic to the US argues that the latter has to recycle the surpluses generated by high-saving countries such as Japan and China by incurring a current account deficit. However, the consensus view is that the US is living beyond its means and the excess in expenditure over income can only be maintained by borrowing from economies with huge surpluses.


DEVELOPMENT RESEARCH NEWS

3

January - February 2004

Recently, the IMF castigated the US government for allowing the recurrence of a large fiscal deficit. While the IMF acknowledges the positive impact of the stimulative fiscal policy on economic activity, it warns of the rise of real interest rates that will result from the need to finance these deficits in the future. Moreover, against the background of a record-high US current account deficit and a ballooning US net foreign liability position, the possible global risks of a disorderly exchange rate adjustment, especially to financial markets, cannot be ignored. Episodes of rapid dollar adjustments failed to inflict significant damage in the past, but with the US net external debt at record levels, an abrupt weakening of investor sentiments vis-à-vis the dollar could possibly lead to adverse consequences both domestically and abroad. A more immediate threat—both temporally and geographically—is the outbreak of avian influenza in Asia. This epidemic has the potential of inflicting economic damage in the scale of last year’s SARS virus. Countries with large poultry industries such as Thailand are at greatest risk. The tourism industry in affected countries may also experience a sharp downturn. Philippine economic performance in 2003 GDP growth in 2003 was only marginally higher compared to 2002 (Table 2). Meanwhile, GNP growth in 2003 became significantly higher after the initial figure for 2002 was reduced from 5.2 percent to 4.5 percent. The forecast presented last year was for a GDP growth rate of 4.3 percent in 2003. In terms of sources of growth, there was not much difference between 2002 and 2003. This is an indication that no significant policy changes were introduced during this period. Services continued to lead the way, sustained by the robust expansion in the telecommunications sector. The composite transport, communication and storage sector has increased its share in total output by two percentage

points—from 6 to 8 percent—in the last seven years. The finance sector continued its solid recovery by posting a 6.9 percent growth rate. Weak private investment and low credit growth suggest that the main source of value added in this sector was not lending activity. The most likely sources are income from government securities and earnings from fee-based transactions. The real estate sector became the last of the three hardest hit areas by the 1997 crisis—the other two being finance and private construction— to generate a modest growth rate.

Dr. Josef Yap, the author, in one of his presentations conducted by the Philippine Institute for Development Studies (PIDS).

Meanwhile, the manufacturing sector overcame the contraction of value added in electronics and posted a respectable 4.2 percent growth. Nevertheless, growth in manufacturing has fallen below aggregate GDP growth in all but three of the last ten years. This is a clear sign that this sector has not responded positively to the restructuring process during the past two decades or so. Manufacturing activity was boosted by the food sector, which in turn drew support from the recovery of agriculture from the adverse impact of El Niño. The combined agriculture, fishery and forestry sector even managed a higher growth rate last year compared to 2002.

In terms of sources of growth, there was not much difference between 2002 and 2003. This is an indication that no significant policy changes were introduced during this period. Services continued to lead the way, sustained by the robust expansion in the telecommunications sector.

Private consumption spending again provided the brightest spot in the expen-


4

DEVELOPMENT RESEARCH NEWS

January - February 2004

Table 2. Selected macroeconomic indicators, Philippines, 1990-2003, forecast for 2004 (annual growth rates and share to GDP, the latter shown in italics) 1990

1991

1992 1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004 Forecast

Gross National Product

5.0

0.3

1.6

2.7

4.6

4.9

7.2

5.3

0.4

3.7

6.9

3.5

4.5

5.5

Gross Domestic Product

3.2

-0.6

0.3

2.1

4.4

4.7

5.8

5.2

-0.6

3.4

6.0

3.0

4.4

4.5

4.8

Agriculture, Fishery and Forestry

0.5

1.0

0.4

2.1

2.6

0.9

3.8

3.1

-6.4

6.5

4.3

3.7

3.3

3.9

3.0

22.30

22.74

21.55

21.13

20.71

Agriculture and fishery Forestry Industry Sector Mining and quarrying Manufacturing Construction

Service Sector Transport, communication and storage Trade Finance Ownership of dwellings and real estate Private services Government services Personal Consumption Expenditure Government Consumption

