I HAD the opportunity to facilitate, here in Xavier Ateneo, the presentation of the World Bank Group on the Philippine Economic Report of 2019 a few weeks ago.
There are many striking points I learned from that forum. The Philippine economic growth prospects has tempered in the last quarters of 2019 because of low public and private investments. The mediocre performance of public investments is a result of the spending ban prior to the May 2019 midterm elections and the delays in the approval of our national budget. Uncertainties from the external environment, such as the escalating trade war between China and United States and the socio-political conflicts among oil rich countries, contribute to the sluggish performance of our private investments. To address this, World Bank suggests that government should resume investments in form of policies that secure inclusive growth.
However, there is an increase of private consumption, which means that the general spending pattern of our citizens has relatively improved last year. This good performance is an effect of the declining inflation and improved labor market conditions (i.e. high employment rates and rising wages). There was also a narrowing fiscal deficit because of government underspending due to budget delays coupled with a robust revenue growth -- an improvement of our tax administration and excise tax collection.
During the plenary session, many of our students have raised a lot of questions relating to the role of the government in both fostering and limiting growth. For instance, World Bank reports that the weak growth of our Philippine economy is partly an end product of the lack of competition among our various sectors. The existence of heavy state involvement in key industries, lagging in ease of doing business, and the constitutional constraints of foreign participation are top three reasons.
Someone asked about the presence of government intervention when, in the first place, it limits growth. If you recall our history, the Philippine government in the 1990s has implemented series of liberalization policies in key industries such as in telecommunication and airline. State-owned companies like the Philippine Long Distance Telephone and Philippine Airlines have been sold to private owners to allow competition and dismantle unfair pricing. The idea of privatization is to limit the government in performing dual roles as both a market participant and a regulator. For instance, if government has remained in the airline industry, it would be difficult for private participants to compete against their very own regulator. There is also an unequal level of enthusiasm between a private and government player. For the former, there is a huge pressure to deliver quality products or services to entice consumers. The latter, on the other hand, don't have the same incentives to perform as their private competitors. For so long as there is government fiscal support sourcing from the people's taxes, government-owned corporations remain secure.
However, there are special cases of monopolies that need government assistance. This is the case of natural monopolies, where the sole participant faces large fixed cost (i.e. high average cost) but low variable cost (i.e. low marginal cost). Prime examples are public utilities like electricity, water and mass transit. These firms have very high set-up costs of producing an output, which makes this industry very challenging from potential entrants. The absence of this provider means discomfort among our consumers as they provide important products or services for day-to-day operations.
The most important reason of government intervention is to correct market failures. Two popular examples are inequality and negative externalities. If the government steps back from being an active participant to a regulator, then private firms compete with each other in form of quality products and game-changing innovations. There will be winners and losers as some will benefit from the free-market structure, while others will be left behind. The role of the government is correct inequality and lessen the gap between those who gained and those who did not. Such government inventions include taxation and subsidies. Here then comes the typical narrative of taxing the rich and helping the middle-class in form of subsidies and transfers collected from the taxes.
Negative externalities, on the other hand, are activities that impose damage to others. Classic examples are the pollution caused by factories, the discomfort you received from your neighbor's loud music, or when a student's cheating behavior changes the grade curve. There are plausible public and private responses to curb negative externalities. What the government may do is to impose corrective taxation, provide subsidies to affected individuals, or implement regulations against the source of these externalities.
An example of corrective taxation is a Pigouvian tax levied on each unit of, say, a polluter's output, which is equal to the amount of marginal damage it inflicts [at par] with the efficient level of output. Meanwhile, regulations are the imposition of quantity limits like a reduction of pollution to avoid facing legal sanctions and charges from the government.
Therefore, the best set-up to secure inclusive growth is when the government intervenes as a proactive regulator -- to provide a level playing field that will allow competition among private owners and to impose policies that correct the unintended consequences of a free-market system.
Our government remains a salient player in our economy. The World Bank recommends that to foster growth and reduce poverty in the Philippines, the government must resume public investments, implement game-changing reforms and magnify competition among various sectors. There are many things that our government can do to ensure robust and inclusive growth performance!
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Jhon Louie B Sabal is a member of the faculty of the Department of Economics and the research coordinator of the Social Sciences of Xavier University-Ateneo de Cagayan. He is a graduate of MA in Economics at Ateneo de Manila University.