Economic management by semantics

“Our forecast is we would not have a recession next year but a slowdown, and there is a technical difference,” Finance Secretary Gary Teves insisted during a Senate briefing. He explained that recession occurs when there is negative growth for two consecutive quarters.

Here we go again. Ate Glue’s boys are trying to make a bad situation seem not too bad. And that’s not good because less informed people may get the wrong idea, which incidentally, the Palace propagandists actually want.

Secretary Teves realizes of course, that the tough thing about a recession is that it is in the mind. He probably thought he was just trying to lighten the mood when he later told reporters the joke about the definition of recession in layman’s terms… “A slowdown is when your neighbor loses his job… a recession is when you lose your job.” Perhaps, what we need is a recession that affects the unimaginative Cabinet.

As we pointed out in last Friday’s column, businessmen who already lost money from the Wall Street meltdown and have grown very risk averse are not about to put in new investments any time soon. There is a grieving period involved, as Sen. Manny Villar related from personal experience. In the same manner, consumers who see job losses all around them are likely to curtail their spending habits out of fear. If both reactions to a darkening economic environment happen at the same time, Secretary Teves’ slowdown becomes an undeniable recession.

One might argue that the only way to fight pessimism at this time is to cloak reality with more than a bit of wishful thinking. But then, in this age of instant global communication, people know the real score at any given time. Misguided attempts to make them feel better than warranted only contributes to a further erosion of credibility, which this administration doesn’t have too much (if any) to spare.

It is particularly dangerous, as some of Ate Glue’s economic managers are fond of doing, to say that we have little to worry about because our fundamentals are strong. The last one who mindlessly said that exact thing was John McCain. He never lived it down and it might have cost him the election. He lost his lead in the polls and from that point in time, Obama never looked back.

There are other things that our economic managers should no longer say to deodorize our situation. One is how emerging economies like ours are decoupled from the Western economies. Or that we will be little affected by the financial meltdown because we were not sophisticated enough to have played the high risk game Wall Street played with derivatives and the like.

I was just reading an article written by Dani Rodrik, a professor of Political Economy at Harvard University’s John F. Kennedy School of Government. “If the world were fair,” he wrote, “most emerging markets would be watching the financial crisis engulfing the world’s advanced economies from the sidelines — if not entirely unaffected, not overly concerned either. For once, what have set financial markets ablaze are not their excesses, but those of Wall Street.”

But the world is hardly fair. The good and the bad are being punished. Rodrik pointed out that emerging markets’ external and fiscal positions have been stronger than ever, thanks to the hard lessons learned from their own crisis-prone history… But, Rodrik laments, “emerging markets are suffering financial convulsions of possibly historic proportions. The fear is no longer that they will be unable to insulate themselves. It is that their economies could be dragged into much deeper crises than those that will be experienced at the epicenter of the subprime debacle.”

Rodrik cited the experience of South Korea and Brazil. “Both economies have experienced currency crises within recent memory — South Korea in 1997-1998 and Brazil in 1999 — and both subsequently took steps to increase their financial resilience. They reduced inflation, floated their currencies, ran external surpluses or small deficits, and, most importantly, accumulated mountains of foreign reserves (which now comfortably exceed their short-term external debts). Brazil’s financial good behavior was rewarded as recently as April of this year when Standard & Poor’s raised its credit rating to investment-grade. (South Korea has been investment-grade for years.)

“But both are nonetheless getting hammered in financial markets. In the last two months, their currencies have lost around a quarter of their value against the US dollar. Their stock markets have declined by even more (40 percent in Brazil and one-third in South Korea). None of this can be explained by economic fundamentals. Both countries have experienced strong growth recently. Brazil is a commodity exporter, while South Korea is not. South Korea is hugely dependent on exports to advanced countries, Brazil much less so.”

What’s happening, Rodrik explained, is that “emerging-market countries are victims of a rational flight to safety, exacerbated by an irrational panic. The public guarantees that rich countries’ governments have extended to their financial sectors have exposed more clearly the critical line of demarcation between ‘safe’ and ‘risky’ assets, with emerging markets clearly in the latter category. Economic fundamentals have fallen by the wayside.”

So, there… call it slowdown… call it recession… the bottom line is, we are screwed. The more honest our government officials are in describing the dangers we face, the better we can all prepare to survive whatever comes our way.

This is why I respect Gov. Joey Salceda among the economic advisers of Ate Glue. He tells it like it is. I came across a presentation he was said to have made before Ate Glue and he played no game of semantics. He called it a global crisis that’s really two distinct but related ones: 1) a financial meltdown coinciding with 2) a cyclical recession in the real economy. The global economy, he said, was generally slowing down even before the Wall Street meltdown.

What lies ahead? Gov Joey sees a deep and long recession with sharp initial shocks and protracted slowdown with false recoveries prompted by state interventions with short-lived and mostly counterproductive impact. Joey sees an L-shaped recession, which rules out a quick recovery.

Joey lists down some of the risks to our real economy. In exports, the slowdown is global and for us, exports represent about 36 percent of GDP ($57 billion) with 17 percent direct to the US plus around 18 percent indirect. OFWs account for 12 percent of GDP ($16 billion) and he points out it is the “investment content” that is most at-risk. Real estate sector sales to OFWs have declined and it is the locals who are buying all those condo units again.

Tourism is 3 percent of GDP ($4.5 billion) and the number of visitors is threatened by rising personal bankruptcies and bad mortgages, particularly in the US. The balikbayan market may not be as robust as before.

BPOs constitute three percent of GDP ($4.5 billion) and there is danger of lost volumes from some big-ticket principals especially in the financial sector. There is the additional risk of higher vacancy as office space completed 501,000 sqm in 2008 from 330,000 in 2007 in anticipation of a stronger boom in BPO.

Then there is the risk arising from the impact on overall business and consumer confidence, which I wrote about last Friday.

More on Joey’s presentation to Ate Glue in my next column. Suffice it to say that it was a very sobering presentation. It offered no false hopes. It also offered policy directions and appropriate responses. The Senate should have asked Joey to give them the briefing instead and they would have been educated instead of hearing platitudes. Then again, I don’t know if Ate Glue listens to him. No wonder he is trying very hard to fly to Harvard by January.

Sick leave

Sonny Mendoza turned in this Chinese classic.

Hung Chow calls into work and says, “Hey, I no come work today, I really sick. Got headache, stomach ache and legs hurt, I no come work.”

The boss says, “You know something, Hung Chow, I really need you today. Tell you what… when I feel like this, I go to my wife and tell her to give me sex. That makes everything better and I go to work. You try that.”

Two hours later Hung Chow calls again.  “I do what you say and I feel great. I be at work soon... You got nice house.”

Boo Chanco’s e-mail address is [email protected]