1.8

2.8 22.08

22.17 22.28

21.98 21.32

-22.2

2.6

-29.4

-11.5

-15.0

-16.5

3.0

1.6 -40.1

3.8

3.4

-6.5

20.91

20.56

19.34

6.7

-30.0

3.3

20.09 19.78 6.4

4.6

19.92 19.71 3.9

3.7

19.91 19.64

19.82 19.68

24.2

-27.3

-19.5

-66.4

19.60 3.6 19.51 193.3

1.02

0.66

0.58

0.48

0.39

0.22

0.22

0.15

0.15

0.19

0.14

0.10

0.03

0.09

3.0

-2.7

-0.5

1.6

5.8

6.7

6.4

6.1

-2.1

0.9

9.0

0.9

3.7

3.0

35.46

34.71

34.41 34.25

35.58

35.91

35.35

34.49 35.46

34.76 34.53

34.03

-2.7

-2.7

6.7

0.7

-7.0

-6.8

1.3

1.7

2.8

-8.4

-6.5

17.5

1.54

1.50

1.60

1.58

1.40

1.25

1.20

1.16

1.20

1.06

1.11

1.01

1.46

1.64

2.7

-0.5

-1.7

0.7

5.0

6.8

5.6

4.2

-1.1

1.6

5.6

2.9

3.5

4.2

25.52

25.56

25.03 24.69

25.27

25.04

24.91

24.47 24.39

24.37 24.14

24.08

12.1

-15.9

10.9

16.2

-9.6

-1.6

-5.0

-3.3

-5.9

4.92

8.9

6.5

5.04

5.22

5.45

5.55

4.7

0.7

2.9

2.73

2.74

2.76

1.0

2.5

4.9

0.2 42.55

24.84 25.34

5.7

2.59 42.24

34.71 35.38

2.8

-0.3

42.84 42.99

13.9

13.0

3.01

3.25

4.2

5.0

42.93 43.07

11.3

26.3

6.42

5.83

5.55

6.62

6.11

5.66

5.09

7.5

4.8

3.3

3.1

4.2

0.7

4.3

2.9

3.30

3.29

3.41

3.40

3.35

3.27

3.27

3.22

4.0

4.4

4.3

5.4

6.4

5.4

3.5

43.29

43.38

45.15

45.42 44.76

2.2

0.5

1.4

2.6

4.2

5.8

7.4

8.2

6.5

5.3

5.76

5.82

5.85

5.84

5.90

5.99

6.17

6.60

6.72

7.01

1.6

2.5

4.0

5.6

4.9

5.2

4.6

0.6

14.91

15.07

10.1

15.27 15.32

15.26 15.39

51.0

5.81

5.70

5.5

3.9

2.4

15.34

15.15

15.61

13.8

13.0

10.4

15.84 15.72

45.32 45.76

5.9

8.8

8.9

8.6

7.41

7.72

8.03

5.6

5.8

16.12 16.33

0.4

2.4

5.5

7.3

4.4

1.9

0.9

1.2

3.4

6.9

4.06

4.07

4.12

4.22

4.54

4.87

5.12

5.04

4.80

4.72

4.68

4.78

2.8

0.3

0.7

1.8

2.9

3.0

4.1

3.8

1.6

0.6

0.0

-0.5

1.7

3.8

5.57

5.62

5.64

5.62

5.54

5.46

5.37

5.30

5.41

5.27

4.97

4.80

4.68

4.65

2.8

0.3

0.6

2.9

4.3

4.3

5.0

4.8

4.7

5.8

4.8

4.4

5.5

5.3

6.85

6.88

6.89

6.94

6.94

6.91

6.86

6.83

7.19

7.36

7.28

7.38

7.46

7.51

2.8

0.3

0.2

2.8

5.5

3.7

5.9

2.5

2.3

3.1

1.7

0.9

4.7

3.8

5.05

5.16

5.15

5.18

5.24

5.19

5.19

5.06

5.21

3.76

5.19

4.98

4.88

4.90

5.4

2.3

3.3

3.0

3.7

3.8

4.6

5.0

3.4

2.6

3.5

3.6

4.1

74.12

75.89

78.10 78.81

76.76

76.62

79.73

7.2

-2.1

-0.9

6.2

6.1

5.6

4.1

4.6

-1.9

7.79

7.70

8.00

8.13

8.20

7.8

7.9

8.7

3.5

17.7

-17.1

24.11

19.96

21.46 22.67

23.59 23.33

8.07

8.03

7.92

6.7 8.17

6.1 8.19 11.4

5.1

77.77 77.50

77.94

-5.3

2.4

-2.8

7.38

6.86

7.53

12.5

11.7

-16.3

-2.0

13.6

-3.5

24.78

26.32

22.16

21.01 22.08

24.36 22.51

4.5 0.0 3.5 6.0

5.8

4.06

79.13 77.30

15.0

16.53

-2.7

78.31 77.66

4.4

46.37

4.16

7.99 Capital Formation

0.7

22.75 22.36

21.29

5.81 Electricity, Gas and Water

22.74 22.75

5.5

4.8

5.0 -3.5 7.0

22.57

Exports (nominal $)

