COVID-19 and the Philippine Economy

Filomeno S. Sta. Ana III

Presented at Oxfam’s “A Better Normal: Civil Society’s Reflections on

COVID-19,” 11 September 2020

It is but expected that COVID-19 is going to tank the Philippine economy.

In fact, the whole global economy is suffering heavily because of the
pandemic.

But the narrative on the Philippine economy would have been different if
not for COVID-19. For context, it is relevant to review the economy
before the onset of the pandemic. Some insights and lessons can be gained
from previous economic performance as we attempt to recover and have a
better new normal.

From 2012 to 2019, the Philippines sustained a high level of growth of

Gross Domestic Product (GDP), which averaged 6.46 percent. At the same
time, the data from the Philippine Statistics Authority showed a significant
decline in poverty incidence among the population. Poverty incidence
dropped from 23.3 percent in 2015 to 16.7 percent in 2018, a reduction of
6.6 percentage points. Impressive is the word to describe the sharp decline
in poverty in a short span of three years and the sustained high growth for
almost a decade

Strong Economic Fundamentals before COVID-19

Undeniably, the economy had strong fundamentals before COVID-19

emerged. The fundamentals were anchored on some very crucial reforms
undertaken in the past years.

In particular the series of tax reform measures that started in 2012 (the
historic sin tax reforms) removed a binding constraint that was the narrow
fiscal space. The 2012 sin tax reform created a momentum for further tax
reforms during the Rodrigo Duterte administration—the personal income
tax relief for working classes, the increase in fuel and automobile excise
taxes (which are progressive), the lifting of unnecessary value-added tax
(VAT) exemptions, the further increases in cigarette and alcohol taxes, the
introduction of taxes on sugar-sweetened beverages, electronic cigarettes,
and heated tobacco products, etc.

The long-overdue rationalization of fiscal incentives and the reform of the

corporate income tax are also forthcoming.

The passage of the controversial Rice Tariffication Law (RTL) was also a
key reform. Immediately, it stemmed inflation arising from a rice shortage,
a welfare benefit for the overwhelming majority of the population. (After
all, we are all rice consumers.) In the longer run, rice farmers should
benefit from the law as it enables other measures, particularly allocation of
more resources, to improve efficiency and productivity.

On social development, the transformative Universal Health Care (UHC)

Act was passed before the pandemic. This law provides health access to
all, and reorients the health system towards primary care.

The above gains inspire financing and investments. Credit-rating agencies

have given the Philippines an investment grade, a notch below the coveted
“A” ranking.

The economic managers were aspiring to get the “A” grade. In addition,
the Economist (in its May 2020 issue) ranked the Philippines sixth among
66 emerging economies with the highest level of financial strength.
Financial strength is measured in terms of public and private debt,
borrowing cost, and reserve cover. The Philippine ranking is impressive,
given that the advanced economies like Korea and Taiwan are on the list.

But then COVID-19 struck, and the economic downturn inevitably

happened. In fact, it was a policy choice to downgrade the economy. There
was no other way, but “freeze” the economy when the principal objective
was to save lives and to “flatten the epi curve.”

COVID-19 and the Recession

For the first half of 2020, the economy contracted by 9 percent, and the
decline will persist for the rest of the year. Capital formation, consumption,
exports, and imports all fell.

Cash transfers or subsidies that benefited more than 80 percent of

households did mitigate the suffering brought about by the fall in
household consumption. Government spending increased, thanks to the
fiscal buffer brought about by tax reforms. The fiscal space also allowed
greater deficit spending.

Unemployment and underemployment shot up in the early stage of the

pandemic, accounting for more than 36 percent of the labor force. The
Social Weather Stations’ surveys showed a rise in involuntary hunger, from
8.8 percent in December 2019 to 16.7 percent in March 2020 (the
lockdown was imposed in mid-March) to 20.9 percent in July 2020.

The enhanced community quarantine (ECQ) affected 78.8 percent of GDP.

