POLICY NOTE
The COVID-19 pandemic has been such a shock. When will the Philippine economy return to normalcy?
Actually, it shouldn’t. If there is anything the virus has shown, it’s that so many things about the old economy are wrong. The country doesn’t have to return to the normalcy of the past — it can do better.
Epiphanies
The coronavirus pandemic and the expansive efforts to address it are new and unprecedented. But they also exposed many old problems that have always been there.
Spontaneously, many are suddenly really seeing how precarious the work of so many is, how vulnerable the poor are, and how unequal society is. There is also the weakness of our public health system and how paternalistic and condescending governance has become. The public outcry is real and these are not normalcies the country should return to.
Looking beyond the fog of dealing with the public health crisis at hand, it is also starker that global economic activity is driven by the invisible hand of self-interest. Dozens of countries have banned the export of medical equipment, supplies and even food to protect their nationals, which the World Trade Organization (WTO) has already noted.
At the same time, there is the resourcefulness and impulse of Filipinos to help those most in need. This is scattered but still a collective response amid difficult lockdown circumstances. Perhaps the moment of repressed consumption has also made the few with so much realize that they can actually do with much less.
These takeaways are vital and can guide the real reforms needed for an economy that is better than before.
Crash
But before going into the reforms needed, where is the Philippine economy now?
The economy was already slowing for three consecutive years and heading for its fourth, even before the first confirmed COVID-19 case in the country. The pandemic just clinched it and the episode of relatively high growth since the mid-2000s has, with dramatic finality, come to an abrupt end. In computer parlance, the economy was already buffering and it has now crashed.
The National Economic and Development Authority (NEDA) sees a drastic fall in the country’s real gross domestic product (GDP) growth to -0.6% to 4.3% in 2020. At best that’s the slowest growth in a dozen years; at worst, it’s the biggest contraction in over two decades since the 1998 Asian financial crisis.
It’s important to unpack how the pandemic impacts on the economy in order to identify the measures for dealing with it. The first wave of crisis is dominated by the effects of the Luzon-wide lockdown and will last for as long as this is in place. The main factors at play here are the harsh restrictions on domestic economic activity by fiat and enforced by militarist population control.
At this time, the economic priority is to ensure the health and well-being of tens of millions of vulnerable Filipinos during virus containment measures and in the period immediately after. This means giving socioeconomic relief as well as ensuring continued production of basic goods and services. These have to remain affordable and accessible.
The second wave sets in when the lockdown is lifted or moderated. Containment measures worldwide have caused a generalized disruption in globalized economic and financial activity. The economy will be trying to overcome its inertia amid a worldwide recession and the possibility of even worse to come.
By then, the economic priority will be to ensure sustained economic activity as overseas remittances, business process outsourcing (BPOs), tourism and export manufacturing weaken, and as infrastructure projects lose their viability. This means boosting household incomes to support effective demand – and household welfare – and buttressing distressed domestic enterprises. Moreover, the strategic direction has to be strengthening public social services, agriculture and Filipino industry, with due attention to ecological sustainability.
Frozen
The initial effect on the economy was from containment measures in China especially around Wuhan province where the outbreak started. Chinese work stoppages and travel restrictions at the end of January immediately disrupted Philippine-based export firms integrated into the extensive global value chains (GVCs) spawned by globalization.
The Duterte administration notoriously still allowed travel and visitors from mainland China. This meant that the travel, tourism and business sectors involved here were initially less affected. However, that show of political and diplomatic friendliness then comes at an incredibly serious health and economic cost today.
In any case, the impact of Chinese measures starting January were overshadowed by the draconian military lockdown first in the National Capital Region (NCR) and then the whole of Luzon in mid-March. The economy froze with consumption spending stifled, work stoppages across the board, and the vast informal service sector choked.
At a stroke, 73% of the economy – Luzon’s share of GDP in 2019 – was thrown into chaos. This included the service core of the country (52% of total services are in NCR) and its industrial heartland (73% of manufacturing is in NCR, Calabarzon, and Central Luzon). The economy is interconnected, so the impact goes far beyond so-called affected sectors.
Overnight, the country was recklessly thrown into the worst de facto mass unemployment in its history. IBON estimated a record 4.7 million unemployed Filipinos in 2019. The Luzon-wide lockdown instantly dislocated as much as 14.5 million on top of this – covering workers and huge numbers of informal earners whose pay and daily income were suddenly put at risk. A next round of dislocation in the Visayas and Mindanao will add 4.4 million workers to this.
These 23.7 million combined will be equivalent to half (50%) of the labor force as estimated by IBON. They are mostly: vendors, shopkeepers, and sales persons in the wholesale and retail trade subsector (4.4 million); construction workers (2.8 million); farmers, farm workers and fisherfolk (2.5 million); pedicab, tricycle, jeepney and truck drivers and mechanics in the transport sector (1.8 million); manufacturing workers (1.5 million); and hotel and restaurant employees (1 million).
