What’s the real state of the nation?

THE economy will most assuredly be among the focus of this year’s State of the Nation Address, as Gloria Macapagal-Arroyo will be expected to bask in its growth as a major accomplishment of her administration, highlighted by a strong peso which appreciated to P44.80 to the U.S. dollar last Friday, buoyed largely by foreign fund inflows into a rejuvenated stock market.

And now that the country’s economy is supposedly back on track, Arroyo’s seventh SONA will be mapping out the government’s agenda in the last three years of her term anchored on the “social payback” mantra she has kept intoning in many of her speeches. As intimated by Press Secretary Ignacio Bunye, this will be in the form of investments in education, social safety nets, vital infrastructure, and peace and order to ensure that “more and more of our people will not just see, but more importantly experience, the tangible benefits of our growing economy.”

But are the economic gains for real and are they sustainable?

Former budget secretary and University of the Philippines economics professor Benjamin Diokno does not think so. During the last six years, the economy, he says, has not performed well enough to make a difference in the lives of most Filipinos, especially the poor.

Echoing the Asian Development Outlook 2007 report of the Asian Development Bank, he says the economy is growing but only moderately, which is not enough to address the country’s unemployment, underemployment, and poverty problems. And despite the 6.9 percent GDP growth rate during the first quarter of the year, Diokno points out that the growth of the economy has only been slightly above four percent in the last 12 years.

“Not enough jobs were created, inflation remained high, and consequently the 2006 misery index is higher than the 2000 level,” he adds.

The misery index corresponds to the rate of inflation plus the unemployment rate, and which peaked at 20 percent at the height of the 1997 Asian financial crisis. After dropping to 15 percent in 2000, the index has steadily been increasing in recent years.

Diokno also thinks the government has not used taxation and spending policy to improve the lives of the poor and disadvantaged sectors. Filipinos are paying more taxes than ever. The tax burden stood at 14.8 percent of GDP, with P785.2 billion in tax collections from January to November last year.

What is even worsening the poor state of public finances is the Arroyo government’s misplaced priorities, neglecting education, basic health care, and public infrastructure for servicing the national debt.

“In 2006, for every peso of tax collected, all of it — or 100 percent — went to debt servicing (interest plus principal amortization) of the national government,” Diokno says.

Heavy government borrowing

With debt servicing as the government’s top priority, interest payments as a percentage of GDP peaked at 5.5 percent during the last two years — up from 3.6 percent in 1999 and 4.2 percent in 2000.

The Arroyo government may harp about the declining national government outstanding debt, now at P3.9 trillion, and a lower debt to GDP ratio at 64 percent in 2006, down from 72 percent in 2005. But anti-debt advocacy group Freedom from Debt Coalition (FDC) says there is more than meets the eye in the “improvements” in the debt statistics bandied by the government.

FDC President Ana Maria Nemenzo says the seeming rosy picture of the country’s debt being prudently managed has been achieved mainly because of the strategy to pre-pay loans in exchange for new loans with longer maturity. This has been coupled with a strong peso, thanks to increasing remittances from overseas Filipino workers, and a decrease in the number of agencies availing of direct loans (both foreign and domestic).

“This is Arroyo’s own ‘FrancSwiss’ scam,” claims Nemenzo of the government’s core debt management strategy to borrow heavily to pay old debts, which an ADB study likened to playing the Ponzi game (commonly known as pyramiding). “It might be working at the moment but is highly unsustainable. And it prioritizes the interest of the creditors over the interest and needs of the Filipinos.”

In fact, Arroyo’s heavy borrowings have long surpassed the combined borrowings incurred during the time of Aquino, Ramos and Estrada, and overwhelmingly exceeds the budget deficit. (see The debt burden and Arroyo’s ‘borrowing addiction’)

Highest recorded budget deficits

Arroyo also has the distinction of incurring the highest budget deficits in recent Philippine history, as measured in terms of national government deficit, public sector borrowing requirements and consolidated public sector deficit. In 2004, public funds were alleged to have been massively used to finance Arroyo’s presidential campaign.

But the apparent obsession to balance the budget is resulting in government’s social spending pattern that Diokno says is “anti-growth and anti-poor.” For the past six years under Arroyo, government has been underspending in education and health. Diokno says spending for education and health reached its peak during the short-lived Estrada administration but dropped under Arroyo.

Proof of such misplaced priorities is that the government alloted P622 billion to debt service (interest and principal) in the 2007 budget, compared to a measly P146 billion for education and P13 billion for health.

Noting that the government’s major budget strategy is a balanced budget by 2008, Professor Leonor Magtolis Briones, co-convenor of Social Watch Philippines, says it is important to ask who will bear this burden. Because as gleaned from the P90-billion shortfall in expenditures for the country’s Millennium Development Goals (MDGs) commitments in the 2007 budget, it is obvious, Briones says, that the poor are being made to bear the burden of balancing the budget.

Diokno likewise sees the Arroyo administration’s failure to get congressional support for its budget plans as a sign of weakness. For three of the six years Arroyo has been in power, the government had operated on a reenacted budget.

Declining investments

Sustaining a higher growth path, Diokno says, requires foreign direct investments (FDIs) and not “hot money” invested in stocks. But in the last six years, foreign investors have avoided the Philippines, a situation he blames on poor governance and the dismal state of public infrastructure. This, he adds, is the foreign investors’ vote of no confidence in the country.

Even the World Bank’s country representative Joachim Von Amsberg regarded the country’s investment rate at about 15 percent “extraordinarily low” during the Philippine Development Forum held in Cebu last March 8-9, 2007.

Domestic investment is also declining, dropping from 19 percent in 2001 to a record low of 14.8 percent in 2006, and is the worst among East and Southeast Asian countries.

The challenge to the Arroyo government, Diokno says, is to bring in more foreign direct investments that would create permanent jobs at home. But he says a necessary prerequisite to that is a significant improvement in the quality of governance, emphasizing the clear link between sustainable economic growth and good governance.

“This appears to be the core of the problem,” says Diokno, citing the country’s deteriorating good governance indicators measured in terms of voice and accountability, political stability, government effectiveness, regulatory quality, rule of law, and control of corruption.

View Prof. Diokno’s presentation.