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For all nations on this earth, growing rich is not inevitable. That is the sad lesson from the past decades of growth posted by developing nations across the globe.
Heretofore, students of development economics learned by rote the stages of economic development postulated by Walt W. Rostow. The so-called “Rostow’s Stages of Growth” enumerated five basic stages of development that all economies must undergo:
On paper, it would imply that all nations would pass these stages on a linear timeline, with some nations taking longer in each stage than others. No matter how long it took, the theory pointed towards “economic convergence.” This meant that, eventually, no matter how long it took, all nations would be as rich as the developed countries. If this were true, then even today’s slowpoke economies would, in due course, cross the finish line.
However, as historical experience has shown, economic convergence is not linear, nor is it predestined and a foregone conclusion. There are countries, such as South Korea, which successfully progressed from the least developed status to advanced industrial nation over a span of 35 years. Aside from South Korea, the other two oft-cited success stories, where a nation successfully transitioned into a modern industrialized economy, include Taiwan and Equatorial Guinea. Three success stories, that’s all. The BRICs (Brazil, Russia, India, and China) are now trying to follow in their footsteps but currently remain middle-income countries.
There have been more failures than successes. Economic divergence, instead of convergence, has been the norm. Many countries, including those in Latin America, have actually backslid while others have stayed poor, such as those in Africa. Brazil, for instance, had 75 years of solid growth of close to six percent until the so-called lost decade of the eighties. According to one development economist: “Among the 132 countries in a sample study, especially among the middle income, it may be seen that a country is more likely to move down than to move up.”
The Philippines, oft-cited as the laggard of Asia, is one of those that fall under the category of countries that have not only failed to take off but has actually backslid during the dark days of the Marcos regime.
But what does economic takeoff mean in practical terms? The country’s economic managers expect the domestic economy to grow between five and six percent this year. Does that growth rate constitute the requisites of a takeoff?
The answer, quite simply, is no. The historical long-run average growth rate of the Philippines has been clocked by economists at around five to 5.5 percent Hitting five to 5.5 percent would be just going back to trend, which was never enough to propel the economy skyward. The local economy, with a per capita income of $4,100 (purchasing power parity basis) remains in the lower middle-income category.
Mongolia, another country that, just like China, had to quickly transition in the nineties from a command (socialist) economy to a market-oriented economy, currently has a higher per capita income of $4,500. Just like China, it had to open up its economy to foreign trade and investments to develop its economy, which went nearly bankrupt when the Soviet Union collapsed. The latter’s transfers accounted for about half of Mongolia’s government budget. Mongolia’s economy grew more than 17 percent in 2011 in real terms.
What about six percent? Would that be takeoff speed for the Philippines’ economy? Again, no. It is estimated that the Philippine economy has to maintain a growth of six percent just to be able to absorb its unemployed plus the annual new entrants to the labor market. That means six percent would be just enough for the Philippine economy to hover in place, not to take it to other destinations.
Once in a blue moon, the Philippine economy has been able to grow more than seven percent, but each time it had stalled and rapidly decelerated due to the economy’s structural problems. Each time the country tries to grow either by pump-priming or consumption-led growth, the economic engines start to overheat and inflation quickly ignites.
Investment remains low, as pointed out by this column last week, and that is partly explained by a low national savings rate and by the bias against foreign investment. With the savings rate of less than 20 percent of national income, versus more than 30 percent for neighboring Asian countries, a low investment ratio becomes inevitable. In order for investments to expand, capital would have to be imported from abroad. That means opening up the economy.
People try to connect these concepts with stock market prices, but those are two different concepts. Economic takeoff would mean growth rates of 10 percent or so for a number of years before slowing down to high single digits. This cannot be accomplished with gradual growth of six percent or so since the rest of the developed world is also moving away – diverging from that of the Philippines. Just like an airplane, the takeoff speed needs to be an over-revved growth engine prior to deceleration towards comfortable cruising speed.
Meanwhile, the stock market is the epitome of shortsightedness. Investors focus mainly on the economy’s performance for a year or two ahead. Just as in the past, prices will fluctuate upwards and downwards on the basis of this myopic view. In short, today’s stock prices are not necessarily an indicator of the country’s long-run development.
What is the definition of “insanity”? Insanity means doing the same thing every year and, each time, expecting a different outcome. When will the country’s leadership finally realize this state of mind?
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