ADB keeps 6% 2024 PH growth outlook

The Asian Development Bank (ADB) kept its growth outlook on the Philippines for this year and next despite the support that consumption can get from softer inflation, as it flags external headwinds that can weigh on the economy.

In its flagship Asian Development Outlook released on Wednesday, the ADB retained its gross domestic product (GDP) growth forecast for its host country at 6 percent for 2024 and 6.2 percent in 2025.

If the prediction of ADB comes true, GDP growth this year would match the lower end of the 6- to 7-percent target range of the Marcos administration, but would fall short of the 2025 goal of 6.5 to 7.5 percent.

Nevertheless, the Philippines would tie with Vietnam as the fastest growing economy in Southeast Asia in 2024 and 2025.

Both countries would also beat the 5-percent average growth rate projected for Developing Asia—which refers to the 46 developing members of the ADB, for 2024. Next year, this region is forecast to grow at a slower pace of 4.9 percent.

For ADB, consumption, a traditional growth driver in the Philippines, could get some boost from lower consumer prices. The multilateral lender lowered its inflation forecast for the country to 3.6 percent in 2024, from 3.8 percent previously, partly due to lower tariffs on rice imports.

ADB said inflation was expected to ease further to 3.2 percent in 2025 compared to the previous projection of 3.4 percent.

In a statement, Pavit Ramachandran, ADB’s country director for Philippines, said “most of the ingredients for the Philippines’ sustained economic growth are in place.”

“Rising government revenues are boosting public expenditures on infrastructure and social services, increasing employment is driving consumption, and reforms to open the economy to more investments are underway,” Ramachandran said.

“With inflation slowing, the country is in a strong position to lead growth in Southeast Asia,” he added.

Headwinds

Government data showed the economy grew 6.3 percent in the second quarter. But analysts had said the figure was magnified by favorable base effects that masked the 4.6-percent growth in consumption, a pace that was uncommonly low for the Philippines.

To help stimulate household spending, the Bangko Sentral ng Pilipinas (BSP) in August cut the policy rate by a quarter point to 6.25 percent. By reducing borrowing costs, the BSP wants to encourage bank lending and consumption.

But the ADB said the Philippines would not be spared from external headwinds dragging global growth.

“External factors such as a sharper slowdown in major advanced economies and the People’s Republic of China, financial volatility due to US monetary policy decisions, geopolitical tensions, and rising global commodity prices also pose threats to growth,” the Bank said.

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Source: Inquirer

Development in the 21st century: Waiting for Godot

The Irish writer Samuel Beckett received the Nobel Prize in Literature in 1969. Waiting for Godot is his famous 1953 surrealistic tragicomedy, where the two main characters, Vladimir and Estragon, are engaged in a variety of discussions, while they wait for someone named Godot. They are not certain if they have ever met Godot, nor if he will even arrive.

A quarter of the 21st century is gone. Today, countries like India, Indonesia, Saudi Arabia, or the Philippines, feel an immense pressure to move up in the income ladder. This has prompted them to create development plans that assume they will grow by about 7% per year, like the East Asian Tigers did several decades ago. Will this become a reality, or will it be like Waiting for Godot?

The problem is that the East Asian super-fast growth miracle has not been the historical development norm. It took today’s advanced countries about 100 years on average (almost 150 in the case of the Netherlands) to traverse the middle-income segment, that is, from the time they graduated from being low-income to the moment they became high-income economies (https://jesusfelipe.net/wp-content/uploads/2022/07/Middle-Income-Trap.pdf).

The reality of development is that it has been a very slow journey, at low growth rates. Very fast growth and sustained growth is a recent phenomenon that has occurred only in the second half of the 20th century in a few countries. This means that countries like the Philippines, with an income per capita of just above $4,000 today, must have grown very slowly for a very long time.

We looked at a much richer nation today, the Netherlands, and obtained its long-run annual income per capita growth profile: 0.09% between year 1AD and 1826, 1% between 1827 and 1955, 3.3% between 1956 and 1970, and about 1.6% afterward. The figures we obtained for the last 224 years give an average annual growth rate of 1.19%. My guess is that Filipino and Dutch per capita income growth rates were not significantly different until the last decades. This means that the Philippines’ starting point must have been much lower.

We have an estimated (an admittedly rough guess) Philippine income per capita in 1800, 224 years ago. We know that income per capita today is $4,200. Applying the Dutch income per capita growth rate of 1.19% implies that Philippine income per capita in 1800 was about $300. In the case of the Netherlands, its income per capita in 1800 must have been about $4,550 (slightly above Philippine income per capita today!), which, at an annual growth rate of 1.19% over the next 224 years became the current $65,000. This implies that the large gap between today’s advanced nations and the rest of the world was established long ago. It has been impossible to close it.

