August - September 2008
Till debt do us part?
The economy

Misplaced government spending worsens woes

IF THIS country were a family, it is unhealthy, lacking in education and employment opportunities, is deep in debt and spends its limited budget on the wrong things.

This is despite the fact that the head of this household called the Philippines is someone whose expertise is economics.

Top financial experts also say things are bound to get worse before they get better. They warn of a “perfect economic storm” in the horizon. Much like a house built on shaky ground, the country’s economy is bound to “collapse come a typhoon,” says University of the Philippines economics professor Ernesto Pernia.

For sure, the Arroyo administration has pointed to the global recession as a major reason for the country’s own economic slowdown. But Rosario Bella Guzman, executive editor of the non-profit group IBON Foundation Inc., notes, “The oil price hike, rice crisis, and power rates increase — these are not new. What is new is that these are happening all at the same time in the context of record joblessness, worsening poverty, and political killings.”

Pernia, meanwhile, comments, “To be objective, the global crisis is affecting everybody, but the adverse effects vary according to the strength of the economy of the country. Countries like Thailand, Malaysia, Indonesia, and Vietnam — because their economies have grown strong — are less adversely affected. They are able to cushion the impacts better. But the case is different in a country that has a weak economy such as that of the Philippines.”

Even former economic planning secretary Solita ‘Winnie’ Monsod, who is known to sometimes offer kind words about President Gloria Macapagal-Arroyo’s economic policies, says, “If there’s anything I have against her (Arroyo), aside from her political moves, is that from 1997 to 2006, poverty went up, and she was president for six of those nine years.”

Indeed, the number of poor Filipinos has increased from 30 out of 100 in 2003, to 33 per 100 in 2006. This translates to 27.6 million poor Filipinos who have little or no resources to ride out the turbulence ahead. The real number may even be much higher, since the homeless — among them the pushcart-dwelling masses — are not counted in the government’s poverty mapping.

Other experts also say that while the coming economic storm has long been anticipated and not just arising from current conditions, it has been made more potent by the Arroyo government’s wrong priorities in the last seven years.

Arroyo spends less for social services

Mapping the spending habits of five administrations since that of Ferdinand Marcos, former budget secretary Benjamin Diokno reveals the Arroyo administration has been spending less for social services as a percentage of the gross national product (GDP) compared to its predecessors. Social services include education, health, land distribution, housing, and subsidy to local government units (LGUs), and other social services.

[photo by Karol Ilagan]

Recently, Diokno, who has gone back to teaching economics at UP, notes that while the share of social services against total government has been increasing, support for this sector as percentage of GDP spending has dropped to 5.3 percent under the Arroyo administration, from an all-time high of 6.4 percent during the Estrada presidency.

Under the Aquino government, says Diokno, education received a high of 65 percent share of social services. But he says the figure has shrunk, and points out, “In fact, under Arroyo’s watch, from 2001 to 2007, it slumped to a historic low of 53 percent.”

By contrast, the Arroyo government’s spending has seen an increase on debt payments, wages and salaries of its employees, and subsidies to local government units. This means the budget has become so lopsided that it no longer supports the development of the nation’s human capital, says Diokno.

Arroyo’s own economic adviser, Albay Gov. Jose Ma. Salceda, recently admitted in an interview with local cable channel ANC that the current budget is non-responsive to the fiscal problems that have emerged. “The budget is really behind,” he said, “and it will be tough to adjust.”

Monsod explains that in absolute number, the Arroyo administration has been increasing its budget for health and education and other social services. It’s just that when computed on a per capita or per person basis, the amount becomes too small to decently support the growing number of Filipinos.

“The population, that’s a big problem,” says Monsod. “It makes it more difficult for us because the number of people sharing the pie is getting larger and larger.” She laments that the government’s population policy has been mired in debate between the Roman Catholic Church and various groups.

[photo by Isa Lorenzo]

Yet in her most recent State of the Nation Address, President Arroyo said that the population growth rate had slowed to 2.04 percent from 2.36 percent, which she credited to her promotion of family planning and “female education” referring to reproductive health.

She also assured the nation that rice production since 2000 has gone up 4.07 percent a year, “twice the population growth rate.”

This begs the question why the Philippines has degenerated into one of the world’s biggest net rice importers.

Number belie claim of growth

Six months ago, Arroyo also said that she had achieved the best Philippine economy in the last three decades. But the latest official figures show the opposite.

This year’s first-quarter statistics show that the industry sector suffered the most significant slowdown, dropping from 6.6 percent in 2007 to 3.9 percent in 2008, mainly due to less activity in construction and manufacturing. Construction, which hit a high of 21.7 percent in the first three months of 2007 — a pre-election period — sank to a low of 4.5 percent in the same period this year.

