GROWTH DIAGNOSTIC

FRAMEWORK:
FACTORS AFFECTING SHORT-
AND MEDIUM-TERM
ECONOMIC GROWTH
Growth Diagnostic Framework
Growth Diagnostic Framework
Learning Objectives
 Identify the most critical or binding constraints to
Philippine economic growth

 Discernthe priorities and sequence of policies required

to promote and sustain growth
 Countries at an early stage of development may not have
adequate capacity to implement a wide variety array of
policy reforms at the same time
Recent Economic Growth Performance

Country 2011-13 2014 2015 2016

Average
Indonesia 6.2 5.0 4.7 5.2
Malaysia 5.2 6.0 4.6 4.6
Philippines 5.9 6.1 5.9 6.0
Thailand 3.2 0.9 2.7 3.1
Viet Nam 5.6 6.0 6.4 5.9
Source: OECD, 2016
Growth Diagnostic Framework
Growth Diagnostic Framework
Comparison of Investment Rates (% of
GDP)
 Gross Capital Formation (% of GDP)

GCF 2012 2013 2014 2015 2016

Indonesia 35 34 35 34 34

Malaysia 26 26 25 25 26

Philippines 18 20 21 21 24
(GCF: $ 74B;
FDI: $ 8 B)
Thailand 30 29 24 22 22
(GCF: $ 90 B
FDI: $ 3 B)

Source: World Bank

 FDI Net Inflows ASEAN, 2015 (%)

Singapore
GCF = $ 75.3 B
0.1 1.4
Brunei Darussalam
9.8
FDI = $ 61.6 B 14.0 Cambodia
6.6
0.9 Indonesia
Lao PDR
9.3
Malaysia
2.3 Myanmar
4.7
Philippines
Singapore
50.7
Thailand
Viet Nam
Growth Diagnostic Framework
Low Social Returns
• Poor geography
• Low human capital

• Bad infrastructure
Social Returns to Investment
 Positive externalities

 Diminished or enhanced depending on investments

made in complementary factors of production, such
as human capital and infrastructure
Human Capital
Human Capital
 May raise the efficiency of individual workers

 Contributes to knowledge, giving rise to innovations

that raise the productivity of all factors of
production (an important source of long-run growth)

 Does RP have low human capital?

Unemployment and Underemployment
Rate, July & October 2015
Indicator July ‘16 July ’17
Employment Rate 94.6 94.4
Unemployment Rate 5.4 5.6
Underemployment Rate 17.4 16.3
Labor Force Part. Rate 63.2 60.6
Does RP Have Low Human Capital?

Hours Worked in a Week % of Underemployed

(July 2017)
Worked less than 40 hrs 51.6

Worked 40 hrs and over 47.4

Did not work 1

Total 100
 Does RP Have Low Human Capital?
Educational Attainment Contribution to Unemployment
(As of January 2018)
No Grade Completed 1.1
Elementary Undergraduate 7.8
Elementary Graduate 6.6
Junior High School Undergraduate 12.1
Junior High School (Completed) 29.4
SHS Undergraduate 0.2
SHS Graduate -
Post Secondary Undergraduate 1.0
Post Secondary Graduate 6.3
College Undergraduate 13.7
College Graduate 21.3
May not be a constraint, but…
 …human capital may be scarce in emerging
industries (like financial intermediation, information
technology, call centers, and real estate)

 Out migration of highly skilled workers may not be

a critical constraint to growth.
Infrastructure
Infrastructure
 Supports private production through connectivity of
places and integration of markets, linking suppliers
to producers and facilitating distribution of
commodities

 Help lower the costs of doing business and increase

returns to private investment
Growth Diagnostic Framework
Air and Sea Transport
Top 5 Worst Airports in Asia
1. Tashkent International Airport, Uzbekistan (TAS)
2. Kathmandu Tribhuvan International Airport, Nepal
(KTM)
3. Guangzhou Baiyun International Airport, China
(CAN)
4. Islamabad Benazir Bhutto International Airport,
Pakistan (ISB)
5. Beijing Capital International Airport, China (PEK)
Top 25 Best Airports in Asia
1. Singapore Changi International Airport, Singapore
(SIN)
2. Seoul Incheon International Airport, South Korea (ICN)
3. Tokyo Haneda International Airport, Japan (HND)
4. Hong Kong International Airport, Hong Kong (HKG)
5. Tokyo Narita International Airport, Japan (NRT)
6. Taipei Taoyuan International Airport, Taiwan (TPE)
7. Bangkok Suvarnabhumi International Airport,
Thailand (BKK)
8. Mumbai Chatrapati Shivaji International Airport,
India (BOM)
9. New Delhi Indira Gandhi International Airport, India 22. Clark International Airport, Philippines (CRK)
(DEL)
10. Kuala Lumpur International Airport, Malaysia (KUL)
11. Osaka Kansai International Airport, Japan (KIX)
12. Iloilo International Airport, Philipphines (ILO)
13. Mactan–Cebu International Airport, Philippines
(CEB)
14. Hyderabad Rajiv Gandhi International Airport, India
(HYD)
15. Bangalore Bengaluru International Airport, India
(BLR)
16. Cochin International Airport, India (COK)
17. Davao Francisco Bangoy International Airport,
Philippines (DVO)
18. Karachi Jinnah International Airport, Pakistan (KHI)
19. Lahore Allama Iqbal International Airport, Pakistanm
(LHE)
20. Brunei International Airport, Brunei (BWN)
21. Trivandrum International Airport, India, (TRV)
23. Bali Ngurah Rai International Airport, Indonesia (DPS)
24. Jakarta Soekarno–Hatta International Airport,
Indonesia (CGK)
25. Kolkata Netaji Subhas Chandra Bose International
Airport, India (CCU)
NAIA 3
NAIA 2
Bangkok Airport
Singapore Airport
 Seaports

