Aggregate productivity in the Philippine economy

Abstract

The Philippines has been the weakest growth performer among the ASEAN countries. This thesis combines both econometric techniques and a computable general equilibrium model to examine the reasons for the country's poor economic performance. Growth models are developed showing the country's declining productivity performance, not only relative to the average of the middle income countries, but also relative to the country's past record. These confirm that aggregate productivity growth was at its worst during the government investment boom period of the late 1970s and early 1980s. In addition, the cross country growth model shows that the investment rate in the Philippines was lower than the average of the middle income countries in contrast to the relatively higher investment rate in other ASEAN countries. During the periods when the country's growth performance was above the average of the middle income countries, the lower investment rate partially offset the contribution of other factors. The results from a multisectoral general equilibrium model, which incorporates imperfect competition and scale economies, suggest that aggregate productivity is low because of trade distortions and associated oligopolistic pricing behavior of protected firms. The sudden fall in productivity growth in the 1980s, however, is more closely associated with the misallocation of investment during the boom period. The sectoral pattem of investment, which has been influenced by the price and profit incentives perpetuated by government investment policies, has not been such as to foster the growth of industries that could generate the largest impacts on the economy from small changes in industry-level productivity. Using the same multisectoral framework, and adding risk premia to the external cost of capital such as might have been associated with the political instability of the early 1980s, the effects of capital flight are investigated. The results confirm that these not only reduce output in the short run but also total factor productivity. Finally, imposing on the growth model of the Philippine economy the assumption that no boom in investment occurred and that no associated decline in total factor productivity followed, it is possible to make a counterfactual simulation through the late 1980s. Real GDP in 1987 could have been higher than the level actually achieved by as much as 11 per cent.