Five arrows for inclusive growth (aim presentation)1.3 (1) (1)

FIVE ARROWS FOR INCLUSIVE GROWTH

Calixto V. ChikiamcoPresident

Foundation for Economic FreedomMakati, Philippines

Economic Growth has been robust for the past five years

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

4.4

2.9

3.6

5.0

6.7

4.8

5.2

6.6

4.2

1.1

7.6

3.7

6.87.2

6.1

GDP annual growth Source: World Bank

Average=6.3%

Philippine GDP growth relative to other countries

2010 2011 2012 2013 20140.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

PhilippinesVietnamSingaporeMalaysiaChina

But growth has not been inclusive

UNEMPLOYMENT and UNDEREMPLOYMENT RATESource: Philippine Statistics Authority

2004Q3

2005Q1

2005Q3

2006Q1

2006Q3

2007Q1

2007Q3

2008Q1

2008Q3

2009Q1

2009Q3

2010Q1

2010Q3

2011Q1

2011Q3

2012Q1

2012Q3

2013Q1

2013Q3

2014Q1

2014Q3

2015Q10

5

10

15

20

25

30

17.8%

6.4%

Underemployment rateUnemployment rate

But growth has not been inclusive• Unemployment is still high

But growth has not been inclusive• Poverty levels remain the same

2006 2009 2012 2014S1

26.5

26.3

25.2

25.8

POVERTY INCIDENCE (%)Source: Philippine Statistics Authority

But growth has not been inclusiveDEGREE OF HUNGER IN HOUSEHOLDS, PH: Jul 1998-Jun 2015

Source: Social Weather Station

Why?

Growth has been consumption-driven, rather than investment-driven

GDP by Expenditure Shares at constant 2000 pricesSource: Philippine Statistics Authority

2008 2009 2010 2011 2012 2013 20140%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Statistical Discrepancy

Net Exports

Capital Formation (FC + CI)

Government Final Consumption Expenditures

Household Final Consumption Expenditure

Growth has been consumption-driven, rather than investment-driven

Gross Capital Formation (% of GDP)Source: World Bank

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 20140.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

PhilippinesVietnamMalaysiaSingaporeThailand

Agricultural growth and agricultural productivity remain low

Agriculture, Hunting, Forestry and Fishing, at constant 2000 prices and growth rate

2008 2009 2010 2011 2012 2013 2014630000

640000

650000

660000

670000

680000

690000

700000

710000

720000

730000

-1

-0.5

0

0.5

1

1.5

2

2.5

3

3.5

0

-0.720000000000001

-0.16

2.592.82

1.09

1.59

In M

illio

n Pe

sos

Source: Philippine Statistics Authority

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 20140

200

400

600

800

1000

1200

1400

-2%

-1%

0%

1%

2%

3%

4%

5%

Agriculture value added per worker (con-stant 2005 US$)

Growth Rate

Agriculture value added per worker (constant 2005 US$)

Source: World Bank

Share of Manufacturing has shrunk

19801982

19841986

19881990

19921994

19961998

20002002

20042006

20082010

20122014

0.00

5.00

10.00

15.00

20.00

25.00

30.00

25.70

20.52

Manufacturing, value added (% of GDP)Source: World Bank

Growth mainly in the services sector, but apart from BPO sector which benefit mainly the college-educated, productivity in the service sector is lower than that of industry

Labor Productivity at constant 2000 pricesSource: Philippine Statistics Agency, Labor Force Survey

2010 2011 2012 20130

50000

100000

150000

200000

250000

300000

350000

400000

AHFFIndustryServices

Therefore, to achieve inclusive growth, reduce poverty, generate jobs, and lower hunger, we have to:

make economic growth investment-driven, rather than consumption-driven

tackle the problem of low agricultural productivity

increase the share of manufacturing (to generate good jobs)

make our industries competitive

How to achieve inclusive growth?

Shinzo Abe’s

THREE MAGICAL ARROWS

Fiscal stimulusMonetary EasingStructural Reforms

Image source: The Economist

Five Arrows for Inclusive Growth

FIRST ARROW: Openness to foreign investment


Remove the Constitutional restrictions on foreign ownership in the 1987 Constitution– Why?

• current restrictions in the Constitution protects monopolies in capital intensive strategic industries, such as ports, airports, telecoms, shipping, e.g. duopoly in telecom sector

• WB’s Bocchi: Monopolies in strategic industries crimp forward-linking and backward linking industries.

Liberalize as much as possible all other restrictions on foreign investment, including the foreign investment negative list, the retail trade law, the practice of professions, and even immigration rules.


2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

PhilippinesVietnamMalaysiaSingaporeThailand

Foreign direct investment, net inflows (BoP, current US$)Source: World Bank

Gross Savings and Gross Capital Formation (% of GDP)Source: World Bank

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20130

10

20

30

40

50

60

70

43

20

Gross savingsGross capital formation


0.000 0.050 0.100 0.150 0.200 0.250 0.300 0.350 0.400 0.4500.00

20.00

40.00

60.00

80.00

100.00

120.00

140.00

160.00

180.00

2013 FDI RR Index (Closed = 1; Open = 0)

2012

Inw

ard

FDI S

tock

s (%

of G

DP)

Mor

e FD

I

More Open

2013 FDI Restrictiveness IndexSources: OECD Statistics and IMF estimates

SECOND ARROW: Modernize the labor code


The existing labor code suffers from two major defects:

1. setting up high minimum wages unrelated to productivity

2. labor permanency after six months

Minimum wages: job killer

• Paqueo,et al. (2014)– generally, Minimum wage is not always helpful to

the common man and the disadvantaged– Minimum wage reduces the demand for workers in

small firms.– Minimum wage decreases the chance of the

young, female, low educated and inexperienced workers being hired

– The rise in minimum wage results in lower household income (20 percent reduction based on our computation).

