Outlook for Global Economic Recovery:
Opportunities and Challenges
Rogier van den Brink Lead Economist and Program Leader
Philippines
Bangko Sentral Ng Pilipinas
Conference on:
Gearing Up for External
Competitiveness
Limketkai Luxe Hotel,
Cagayan De Oro City
19 November 2014
2
Contents
1. Global trends—pessimistic
2. Philippine trends—optimistic
3. Inclusive growth—challenge
4. Opportunity—stars aligned, wind in your sails
5. Poverty projections—look good
6. Jobs challenge—remains
7. The way forward…
3
Global recovery is weak and slow…
Outlook is pessimistic
Disappointing year
Global growth forecasts: revised further down
Trade: slower long-term growth
Outlook is pessimistic:
Summers’ “Secular Stagnation”
Lagarde’s “New Mediocre”
Rodrik’s pessimism about the relevancy of the “old” growth
strategies for the future
Developing countries: transition to a new environment
Post-crisis growth slowdown widespread
Structural challenges abound
4
Global growth downgraded during 2014
Global growth:
3.2% >> 2.6%
Growth in developing countries:
5.3% >> 4.5%
Growth in high income countries:
2.2% >> 1.8%
Source: World Bank Global Economic Prospects
Medium-term global growth: mediocre
5
Sources: World Development Indicators; DECPG Projections
-4
-2
0
2
4
6
8
10
200
7
20
08
200
9
201
0
201
1
201
2
201
3
201
4
20
15
201
6
201
7
World High income countries Developing countries
GDP growth (percent)
Slower trade growth….structural shift?
6
80
100
120
140
20
05
200
6
200
7
200
8
200
9
201
0
201
1
201
2
201
3
201
4
World trade
Trend 05-08
Trend 11-14
Index, 2008Q1 = 100
Rodrik on service sector and growth
strategies in developing countries…
7
But… Philippines’
growth is only now
picking up, strategy
is not based on
export-led, labor
intensive
manufacturing, and
the BPO sector is
booming!
3% by 2030 is far from assured:
Business as usual will not get us there
8
Scenario Headcount
(percent)
Number of poor
(million)
Average income growth of 4% p.a. in each country 3 252
Each country sustains avg per capita growth during past 20 years 6.8 573
Each country sustains avg per capita growth during past 10 years 4.8 405.4
Each country sustains avg per capita growth during past 10 years
(survey-based growth) 6.7 564.8
Global Poverty in 2030 at $1.25 per day (2005 PPP),
assuming unchanged inequality
Source: World Bank, 2014, A Measured Approach to Ending Poverty and Boosting Shared
Prosperity
…and growth is slowing.
Projecting the changing face of poverty to
2030
9
Source: World Bank, 2014, A Measured Approach to Ending Poverty and Boosting Shared
Prosperity
Note: Data for the Philippines refer to 2012 poverty data taken from the Family Income and
Expenditure Survey, the latest year with available full year poverty estimates.
…But the Philippines has experienced higher
growth in recent years…
10
-10
-5
0
5
10 Real GDP per capita (2000 prices) growth
Pe
rce
nt
Sources: National Statistics Office (NSO), WDI, World Bank staff estimatesNote: Red line at 2.5 percent (long run average)
Post war
reconstruction
Debt-driven
growth
Governance-led growth
…along with stronger macro fundamentals…
11
-9
-6
-3
0
3
6
Current account balance
Perc
ent
of
GD
P
Sources: WDI, Department of Budget and Management (DBM)Notes: The red line is at -3 percent. Current account balance has a series break in 1977 and in 2005.
…lower inflation…
12
Low and stable inflation in the last decade has led to
increased real income for businesses and households
0
5
10
15
20
Pe
rce
nt
CPI inflation
Sources: Philippine Statistics Authority, Bangko Sentral ng PilipinasNotes: The red line is at 5 percent.
