Friday, June 01, 2007

Limits to a services-driven economy

A 6.9-percent GDP growth rate, the highest quarterly growth in the last 17 years in the country’s history, is certainly good news. Never mind that our neighbors China, Vietnam and India have raised the bar to the 7-percent to 11-percent growth band in the last several years. An almost 7-percent growth in GDP for a country with barely a $1,000 per capita GDP is actually quite ordinary.

But let’s drink to that pretty new and higher number, if only because for years now we have been used to being thrashed by the world’s number crunchers, including those from multilateral institutions who kept on telling the international community we “lack global competitiveness,” have “poor infrastructure,” or we have less “economic freedom.”

But this new number may actually give us a hint that good things could happen if only some elements are present, like higher public spending, to compliment people’s expenditures.
On hindsight, this encouraging figure could actually be just an unusual bleep in the economic screen. We just had a midterm election and, certainly, politicians may have started throwing out money around as early as January to beef up their electoral chances. We have a construction ban on election season; the ruling party may have tried to ratchet up spending to put some spine to its hopelessly limp Senate lineup. That is clearly shown in government’s pump-priming activities that caused a 16.9-percent growth in public construction.

Looking at the rest of the numbers, however, it appears that the numbers do look real. As usual, personal consumption explained much of the growth figures. The people purchased more food, clothes, shoes, tobacco and spent more for fuels and light.

And where did they get the money? As usual, the rising personal spending came from the dollars sent in by overseas Filipinos. The number of deployed workers actually went down, but the money coming in is rising since we are increasingly responding to jobs that require greater skills and brainpower (like engineers and medical professionals).

Exports also maintained their double-digit growth, apparently because of the continuing robust demand for electronics and semiconductors.

Also, despite the super typhoons, the farm sector did look stable, and the increased productivity from the fishery sector may also have helped a lot. Manufacturing also remained stable, while mining recovered.

All these factors translated to more money being transacted through banks, money being spent in malls and sari-sari stores, more cash being burned in cellular phones and Internet games, and more money being used to buy vehicles.

No wonder the services sector grew by more than 9 percent, contributing 4.4 percentage points to the 6.9-percent growth rate. Industry contributed 1.9 percent and the farm sector 0.8 percentage points.

Now that we have praised ourselves with this new growth figure, we need to ask whether or not the service-driven economy is the most desirable growth path for us. Growth per se is good; an expanding pie somehow means that more and more people got the crumbs. But crumbs are crumbs and they are not going to create adequate nourishment for the broader sectors of the economy.

Consider these facts: interest rates are low (read: capital is cheap) and the peso has been “strong” (read: imported machines, technology, packaging products and equipment are cheap). And yet, durable equipment has not been rising. That could be interpreted to mean that business organizations are not investing in new machines and are not refurbishing their offices. Isn’t that a sign of a wait-and-see attitude? If it is, investor confidence, therefore, is not yet fully restored.

The real reason probably lies in the structure of the economy, i.e. its being a service-driven one. Service companies, business-process outsourcing (BPOs) for instance, usually don’t import huge machines, nor do they build factories. That means they are not likely to hire workers en masse the way a factory, requiring thousands of skilled and unskilled workers, would. Do we ever wonder why despite all the decent growth we achieved in the last three years, we can’t seem to address joblessness? That’s the reason.

The counterpoint seems to be that the services economy actually creates jobs fast, since setting up a service company like a BPO doesn’t require so much capital infusion. All that is required is a nice building with reliable broadband Internet connection and voilà! hundreds of call-center agents or software programmers are hired.

That’s true in the case of the country’s cyberservices industry. But the one thing that is ignored in this debate is the fact that the services sector has the tendency to hire call-center agents, accountants, medical transcribers, lawyers and software engineers first before they get janitors, street sweepers and errand boys. The ideal thing to do is to provide jobs for both accountants and the like, as well as janitors, street sweepers, farmers and factory workers.

India should provide a clear example to us. India is far ahead of the Philippines in terms of service-driven growth. Bangalore, Chennai and Delhi are full of information-technology campuses that glittered like urban utopias.

A few blocks from these campuses are stark manifestations of the continuing poverty, inequality and the perennial failure of the public sector to provide much-needed social services and urban infrastructure. Indians are aware of this and are actually looking at China’s manufacturing-driven growth with great envy.

The point here is that our service-driven growth is good, but we should start looking beyond that to spread the benefits of an expanding economy beyond the upper strata of society.
Romulo Neri, director general of the National Economic and Development Authority, actually acknowledged these limitations and has outlined crucial reforms and expenditure programs to boost both the farms and factories.

We wonder whether or not government has actually done something to address the bureaucracy’s absorptive capacity, as well as its tendency to waste public money to graft and corruption. It’s something that mass media and the general public should watch for as we approach the second half of 2007.

Yes, the people are watching. (Drafted as editorial for BusinessMirror, 31 May 2007)

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