But even if the lockdown did not happen, contrary to the argument of the
libertarians, the economy would have still suffered tremendously. (A

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survey done by government showed that many establishments voluntarily
closed.)

Naturally, fear of getting infected was pervasive. Fear meant a fall in

consumer and investor confidence, and a disruption of markets. It is the
pandemic itself that created weak demand and supply shocks, which in turn
led to a rise in joblessness and hunger.

The government early on projected an economic contraction of 6.6 percent

in 2020. Government also counted on a quick recovery. It said that the
economy would grow between 6.5 and 7.5 percent in 2021 and 2022. But
others were more pessimistic, forecasting a sharper contraction of 8.5
percent or more.

Now that we have slowly lifted the restrictions on mobility, we can expect
the economy to move but still at a slow pace. Despite prior economic
fundamentals, the situation is now different. The structural reforms that
have been put in place can facilitate recovery, but they can no longer be
sufficient to rebuild the economy. The scarring from COVID-19 is deep.

Uncertainty

Furthermore, uncertainty remains. The uncertainty makes it difficult for us

to define economic outcomes. A prolonged pandemic and high
transmission rates will restrict mobility and economic activities.

And so, for some time, even with the introduction of a vaccine, we will
have a situation where mobility and economic activities will remain
hampered.

It goes without saying that the pandemic will have long-term effects. Think
of the so-called long-haulers—those who continue to suffer from COVID-
19 symptoms since their infection. Think of the mental or psychological
distress that has an impact on our productivity and wellbeing. Think of
those who dropped out from the labor force because they could no longer
find employment during the pandemic.

Given the uncertainty and the longer-term impact, it’s iffy that we would be
able to recover at the soonest. The government was hoping for a V-shaped
recovery. The shape of V suggests a steep decline immediately followed
by a sharp increase. But that won’t happen amid the uncertainty and the
deep scar brought about by COVID-19.

The vaccine for all brings hope. But we cannot lower our guard. It takes
time for the attainment of herd immunity from vaccination. And the
vaccine distribution creates new issues.

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First, the efficacy of the first-generation vaccine, despite the trials, is not
fully ascertained. We do not know either what the unintended
consequences will be.

Then in the Philippine context, a significant number of people now fear

vaccination because of the negative experience in the past. Recall the
Dengvaxia debacle that happened in 2016, but which continues to haunt our
society.

We also have to contend with people whose fundamentalist religious

beliefs make them shun vaccines. The communications strategy must
address the apprehension and assure the public of the vaccines’ efficacy
and safety.

On the rollout, the whole logistics can be messy. The bigger inescapable
issue regarding vaccine distribution relates to the political economy.
“Some are smarter (or have better connections and resources) than others.”
Our advocacy must fight for a fair, equitable, and transparent vaccination
program.

Hence, we cannot treat the vaccine as a silver bullet. We will continue

coexisting with the virus for some time.

Strategies

We cannot just annihilate the virus soon, even with the introduction of the
vaccine. In this war against COVID-19, annihilation is not the appropriate
strategy.

We cannot rely either on letting natural herd immunity to happen. Look at

what happened to Sweden, which embraced that approach. The health and
economic outcomes have been terrible. Having herd immunity by allowing
the coronavirus to infect the many is brutal and inhumane.

We cannot rely either on a strategy of prolonged general lockdown. It is

very contextual. Over a long period, the benefits from a lockdown also
diminish.

The ultimate goal is saving lives. That means strengthening the health
system and improving medical and non-medical interventions that will
flatten the infection curve.

But government has faltered in flattening the curve, despite the imposition
of a severe lockdown. Hence, when national government was about to ease
the quarantine restrictions despite the high infection rates, the coalition of
health professionals asked for a timeout. The health community got the
support of the public, compelling government to take heed.

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The timeout was meant not only to relieve the strain of the critical care
system. It also gave time for government and society to refresh or
reinvigorate the strategies.

These strategies have wide coverage: Case-finding, testing, self-quarantine,

treatment, contact-tracing, physical distancing, self-protection, workplace
and public transport safety, social amelioration, hunger prevention, and job
preservation.