Recent estimates from Oxford economist Lant Pritchett (“Keeping the Gold in the Golden Rule: Economic growth and the basics of human material wellbeing,”) indicate that today, there are 29 countries with a per capita income below that of the world leaders in 1700; 19 countries with a per capita income below that of the world leaders in 1870; 17 countries with a per capita income below that of the world leaders in 1918 (the Philippines is in this group); 24 countries with a per capita income below that of the world leaders in 1950; and 23 countries with a per capita income below that of the world leaders in 1968.

The East Asian economies understood that the fast track upwards was the result of getting into manufacturing and exporting. They understood that not all products have the same consequences for development. Entering manufacturing and leaving behind basic products (compare the export basket of South Korea in 1970 with today’s) meant understanding how income is generated in a modern economy. Exports forced competition in world markets, not just at home. This also implied improving what was produced (higher quality) to be able to continue competing.

While the leaders of the East Asian economies recognized the power of this recipe very well decades ago, many of their peers in today’s developing countries have not grasped it yet. Vietnam may be an exception. Reading the programs of many developing countries leaves you bewildered. These programs are a salad of dozens, even hundreds, of objectives, without a clear prioritization (there are over 350 in the latest Philippine Development Plan 2023-2028;).

Although there has been progress during the last decades, this has occurred at a slow pace for most countries, and overall, the world has not experienced income convergence. Why?

For one, although developing economies have grown faster than advanced ones, the former fall by more than advanced countries when they fall prey to a crisis. Second, the “base effect” is a great burden. Imagine an advanced country with a per capita income of $50,000. This country’s income per capita grows by just 1%. The following year, its per capita income will be 50,500 dollars. Now let’s think of a country with an income per capita of $4,000 that grows by an amazing 10%. This country will reach $4,400 the following year. Despite growing 10 times faster than the advanced country, the absolute gap between the two has increased by $100. This is what happens in reality, namely the growth of developing countries, despite being higher than that of advanced countries, is not enough to close the gap due to the low starting point.

Overly ambitious development plans will not be fulfilled because most developing countries tend to see “boom and bust” growth, that is, periods of growth acceleration followed by periods of growth deceleration. Circumstances or policies that produce 10 years of rapid economic growth appear easily reversed, often leaving countries no better off than they were prior to the expansion.

Excelling in manufacturing is not easy, but it is the only way up. There are niches that can be exploited in virtually all manufacturing segments: glasses (chemicals), cutlery (metals), tables and chairs (furniture), table napkins, bedsheets (textile), shoes, or furniture; and in the sophisticated machines that make these products. It is in the latter where the value-added hides and what makes rich countries rich.

The products we mention are the ones that “make a nation” and which most developing countries should be able to manufacture for home consumption and to compete in export markets. No developing country should say “we do not have comparative advantage in the manufacture of glasses or chairs” and then think of automobiles and other complex products. We cannot help but paraphrase Donald Trump’s famous statement about steel: “If you don’t have steel, you don’t have a country.” This is even more obvious in the case of the products we mentioned.

What developing countries need is modern capitalist firms with the necessary capabilities to make such products — these firms are the missing link. These capabilities are tacit knowledge to organize work and operate machines efficiently, both required to make high-quality products. Enhancing these capabilities should be the focus of economic policy.

Given the weight of history, the governments of developing countries are not to be blamed for the fact that their countries are “poor” today. Yet, they are to be blamed for implementing wrong economic paths and for promising the arrival of Godot. In Beckett’s play, a boy shows up in the middle of it and explains to Vladimir and Estragon that he is a messenger from Godot, and that Godot will not be arriving tonight, but surely tomorrow. Yet, Godot had not arrived by the end of the play.

Unless policy makers understand the reality, their (developing) economies will not be able to close the breach with respect to the advanced nations (which are marching forward too) during the rest of this century.

By the year 2050, the Philippines will be a richer economy than it is today, closer to the World Bank’s high-income threshold; but it will not be a rich, high-income, country as we understand the term, that is, as what the European countries, Japan, the US, Canada, or Australia, “look like.” True convergence with them may happen toward the year 2100 or in the 22nd century, barring economic or health crises, and wars, and only if we make significant efforts toward having an economy that resembles theirs.

This applies to many other Asian countries. While it is true that Asia’s weight in the global economy will increase further, most countries (think of Afghanistan, Nepal, Cambodia, Myanmar, and even of Bangladesh, Pakistan, or Sri Lanka) will remain far behind the advanced nations in per capita income because companies in the former make poor-quality and simple products that fetch low prices in international markets.

They will still have cities with poor infrastructure, transportation, and waste management, and they will not have universities among the top 25 in the world. To say otherwise is to lie.

Author: Jesus Felipe is a distinguished professor of Economics and a research fellow at De La Salle University. Beatriz Elaine Banzon is an Economics student at De La Salle University.

Economic growth and the basics of human material wellbeing.