Luzon also has 633,886 micro, small and medium enterprises (MSMEs) with 3.8 million employees, accounting for 64% and 67% of the national total, respectively. They are much more vulnerable than large enterprises to the supply and demand shock from the sudden lockdown.
Incomes have also collapsed. The danger is greatest for the 7.5 million lowest-income families in Luzon. They have the least savings or means to adjust to the severe disruption in their livelihoods, and to restrictions on their mobility. This includes 5.2 million families struggling to get by on monthly incomes of Php15,000 or much less. Poor people are more vulnerable to sickness and disease, and making them poorer only makes them more vulnerable.
Safe mode
The economy and Luzon in particular is operating in safe mode with, if it was a computer, only the essential programs and services operating.
The consensus is that strong quarantine measures are necessary. This is especially after the Duterte administration’s gross negligence to contain the virus starting in the extremely critical early stages of the contagion.
The effect of the virus having a month-and-a-half to spread freely before the lockdowns is already unfolding. From the first confirmed case on January 30, there were three confirmed cases and one death as of March 1; 138 cases and 12 dead by March 15; and 1,546 cases and 78 deaths as of March 30. Yet two weeks into the military lockdown, it’s still hard to say how much this has helped in containment.
IBON estimates Php296.2 billion in emergency relief measures are needed to protect vulnerable Filipinos, avert hunger, and ensure a minimum level of welfare for all. These cover relief packages, cash transfers, wage subsidies for workers, financial assistance for informal earners, farmers and fisherfolk, and support for senior citizens.
These measures overlap to make absolutely sure that everyone in need gets protection. They are generous to give allowance for the still many difficulties to come. From a broader economic standpoint, they will also support a domestic consumption-driven stimulus amid the looming severe domestic and global economic downturn.
Price controls and moratoriums on utility bills, lease rentals and debt payments will give additional relief. Demolitions of urban poor communities should be stopped and, if anything, decent shelter ensured for all.
Restricted transport and work stoppages create major challenges. Producers of essential goods and services struggle to keep their logistical chains functioning. The skeletal workforce and quarantined consumers look for alternative means of mobility amid suspended public mass transport.
Unsafe mode
The situation is critical and the crisis ongoing. Yet the Duterte administration’s response has been sluggish, and to date is still far below the order of magnitudes needed for socioeconomic relief. The paucity of health interventions is another story. The first Php27.1 billion COVID-19 response package it announced was a haphazard public relations patchwork of mainly recycled pre-pandemic government programs. The package was even misleadingly bloated by an irrelevant Php14 billion tourism item.
The administration played up the vast public health and economic relief needed to justify asking for emergency powers. Yet the final ‘Bayanihan to Heal as One Act’ is bereft of many concrete details especially for socioeconomic measures. The most specific are mentioning Php5,000-8,000 in emergency subsidy for 18 million families – in practice actually just Php2,850-5,850 because existing cash transfers and rice subsidies will be stingily deducted – and 30-day grace periods for residential rents and mainly personal loans.
The law and sponsors of the bill in Congress however remained non-committal in provisions on expanding the Pantawid Pamilyang Pilipino Program (4Ps) cash transfers and various programs under the labor, social welfare, agriculture, trade and industry, and education departments. There is hardly anything on supporting MSMEs, and the one provision plausibly helping them – on cheaper credit – was curt and vague.
There is a similar ambiguity even on measures to address the public health crisis. There is important compensation for health workers. However, there is no detail on ensuring adequate: personal protective equipment (PPE) and other logistical support for medical frontliners and responders; mass testing and surveillance; isolation and quarantine facilities in congested urban poor communities; and treatment facilities including medical supplies.
It could be speculated that this comes from a desire to not stoke panic about the extent of the pandemic. The generally disorganized and incoherent response of the government – two months since the virus hit the country, two weeks into the Luzon-wide military lockdown, and even after asking for emergency powers – may explain more though.
Failure to contain the virus quickly will have serious economic repercussions. At the very least, extended ‘social distancing’ will keep inhibiting economic activity. This will be particularly felt by the Philippines which has a service- and consumption-driven economy, at 58.4% and 68.4% of GDP respectively in 2019. Services and consumption activity tend to involve high degrees of social interaction. At worst, unrestrained contagion may compel an extended, expanded or more severe lockdown.
Reboot?
But the military lockdown is an extreme measure and cannot go on for too long. The burden of income losses and risk of shortages will only become greater. Once the lockdown is lifted or moderated, the reality of a changed world will sink in.
COVID-19 has already infected 722,000 people and killed nearly 34,000 in over 200 countries. Hundreds of millions of people have been quarantined around the world and economies have ground to a halt.
The International Monetary Fund (IMF) has already projected the world to go into a recession “at least as bad as during the global financial crisis or worse” as countries respond to the epidemic. The Economist earlier forecast the global economy to contract (negative growth) by 2.2% in 2020. This includes the United States (US) and Japan contracting by 2.8% and 1.5%, respectively, while China drastically slows to just 1% growth. Europe’s three biggest economies will also each contract – Germany by 6.8% and the United Kingdom (UK) and France by 5 percent. These six countries combined are the engine of the world economy and account for some three-fifths (56%) of global GDP.
