WB study shows how to spur 'inclusive growth' in the PHL

Accelerated economic growth could be achieved by the Philippines this year and the next if it can put in place key reform measures, according to the latest World Bank assessment of the country’s prospects.   These reforms would advance recent gains built on strong macroeconomic fundamentals, political stability and a popular government, the report asserts.   Increased government spending, anchored on higher tax revenues, will be crucial in the durability of this growth, the report suggested. The report, “Philippines Quarterly Update: From Stability to Prosperity,” listed three key reform areas—strengthening public financial management, raising tax revenues efficiently and equitably, and enhancing competitiveness to attract more investment—that need to be addressed to spur economic growth that would “improve the lives of many poor Filipinos.”

“The urgent task now is to address the key impediments to accelerating inclusive growth in order to bring the country to a higher level of development and bring prosperity to all Filipinos,” the report said.   Domestic demand could help the economy grow by 4.2 percent this year and by a faster 5 percent in 2013, which could be propelled by steady domestic demand, the report said, noting the slower 3.7 percent growth in 2011 that was caused mainly by weak public spending and external demand for the country’s exports.   Now, domestic demand, boosted by investment and government spending, could help the Philippines achieve growth even if the global economic slowdown persists, according to the report.   However, this can only be sustained if matched by higher tax revenues, the report said, adding that the Aquino administration’s effort to strengthen tax administration and push for the immediate passage of the tobacco and alcohol excise and fiscal incentives bills are “steps in the right direction.”   Strong fundamentals   The country is now benefiting from strong macroeconomic fundamentals, political stability, and a popular government that is seen by many as committed to improving governance and reducing poverty, it said.   Quoting from the report, World Bank Country Director Motoo Konishi said “a “window of opportunity now exists for speeding up critical reforms.”   However, it was pointed out that the window of opportunity is narrowing given elections in 2013 and 2016 and the historical difficulty of moving forward with reforms when the campaign period kicks in.   “Now is the time to implement the reforms needed to accelerate growth, create jobs, and reduce poverty,” Konishi said in a statement coinciding with the launch of the report.   Highlights of the quarterly review were presented in a media briefing by the World Bank office’s Rogier van den Brink, lead economist, and Karl Kendrick Chua, country economist.   Reviewing the strong growth in the fourth quarter of 2011, the World Bank economists said overseas Filipinos’ remittances, although showing signs of vulnerability to the weak external environment, continued to provide the much needed boost to the current account that has been beset by a growing trade deficit.   Combined with capital inflows, the OFW remittances helped generate “record-high reserves accumulation,” the report said. By the end of 2011, the reserves amounted to $75 billion, enough to cover 11 months’ worth of imports and up to six times the country’s short-term foreign debts.   Exports, on the other hand, deteriorated further owing to a 24 percent contraction in electronics exports for the whole of 2011. This was exacerbated by a decline in non-electronics exports starting in the fourth quarter of the year.   The employment picture was mixed, with a two-fold increase in jobs in the fourth quarter which was, however, brought about mainly by new jobs in the informal sector, mostly in the retail trade, noted the report.   Real wages, it said, have not moved from low levels.   Also in the fourth quarter, the incidence of poverty and hunger remained high. “The hunger incidence remained stubbornly high at around 20 percent in recent years, reflecting structural weaknesses in the labor market, with recurring spikes during the tail-end of the typhoon season (October to December), which brings stronger and hence more destructive typhoons,” the report said.   Outlook   Looking ahead, the World Bank Quarterly Update said higher growth in 2012 will be “very much dependent on the ability of the government to ramp up spending.”   The gap between budgeted and actual spending in 2011 was equivalent to 1.6 percent of GDP compared to an average of 0.8 percent of GDP in 2008-10.   Under a protracted global slowdown, investments and government spending can help boost domestic demand which will play a bigger role in achieving the country’s growth targets for 2012 and beyond, said the report   It added that appropriate fiscal and monetary policy responses are expected to boost growth to 4.2 and 5 percent in 2012 and 2013, respectively, assuming sustained growth in consumption and some improvement in investments and exports.   However, the stimulus can only be sustained if matched by higher tax revenues, the study noted. The Executive’s effort to strengthen tax administration and push for the immediate passage of the tobacco and alcohol excise and fiscal incentives bills are steps in the right direction, it said.   Impact of government spending   Changes in total government spending, according to a sensitivity analysis made by the report’s authors, have a “significant impact” on economic growth.   An increase of five percentage points in the average disbursement-to-appropriations ratio of 85 percent to 90 percent results in an additional 0.6 percentage point increase in GDP growth, the study found out.    A higher ratio of 95 percent—that is, including the stimulus—could push growth further by an additional 0.6 percentage point to 5.4 percent, the study showed, and “a very large stimulus where actual disbursement equals total appropriations can potentially lift growth to 6 percent.”   However, the report warned that a repeat of the 2011 scenario where the ratio falls below 85 percent would lower the base case growth projection from 4.2 to as low as 2.9 percent (not counting the impact of a large external shock).   In order to be able to boost spending to levels targeted in the Philippine Development Plan for 2011-16, the government “urgently needs to raise tax revenues,” the report emphasized.   The tax effort has remained low in the last 15 years owing to policy weaknesses (in particular excise tax rates that have significantly fallen behind current prices) and the frequent granting of tax incentives (many of which are redundant).   Increasing excise taxes to levels at par with international levels and rationalizing tax incentives are urgently needed to boost revenues and increase spending, said the report.   “If these reforms are not implemented, inflation will continue to erode real tax revenues, and real spending will have to be cut anew, resulting in further deterioration in the country’s economic and social prospects,” it warned.   The report also noted that employment prospects this year “will see some improvements given higher public spending and continued growth in some acyclical industries.”   Higher infrastructure spending, the report said, is expected to “create hundreds of thousands of new jobs in the construction and trade sub-sectors” while continuous growth of the BPO industry is expected to generate 100,000 new jobs this year, although industry expansion is being slowed down by the diminishing supply of qualified workers.   Watch out for risks   There are “downside risks” to the Philippine economy caused by strong headwinds from the second global slowdown, the report said.   And even if its economic fundamentals remain strong, the Philippines “needs to be prepared” for the impact of slower growth in large middle income countries and financial turmoil in Europe.   The most recent projections indicate a recession in Europe and some recovery in United States and Japan for 2012, said the report. China’s growth is expected to decelerate further, which will have a significant impact on the Philippine economy given strong trade links between the two countries, it added.   A global slowdown is expected to significantly affect employment prospects in the exports sector, in particular electronics, which accounts for around half of the estimated one million direct jobs in the sector.   Slower deployment of overseas Filipino workers could also dampen employment prospects in the coming quarters, the World Bank study said. – HS, GMA News