In news that seemed to be just a little too conveniently timed to coincide with the verdict in the Corona impeachment trial, the government announced this week that the Philippine economy had grown by a surprising 6.4% in the 1st quarter of 2012, beating most analysts’ expectations. The Administration of President BS Aquino III was quick to take credit for the unexpected results, with Budget and Management Secretary Florencio Abad positively gushing in a press release that
“The remarkable increase in the country’s GDP for the first quarter is proof that good governance—coupled with a dedicated reform platform and sound financial management—is not merely related to economic growth, but is instead intimately tied to it. These positive figures reaffirm exactly what this Administration has long believed in: kung walang corrupt, walang mahirap.”
Okay, Butch. Whatever. From the moment N/A raised his right hand two Junes ago his administration has consistently taken credit for the country’s economic performance, despite not having engaged in much activity to actually support the economy. As an administrator who presumably has some economic training, Abad should realize that the time scale on which an entire national economy changes is rather long, as former Congressman and respected commentator Teddy Locsin, Jr. pointed out in a Tweet that has been circulating around the local social media:
There are many variables that play a role in the country’s economic progress, but Mr. Locsin is essentially correct; the inertia from the previous administration in general has an effect from two to four years into the next term, and likewise, economic moves within the current term can take two to four years to have a comprehensive impact on the entire country. The US is a good example: The economic policies of the Bush Administration were initiated at the beginning of his first term, but did not really reach their full potential until 2004. The more forward-looking economists did not start seeing the signs of impending economic trouble until late 2005 or 2006, and from that point it was another two years before things really went sideways. Barack Obama took office in January 2009, and more than three years later is still wrestling with the aftereffects of the 2008 Economic Crisis.
Those who disagree with the view that ‘economic inertia’ is not entirely responsible for the state of the US economy may have a few valid points; for instance, the effects of global conditions like the ongoing Eurozone crisis and the more recent slowdown in China cannot be completely overlooked. But on the other hand, those points just reinforce the notion that “ownership” of the economy by a sitting President is not something that happens immediately, or is entirely due to his own hand.
Trying to convince any of the Administration’s apparatchiks or their many supporters that, for example, a stable banking system and a steady reduction in the country’s sovereign debt are not things that actually can happen in less than two years is probably futile. In one sense, the desire to attribute current economic conditions, regardless of their underlying causes, to the current Administration is understandable, particularly when those conditions appear to be favorable. The perspective that automatically correlates current events to the actions (or in the case of Noynoy Aquino, the mere existence) of the current President probably accurately reflects most of the public’s perception as well, regardless of how inaccurate it might be.
So President BS Aquino and his Administration want to ‘own’ the current economy, and take responsibility for its apparent success? Fine, we can do that. Before we investigate how well that’s actually working out, however, let’s have a quick review of how GDP is measured.
Gross Domestic Product (GDP) is the most-widely used measure of the nation’s economic output, and the method used by the Philippines is the expenditure approach, which adds the total consumption, investments, government purchases, and exports to arrive at a total GDP. The most basic way to calculate GDP is according to current prices, and this is called the nominal GDP. The table below compares the nominal GDP of the 1st Quarter of 2011 to the 1st Quarter of 2012:
The problem with calculating GDP in this fashion is that it does not take into account price inflation or the increase in population. Both of those factors cause an increase in nominal GDP, but do not necessarily reflect a true increase in economic output. To compensate for the effect of price inflation, the nominal GDP is divided by a price deflator (in the case of the Philippines, 1.62708), which produces the real or constant GDP. To account for the effect of population growth, constant GDP is usually expressed as per capita GDP. Although the National Statistics Coordinating Board (NSCB) reports this figure, they tend to do so with minimal detail, as they do the seasonally-adjusted GDP figure. The seasonal adjustment takes into account periods in the reporting year when economic activity is unusually high or low; for example in the Philippines, the 4th quarter usually produces a much higher GDP due to intense levels of spending for the Christmas season. As a rule, countries report their GDP as a percentage increase or decrease from the same quarter in the previous year, in real GDP terms; this is what the 6.4% figure headlined this past week represents – the increase in economic output during a one-year period.
GDP Reality: Is the Aquino Administration Certain They Want Credit for This?
One apparent discrepancy in the 1st quarter economic data is a population projection of 95.2 million people, which would mean that 1.3 million Filipinos vanished between New Year’s Eve and the end of March. Assuming that didn’t really happen and correcting the population figure to around 97 million where it should be, real per capita GDP during Mr. Aquino’s term so far, according to the official data, looks something like this:
The up-and-down trend of the graph fairly accurately depicts the natural economic cycle of the country; the 2nd quarter (school vacation and festival time) and 4th quarter (the Philippines’ three-month long Christmas spending orgy) are generally more active than the 1st and the 3rd quarters. On a year-on-year basis, which gives us a more accurate picture of a long-term trend, the country is making only modest gains:
The actual GDP growth in the 1st quarter of 2012 was a moderate 4.31%, not 6.4% as the government claims; still remarkably better than the previous quarter, but actually a little short of forecasts. Those real GDP figures, however, are based on constant prices from the year 2000. From an analytical standpoint one year is as good as another to use as a benchmark, but in real-world terms, the Pinoy economy and society of 2012 does not have that much in common with the last year of Joseph Estrada’s term in the pre-9/11, pre-Global Economic Crisis days of the peso trading at around 50 to the dollar. If, as the Aquino Administration and its supporters insist, this is truly “P-noy’s” economy, then the only legitimate way to measure his progress is to set the benchmark to the state in which it was delivered into his stewardship. Substituting the end of the 2nd quarter of 2010 – the day he took office – as the ‘constant’ for the year 2000 used now and recalculating the appropriate deflator variable (which in this case ranges from 1.039 to 1.33) to compensate for inflation paints an interesting picture:
The nominal GDP figures are the same as those in the graph above since they are based on current prices, and the real GDP, since the benchmark constant lies not too far in the past, is much higher. That’s good, right? Not exactly. Notice how the blue bars are not quite climbing as high as time passes? Far from presiding over a robust and growing economy, N/A is leading one that is shrinking at an annual rate of 10 to 13 percent:
And that is why you’re not feeling the economic gain the Administration is quick to take credit for, because in real terms, there isn’t one. Of course, this is not the usual way economic indicators are handled; the Philippines is not the only country in the world where the leadership prefers to hear only good news. The rest of us, at least, can be a little more realistic.