…improving fiscal position…
13
-6
-5
-4
-3
-2
-1
0
1
2
0
10
20
30
40
50
60
70
80
90
Per
cen
t o
f G
DP
National government deficit and debt
Debt
Deficit (rhs)
Per
cen
t o
f G
DP
Source: WB staff estimates using NSCB, BTr, and DOF data
Lower debt levels and deficit mean more fiscal space for pro-poor
spending. In fact, social spending doubled in the last 4 years.
-15
-10
-5
0
5
10
15
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2011 2012 2013 2014
Perc
enta
ge p
oint
Demand side: contribution to GDP Growth
Private consumption Govt consumption Capital formation
Statistical Discrepancy Net Exports GDP growth
Source: PSA
Recent economic and policy developments
14
GDP growth decelerated somewhat to 6.0 percent in H1 2014
due to weak government consumption and public construction.
Private consumption continued to drive growth.
But growth was third highest in the region behind only China and
Malaysia.
Inclusive growth challenge: Creating more and better jobs, reducing poverty and protecting the
vulnerable
15
Growth may be necessary but is not sufficient to ensure poverty reduction…
How broadly based growth is—i.e., how pro-poor the distribution of
growth is—also matters…
Raising the returns to labor—the main asset of the poor
by…
…increasing value-added per worker in
agriculture
…moving workers out of agriculture to higher value-
added activities in manufacturing and service
…as does how resilient growth is and the extent to which poor and vulnerable households are protected
from shocks
Putting in place appropriate
social protection schemes
…and raising human capital endowments
China’s incidence of growth:
inclusive growth in several periods
16
Philippines?
17
• Long history of policy distortions
slowed the growth of agriculture
and manufacturing in the last six
decades.
• Incomplete structural
transformation
• Agricultural productivity has
remained depressed,
manufacturing has failed to grow
sustainably, and a low-
productivity, low-skill services
sector has emerged as the
dominant sector of the economy.
0
20
40
60
80
Sector share to GDP
Agriculture Industry Service
Source: PSA
Perc
ent
0
10
20
30
40
50
60
70
Perc
ent
Employment share by sector (detailed)
Agriculture Manufacturing Other industries
Formal services Informal services
Source: LFS, PSA
Philippine incidence of growth: less
inclusive
18
-10
-5
0
5
10
15
20
1 11 21 31 41 51 61 71 81 91
Ave
rage
an
nu
al g
row
th in
pe
r ca
pit
a co
nsu
mp
tio
n (
%)
Percentiles of the distribution of per-capita household consumption
PHILIPPINES: per-capita household consumption GROWTH INCIDENCE CURVES
1994-1997
2006-2009
2003-2006
2000-2003
1997-2000
2009-2012
A window of opportunity
19
A regional environment favorable to the Philippines
Sound macroeconomic fundamentals
A government committed to reform
Widespread confidence
Highly skilled, talented, English-speaking, youthful
population
Abundant natural resources
Opportunity to build on momentum of reforms already
successfully implemented, for instance:
Better public financial management, which created fiscal space
Doubling of budgets for social services since 2010
Conditional cash transfer and CDD programs
Major improvements in transparency (Open Government)
Good neighborhood to be in!