4.7

8.0

11.1

15.8

18.5

29.4

17.7

22.8

16.9

18.8

8.7

-15.6

9.5

1.5

7.0

Imports (nominal $)

17.2

-1.3

20.5

21.2

21.2

23.7

20.8

14.0

-18.8

4.1

2.1

-5.9

7.2

5.7

12.0

Inflation (average)

14.2

18.7

8.6

7.0

8.3

8.0

9.1

6.0

9.7

6.7

4.4

6.1

3.1

3.1

3.8

91-Day Treasury Bill Rate (average)

23.7

21.5

16.0

12.4

12.7

11.8

12.3

12.9

15.0

10.0

9.9

9.7

5.5

5.9

7.0

Nominal Exchange Rate (average)

24.3

27.5

25.5125 27.1199

26.4172 25.7144 26.2157 29.4707 40.8931 39.089 44.1938 51.0

51.6

54.2

55.4

Source: National Accounts of the Philippines, National Statistical Coordination Board; Selected Philippine Economic Indicators, Bangko Sentral ng Pilipinas; and forecasts of J.T. Yap


DEVELOPMENT RESEARCH NEWS

diture category, increasing at a rate of 5.1 percent in real terms. The category with the highest growth rate remained to be the transportation and communication sector, followed by fuel, light and water. Low inflation, favorable interest rates, and solid agriculture growth contributed to strong consumption growth. The peso depreciation contributed somewhat by increasing the peso value of remittances of overseas Filipino workers (OFW). Total investment posted its highest growth rate since 1997, with spending on durable equipment growing by an encouraging 9.3 percent last year. Construction, however, contracted by 6.6 percent despite the 7.4 percent rise in private construction activity. Public construction, which historically has been higher than private construction, fell by 17.9 percent, mainly as a result of deficit-reduction efforts by the national government. This follows the six percent contraction in 2002, a trend that does not augur well for future economic growth. Export growth in nominal dollar terms was only 1.5 percent last year, an extremely disappointing outcome considering the performance of other East Asian economies (Table 3). All the other countries included in the table had higher export growth rates last year compared to 2002, which can be attributed mainly to the recovery in Japan and the US. One possible reason for the export slowdown in the Philippines is the degree of trade links with China, which has increasingly been a buyer of Asian commodities (Table 4).

5

January - February 2004

target of P202 billion feasible. However, the consolidated public sector deficit is projected to be above 6 percent of GDP, which is considered to be a critical threshold. Meanwhile, lending activity by deposit money banks continued to be sluggish, especially when compared to other East Asian economies (Figure 1). Table 3. Export growth in selected east Asian Outstanding countries (nominal US dollars) bank credit in the Philippines as Indonesia Korea Malaysia Philippines Thailand of September 2003 is not significantly 2003 6.6 19.6 8.0 1.5 17.4 different from 2002 1.5 8.0 5.9 9.5 5.7 the January 2002 level and is even Source: Asia Recovery Information Center below the January 2001 level. One reason is the delay in the establishment of an asset management company, with the Special Purpose Vehicle Act being enacted to law only in early 2003. Moreover, there have been problems in its implementation, leading to slow progress in the resolution of nonperforming loans.

Among the countries shown, the market share of China in terms of exports is lowest in the Philippines. Some analysts also cite the slowdown of foreign direct investment into the Philippines as another reason. Because of the deceleration in export growth, import growth fell from 7.2 percent in 2002 to only 5.7 last year.

Similar to last year, inflation was a source of good news. The inflation rate of 3.1 percent last year was way below the 4.5 percent target. As a result, Table 4. Share of country’s exports to China domestic interest rates hardly changed Indonesia Korea Malaysia Philippines Thailand despite the sharp deprecia1997 4.2 10.0 2.4 1.0 3.1 tion of the peso. 1999 4.1 9.5 2.7 1.6 3.2 However, this 2001 3.9 12.1 4.3 2.5 4.4 situation may not persist, Source: Trade Analysis System on Personal Computers (PC TAS) given the recent rise in the exchange rate and rising food prices.

