Growth

The Asian Development Bank says our economy should grow at a pace of between 7 percent and 8 percent to have any significant reduction in the poverty rates.

That is not about to happen. By most estimates, the Philippine economy will grow at 5 percent or maybe a bit less this year. Since our population grows at about 2.4 percent (one of the highest in the world), we will have net economic growth at roughly 2.6 percent.

Our rate of growth will fall woefully short of what is required to soak up poverty and bring down the level of misery in our society.

Every government we had tried to find the silver bullet that will slay the dragon of poverty. We do not seem to have succeeded in finding it.

There is even more bad news brought forth by recent studies: there might not be a silver bullet at all.

The other night, the resident representative of the World Bank hosted a small dinner with Bill Easterly, professor of economics and purveyor of rather irreverent ideas. Easterly has done comparative development studies and concluded that there is no specific set of factors that cause development.

If societies did not have accountable institutions, low levels of corruption, a well-formed culture of entrepreneurship, free markets or a reliable legal system, no amount of international assistance, capital flows and cheap credit will make development happen. If the institutions of governance are weak, international assistance will go to waste. Investments will go down the drain.

Around the dinner table with Prof. Easterly the other night, apart from the resident representatives of the World Bank and the IMF, were Chief Justice Arturo Panganiban, Finance Secretary Gary Teves, former Prime Minister Cesar Virata, businessman Jaime Augusto Zobel de Ayala, former economic planning secretary Felipe Medalla, Senator Ralph Recto, former finance undersecretary Romeo Bernardo, DBP chair Vitaliano Nanagas and myself. In a word, this was a group that thought a lot about the problems of Philippine development.

None of us had easy answers about what has kept our growth rate slow. Each of us held some pet theory about our underdevelopment.

Quite surprisingly, some us took issue with Prof. Easterly’s assertion that democracy was a condition for rapid growth. This was clearly not true of the case of China or Singapore – although it could be argued that it was economic freedom, not democracy, that seems to play a more significant role in improving prospects for rapid growth.

The case of India came up.

In that country, a reformist and pro-market party – the BJP – undertook the painful but necessary market-opening reforms. But because the reforms caused short-term pain, the BJP was quickly thrown out of power. Consequently, the traditionalist Congress party reaped the rewards of the buoyant economy the BJP’s reforms brought forth.

The same argument could be made about Chile. The Allende dictatorship instituted pro-market reforms that laid the foundation for a strong economy. Those reforms were continued, in a more democratic setting, by the previous leadership. The pain of transitional reforms, however, produced a populist backlash. Just the other week, the woman candidate of the Socialist Party was elected to office – and will likely inherit the robust economy whose basis was set down by the previous "right-wing" governments.

In other cases, such as Venezuela, the prosperity brought about by the pro-market policies of "conservative" governments produced the same populist backlash. In that particular country, now led by left-leaning, populist government, per capita income has been dramatically declining – a measure of the anti-growth, anti-market policies of the current leadership.

The case of the RVAT crossed my mind.

After the RVAT was finally imposed last November, a truly commendable act of economic statesmanship by the Arroyo administration, the President’s popularity ratings dropped through the floor. But the peso and Philippine bonds strengthened, investor interest has been revived and the large global funds renewed their interest in our stock market.

When the VAT rate is increased to 12% next month, we should expect a lot of political tremors. But that will help strengthen our peso, boost investor confidence in our fiscal stability and help propel a higher level of economic growth.

In the course of our dinner-discussion, the World Bank distributed a summary of their survey of firms doing business in the Philippine economy. The survey listed issues and concerns that serve to constrain investments in the country.

True enough, the biggest concern of investors in the Philippine economy is macroeconomic stability. Investors are worried about the management of the fiscal picture, the danger to the stability of our currency posed by a large budgetary deficit that will force us to borrow in order to finance ourselves. Hopefully, the political will demonstrated by this administration will help allay that fear and create a more reassuring environment for expanded investments that will in turn create livelihood for our people.

But there are other concerns. After macroeconomic stability, the next major concerns of investors is corruption, electricity costs, high corporate tax rates and regulatory policy uncertainty.

All these concerns, including electricity costs, draw from the quality of governance: our ability to plan on a longer horizon and not be distracted by a short electoral calendar, the capacity of our bureaucracy to anticipate policy and regulatory problems and the steadfastness of the political leadership to maintain correct but momentarily unpopular policies.

We all seemed to agree that an urgent cause for concern was the rapidly deteriorating quality of our bureaucracy. Low pay, petty politicking, patronage politics and the low public and media regard for our professional bureaucrats conspire to discourage the brightest from the public service.

If we aspire for sustained and robust economic growth, we must act with urgency to strengthen our bureaucracy, raise the quality of the people we entrust with policy-making and produce a reliable regulatory environment. We must strengthen our institutions of governance if we aspire to dissipate poverty through growth.