 Port congestion in 2014

caused by the Manila
Truck Ban and other
similar ordinances in
Metro Manila
 Port of Manila is
ranked 36th in the
world, Shanghai and
Singapore are 1st and
2nd, respectively
Land Transport
Obsession with Flyovers?
Obsession with Cars?
 Lack of Infrastructure

 Only 22% of the road

network in the Philippines is
paved, compared to 99% in
Thailand, 81% in Malaysia,
and 58% in Indonesia.
 JICA estimates that P 3.5
billion per day is lost due to
traffic congestion
 Metro Manila has 3rd worst
traffic congestion in SEA
after Bangkok and Jakarta
 Electricity

 A study of 10 Southeast Asian cities noted that the power

tariffs for businesses in Manila were 20–80% higher than
tariffs in the other nine cities

 Reliability of electricity supply has been poor and the

investment climate survey shows that SMEs have been
losing up to 8% of their production due to frequent
power disruptions.
Infrastructure Constraints
 Within infrastructure, expensive and unreliable
electric supply and inefficient transport network
remain to be critical constraints to growth.
Public and Private Sector Investments in
Infrastructure (% of GDP)
Government Development Expenditures
(% of GDP)
Low Appropriability
• Government Failures
• Market Failures
Investments and Economic Stability
 Private parties will invest only when they expect to
capture adequate returns from their investments.

 Anything that weakens the capture discourages

investment and, ultimately, slows growth.

 The macro risks may include fiscal and financial crises

 The micro risks may be bad governance such as

corruption, weak rule of law, overly burdensome
taxation, and labor-capital conflicts.
Growth Diagnostic Framework
Government Failures
• Macro Risks
• Micro Risks
Macro Risks
• Financial Instabilities
• Monetary Instabilities
• Fiscal Instabilities
RP Government Deficit, 1990-2015
RP Government Deficit, 2006-2016
Revenue and Expenditure Reforms
 As budget deficits persist, the urge to tax intensifies.

 With the public debt at 64.0% of GDP in 2006,

interest payment reached 5.5% of GDP and 31.1%
of the budget in the same year.

 The deficits were reduced mainly through deep cuts

in social and economic services (including
infrastructure) as interest payments went up
Managing the Deficit, Sacrificing
Service?
 The passage of the reformed value-added tax (VAT) law
and improved financial condition of the state-owned
National Power Corporation (losses from which aggravated
public deficits during 2002–2005) also helped reduce fiscal
deficits in 2006.

 Prudent spending (and possibly better tax policy and

administration) decreased the budget deficit to 2.4% of
GDP in 2016 from 3.7% in 2009

 Total consolidated general government debt as %age of GDP

decreased from 42.2% in 2010 to 36.8% in September
2015
Financial Stability: Interest Rate
Financial Stability: Interest Rate
Monetary Stability: Inflation Rate
Monetary Stability: Inflation Rate
Maintaining Recently Gained Stability

 Macroeconomic instabilities may no longer be a

critical constraint to growth but it is important to be
able to maintain the stability that has been
achieved.
Growth Diagnostic Framework
Micro Risks
• Political Stability and Property Rights
• Corruption
• Taxes
Microeconomic Risks
 Poor governance is a credible threat to appropriability
and a critical constraint to investment and growth.

 Corruption, political instability, and weak rule of law

have had significant negative effects on investment.
Corporate Income Tax and Value-Added
Tax Rates in Selected Economies (%)
Collection Efficiency of CIT

Country CIT Rate Collection Efficiency*

Philippines 30% 12.3%
Thailand 20% 30.5%

* - Ratio of actual take against potential collection.