Minimum wages: job killer

• Dr. John Nye: Minimum wages hampers industrialization or the movement of surplus labor in the countryside to industry.– Manufacturing share to GDP has shrunk from

26% in the 1980s to 21% in 2014.– Migrant labor going to low-paid, low-level service

jobs – e.g. gasoline boy, selling DVDs or banana cue, etc.

Minimum wages – job killer

• Dr. Gerry Sicat: Labor rigidities dampen demand for labor and make country unattractive to labor-intensive industries.


Result?- Industry cannot create jobs- Workers can’t learn; contractualization - Shift from agriculture to industry impeded

Who benefits?– the monopolists use high minimum wages to deter

competition– Relatively small proportion of labor force at expense

of unemployed


SUGGESTED POLITICALLY FEASIBLE SOLUTIONSGerry Sicat’s proposed special economic zones where

LMW and labor security suspended in labor surplus areasLiberalize the apprenticeship law

Length of time for training Pay at 75% of LMWOpen to other industries

Pass HB 5468 or the JobStart Act by Rep. Nograles18-24 yrs. old high school graduates with less than one year

working experienceThree months technical skills training with allowance of P200Training graduates to be hired at a pay rate of 75% of LMW

THIRD ARROW: Improve Agricultural

Productivity

THIRD ARROW: Improve Agricultural Productivity

Why Low Agricultural productivity?1. Uncertainty of property rights due to CARP

• never-ending extension of CARP, collective CLOAs, non-bankability of CLOAs

2. CARP Prohibition of ownership beyond five has.• efficient farmers cannot buy out inefficient ones

3. NFA monopoly of rice importation; 70% of agriculture budget going to low-value commodity, rice.

4. Restrictions on the rural land market: agri patent law.

Domestic and world price of rice (peso/kg), 1990-2010

Source: IRRILifted from PIDS Policy Notes No. 2011-11


End CARP (to end uncertainty over property rights) and Amend CARP

Fabella: allow CARP beneficiaries to lease their land

Allow CARP beneficiaries to sell their usufruct rights to land

Repurpose DAR to do land consolidation

Dismantle NFA monopoly on rice importation, tariffy rice imports, direct aid to rice farmers, rely on trade for food security, and focus R & D on high value-added crops.



Amend the Agricultural Patent Law:

Remove restrictions on conveyance of agricultural patents

Five years restriction on saleRestriction by right to repurchase: non-

bankability of free patent agri lands (about 2 million titles)

FOURTH ARROW: Competitive Exchange Rate


NOT capital controls, NOT managed exchange rate BUT GOVERNMENT POLICY TO MAKE THE PESO COMPETITIVE.


How? Coordinated government response (BSP+executive) Massive infrastructure spending to drive the demand for

capital imports and dollars and lower the cost of doing business in the Philippines.

Rice import liberalization to increase demand for dollars, lower food prices, and dampen wage adjustment rate pressures

BSP aggressive purchasing of dollars Fabella and Abola: Money creation through purchases of dollars not

inflationary due to liberalized trade regime. World is facing structural deflation. Fabella: BSP fighting the last war.


Other structural reforms to reduce the cost of doing business in the Philippines:ChaCha to improve competition and lower prices

in strategic industries

Benefits of a competitive exchange rate

• Increased purchasing power of OFWs – boost retail, real estate, and education sectors

• Make BPOs and other exports more competitive• Protect local industry; deter smuggling with high

import prices• Protect domestic high-value added sectors like

agriculture. • Shield domestic industry from AFTA while working

on issues like port congestion, poor infrastructure, etc.

FIFTH ARROW: Institutional Reform


Why?Weak state capacity is a big binding constraint

to growth.

Cases in pointGovernment under spending, DOTC failures in

airports, MRT, LTO etc., NTC allowing mergers in telecoms, creating duopolies (regulatory capture), ERC favouring the oligarchy.


How? Strengthen the political party system

Law against turncoatism; public financing of political parties, public financing of electoral campaigns.

Solve the collective action problem of the political class. Strengthens political accountability.

(Parties behind development miracles – PAP in Singapore, UMNO in Malaysia, CCP in China, Koumintang in Taiwan, Golkar in Indonesia, LDP in Japan.

Dismantle private armies; reduce political dynasties Professionalize the bureaucracy (limit political appointments) Strengthen separation of powers

Chinese formula for hypergrowth

1. Openness to foreign investment2. Flexible wage rates3. Property rights reform in agriculture4. Competitive exchange rate

+ for Philippines: 5. institutional reform

Summary

FIVE ARROWS

Openness to foreign investment

Modernize the labor code

Improve agricultural productivity

Competitive exchange rate

Institutional Reform

End of Presentation

Contact Details:Foundation for Economic Freedom, Inc. 105 Philippine Social Science Center (PSSC) Commonwealth Ave., Diliman, Quezon City 1101

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Economy & Finance

Five arrows for inclusive growth (aim presentation)1.3 (1) (1)