The fiscal deficit continued to be a central issue among policy makers. As of November 2003, the national government deficit was P172.2 billion, making the full year

Prospects and policy issues “It is very likely that there will be minimal progress in key reform areas…” This prediction in last year’s outlook unfortu-


6

DEVELOPMENT RESEARCH NEWS

January - February 2004

Figure 1. Real bank credit* five crisis-affected countries (2001 January = 100), seasonally adjusted 145 140 135

economic performance. GDP growth will likely be below the government target of at least 5.2 percent and settle at 4.8 percent. The higher growth compared to 2003 will be generated by the momentum from the following activities:1

130

@

125 120 115

@

110 105 100

@

95 90 85 Jan01

Mar01 *Cl i

May01 th

Jul01

Sep01

Indonesia i t t

Nov01 d

Jan02

Mar02

Rep. of Korea it b k

May02

Jul02

Sep02

Malaysia

Nov02

Jan03

Philippines

Mar03

May03

Jul03

SepSe 03 03

Thailand

@

* Claims on the private sector: deposit money banks Source: ARIC indicators

@ nately turned out to be true. One example is the delay in the passage of legislative bills related to enhancing tax revenues. The failure of Congress to enact these bills into law was one reason for the decision by the Lower House to simply reenact the 2003 budget.

Inflation will definitely be higher in 2004 owing to the peso depreciation, higher fuel prices, and higher food prices. The increase in the price of certain food items started during the Christmas season in 2003 and the trend has not been reversed.

The budget reenactment threatens to lead to further cuts in public construction. Meanwhile, the Bangko Sentral ng Pilipinas (BSP) has begun to tighten monetary policy partly in response to the higher-than-expected inflation rate in January 2004, which was recorded at 3.4 percent. The BSP has also attributed the change in its policy stance to concerns over the widening fiscal deficit. However, it is clear that the BSP is also responding to the undervaluation of the peso. A less accommodating fiscal and monetary stance combined with the lack of fresh policy initiatives and increasing political uncertainty in the run-up to the elections will take their toll on this year’s

1

Most of these developments were obtained from assumptions made by the National Economic and Development Authority.

Continued progress in the Malampaya project. Possible resumption of operations in the National Steel Corporation. Election-related spending on selected manufacturing sectors: food, beverages, and publishing and printing. Recovery of electronics exports following the rise in economic growth of industrialized economies Sustained increase in tourism, bolstered by the open skies policy in Clark, Subic, Cebu and Davao.

The service sector will continue to lead the way, with growth expected at six percent. There are no indications that the telecommunications sector will slow down and the finance sector should sustain its recovery. Recent initiatives in the housing sector by the government should provide a boost to the real estate sector. Assuming that the Philippines is not drawn into the bird flu crisis, agriculture should post a growth rate of about three percent. The poultry industry may benefit from an increase in demand from external sources although it may not readily adjust to such a scenario. The manufacturing sector will benefit mainly from a turnaround in the electronics sector. Higher growth is expected this year also because of election-related spending. Meanwhile, the food sector should be able to sustain the momentum generated in the past two years. The 4.5 percent growth in manufacturing will underpin the 4.4 percent growth in the industry sector. While the mining sector should still post a double-digit growth rate, 9


DEVELOPMENT RESEARCH NEWS

The recent lackluster performance of the Philippine economy compared to its neighbors in East Asia has revived its moniker “sick man of Asia.” A recent analysis of Asian Development Bank (ADB) economist Dr. Jesus Felipe has pointed to weak long-run growth fundamentals of the Philippine economy as the primary reason for its recurring boom-bust cycle. While these fundamentals cover many areas (technological capability, human resource development, macroeconomic management, etc.), Dr. Felipe uses the concept of unit labor cost as the cornerstone of his analysis. Unit labor cost is the ratio of nominal wage rate to labor productivity, with the latter measured at constant prices.1 The unit labor cost measures the “wage cost” of one peso worth of output prownducedby w L laborer. The lower this ulc = P =  n a typical VA (VAn / Pcost, ) / L the n  likely a firm will operate  more profitably in the Philippine economy. Looking at it from a different perspective, unit labor cost can also be expressed as the share of the wage bill in value added multiplied by the price level. It would be interesting to compare the trend in the Philippines’ unit labor cost with a similarly situated country in terms of labor input. For this crosscountry comparison, the appropriate conversion