The IMF also expects recovery in 2021 but this is likely a statement of optimism more than anything else. The direction of the world economy from next year and beyond is extremely uncertain and impossible to predict. It will be burdened by the aftershocks of containment measures, the real possibility of changed post-pandemic economic strategies especially towards greater protectionism, and the threat of renewed financial turmoil.
The current global financial fragility is particularly troublesome. Even before the pandemic, the world economy was still struggling to overcome the protracted stagnation since the 2008/09 financial crisis. The over-reliance on monetary measures has resulted in record levels of government, corporate and household debt.
The Institute of International Finance (IIF) said that global debt rose to all-time highs of US$253 trillion and a 322% ratio of global debt to GDP in the third quarter of 2019. This will grow even more and even faster in 2020 as governments finance COVID-19 response measures – greatly increasing the risk of a new debt crisis.
What is certain is that the external factors that have buoyed the Philippine economy for so long are going to weaken even further – overseas remittances, BPO, tourism, and foreign-dominated manufacturing. Foreign investments will fall. Even the main internal growth driver has become compromised with the social, economic and financial viability of Build, Build, Build (BBB) infrastructure projects – overoptimistic to begin with – now under more question than ever. Much of the Php975 billion for infrastructure in the 2020 budget is likely now better spent on directly responding to the pandemic.
The NEDA has already estimated the impact of the global pandemic – on transport and tourism, exports, remittances, and consumption – and of the Luzon-wide lockdown in 2020. It expects a cumulative loss in gross valued added (in current prices) of Php429 billion to Php1.4 trillion and job losses of 116,000 to 1.8 million. The economy is facing its worst levels of unemployment in the country’s history.
The economic managers have already given some signs of their plans for the economy apart from putting the pandemic under control. What they have said so far is meant to be reassuring but, all things considered, is actually disappointing.
They are still stuck in their own propaganda and cling to the clearly outdated premise that “the Philippines’ economic fundamentals remain very strong”. This is oblivious to the economic weaknesses that the pandemic has exposed as well as to the vastly changed global economic situation in 2020 and beyond.
As with the immediate response measures, details are scant. There seems to be a bias for monetary measures – the Bangko Sentral ng Pilipinas (BSP) cut key interest rates and reduced the reserve requirement (RR) of universal and commercial banks, supposedly injecting Php200 billion into the economy, to make credit cheaper for businesses. The most recent statement of the finance department did not mention anything else aside from these monetary tools.
The lower rates may not spur economic activity that much. The reduction is not particularly large and, moreover, whether or not businesses will even borrow more during lockdown conditions and heightening uncertainty remains to be seen. As it is, non-performing loans have already been rising since 2017. Substantially cheaper credit for businesses, especially MSMEs, can be useful but not in isolation and especially not while the general direction of the pandemic and economy remains uncertain.
The Duterte administration seems to be after a mere reboot and getting the economy to run ‘normally’ again. This doesn’t learn from the key insights that are already emerging and that so many already appreciate.
Update, upgrade
The economic policy challenge is defined by the economic weaknesses that the pandemic has revealed – going far beyond the serious inadequacies of the public health system – and by the accelerated seismic shifts in the world economy. The time of thinking that it can in any way be ‘business as usual’ is long past.
We do not know the full extent of the cataclysm, but change is clearly more urgent than ever. The illusion of development from relatively rapid growth since the mid-2000s has disappeared as the economy slowed since 2016 and especially so with the pandemic-driven crisis today. The problems are deep-rooted and the external sources of growth have been fading. If anything, continued liberalization such as of the agricultural sector and utilities will make things worse.
The Philippine economy’s problems are structural and hard-wired into the system by neoliberal ‘free market’ policies of globalization: poverty, inequality and vulnerability; privatized health; and agricultural and industrial decline. The economy’s operating system is fundamentally flawed, and the economy’s fundamentals unsound.
But this can be corrected.
The country is not bereft of rethinking and alternatives. People Economics consolidates and articulates long-standing proposals by the country’s social and mass movements for a more people-oriented, self-reliant, stable and ecologically sustainable economy. Comprehensive social and economic reforms were on the agenda when the peace talks between the government and the National Democratic Front of the Philippines (NDFP) stalled.
Income and wealth need to be redistributed. Publicly-provided health, education and housing need to be expanded. Social protection needs to be universal. Agriculture has to be developed and the economy industrialized, necessarily through government planning, protection and support. The financial sector has to be regulated for development. Foreign capital looks out for itself so, in dealing with them, the Philippines has to watch out for its own.
There won’t be any real change if the problem is framed, as the government is doing, as merely trying to regain momentum from the inertia created by the lockdown. Stepping down from positions of privilege will make things absolutely clear – it isn’t enough to merely reboot the economy after the pandemic, it needs to be vastly updated and upgraded. ###