The successful implementation of the strategies towards containing the

pandemic is the key to economic recovery. Said another way, economic
recovery cannot happen without flattening first the epi curve.

The trade-off between health and economic outcomes is superficial.

Meeting the health objectives and providing the subsidies and safety nets
for the people will define and shape the economic recovery.

Deficit spending

To be sure, substantial resources are needed to finance the health and social
interventions. But revenues have plunged in light of the economic shock.
Government then has to rely on massive deficit spending.

All over the world, governments have no choice but incur bigger deficit
spending. The question for the Philippines is whether its deficit spending is
bold enough.

Based on government data, deficit spending for 2020 is equivalent to 9.6

percent of GDP. Deficit spending for 2021 and 2022 is estimated at 8.5
percent and 7.2 percent of GDP, respectively.

However, some argue that this is still conservative. The Philippine

government’s deficit spending is lower compared to that of other emerging
markets (EMs). Based on the International Monetary Fund’s World
Economic Outlook update (June 2020), the global average of deficit
spending for EMs is 10.6 percent of GDP. For Asia’s EMs, the average is
11.4 percent of GDP.

Further, the Philippines has sustainable debt. Our debt ratios are sound. For
example, gross debt stood at 40 percent of GDP (source: IMF). For all
EMs, the IMF projection of 2020 gross debt is 63.1 percent of GDP.

In other words, the country is far from threatened by a debt crisis. We have
secured the fiscal space that allows us to incur a higher deficit. That fiscal
space can be attributed to the passage of the bulk of the comprehensive tax
reforms before the pandemic.

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Constraints

But Philippine deficit spending also faces a legal constraint. One particular
reason why government could not spend more even if it wanted to is a
provision in the Constitution. Government needs to pass a supplemental
budget for additional resources to fight the pandemic.

But Article VI, Section 25, paragraph 4 of the Philippine Constitution

states: “A special appropriations bill shall specify the purpose for which it
is intended, and shall be supported by funds actually available as certified
by the National Treasurer, or to be raised by a corresponding revenue
proposed therein.” In short, the special appropriations cannot be financed
by borrowing but by reallocation of available funds or generation of new
revenue.

That puts government spending for the supplemental budget in a bind. On

the one hand, at a time of deep economic crisis, government cannot depend
on new revenues. On the other hand, the Constitution disallows borrowing
to finance the supplemental budget.

The prolonged pandemic (series of waves) together with uncertainty also

compels a strategy of preserving bullets or keeping the powder dry.
Government borrowing from the private sector, foreign sources and the
central bank cannot be infinite. Unsustainable borrowing is damaging.

Even monetary policy has its limits. When consumer and investor
confidence is shattered because of the fear of getting infected by the
coronavirus, the effectiveness of injecting liquidity and repressing interest
rates is greatly diminished.

The Bangko Sentral also has to contend with the rules imposed by its
charter. Monetization or printing money is subject to special and stringent
conditions.

Quality of Spending

Higher deficit spending should never be an excuse for waste and

inefficiency. The quality of the spending like having cost effectiveness or
delivering the bang for the buck should be a constraint to higher public
spending.

For the quality of spending matters, it is appropriate to assess the

expenditure proposals like the bill titled ARISE (Accelerated Recovery and
Investments Stimulus for the Economy). The amount involved in ARISE is
huge: PhP1.3 trillion. This dwarfs the Bayanihan 2 budget of PhP162

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billion. But ARISE contains wasteful and redundant spending, including
pork barrel insertions.

As an illustration, billions of pesos from ARISE will be used for rapid

antibody tests (RATs). RATs are not a substitute for the polymerase
reaction (PCR) test, the gold standard, to determine whether one is infected
by COVID-19. (Space constraint prevents us from detailing other issues
related to ARISE.)