20
Source: World Bank
0
1
2
3
4
5
6
7
8
East Asia &Pacific
Europe &Central Asia
Latin America &Caribbean
Middle-East &North Africa
South Asia Sub-SaharanAfrica
2012 2013 2014 2015 2016
Percent annual GDP growth
East Asia and ASEAN growth projections
21
Forecast
Changes from April 2014
(in percentage points)
2012 2013 2014 2015 2016 2014 2015 2016
East Asia 6.0 6.1 6.0 6.1 6.1 -0.2 -0.2 -0.3
Developing East Asia 7.4 7.2 6.9 6.9 6.8 -0.2 -0.2 -0.3
China 7.7 7.7 7.4 7.2 7.1 -0.2 -0.3 -0.4
Indonesia 6.3 5.8 5.2 5.6 5.6 -0.1 0.0 0.0
Malaysia 5.6 4.7 5.7 4.9 5.0 0.8 -0.1 0.0
Philippines 6.8 7.2 6.4 6.7 6.5 -0.2 -0.2 0.0
Thailand 6.5 2.9 1.5 3.5 4.0 -1.5 -1.0 -0.5
Vietnam 5.2 5.4 5.4 5.5 5.8 -0.1 -0.1 0.0
Cambodia 7.3 7.4 7.2 7.5 7.2 0.0 0.5 0.2
Lao PDR 8.0 8.5 7.5 6.4 7.0 0.3 -1.5 -2.1
Myanmar 7.3 8.3 8.5 8.5 8.2 0.7 0.7 0.4
ASEAN 5.7 5.0 4.5 5.0 5.3 -0.3 -0.2 -0.1
Memo: Developing East Asia ex-China 6.2 5.2 4.8 5.3 5.1 -0.2 -0.3 -0.1
World 2.5 2.4 2.6 3.2 3.3 -0.4 -0.1 -0.1
High-income countries 1.5 1.3 1.8 2.3 2.4 -0.3 -0.1 0
Developing countries 4.8 4.8 4.5 5.0 5.3 -0.5 -0.4 -0.3 Source: World Bank, "East Asia and Pacific Economic Update: Enhancing Competitiveness in an Uncertain World", October 2014
Current growth more pro-poor…
22
20
22
24
26
28
30
32
0
4
8
12
16
20
24
28
Po
vert
y in
cid
en
ce (
pe
rce
nt
of
po
pu
lati
on
)
Mag
nit
ud
e o
f p
oo
r (i
n m
illio
ns)
Poverty incidence and magnitude(first semester estimates)
Magnitude (in millions) Incidence (lhs)
Source: PSA, United Nations World Population Prospects
Jan Apr Jan Apr Jan Apr
Unemployment 7.2 6.9 7.1 7.6 7.5 7.0
Underemployment 18.8 19.3 20.7 19.2 19.5 18.2
Job creation (thousands) 1,005 1,001 519 -37 283 1,654
By industry:
Agriculture 132 323 -540 -621 121 323
Industry 210 219 318 228 117 345
Services 664 458 741 393 45 910
By sector:
Public sector 115 21 24 45 -35 -11
Private sector 891 980 495 -82 318 1,665
By class of worker:
Wage and Salary 435 838 1,820 593 -994 914
Self-employed 349 -15 -613 -225 705 445
Unpaid workers 220 178 -688 -404 536 296
Source: LFS
2012 2013 2014
Note: January estimates exclude Region 8, whi le Apri l estimates
exclude the provnce of Leyte, due to the effects of typhoon Yolanda.
In 2013, poverty incidence declined
significantly
23
First half poverty incidence among the population fell by 3 ppt. to 24.9
percent, down from 27.9 percent in the same period in 2012.
This translates to around 2.5 million Filipinos uplifted from poverty.
Job creation:
In 2013, weak
In 2014, better
Philippine Development Plan’s poverty targets
for 2016…can be achieved
24
Scenario 1:
GDP p/cap growth 4.2%
(Med-Term WB estimate)
Alternative elasticities of
pov reduction not pro-
poor to pro-poor growth.
Scenario 2:
GDP p/cap growth 5.7%
(Gov. 7-8% GDP growth
target by 2016)
Same alternative
elasticities of poverty
reduction.
Under both growth scenarios, achievement of 18-20% poverty target
possible, if the 2012-2013 elasticity is maintained (pro-poor growth).
In the higher growth scenario, an elasticity half the size would also
achieve the target.