1

In equation form, it is defined as

where ulc is unit labor cost, w is nominal wage, VA is value-added, P is a price index, and L is employment. 2

For crosscountry comparison, ulc is divided by the exchange rate and a purchasing power parity price index is used instead of the domestic price level P. Hence, we have

 w L  PPP  ulc =  n    VAn  ER 

7

January - February 2004

Improving labor productivity

The cornerstone for better competitiveness and income distribution in the Philippines of the peso using the applicable exchange rate and purchasing power parity price index was made.2 Figure 1 shows that the unit labor cost in China was much higher than that of the Philippines in the early 1980s. The unit labor cost of both countries generally fell during the 1980s, with that of China having a steeper drop. However, the unit labor cost of the Philippines began to rise—albeit only moderately—in the late

Asian Development Bank (ADB) economist Dr. Jesus Felipe (second from left) points to weak long-run growth fundamentals of the Philippine economy as the primary reason for the country's recurring boom-bust cycle.


8

DEVELOPMENT RESEARCH NEWS

Figure 1.

January - February 2004

Unit labor costs: Philippines and PRC

0.40

0.35 PRC

0.30

0.25

0.20

PHIL

0.15

0.10 1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

Years

1980s and as a result, the unit labor cost of China became comparatively lower beginning in 1990. The unit labor cost of the Philippines then started to fall again after the 1997 financial crisis. Determining the causes of the trends in the unit labor costs of both countries will be useful for policy design. The primary reason for the fall in the unit labor cost for the Philippines has been the diminishing share of wages in total income.

Figure 2.

Labor shares: Philippines and PRC

0.80

0.75 PHIL

0.70

0.65

0.60

The fall in the share of the wage bill can be brought about by either faster growth in output relative to wages mainly as a result of productivity gains or the suppression of wages. Unfortunately, in the case of the Philippines, the fall in the share of the wage bill was due to the suppression of wages. Real wages in the Philippines fell sharply in the 1970s and 1980s and only started to recover after 1993. Data also show that labor productivity stagnated in the 1980s and 1990s. Meanwhile, labor productivity in China increased significantly during the same period. Many economic analysts tend to put a lot of weight on an overvalued peso as the cause of the malaise of the Philippine economy. Data clearly show that the value of the peso was relatively stable over the past two decades, rising slightly after 1988. The moderate increase in the unit labor cost in the Philippines is attributable to a real appreciation of the peso but any overvaluation would not have been substantial. Moreover, the peso has been relatively undervalued for the past six years and no noticeable benefits have accrued from this situation. Hence, the inability to bring down the unit labor cost is primarily due to the stagnation of labor productivity. Dr. Felipe highlights many factors that account for the moribund state of labor productivity. This would include poor infrastructure—particularly in the rural sector; the low quality of schooling that hampers human resource development; weak technological capability; and the generally poor investment climate.

PRC

0.55

0.50 1980

Between 1980 and 2000, the share of wages in total income fell from a peak of about 78 percent in 1982 to only 63 percent in 2000. In the case of China, its labor share was fairly constant at 60 percent (Figure 2).

1982

1984

1986

1988

1990

Years

1992

1994

1996

1998

2000

2002

He also alludes to the O-ring theory of economic development, which emphasizes the lack of fundamentals as being the cause of weak economic growth. The


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DEVELOPMENT RESEARCH NEWS ○

2004 from page 6 ○

the construction sector will likely be bogged down by efforts to consolidate the fiscal deficit. Inflation will definitely be higher in 2004 owing to the peso depreciation, higher fuel prices, and higher food prices. The increase in the price of certain food items started during the Christmas season in 2003 and the trend has not been reversed. Supply bottlenecks have been cited as the reason and the situation may be exacerbated if either the bird flu virus will spread to the Philippines or poultry farms will start exporting to neighboring Asian countries. Inflation will likely average 3.8 percent in 2004. The peso should appreciate toward the end of 2004, with the exchange rate settling between 55 and 55.50. The average exchange rate is estimated at 55.40 for 2004. Gross domestic investment as a ratio of GDP fell again in 2003 and stood at 18.7 percent compared to 25 percent in 1997. Even the latter pales in comparison to ratios of Indonesia, Korea, Malaysia, and