A good stimulus bill is one that is not only bold and adequate. It must also
be well-designed and well-targeted. Specifically, the stimulus spending
must target the poor households and the unemployed or displaced workers.
After all, they are the ones who will use the subsidies for consumption, thus
helping boost aggregate demand.

A stimulus is likewise temporary, and the policy maker must know when to
unwind it.

Collective Action Problem

The main challenge we face to flatten the COVID-19 curve and facilitate
the economic recovery revolves around collective action. The specific
issues include:

• Politicization: political conflict and partisanship, polarization,

vendetta.
• Poor communications strategy and the spread of disinformation.
• Coordination failure and unclear accountabilities, proliferation of
fiefdoms.
• Policy incoherence or inconsistency: local government units (LGUs)
or agencies deviating from Department of Health’s policies and
guidelines (e.g., indiscriminate use of rapid antibody tests).
• A punitive approach.

The response to COVID-19 has been highly politicized. The closure of the
ABS-CBN franchise and the targeting of political adversaries like Vice
President Leni Robredo and the Left manifest the partisanship and
polarization. Unity, not division, is what we need during this emergency
period.

Poor communications and the spread of fake news (like the President’s
statement that gasoline can clean masks) undermine public compliance
with health protocols.

Policies and actions of government agencies contradict one another. For

example, the Department of Health is firm about the use of PCR tests to

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detect present infections, but some agencies and some LGUs
indiscriminately rely on RATs. LGUs by themselves have become small
kingdoms with their own rules. Having independent “czars” and having a
Presidential spokesperson contradict the DOH also complicate collective
action. All this results in policy incoherence.

A punitive approach or a militaristic response only heightens fear.

Changing behavior is best done through motivation and persuasion.

Never Waste a Crisis

Despite these problems, we see some significant gains. As Winston

Churchill said, never waste a crisis. COVID-19 has provided the impetus to
accelerate reforms on different fronts. Some of these are:

• Advancement of universal health care (UHC), particularly primary

healthcare.
• Consolidation and modernization of the public transportation system
and promotion of new modes like use of bicycles.
• Fast-tracking of interconnectivity reforms.
• Near completion of comprehensive tax reforms and other structural
reforms.
• Rollout of digital ID as tool for inclusive development.
• Improvement in rice productivity together with stabilization of rice
prices.

We hope that these gains and reforms can shape a better new normal. What
are the contours of a post-pandemic world, a better new normal?

One priority will be pandemic preparedness together with universal health

coverage anchored on primary health care. The health system must be
good at simultaneously doing individual-based and population-based
interventions. The desired system augments the health workforce, services
and facilities. It has to stockpile medicines, supplies, and equipment.

An urgent task is to recapitalize the Philippine Health Insurance

Corporation (Philhealth). Everyone sees is the need to reduce waste and
corruption. Strengthening the health technology assessment and introducing
technological innovations address waste and corruption. And they improve
the quality of services.

Another major concern is urban renewal. This encompasses many items,

and each component entails a set of reform measures. Consider the
following: better public transport, socialized housing, hygiene and
sanitation facilities, and green spaces.

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Having a safe and efficient public transport system means that society treat
it principally as a public, not private, good. Active public transport, too,
needs encouragement. National and local governments should build
bicycle lanes and pedestrian-friendly roads.

Both government and the private sector must invest in socialized,

affordable, and environmentally sustainable housing. This requires huge
resources.

Also pronounced is the need to balance urban and rural development and
scatter economic activities—from the centers to the peripheries. This
balancing and dispersal could avoid a future situation in which an
emergency or calamity in Metro Manila and urbanized Luzon would affect
almost 80 percent of the country’s GDP.

Another realization is the immediacy of digital connectivity for all and

deeper Internet penetration. The role of digital connectivity in the time of
the pandemic is most felt in the delivery of essential services and in
continuing productive activities. Health care at the primary level, online
education, and remote work require access to strong and uninterrupted
digital connection.

The pandemic has also forced the workplace and the education system to
adopt new models, standards and arrangements. The employers have to
give extra attention to the health and safety of workers. Similarly, the
workplace has to innovate to preserve social relations and enhance
productivity despite the constraints of physical distancing.