These rough estimates suggest the government could achieve its
poverty reduction target…
Elasticity = -2.03 (2012-2013)
Elasticity = -1.00
Elasticity = -0.24 (2006-2012)
The jobs challenge is more daunting…
25
Medium-term reform agenda:
26
Thematic areas:
Enhancing competition
Simplifying business regulations
Securing property rights
Increasing investment in physical and human
capital
No silver bullet…these are the “economy-wide
capabilities” that Rodrik was talking about
Example: Enhancing competition in the shipping
industry needs a package of reforms
27
Philippines EAP
Weak competition Share of primary routes served by a single operator (%) 40 NA
High shipping costs Share of logistics costs to wholesale price (%) 24-53 20
High shipping costs Share of shipping and port handling costs to wholesale price (%) 8.4 NA
High shipping costs Share of shipping and port handling costs to retail price (%) 4.9 NA
Small domestic trading volumes Domestic market throughput (millions of metric tons) 74 782
Low quality of services Rank in liner shipping connectivity (out of 157) 66 17
Poor port infrastructure Rank in quality of port index (out of 148) 116 47
Low profitablity Average return on equity (%) 1 NA
Old vessel age Average age of ships (years) 30 22
Poor safety standards Average number of yearly accidents 228 32
Poor safety standards Average number of yearly casualties 303 60
Sources: World Bank (2013), World Economic Forum (2013), JBIC (2002), Securities and Exchange Commission, MARINA, National Statistical Coordination Board, World Development Indicators, and Board of Maritime Inquiry, UNCTAD (2011), Various country statistical officesNote: Average age of ships used was global average in the absence of dataSelect East Asia and the Pacific countries are Singapore, Hong Kong, China, Malaysia, Thailand, Viet Nam, and IndonesiaA group of 5 international comparator shipping firms from the region were used for average return on equity
Sector Features Measurement Indicator
Example: Simplifying regulations requires a
package of reforms…
28
Indicator 2015 Rank(Change), DTF
2014 2013
Ease of doing business 95 (+13), 62.08 108 138
Starting a business 161 (+9), 67.23 170 161
Dealing with construction permits 124 (-25), 66.08 99 100
Getting electricity 16 (+17), 90.59 33 57
Registering property 108 (+13), 62.81 121 122
Getting credit 104 (-18), 40.00 86 129
Protecting investors 154 (-26), 41.67 128 128
Paying taxes 127 (+4), 66.46 131 143
Trading across borders 65 (-23), 77.23 42 53
Enforcing contracts 124 (-10), 52.02 114 111
Resolving insolvency 50 (+50), 56.74 100 165
RANKINGS: Philippines in ASEAN - Up 1
29
Countries 2015
N=189
2014
N=189
2013
N=185
2012
N=183
2011
N=183
Singapore 1 1 1 1 1
Malaysia 18 6 12 14 23
Thailand 26 18 18 17 16
Vietnam 78 99 99 99 90
Philippines 95 108 138 136 134
Brunei D. 101 59 79 83 86
Indonesia 114 120 128 130 126
Cambodia 135 137 133 141 138
Laos 148 159 163 166 163
Starting a Business
30
Country
(Starting a Business Rank) Number of
Procedures
Singapore (6) 3
Malaysia (13) 3
Thailand (75) 4
Laos (154) 6
Vietnam (125) 10
Indonesia (155) 10
Cambodia (184) 11
Myanmar (189) 11
Brunei D. (179) 15
Philippines (170) 16
0
1
2
3
4
5
6
Pe
rce
nt o
f GD
P
Education
0
1
2
3
Pe
rce
nt o
f GD
P
Health
0
1
2
3
4
5
Pe
rce
nt o
f GD
P
Infrastructure
Public Expenditure
Source: WDI and ADB estimatesNotes: Education and health figures are from 1995 to 2012 (Some countries have missing values for certain years.). Infrastructure data is from 2008 to 2012.
Example: investing in infrastructure, health
and education…
31
However, the Philippines has an investment deficit
Spending on infrastructure, health and education has been lower than in
some neighboring countries.
Low spending has contributed to weak health outcomes and lower
quality of education, and tremendous traffic.