Productivity from page 8 ○

O-ring is a very simple component but damage to it will compromise the whole mechanical device to which the O-ring is attached. To get out of the “low-skill, low-technology, low-growth” trap, Dr. Felipe pushes for achieving a critical minimum effort in terms of investment. The national government can facilitate this by increasing its tax base and streamlining its expenditures. Labor productivity can also be

January - February 2004

Thailand, which stood at between 30-45 percent prior to the crisis. Apart from the usual factors to contend with—physical infrastructure, governance, a more strategic FDI strategy— policymakers should begin taking a more aggressive posture vis-à-vis the debt overhang of the government. Between 1986 and 2002, the government shelled out the equivalent of $74.7 billion in debt servicing for local and foreign obligations. In spite of this enormous repayment, total outstanding government debt increased from $20 billion in 1986 to $45 billion in 2002.

Apart from the usual factors to contend with—physical infrastructure, governance, a more strategic FDI strategy—policymakers should begin taking a more aggressive posture vis-à-vis the debt overhang of the government.

One course of action is to invoke the Odious Debt Doctrine, where odious debts are defined as “those contracted against the interest of the population of a state, without its consent and with full awareness of the creditor.”2 The government should seek legal remedies in the international arena to relieve the excessive debt burden of the Philippines. DRN

2

A good reference is http://www.odiousdebts.org/ odiousdebts/publications/Advancing_the_Odious _Debt_Doctrine.pdf

increased by a more focused education program. For example, the mismatch in terms of the skills that industry demands and what schools provide should be resolved. Dr. Felipe also points out that increased labor productivity will have a direct impact on income distribution. To improve competitiveness of firms, unit labor costs have to come down. But if labor productivity improves—mainly as a result of increased investment and better schooling—the unit labor cost can be reduced without lowering the share of labor in or wages to total income. DRN

Dr. Felipe pushes for achieving a critical minimum effort in terms of investment. The national government can facilitate this by increasing its tax base and streamlining its expenditures.


DEVELOPMENT RESEARCH NEWS

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Editorial Board: Dr. Mario B. Lamberte, President; Dr. Gilberto M. Llanto, Vice-President; 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; Genna J. Estrabon, Issue Editor; Sheila V. Siar (on study leave), Jane C. Alcantara, Claudette G. Santos, Ma. Gizelle G. Manuel, Edwin S. Martin and Mitzi H. Co, 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 2004

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 long-term, 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 Bldg., 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 DEVELOPMENT RESEARCH NEWS Vol. XXII No. 1 January - February 2004 ISSN 0115 - 9097

Reentered as second class mail at the Business Mail Service Office under Permit No. PS-570-04 NCR. Valid until December 31, 2004. 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.

Announcements The following are titles under the Perspective Paper Series. These are the individual paper presentations of PIDS research fellows on the development and evolution of issues and concerns over the past 25 years in their respective fields of specialization. These titles cover most of the themes in the PIDS research agenda and shall be available starting April 2004. @ A Perspective on Macroeconomic and Economy-wide Quantitative Models of the Philippines: 1990-2002 (Josef T. Yap) @ The Poverty Fight: Has It Made an Impact? (Celia M. Reyes) @ The Philippines in the Global Trading Environment (Myrna S. Austria) @ Philippine Competition Policy in Perspective (Erlinda M. Medalla) @ Central Banking in the Philippines: Then, Now and the Future (Mario B. Lamberte) @ Financial Services Integration and Consolidated Supervision: Some Issues to Consider for the Philippines (Melanie R.S. Milo)

@ The Quest for a Better Environment: Past Experiences and Future Challenges (Danilo C. Israel) @ Education, Labor Market and Development: A Review of the Trends and Issues in the Philippines for the Past 25 Years (Aniceto C. Orbeta Jr.) @ Research and Development and Technology in the Philippines (Caesar B. Cororaton) @@@ The study of PIDS Vice-President Dr. Gilberto M. Llanto and Research Fellow Dr. Marife M. Ballesteros titled "Land issues in poverty reduction strategies and the development agenda: The Philippines," which came out as PIDS Discussion Paper no. 2003-03, is included in the 2003 third quarter special edition of the World Bank (WB) and Food and Agriculture Organization's (FAO) Land Reform Bulletin on land settlement and cooperatives. DRN


Philippines 2004, a 2003 Replay