The education system has to find new ways to be resilient. Online teaching
or learning is a challenge. Given the technological constraints, this presents
more difficult challenges to ensure the quality of education. Giving
additional responsibilities to the children’s parents and having appropriate
online materials are new demands.

On agriculture, the whole of society—producers and consumers—have to

redefine food security. In the Philippine context, food security has
traditionally been associated with locally producing to the maximum the
needs of the population. Sadly, in the past, quantitative restrictions (QR) on
rice imports became the tool for food security. This had a perverse effect
of creating rice shortages and hence higher rice prices.

However, the lifting of the QR in 2019 has eased supply and has lowered
rice prices. To be sure, the RTL has adversely affected the rice farmers in
the short term. But then, the old QR regime failed the farmers; their over-
all welfare did not improve under the old rules. The new rules and the

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attendant resources from the tariff revenues that have replaced the QR
create conditions for efficiency and productivity.

In this context, food security should no longer be about trade protection.

Food security has to be defined differently. It is about making rice
consumption of the whole population affordable and accessible. It is about
promoting competitiveness, scale, and productivity, thus leading to higher
incomes for our farmers.

The pandemic has also highlighted the need to strengthen the capacity of
local governments. In particular, LGUs have to adopt a data-driven
strategy. LGUs need to become adept at collecting, analyzing, and
interpreting data. Responding to emergencies, which is a common
occurrence in the Philippines, is a key task for LGUs.

One favorable development is the increase in fiscal resources for LGUs,

arising from the Supreme Court ruling, known as the Mandanas ruling.
The ruling mandates national government to allocate a higher percentage of
revenues to the LGUs. In the face of absorptive capacity issues, the LGUs
must deepen their learning to allocate and distribute resources efficiently
and equitably.

Data-driven Strategy

Having a data-driven strategy thus gains urgency. This is the way to go, not
only for national government, but for local governments as well.
Incomplete or missing data have hampered the whole of government’s
response to COVID-19. The antiquated data systems or infrastructure, the
lack of access to information, and an undeveloped data culture have all
combined to the information problem.

Examples abound on how data-related problems have impeded the goal of

flattening the pandemic curve. To wit:

• Slow or delayed reporting of daily COVID-19 cases.

• Disorganized and fragmented medical records.
• Philhealth corruption.
• Exclusion of beneficiaries of cash transfers because of missing info.
• Delayed rollout of the national ID system.
• Non-functional community-based monitoring systems.

In sum, creating a better new normal requires fresh, precise and accessible
information. A data-driven strategy is a key ingredient in crafting and
implementing evidence-based policy.

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Addressing Inequality

The problems and solutions discussed above are related to the chronic issue
of inequality. Consolidating the reforms on health, education, employment,
public transportation, Internet connectivity, socialized and sustainable
housing, food security, and local government capacity, inter alia, will
prepare us in mitigating shocks and in reducing inequality.

These reforms are transformative, but they cannot be done overnight.

Reforms are generally incremental, but they all contribute to having social
inclusion and reducing inequality.

There will nevertheless be tough decisions for both the medium-term and
the long-term. Concretely, as we move towards the new normal, a point
will come that the stimulus has to unwind. That means narrowing the
deficit through a combination of tightening public spending and increasing
revenues or taxes.

As earlier said, higher deficit spending during a health and economic crisis
is necessary. But once the stimulus has achieved its objective of reviving
the economy, the increased borrowing and spending will be rolled back to
the normal level.

Yet, policy should no longer ignore the “black swan” (the rare, the
improbable, the uncertain event). The black swan has become more
frequent. Year in and year out, the Philippines confronts shocks and
calamities. Each crisis has almost irreparable consequences, especially for
the poor.

To brace for uncertainty, formulaic policies and interventions will not

work. They have to cover a range of actions, from the conservative to the
radical.

Heterodoxy

The black swan suggests that the conventional economic policies are
inadequate or even inappropriate. We should embrace economic
heterodoxy.