Table 1: GDP Growth Rates By Industrial Origin
Source: NSCB, Social Watch Philippines

(First Quarter
(First Quarter
Agri, Fishery, Forestry 4.0 3.0
Industry Sector 6.6 3.9
Of which:
Manufacturing 4.1 2.3
Construction 21.7 4.5
Service Sector 8.4 6.9
GDP 7.0 5.2

These two areas are labor-intensive and employ millions. Social Watch co-convenor Leonor Magtolis Briones estimates that this translates to a loss of 168,000 jobs since April last year.

“These claims are totally erased by the fact that unemployment now stands at eight percent and underemployment at double-digit levels,” says Briones, adding that the jobs created were “for street cleaners, canal diggers, flower trimmers and the like,” not long-term work.

In fact, the number of unemployed Filipinos could have been higher than eight percent had it not been for a revision of the formula, which now excludes those who do any work even for one hour during the reference period.

Meantime, Alvic Padilla of Social Watch Philippines for the Alternative Budget Initiative points out that inflation continued to accelerate after the first quarter, hitting a record 11.4 percent last month.

“Diminishing purchasing power of people’s money will inevitably lead to lower consumption, and may affect business profitability, defer expansion of business, and reduce overall production,” he says in a paper he authored.

Table 2: Monthly Inflation Rates, 2007-2008
Source: BSP, Social Watch Philippines

2007 3.9 2.6 2.2 2.3 2.4 2.3 2.6 2.4 2.7 2.7 3.2 3.9
2008 4.9 5.4 6.4 8.3 9.5 11.4

Typhoon Frank, which pummeled a wide swath of the country a few weeks ago, also weakened the capacity of those in the lower quintile of the population to weather the economic storm.

Frank damaged crops, livestock, fisheries, irrigation, and other agricultural facilities worth P7.57 billion. An estimated P3.9 billion worth of roads and bridges were also damaged. This will obviously have an impact on the country’s food production and food price, says Padilla.

As it is, food prices had already been on a steep climb in the past few months, with President Arroyo blaming the global food crisis for the rice price hike in the local market and the ripple effects on all food commodities and grocery items.

But IBON’s Guzman argues that while it is true that global food costs have increased, global food production in 2007 would show that most of the food commodities registered growth in production (except for wheat) while ending stocks for important grains (in the case of wheat and corn) either declined or were maintained (in the case of rice).

[photo by Jaileen Jimeno]

“In other words,” she says, “global supply is simply tight but manageable and is therefore not the main cause for the phenomenal price movements.”

Rice Watch and Action Network (R1) lead convenor Jessica Reyes-Cantos also says that while global trends will always be a factor, the primary dilemma is with the Philippine government’s policy implementations.

Problematic agricultural sector

The way IBON sees it, the Philippines has long had an agricultural crisis that is characterized by backwardness, low productivity, landlord monopoly, tenancy, usury, foreign control and incursions, trading cartel and monopoly. These days, it says, the situation has been aggravated by globalization policies such as the liberalization of rice and food imports, as well as the privatization of public stockholding and marketing organs, such as the National Food Authority (NFA), and the deregulation of agriculture, such as substantially reducing the budget for it.

Reyes-Cantos rues what she calls the government’s “quick-fix” solutions. “If there is rice shortage, then import,” she huffs. “This is not sustainable. What’s necessary is to create long-term solutions, invest in production, and support farmers.”

But financial and economic experts point to other “band-aid” measures that they say only worsen problems. Monsod, for instance, describes the president’s recent scheme of giving P500 doleouts to selected members of the poor as “nakakasuka (sickening).”

“What is P500?” asks Monsod. “What is a one-shot deal that has no long-term effect?”

She adds that it is obvious that Arroyo was just “courting the Manila vote.”

The government has defended the scheme by saying it is merely giving back part of the people’s taxes, since the funds supposedly come from the value-added tax (VAT) imposed on oil.

Monsod acknowledges that the VAT “saved the country.” But she urges Arroyo to be more circumspect in the use of its proceeds. “The best you can say for it is that it (the subsidy) is aimed at the poor,” she says. “But even then you could have been more selective.”

Monsod is a member of the advisory council of the Pantawid Pamilyang Pilipino, a subsidy program under the Department of Social Welfare and Development (DSWD). The program aims to implement a conditional cash transfer program to the poorest families in poorest towns identified in the 2006 Family Income and Expenditure Survey (FIES). Under the scheme, families who send their children to school will receive as much as P1,400 a month in health and education support.

Briones, for her part, suggests, “(Arroyo) should start reversing the government public expenditure patterns. Declining economic growth, soaring cost of living, and increasing unemployment do not bode well for the worsening poverty.”