Comprehending the ‘economic turnaround’

THE Philippine peso was the best performing currency in Asia in 2007, appreciating by 19 percent against the U.S. dollar. The country’s GDP in the first three quarters of last year also grew at 7.1 percent and is hailed as the “highest in 30 years.”

These are among the economic gains being trumpeted by the government, and even prompted President Gloria Macapagal-Arroyo to declare during her first Cabinet meeting for 2008 that over 90 percent of Filipinos will have a bright future this year. Yesterday, buoyant in her speech before Filipino-Chinese businessmen, she said 2007 was a year of economic turnaround, one that will propel the country into First World status in 20 years.

But a strong peso and GDP growth rates unheard of in decades are not necessarily signs of a strong or strengthening economy, argued the independent think tank IBON Foundation, even as it points out to “record joblessness, worsening poverty, severe inequality and relentless economic decay” that the country is facing in seven years of the Arroyo administration.

IBON’s claims resonate loudly in the recently released final results of the 2006 Family Income and Expenditure Survey (FIES). In real terms, family incomes only increased by 1.7 percent from the time the survey was last taken in 2003, while family expenditures grew by 3.6 percent. Income disparity among Filipino families remain wide, with the richest 10 percent continuing to account for more than a third of total family income. On the average, the richest 10 percent earned 19 times more than the poorest 10 percent in 2006.

At IBON’s yearend briefing last Monday, its head of research, Sonny Africa, dispelled government’s claims of strong economic growth. For one, the peso’s strong performance, Africa said, is primarily because of three major factors: the weakening of the dollar, an increase in speculative foreign investments, and record billion-dollar remittances from overseas Filipino workers (OFWs).

Download IBON’s yearend briefing paper.

The U.S. dollar has weakened not just against the peso but also against almost every currency across the globe. By December 2007, the Canadian dollar appreciated by 13 percent against the greenback, the Brazilian real by 17 percent, the Indian rupee by 12 percent, and the Thai baht by 16 percent.

Speculative foreign investments or “hot money” reached $3.7 billion from January to November 2007, a 76.6-percent increase from the same period the year before. Meanwhile, OFW remittances totaled $11.9 billion in the first ten months of 2007, an increase of 15.2 percent or an additional $1.568 billion from the same period in 2006.

University of the Philippines economics professor Ernesto Pernia also attributed the peso’s appreciation to the same factors, adding that another contributor is the surge in business process outsourcing (BPO) activities. “The increase in BPO,” he said, “has also resulted in the inflow of dollars,” though he thinks the biggest contribution came from OFW remittances.

Real economy not generating employment

To find out whether these factors have strengthened the economy, Pernia said that both financial and real sectors of the economy need to be analyzed. “The real economy is the economy that produces output and generates employment,” he explained. “Then there’s also the financial side of the economy, which is made up of the stock market, investments, money flows, financial flows of the economy.”

While both sectors of the economy have improved, Pernia said the financial aspect is improving much significantly. “GDP growth has been much stronger than in previous years but it has not been producing commensurate quantity of employment,” he said.

Pernia further added, “The strengthening of the peso makes the financial side of the economy even look rosier but then the question is: Does it translate to the real economy being able to provide or to generate employment and to increase the real incomes of poor families?”

Not so, according to IBON, which puts the number of jobless Filipinos at a minimum of 4.06 million, given an unemployment rate of 10.8 percent. IBON’s figures contradict government’s statistics that place the number of unemployed Filipinos at 2.7 million, with the average unemployment rate for 2007 at just 7.3 percent.

The disparity is rooted in the Arroyo administration’s revised definition of unemployment to exclude discouraged job hunters from the labor force count, not because the economy created more jobs, Africa said. The new formula in use since April 2005 in effect pulls down the labor force participation rate (the percentage of population 15 years and above who are in the labor force) to 64 percent from the 66.5 percent under the National Statistics Office’s traditional unemployment definition.

This year, the Arroyo administration will however be forced to confront dilemmas resulting from its economic policies, claimed IBON, as it has made cheap labor export, foreign investment and debt the “cornerstones of its development policy.” These, it said, are “eroding jobs at home and turning the peso exchange rate into a weapon of economic destruction.”

IBON, which considers the OFW phenomenon one of the “clearest signs of the country’s economic backwardness,” said Filipinos go abroad for job opportunities that the domestic economy cannot provide but the billions in dollars they remit are among the reasons causing their peso incomes to fall.

OFW families hit hardest by ‘strong’ peso

The appreciation of the peso has resulted in a sharp cut in OFW incomes, costing them over P700 per $100 remitted. This led V-Team, a loose umbrella organization of OFW advocacy groups, to appeal for government help regarding their plight. As early as August last year, V-Team had petitioned Arroyo to take immediate steps, in particular, fixing the exchange rate at 10-percent premium above the prevailing rate in the market or a flat rate of P50 to one dollar for legitimate OFWs.

V-Team also launched an online petition for this purpose. So far, it has gathered 14,000 online signatures, over 4,500 e-mail responses, and more than 2,000 physical signatures from camp-to-camp and door-to-door campaigns. Government’s economic managers, however, swiftly turned down the proposal, pointing to the policy of allowing the market to determine the currency exchange rate.

In an email interview, Ronnie Abeto, V-Team’s senior action officer, said “Our campaign is to protect OFWs from the rapid appreciation of the peso where most of us are severely affected. (This) reduces our purchasing power and decreases our state of living.”

V-Team member William Yerro added, “We left our country to seek higher income abroad and now it looks as if the strong peso has defeated this purpose. It certainly upsets us and our families who look forward to our quick return.”

The group has not received an official reply from the government but recent news reports have stated that the Development Bank of the Philippines (DBP) is set to open a hedging facility to help OFWs cope with the continuing appreciation of the peso. This has not yet been implemented or offered to OFWs, according to Abeto.

“While this is good news to us, we somehow regret that the government will only do it at this late time when we have already suffered so much from the strong peso. The government is demonstrating once again their adeptness in depicting the old adage ‘Aanhin pa ang damo kung patay na ang kabayo,'” lamented Yerro.

What also bothers OFWs is that based on initial information they are getting, the hedging facility will be offered via the manning agencies in the Philippines. “We are afraid that this will again be exploited through levying exorbitant and unnecessary fees during the pre-employment process, and worse, be abused by some enterprising person in the industry,” he said.