COVID-19 has hammered the last sharp nail in the neoliberal coffin.
Neoliberalism, the dogma of selfishness and unfettered markets, is dead.
(But in politics, economics, and religion, what is dead can be resurrected.)

COVID-19 has shown that even the most conservative or most neoliberal
governments have embraced policies that contradict the sacred principles of
unrestrained liberalization and deregulation.

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The example is how even the supposed fiscal hawks have accepted deficit
spending. The famous quotation attributed to disgraced US President
Richard Nixon is back: “We are all Keynesians now.” In 1971, Nixon
pursued massive deficit spending, making him a proud Keynesian even
though he was an extreme conservative.

Nixon’s deficit spending amounted to US$23 billion, equivalent only two

percent of the GDP. Currently, US deficit spending, under a more
reactionary President, is equivalent to 16 percent of GDP percent. (In the
Philippines, as stated previously, the deficit is just below 10 percent of
GDP.)

Soaring budget deficits scare the economists and everyone else. However,
a deep crisis has compelled politicians and technocrats to set aside dogma,
and embrace big, bold deficits.

The old model attached to efficient markets is likewise retreating in the

face of the war against COVID-19. The pandemic has disrupted or
destroyed markets. This necessitates a new approach that emphasizes the
role of institutions and collective action to address the market failures.

One example of how the black swan phenomenon has led to rethinking
models pertains to the idea of having supply “just in time.” In its place is
the “just in case” model, as articulated by Javier Solana, the former NATO
(North Atlantic Treaty Organization) Secretary General. “Just in case”
anticipates the possibility of a national disaster or emergency that has
unbearable costs to society.

Its implication on the health system is the stockpiling of essential supplies

and equipment. The security of supply is paramount, even if this means
trading off cost-efficiency or optimal allocation.

Maintaining an army suits the “just in case” model. On the surface, having
a large army is costly. Why maintain a large army at peacetime? Isn’t this
is a waste of resources?

But society recognizes that having a national army or having external

defense is a public good. Maintaining a large force even during a long
period of peace is unquestioned. The country must always be prepared “just
in case” war or invasion happens.

Flattening the COVID-19 curve has been likened to fighting a war. The
countries that at the outset have prepared for the pandemic war are the most
effective in containing the virus. From the start of the outbreak, they
already have put in place the adequate human resources, equipment, and
supplies.

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Arguably, one of the last bastions of neoliberalism is the central bank. But
even here, “the times they are a-changin’.” Take the case of the US Federal
Government’s radical stance. The Fed has made a turnaround on
conventional monetary policy by adopting a bias for “maximum
employment.”

For generations, central banking is focused on, if not obsessed with,

targeting inflation. Until now, the sacred duty of the central bank is to
fulfill its mandate of maintaining price stability. The new direction of the
US Fed is some sort of a sacrilege.

The US Fed’s review of monetary policy strategy, tools and

communications (August 2020) states the new bias of tolerating inflation
and maximizing employment. Specifically, the Fed must “be informed by
the assessments of the shortfalls of employment from its maximum level.”

The practical implication of the statement is that inflation expectation will

not necessarily result in a policy rate increase. The Fed will first address
the employment shortfalls, and will only act on inflation when it actually
climbs to a non-tolerable level.

Other central banks have taken notice. It is perhaps a matter of time before
they follow the Fed’s lead.

In other areas, unconventional monetary policies like quantitative easing or

even monetization and the more radical Modern Monetary Theory (MMT)
have become en vogue. (MMT argues that some governments can create
money as long as necessary without being burdened by debt, the only
constraint being inflation.) Some ideas like MMT are debatable, but the
point is that they have become part of the mainstream discussion.

The Philippines is not at the cutting edge of these momentous changes. But
circumstances move the country farther from dogma and towards the
direction of new thinking.

There you are. Bye-bye neoliberalism. Heterodoxy will define the future.
Hopefully, the future will be a better new normal.

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