• Under the proposed reform, the CIT rate will be lowered to

28% in 2019 and 25% in 2021

• Concept of race to the bottom

• Experience of Ireland
Very High Tax Rates

 High tax rate and poor tax administration are critical

constraints.
Growth Diagnostic Framework
Market Failures
Growth Diagnostic Framework
Information Externality
 Introducing new products and production processes:
 may spill over to third parties without giving due
remuneration to the original proponent if successful
 only the original proponent bears the cost in case of
failure

 Could lead to underinvestment in new products and

production processes, yielding a low level of
diversification and innovation
Information Externality

 RP has a low patent application rate per population

(0.2 per 100,000) vs. Malaysia’s 3.7 and
Singapore’s 20.4

 Intellectual Property Rights

 E.g. organic fertilizer
Ranking by IP Filing Activity, 2013

Country Patents Marks Designs

Thailand 40 29 24
Indonesia 50 22 27
Viet Nam 54 26 36
Malaysia 36 42 46
Philippines 65 44 44
Patent Applications, Top 10 (2013)
Sources of Patent Application (2013)
Growth Diagnostic Framework
Coordination Failures
 A firm’s productivity depends not only on its own
efforts and the general economic conditions, but
also on how the upstream and downstream firms link
and perform, its access to infrastructure, regulations,
and other public goods.

 Backward and forward linkages

 E.g., Lamoiyan Corporation
High Cost of Finance
Growth Diagnostic Framework
Comparison of Sovereign Spreads
(basis points)
Philippine Credit Rating History
Philippine Credit Credit Rating Definitions (S&P)
Rating History
Rating Definition
Year Credit
AAA Capacity to meet commitment is extremely strong
Rating
AA Capacity to meet commitment is very strong
1993 BB-
A Capacity to meet commitment is strong, but
1995 BB-
susceptible to economic changes
2000 BB+ BBB Adequate protection but adverse changes may
2005 BB- weaken capacity (Investment Grade)
2010 BB BB Speculative Grade; faces ongoing uncertainties
B More vulnerable than BB but still has capacity to
meet commitment
CCC, Currently vulnerable to nonpayment;
CC, C Highly vulnerable to nonpayment
D Default
Does the Philippines have a lack of
access to international financial markets?
 In a 2016 estimate, RP sovereign spread is less than
200 basis points

 As of December 2017, RP has an Investment Grade

rating in three major rating agencies (Fitch – BBB, S&P
– BBB stable, and Moody’s – Baa2)

 Access to international financial markets may have been

poor in the past but has improved significantly recently.
It may not be a critical constraint.
Growth Diagnostic Framework
Comparison of Gross Domestic
Savings, 1980-2006 (% of GDP)
 Gross Domestic Savings (as % of GDP)

Country 2010 2013 2015 2016

Indonesia 34.0 31.6 34.8 35.1
Malaysia 40.3 35.4 32.7 32.5
Philippines 18.7 15.6 13.9 15.3
Thailand 33.4 32.5 35.4 36.7
Vietnam 27.5 30.7 28.5 29.1
Gross Domestic Savings and
Investments (% of GDP)
Gross Capital Formation and Saving

 Gross Capital Formation – 24% of GDP (2016)

 Gross Domestic Saving – 15.3% of GDP (2016)

Modest Investment and Savings Rate

 Aggregate domestic savings rate is low in the

Philippines and is a critical constraint to growth at
present.
Growth Diagnostic Framework
Comparison of Spreads bet. Lending
and Deposit Rates, 2000-2006
Comparison of Spreads bet. Lending
and Deposit Rates, 2007 & 2013
Country 2007 2013 2016
Indonesia 5.9 5.4 4.7
Malaysia 3.2 1.6 1.5
Philippines 5.0 4.1 4.0
Thailand 4.2 4.1 3.1
Vietnam 3.7 3.2 2.2

• Ponder: Failed merger of Land Bank of the Philippines and

the Development Bank of the Philippines
Is Lack of Domestic Credit the
Problem?
 Efficiency of domestic financial intermediation could
be improved but may not constitute a critical
constraint to growth.

 However, compared with some of the developed

countries such as France, Italy, and United Kingdom,
the efficiency of Philippine financial intermediation
has significant room for improvement.
Cost of Finance Not a Critical
Constraint
 Although access to and cost of finance do not
currently constitute a critical constraint to private
investment and economic growth overall in the
Philippines, many SMEs find the access to financial
services relatively more difficult.
Reference for Current Topic
 Asian Development Bank, Philippines: Critical
Development Constraints. (Manila: ADB, 2007),
Available online at
www.adb.org/Documents/Books/Philippines-
Critical-Dev-Constraints/highlights-phil-critical-dev-
constraints.pdf.
 Other sources as indicated
 Secondary references: Ranis