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CEO optimism remains high

A majority of chief executive officers (CEOs) in the Philippines are confident that their organizations will see revenue growth in the next 12 months, despite geopolitical uncertainties, a survey showed.

Results of the survey conducted by PwC Philippines in partnership with the Management Association of the Philippines (MAP) showed that 85% of 168 CEOs are optimistic that their companies will post revenue growth in the next 12 months.

The results of the survey, which ran from July 8 to Aug. 9, showed improved optimism compared with the 79% of 157 CEOs who said they were confident of topline growth last year.

Meanwhile, 86% of CEOs are confident of revenue growth in the next three years, slipping from 87% in the previous survey.

The survey also showed that 86% of the CEOs are confident about industry prospects for the next 12 months, higher than the 83% seen in the previous survey. This is the highest level of optimism since the pandemic.

“What helped drive optimism among our CEOs here in the Philippines is mainly our country’s economic growth,” said Karen Patricia A. Rogacion, deals and corporate partner at PwC.

She noted the Philippines recorded faster economic growth despite geopolitical uncertainties, which have affected economies in the United States and Europe.

“When the year started, at the global level, we had a slow start. We are still feeling the impact of the Russia-Ukraine war as well as the impact of China’s real estate crisis,” she said.

“Several economies, such as the US and even Europe, were expecting a recession because of the high interest rates and unstable market conditions. In the Philippines, however, we showed fast growth,” she added.

The Philippine economy grew by 6% in the first six months of the year, hitting the low end of the government’s target of 6-7% this year.

In the survey, CEOs said infrastructure development, domestic consumption, and foreign direct investments are the main drivers of growth in the next 12 months.

“Given the top three drivers, it’s also been consistent that the CEOs say that our government is doing a good job in pushing for infrastructure development, forging stronger relationships with other nations, and also managing inflation,” Ms. Rogacion said.

However, 62% of the CEOs said geopolitical uncertainties arising from the Russia-Ukraine war, conflicts in the West Philippine Sea, and upcoming elections in other countries are keeping them awake at night.

“We have actually been indirectly and directly affected by challenges due to global supply chain pressures, inflation, and other related threats,” she said.

Donald L. Lim, chair of the MAP CEO Conference Committee, said CEOs fear geopolitical uncertainties as these may suddenly disrupt supply chains and operations.

“I think the geopolitics, whether Ukraine-Russia or even the West Philippine Sea, are a great unknown. We don’t know what will happen. But if that happens, it will have a severe impact on the business,” he added.

However, Roderick M. Danao, chairman and senior partner of PwC, said that some companies are already starting to manage and mitigate the effects of geopolitical uncertainties.

“A few local companies have effectively tried to manage to mitigate the effect [through] product diversification, market diversification, and supply-chain diversification,” Mr. Danao said.

“Of course, all of these have to be backed up by long-term risk management plans for the company to adapt and to proactively manage the impact of the geopolitical conflicts,” he added.

TECHNOLOGICAL INNOVATION

Meanwhile, the survey showed that 46% of the CEOs believe that their company will no longer be viable after 10 years if it continues running on its current path.

According to PwC, new technologies such as generative artificial intelligence (GenAI) are set to revolutionize business models, redefine work processes, and transform industries.

“I always believe that AI will certainly bring more opportunities rather than threats,” said Mr. Danao.

In the survey, 40% of the CEOs said that they have already adopted the technology, while 71% believe that GenAI will change how their companies create, deliver, and capture value.

Even though 78% of the leaders believe that the technology can improve the quality of their company’s products and services, the survey also showed 61% of the CEOs said that they are not yet widely adopting the technology in their operations.

Asked why there is still low adoption, Mr. Danao and Mr. Lim said that AI in the Philippines is still in its nascent stage.

“The awareness is still very low at the Philippine corporate level. We are all excited about what this AI can bring into our organization. But embedding AI is still a work in progress. There will be investments and workforce upskilling needed,” Mr. Danao said.

“We are just at the tip of the iceberg. I think you’ll be lucky to have real AI adoption across the majority, meaning more than 50%, in five years. It will be a long time,” Mr. Lim said.

Mary Jade Roxas-Divinagracia, deals and corporate finance managing partner at PwC, said AI adoption will be led by industries like healthcare, banks, financial institutions, and retail.

“And then you have one of the major industries in the Philippines, the business process outsourcing, and this can be a game changer for them, not just on the risk side, but on the opportunity side as well,” she added.

However, Mr. Lim said that the full adoption of AI may result in job losses if the workforce will not be able to keep up.

“AI won’t replace jobs. Those people who use AI will replace those who do not know how to use it. So, I think the problem is more on education because the teachers do not understand this,” he said.

“So, we have to make sure that the educational system prepares our next three batches of graduates to use and harness AI. Will there be a loss of jobs? I think there will be. Because it won’t be able to catch up,” he added.

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Source: Business World