‘Limits of fiscal capacity: COVID-19 lockdown, recession and recovery’

(Part of the series on COVID-19 recession)

In general, undertaking a successful recovery is made more difficult by the burden of a large population. Since it is obligatory to support a country’s human base, the margin for improving development outcomes is reduced.

The more divided is the effort. The lower the per capita GDP and the more unequal the distribution of income, the more difficult is the recovery effort. This general proposition is best explained by the following information on population and the number of cases and deaths from the COVID-19 pandemic.

As a country, we have, numerically, more people in poverty. Today, because of the pandemic, the poor have increased further, adding to the need for state support in order to survive.

For the purpose, I refer to the latest data for Aug. 3 (See: www.worldometers.info/coronavirus/). I plucked the data below for the Philippines and a few selected countries:

Among the three ASEAN countries, the Philippines now lags in per capita GDP. The same is true in terms of income and wealth inequality. Such data are not given above, but are an aftermath of their more successful investment and employment policies.

But the greater relative burden on economic recovery falls on the nation with a relatively larger population to support.

One dimension of the problem has to do with the cost supporting human capital development. (See Crossroads, July 15, Population Size and Filipino Human Capital Development, Philstar.) From the historical paths through seven decades of development of the Philippines, Thailand and Indonesia – three sizable three ASEAN countries – the population of the Philippines grew much faster than those of the other two.

At the time of our independence, our population was equal to that of Thailand and Indonesia was numerically almost four times as populous than us.

Today, our population is almost 40 million more than that of Thailand. Although still remaining as one of the populous countries on earth, Indonesia is no longer four times more populous than us. Today, Indonesians are only two thirds more plentiful than Filipinos.

Both countries undertook more serious efforts to plan their population levels, but we did not have the same political resolve.

In general, the outcome of this is that today they can invest more in terms of social, educational, and health improvements in their domestic economy, thereby enhancing the living standards of common citizens. Having less people to support per dollar of government revenues has enabled them to generate more social and economic profits for their citizenry.

Big policy obstacles for the long term. Of course, there are other dimensions of reforms and economic conditions. In my assessment, there is need to address the improvement of the investment opportunities. The nation can achieve greater inclusiveness in the participation of foreign investments in expanding the country’s markets.

Lack of stress on these issues in the recent SONA made it sound hollow in the face of the recovery challenge.

Domestic savings resources are never enough, and the old policy of restricting such participation in the internal economy diminishes the development potentials in a low income country. Also as important, labor market conditions have to be improved through a reform of the deficiencies that exist. They could help to tilt the investment decision.

Many times I have expounded on these reform themes. Either I sing a foolish tune. Or the body politic just cannot digest their beneficial consequences. Perhaps we need to hope for a far-seeing future leader (or leaders) to face the challenge. Given what other countries have done, why is the full picture still blurred?

The limits to fiscal capacity. The fiscal space to do a big job cannot be accomplished without investing in further rearrangement of the fiscal tax framework. Within the current government plans, this is embedded in the passage of the CREATE reform. It is integrally important to the recovery effort.

My disappointment in the last SONA was in the failure to give it the prior importance that it occupies in the economic recovery effort.

The CREATE reform extends the early successful effort of the Duterte government to secure the TRAIN fiscal reform, which addressed the sales and the personal income tax systems. The fiscal reforms need completion.

The CREATE fiscal reform constitutes the lynchpin of an aggressive effort to support the recovery. It strengthens the capacity to get successful investments already in the country (both domestic and foreign) help increase the country’s fiscal capacity to improve the landscape of finance for development and social amelioration programs.

It is needed as a vote of confidence to enable the international development community to perceive that the political will is there to support economic recovery.

Moreover, it is also directed at enhancing the opportunities to play a better role in FDI attraction. It might help to turn the tide for important investments coming out of the restructuring of FDIs out of the China, in favor of new locations of supply.

In this, most of the benefits in the ASEAN region have gone to Vietnam, Thailand and Indonesia. Possibly more benefits might, as some “new” normality returns, to include Cambodia, Myanmar, among others.

India seems to be one of the big winners in this relocation game. The decision of Apple to transfer a large part of its China operations there is a game-changer for India.

But the Philippines has been missing in the conversation, partly because the Congress has failed to act swiftly enough on this reform measure.

Yet, even if Congress accommodates the immediate passage of CREATE now, we must recognize that it is only part of the magic formula for launching and supporting a viable recovery program. It will also help us to catch up, or perhaps reduce the gap, that other countries have attained in the the serious game of economic growth and development.

Next week: The limits of monetary creation and prices.

My email is: [email protected]. For archives of previous Crossroads essays, go to: https://www.philstar.com/authors/1336383/gerardo-p-sicat. Visit this site for more information, feedback and commentary: http://econ.upd.edu.p h/gpsicat/