There is a wise principle of game theory called “backward inductive rationality” which states that no matter what has happened before, your next and following moves should be dictated by the best outcome you can achieve. at the end of the process. Ferdinand Marcos, Jr. is president of the Philippines for the next six years. Our best course of action should now be anchored on the best possible outcome for the nation given these new political and economic realities.
A salient economic reality is the draconian public debt of 13 trillion pesos and 8% Ifscale ofIfcit — disturbing because they were fellow travelers as the Philippine economy plummeted to the bottom of the East Asian barrel. A debt crisis? Not if the economy is growing rapidly and sustainably faster than the debt. But as sustained economic growth flhigh and sustained investment ows, the question is: how will investment perform in the future?
The healthy growth in the first quarter of 2022 was widely hailed as a harbinger for that future. But isn’t Q1 growth largely a weak base effect and a story of revenge spending? The massive 20% growth in investment cooked in a catapult slingshot of -14% growth in Q1 2021. GDP growth of 8.3% in Q1 2022 received an adrenaline rush after GDP growth -3.8% in the first quarter of 2021. For all the din, investment (gross fixed capital formation or share of GFCF in GDP) in the first quarter of 2022 remained at a low of 21.5%. This portends anemic, non-stellar growth. Our investment rate has always lagged miserably compared to our rivals. An average investment rate of around 25-40% sustained for at least two decades has been the driving force behind East Asia’s miracle economies.
On the heels of Q1 growth, the National Economic and Development Authority (NEDA) boasted that upper-middle-income country status is achievable for the Philippines by 2023! Truly, we live on hope!
High middle income status means, by World Bank standards, a per capita income between $4,090,000 and $12,600. In 2021, our per capita income was either $3.16 thousand according to World Bank et al. or $3.5 thousand as calculated by the Philippine Statistics Authority (PSA). If we follow the PSA calculation and if the GDP increases according to the NEDA target (7% in 2022 and 2023), we will still be at $4,000/capita in 2023 or less ($3.93,000/capita) if we take into account a population growth of 1%. If, based on the estimate of $3.2k, we would be down to just $3.66k in 2023 ($3.59 per capita with population growth). Starting at $3.2 thousand and factoring in population growth, we’ll barely reach upper-middle-income country status by 2026. And we could still miss the dodgy feesIfc — with global inflation reaching new heights, the target is likely to be $4.2k by 2023. Meanwhile, NEDA’s 7% growth target is itself ambitious; the continued spikes in oil and food prices following the ongoing COVID-19 crisis are contributing to this. President Rodrigo Duterte’s watch in more growth-friendly times (excluding the pandemic years of 2020 and 2022) could only manage an average real GDP growth rate of 5%, below 6, 2% under President Benigno Aquino. Since it is the investments that will make or break us, how will the investments fare?
Investments come from both the government and the private sector. When Duterte came to power in 2016, the government had money leaking out of its ears, thanks in part to what one current (and past) budget appointee once called the “crime of underspending.” under President Aquino. When Marcos dad seized power in the 1970s, recycled petrodollars were just waiting to be borrowed at a free real interest rate. Marcos dadThe eve of martial law (1972-85) achieved no more than 3.2% GDP growth. In contrast, Marcos Jr. comes to power when the fiscal coffer is empty and faces an increased demand for safety net resources. By granting the Philippine economy greater openness under President Marcos Jr., will private investment cover the fall in public investment? Unlikely. Curses are more likely for the incumbent president when new taxes and spending cuts hit the road. Leni Robredo, more valuable to the nation now as a symbol than as a commander-in-chief going to war without bullets, will be spared these curses. Duterte certainly paved the way for BBM to become PBBM, but he could also be tax tricked into opening a detour for Vice President Sara Duterte. A consolation for those who fear the Marcosian excesses: scarcity is a poor hunting ground for debauchery!
With a height Ifscale ofIfcit (the program ofIfcit is 8.2% of GDP for 2023) and a failing credit rating, new foreign borrowing will be limited. We will compete with more politically popular Ukrainian and hunger-related sovereign and multilateral loans. The sale of state assets bailed out the shaky past Iffiscal positions, but the state’s most valuable assets have already been alienated. IMF-style conditionalities—new and/or higher taxes and spending cuts—are needed. So it’s really higher taxes or a bust for the Department of Finance (DoF)!
And there’s the catch – with Filipinos still suffering a severe drop in income, won’t higher taxes be met with great resentment? To complicate the DoF problem: the final arbiter on expenses has a tax evasion conviction on his head and has an unsettled estate tax liability. With likely higher taxes, a foreign investor will think twice before setting up shop in the Philippines, which has a corporate tax of 25% compared to 17% in Vietnam. Investment pledges from the Philippine Economic Zone Authority continue to decline, apparently unrelated to recent reforms. Foreign investment is extremely sensitive to the rule of law which rests as much on how the rules are applied as on how the rules are written.
Public-private partnership (PPP) is a pathway to more private investment for an economy strapped for fiscal resources. PPP’s crop has so far impressed. But here, Duterte’s legacy weighs heavily. Big companies have started turning to PPPs since Duterte refused to comply with Singapore’s arbitration award and threatened unilateral expropriation. Rule of law? What rule of law? In addition, the proposed implementing rules and regulations of the amended Construction, Operation and Transfer Act will exempt the government from legal liability for adverse government actions. Bad for PPP.
With such negative baggage, the best recourse for President Marcos Jr., from a game-theoretic perspective, is to offer one or more credible pledges that he will be a rule of law fanatic. The operational word is “credible”, which means, hindi lang laway kasi makirot pag-ibinali-laway (not just spit because it hurts to eat your words).
Some possible credible engagement arrangements are:
1.) Appoint to positions of power people who have established a reputation for righteousness and competence and who are not afraid to be Ifred for telling the boss the truth. Marcos Jr. did it pretty well with his announced appointments to the economics team. A reason for optimism, of course, but also for caution! Then-President Joseph “Erap” Estrada received just as much applause with his nominations (some faces are the same), but he continued to blindside them in favor of his midnight cabinet and the Erap promise went pfft. Ferdinand Marcos’ firm was unparalleled in terms of individual stature and advanced degrees, but it operated primarily to borrow recycled petro-dollars that funded loans to cronies and mindless shopping sprees. That President Marcos Jr. privileges the judgment of his appointees over his family and political interests lies in the realm of prayer.
2.) If Duterte defers to the president-elect, Marcos Jr. should introduce a strong Material Adverse Government Action (MAGA) provision (the government can be held liable in court for adverse actions) in the TRI for the BOT Act amended before signing.
3.) President Marcos Jr. should signal his intention to enforce the decision of the Singapore Arbitral Tribunal if it is staggered.
Finally, 4.) Marcos Jr. should begin the process of settling the estate tax debts imposed by the Supreme Court in 1997 if on a gentle slide path as a public commitment to the rule of law.
As con studiesIfrm repeatedly (see for example, Daway-Ducanes and Fabella, 2022), few factors matter more for the rate of investment than the rule of law!
Raul V. Fabella is a retired professor of the UP School of Economics, Fellow of the National Academy of Science and Technology, and Honorary Professor of the Asian Institute of Management. He gets his dopamine fix by riding his bike and tending to flowers with his wife Teena.