How the Government’s Keynesian Stimulus Spending Conceals the Real State of PH Economy

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A few weeks ago the Aquino administration and its economic minions bragged about the surprising growth of the Philippine economy. Reports said the country’s economy expanded at its fastest pace, surprising [Keynesian and Marxist] economists and statisticians and outperforming its more progressive neighbors in Asia. Not surprisingly, such press releases and reports attribute the most touted growth to increased government spending and consumption.

As most of the country’s government stimulus advocates already know, state spending and private consumption are just two of the four metrics economists and statisticians use to compute a country’s gross domestic product or GDP.

I’m sure both undergrad and post-grad economics students have already heard tall economic tales claiming GDP positively impacts a country’s economic conditions. In fact, the Aquino regime’s stimulus economists and central planners exploited the same anti-economics story-line to brag about the government-promoted 7.8-percent growth meme. 

National Statistical Coordination Board  Secretary General Jose Ramon attributed the strong growth to “the upbeat business and consumer sentiment, as well as sustained government capital expenditure.” Other factors that contributed to the growth include increased investments in construction and durable equipment. Ramon said this record beat China’s first-quarter growth of 7.7, India’s 5.5% and Indonesia’s 6.02%.

For his part, Economic Planning Secretary Arsenio Balisacan described the first-quarter data as “significant”, as “it puts to rest the doubts cast on the 2012 figure as being due to base effects only.”

However, less than a week after all the great fanfare regarding the country’s growth, the laws of reality and economics hit the entire country with the following solid economic facts: unemployment rose to a three-year high, as jobless rate rose to 7.5% in April, the highest since April 2010, exports fell, and foreign direct investment was negative in March.

This now leaves us with the following multi-billion dollar question: Does statistics-driven growth equal real progress?

How can the Aquino government and its economic central planners claim the country’s economy is improving when we are faced with higher jobless rates, negative investment and less exports?

Ironically, even the statist or socialist economists at Demos, a liberal think-tank in the United States, stopped buying the Keynesian propaganda that GDP growth means real economic progress. Demos states in its report that “while GDP has been steadily increasing, indicating a growing economy, other metrics of progress show a very different picture.” According to Demos,  GDP “is an incomplete measure and explains in depth what is missing from GDP that prevents it from measuring progress.”

This is exactly what the Aquino government currently confronts, as other metrics (unemployment rate, FDI, and exports) belie its claim that our third-world economy is on the rise.

To understand the economic contradiction that now trolls the country’s central planners and statisticians, it is important to properly grasp how the GDP metric is calculated. At a high level, the GDP is measured like this:

GDP = private consumption + gross investment + government spending + (exports − imports)

That basic formula shows that all government spending is included in the metric as being necessary. This means that no matter how the government spends its money (or the people’s money), the formula automatically includes such spending as part of the factors of economic growth. In other words, the government can simply boost spending to manipulate statistics and to improve its image. The term “public spending” here does not explain whether the government borrowed money from foreign sources, embarked on debt monetization, or increased taxes.

In 2011, government spending was 17.3% of GDP. However, over the past several months government statistics and reports show spending significantly increased to stimulate the economy.

Yes, the idea that government spending is necessary to boost the economy is part of the Keynesian economic theory. And this is exactly what our government planners and economists have been following for decades.

The official pronouncements by our public officials reveal that increased spending is purely for statistical and media purposes. And we’re not yet talking about whether such spending was misplaced or not, or whether the government borrowed money to further stimulate the economy. Where did the money go? Did it merely benefit government cronies and politically connected contractors? Did most of the welfare money intended to help the poor go straight into the deep pockets of corrupt politicians and public officials? 

One particular government official who strongly believed that more government spending means higher growth is Budget and Management Secretary Florencio Abad, who said in January that state spending and the national elections could boost the economy.

The budget secretary believed in increasing spending to meet their target of six to seven percent in 2013.

“The momentum in government spending will combine with the upcoming 2013 elections to spur growth,” Abad said.

The government made this report in September last year:

Budget and Management Secretary Florencio B. Abad confirmed that the National Government expects spending to jump further in the second half of the year, particularly in view of key reforms and measures currently being implemented by the Department of Budget and Management (DBM).

He reported that because of these, spending for infrastructure and capital outlay soared to P106.2 billion or 64.7 percent from January to July. Disbursements for Maintenance and Other Operating Expenditures (MOOE) also sent spending levels on an upswing, with disbursements under this expense class up by 37.2 percent to P134.6 billion.

The DBM previously reported that from January to July this year, a total of P958 billion of the 2012 National Budget had already been released, 15 percent higher than figures recorded in the previous year.

“We’ve already implemented some landmark reforms to speed up disbursements across all government departments and agencies, as well as clear up bottlenecks that only result in costly delays in project execution. We’re pleased to note that these measures have already produced results, with departments optimizing the releases made to them and disbursements enjoying higher levels in July,” Abad said.

Yet it seems that the government spending on steroids was not enough, as the statist, Keynesian think-tank Philippine Institute for Development Studies (PIDS) had been urging the government to sustain its spending. To enhance the government’s chances to meet its target of over 6-percent growth, the PIDS said public-construction spending should be combined with election spending.

This clearly shows that the entire state spending machinery was geared toward meeting the Aquino administration’s statistical target. That this whole spending process is purely for publicity and good public image rather than real economic progress and growth.

The government think tank believed that increased spending in 2012 was a key contributor to the 6.6 growth last year.

“Despite the increases in public spending for infrastructure, it appears that more investments in infrastructure are necessary to compensate for past neglect and to improve the country’s competitiveness. In the Global Competitiveness Report 2012-2013, the Philippines ranks only 98th among 144 countries in the overall quality of its infrastructure,” the PIDS said.

This increased spending rhetoric was strongly promoted by the NEDA and its central planners. Last year, Socioeconomic Planning Secretary Cayetano Paderanga Jr. said more spending is the key to growing the economy to over 5 percent.

“We know that we will be spending more in infrastructure. Budget spending this year will be much more efficient than last year,” Paderanga said.

Yet it now appears that heightened state spending was not enough to bring real economic growth and progress, as unemployment  and budget deficit widened.

Recent press reports reveal that budget deficit in the first three months reached P66.478 billion, almost double the P35.198 billion psoted in the same quarter a year ago.

Also, it must be noted that the Aquino government borrowed P852.7 billion last year to finance its ever-increasing spending. A very recent report shows that from January to November last year (2012), the government registered a net borrowing of P477 billion. That’s five times the P99.7 billion made in the same period last year, according to the Bureau of Treasury (BTr). That means that the current administration borrowed more at a faster rate, while its payments declined.

So, apart from widening the government’s budget deficit, the Aquino administration’s Keynesian stimulus solution also increased the country’s debt.

Aside from increased state spending, there are other factors that contributed to our so-called GDP growth, which include increased OFW remittances that impact OFW family spending.

Reports reveal that OFW remittances have been on the rise over the past several months.

This IMF report explains how private remittances positively affect economic activities. Private remittances, according to the IMF, “support a high level of private consumption, financing imports of consumption goods and risky loan provision of the banking system.”

In my own humble opinion, such hostile factors as increasing jobless rate, negative FDI, and less exports that all contradict, and expose the fallacy of,  the government-promoted GDP growth merely prove that the so-called growth is both artificial and bogus.

 

2 thoughts on “How the Government’s Keynesian Stimulus Spending Conceals the Real State of PH Economy

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  2. Pingback: A Tale of Two Leaders: Singapore's Lee Hsien Loong Vs. P-Noy - VINCENTON BLOG

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