Dutertenomics and economic prospects for the second decade

MANILA, Philippines — The May 2019, where the Philippine polity dealt the opposition’s Otso-Diretso slate a 0-8 thrashing, is pregnant with meaning. The Filipino people it seems have voted to hand the last bastion of opposition, the Philippine senate, to Duterte. Having now a free hand, he can no longer blame the so-called oppositionist obstructionism for the lack of progress in the economic space moving forward. There is less call to extend the Mindanao state of emergency to the whole country. The electoral victory seems to imply that the people have reaffirmed its implicit social contract with Dutertismo – less political space in return for more economic space. The next three years will reveal whether the Great Unwashed of this country has taught its snooty upper class a lesson in discernment. What can we glean from the first three years? First we look at the benchmark.   

The previous administration defined what is minimally attainable for the Philippine economy both in quantity (a 6.5% average annual GDP growth) and in quality of growth (Manufacturing for the first time grew on annual average faster than Services). And it was dramatically inclusive: In October 27 2016, the Philippine Statistical Authority announced that poverty incidence for the full year 2015 dropped to 21.6% from the previous level of 26.2% (https://psa.gov.ph/content/poverty-incidence-among-filipinos-registered-216-2015-psa). Under no other president was such a record ever attained. The label “new normal” for this achievement seems appropriate, since the “old normal” for the last 25 years was 4.5% average GDP growth with Manufacturing always growing slower than Services. In those baneful quarter century, the Philippines said goodbye to the economically rampant East Asia.

How about the Dutertenomics?  In the first full year of Duterte watch (2016-2017) GDP grew by 6.8% and Manufacturing grew faster than Services, better than the new normal as the Duterte economic cluster had hoped for. The second full year growth was 6.1% GDP growth with Manufacturing now growing slower than Services. The Q1 2019 growth dipped further at 5.6% GDP growth and Manufacturing growing slower than Services. It is unlikely that the third year will match the new norm. There is as yet no evidence that poverty incidence has fallen and the claimed 6% drop since Duterte took over is just fake news; job creation has lagged behind its predecessors’ record.  Is the Philippine economy reverting to the old normal of slow economic growth, slow poverty reduction and economic mediocrity? The official reason given was the delay in budget law approval and inclement weather. Inclement weather we will always have but the failure to pass the budget law is an administration failure. We earnestly hope that this is a temporary hiccup.

To be sure there have been some encouraging progress in the policy front: Train 1 is now a law to the relief of middle class, the NFA’s exclusive power to import rice has been clipped, a third telco player has been certified for yet to-be-realized benefit to consumers. The president just signed into law the tax increase on sin products which would boost health care coverage. Of greater moment was President Duterte’s recent veto of the Security of Tenure (SOT) bill, to the great relief of the business community.  They dodged a lethal bullet. Although there are signs this may just be kicked farther down the road, there is reason for hope. Clouds in the horizon still abound nonetheless: TRABAHO (TRAIN 2) in its current form threatens to attenuate the incentives for Manufacturing and exports in the economic zones and spooks direct foreign investment in particular. The trifling of the rule-of-law in, among others, the case of the penalty imposed on water concessionaires by the regulator, MWSS, the very culprit in the March water crisis, further waters down our country’s attraction to foreign and long-term investment. There is little or no movement in agricultural land policy which has traditionally driven private capital out of agriculture and throttled farm sector productivity. The much debated shift to a federalist system, which will likewise throttle investment for years to come, is not dead but only and threateningly undead.

  Duterte had at the start of his watch promised to leave the economic domain (the market) to his economic team, claiming the political domain for himself. Duterte’s politics is decidedly populist. But the boundary between the market and populism is not impermeable. In his first three years, Duterte has hued uneasily to the shores of respect for the market. How will the May 2019 electoral reaffirmation of Dutertismo affect the tug-of-war between populism and the market in the next three years? Will this lurch to autocracy be used to henceforth enable the market to expand economic space, or will this be used to indulge in quick populist gratification that stifles the market? This is the mother of all questions.

The Security of Tenure (SOT) veto is intriguingly interesting. Does it start an era of respect for the market? Or does it mean more populist profligacy elsewhere as quid pro quo? Duterte–after what seemed a deep bout with ambiguity–vetoed it in response to urgent calls from industry associations. Organized labor is crying betrayal. For in truth, the veto of SOT by Duterte means more than a reprieve for the market. It argues that the populism of the reaffirmed Duterte remains for the moment a bridled one. What the signal lacks is a reasoned conviction against unbridled populism which would discourage SOT’s reincarnation and similar overtures in future. Whatever happens next, the veto itself shows that the reaffirmed Duterte abides by his promise at the cost of another promise–a fair bargain in my book and an encouraging start, if only a start, for the next decade.

There is an enduring lesson of history here: you trifle with the market and you trifle with your future. Even if you’re an absolute autocrat! Deng Xiaoping of China used his autocratic power to firmly enable the market towards shared prosperity; Hugo Chavez and Nicolas Maduro of Venezuela and Mao Zedong before Deng, by contrast, deployed autocratic power in the service of unbridled populism that destroyed the market and engendered shared poverty.

The refrain in the next decade could either be, “Venezuela here we come,” or “East Asia we are back!” If, as we hope, the SOT veto starts the Dutertenomics firmly on a Deng Xiaoping path, it could be the latter.