The importance of improving infrastructure

This is a part of the DEMAND AND SUPPLY column of economist Boo Chanco. Full column can be accessed at http://www.abs-cbnnews.com/storypage.aspx?StoryId=80379

A new and improved Ate Glue?
BOO CHANCO

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Poor Ate Glue! She may proclaim through the rooftops until she is blue in the face that the economy grew the strongest during her watch but the people are not inclined to give her any credit for it. That’s because people can’t eat statistics. If the economy is really strong, how come they are not feeling it?

The same question was the subject of an article by Karen Bitagun in the Makati Business Club magazine and website. The general populace, the MBC publication noted, measure economic growth in terms of availability of jobs, access to services, and food on the table. The areas that have recently been experiencing growth — the stock market, export revenues, or even OFW remittances, affect a more limited number of people.

The MBC publication turned to World Bank country director Joachim von Amsberg for his views on what exactly is going on in the Philippine economy. Mr. Von Amsberg says sustainability of stronger than usual economic growth depends on strong policy signals from government and real investment to come in. Unless investment kicks in strongly, that 6.9-percent growth is in street parlance, ampaw.

According to Von Amsberg, as quoted in the MBC publication, the per capita GDP growth rate of the Philippines from 1966 to 2004 averaged 1.28 percent, significantly lower than the regional average of 5.77 percent. "This is not talking about one administration, not talking about one regime, but a 40-year perspective," he explains.

It would appear, he said, that the Philippines has been missing opportunities and did not adapt well to changes in those four decades. The country’s recent economic performance has picked up, but there are still doubts about whether this can be sustained and expanded to the point that it becomes palpable to all Filipinos.

The local World Bank representative thinks "one of the basic building blocks of economic expansion is improvement in infrastructure, where, unfortunately, the Philippines has failed miserably compared to its neighbors." The paradox, he observed, is that the Philippines is a "country with wonderful assets, great opportunity for progress, educated people, natural resources, and wonderful neighbors who are rapidly developing and strengthening the dynamic business sectors. But the modest development outcome, modest levels of growth compared to other countries of the region, is rather a slow progress in terms of improving the quality of life of the poor and poverty reduction." Von Amsberg points to poor infrastructure as the culprit. "I want to make a case that infrastructure policies and infrastructure investments are actually quite central for the Philippines to grasp its window of opportunity and become part of rapidly growing East Asia. Entrepreneurs, and business leaders have told us that infrastructure is a major concern and constraint to investment," says von Amsberg.

The good news, according to the World Bank official, is that the year 2007 presents a unique window of opportunity for the Philippines to catch up on infrastructure investments. For one, the country’s fiscal condition is now healthy and can therefore afford disbursements for infrastructure projects. Furthermore, there is presently high liquidity among international investors just waiting to be tapped and channeled into infrastructure projects. Just as we have written in this column, the World Bank executive sees two possible scenarios for the Philippines in the next three to four years.

"The first scenario is a continuing ‘muddle through’ scenario, where fiscal reforms and the current positive environment will lead to complacency," says Von Amsberg. In this scenario, he expects politics will dilute fiscal reforms and investments will not pick up. Unless urther policy reforms are pursued, people will not see financial gains leading to better jobs or higher income.

On the other hand, von Amsberg paints another more positive scenario, the "takeoff" scenario. If the Philippines is to be set on a path toward joining the East Asian renaissance, key decisions need to be made. The fiscal gains of 2006 have to be followed up with real investments in 2007, with infrastructure playing a driving role in the real investments. With new investments, there will be more jobs and income, and Filipinos will begin to feel the fruits of the economic reforms. The choices are clear: muddle through or take off. If indeed we have a new improved Ate Glue ready to govern as she should and not as her political allies dictate, then we just might take off. But unless I see concrete evidence that the new and improved Ate Glue is for real, muddle through is the likely scenario for the next thousand days.