But recent trends are in the right direction…need to be sustained
Financing this trend needs more revenues…
so reduce the tax gap
32
0.31.8
3.01.8
6.9
0.8
0.3
1.4
1.4
4.0
0
2
4
6
8
10
12
SEP CE CIT VAT Total
Actual Gap
(0.5)
-
0.5
1.0
1.5
2.0
2.5
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
Using NSO imports Using BOC imports
BIR tax gap (in percent of GDP)
(Actual collection plus collection gap) BOC tax gap (in percent of GDP)
(0.5)
-
0.5
1.0
1.5
2.0
2.5
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
UsingNSOimports UsingBOCimports
33
…and more reforms in areas such as
real property tax.
• As of June 2014, around 80% of cities and 75%
of provinces use outdated schedule of market
values (SMVs) for collecting real property tax.
• Richer LGUs continue to use decade-old property
valuation.
Quezon City
Makati City
Pasig City
Los Baños
Tagaytay City
Dasmariñas City
Cainta
Malolos City
San Miguel
Antipolo City
San Pablo City Calamba City
(9, 29]
(6, 9]
(3, 6]
[2, 3]
Number of years since
last update
(9, 29]
(6, 9]
(3, 6]
[2, 3]
Number of years
since last update
…needs a tax reform package…
34
Raising tax revenues efficiently and equitably
First phase: raising tax revenues
Rationalize tax incentives to reduce
redundancy;
Enact a tax expenditure ceiling
Reduce the number of VAT exemptions;
use the NHTS-PR to protect vulnerable
Filipinos
Centralize the valuation of real properties
and, if needed, levy a national surtax to
enhance equity
Index petroleum excise taxes once prices
have fallen or automatic increase in excise
tax once fuel price falls to enhance equity
Second phase: lowering tax rates and
further broadening the base
Reduce the corporate income tax rate
while increasing the gross income
earned to enhance equity
Reduce the highest marginal tax rate for
personal income tax and reduce the
number of brackets
Consolidate all laws and regulations on
tax incentives into one code
Simplify the tax regime for micro and
small firms into a single tax on turnover
to reduce compliance cost
The way forward
35
“We Can Work It Out” is not just a nice
slogan…
36
Broad reform coalitions are necessary. Without a broad coalitions,
reforms made under a strong president can be reversed, as the
country’s history has shown.
Stakeholders need to focus on a package of reforms to support inclusive
growth. Given the political economy, individual reforms will face strong
opposition.
Example: sin tax reform
These coalitions can form at many levels and around many themes
Country needs to come together and seize this unique window of
opportunity
…not to be missed!
Inspiration: a history of successful reforms
that made a big difference, but were strongly opposed by
key stakeholders
37
0
100
200
300
400
500
600
700
800
900
Hundre
d t
housands
BPO sector - total employment
Source: BPAP
0
10
20
30
40
50
60
70
80
90
100
Mill
ions
Number of mobile phone subscribers
Source: WDI
0
5
10
15
20
25
30
Mill
ions
Number of internet users
Source: WDI
0
5
10
15
20
25
Mill
ions
Air transport, passengers carried
Source: WDINote: Data include passengers of both domestic and
international flights.
Final example: What to do about rice prices?
38
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
Wh
ole
sa
le p
ric
es
, U
SD
/kg
Philippines
Vietnam
Thailand
In September 2014,
1kg of rice cost PHP
41 in Philippine
supermarkets.
Consumers in Vietnam
were paying the
equivalent of PHP 16.
Example of a balanced package of reforms:
39
Government
• Enhance programs to reduce food prices without farm profits falling
• Provide universal social protection, health insurance, basic education
• Simplify business regulations, for firms of all sizes
Businesses
• Support reforms that promote competition to level the playing field
• Support freedom of association and collective bargaining
• Partner with government and organize training for workers to create and upgrade skills
Labor
• Actively participate in dialogue and include informal workers
• Recognize valid forms of flexible contracts
• Reduce calls to hike minimum wages, as food prices fall.
Civil society
• Ensure broad-based participation and support for this type of agreement.
• Monitor commitments made
• Support evidence-based policy making, performance-informed budgeting (media, Open Government)
The way forward
40
Thank you
Rogier van den Brink Program Leader and Lead Economist