The Philippine economy has been protected by a firewall from being significantly affected by political events and noises for many years now. Despite confronting various issues involving
corruption allegations, armed conflict and political scandals, the country’s economy remained unscathed. In fact, from the Arroyo to the Aquino administration, and until today, the Philippines has been enjoying an annual GDP growth ranging from 4.5 percent to 7 percent. The firewall serves a good purpose, since any economic downturn will hurt so many people, particularly the poor and near poor. But what exactly sustains the firewall? Are there certain political issues that can cause its collapse?
Rational economic agents use all available information in the economy to make choices. Consumers look at the prices of commodities to determine if they should buy a particular good or if they should just keep their money in their pockets. Stock traders evaluate the business outlook of firms to identify which stocks are most lucrative to invest in. The list goes on. News about political events are part of this information that agents process. As such, producers and consumers have already factored in all the political noises around them in their decision-making. They consider such political occurrences as temporary, and thus adjust accordingly by incorporating this information in their expectations and actions.
Hence, when political instability generates a level of uncertainty so great that economic agents are unable to decide, the firewall that prevents political variables from adversely affecting economic variables begins to break. By raising the risks associated with economic decisions, uncertainty makes it costly for agents to act. Plans to consume or invest are thus put off until news of further developments circulate. This reduces aggregate demand, as well as physical and human capital investment. A telltale sign of the gradual weakening of the firewall is a downward trend in foreign direct investments. Exacerbating this will be capital flight even coming from domestic investors. This can actually result in a herd mentality, which may affect important economic variables such as prices and the exchange rate.
Another channel through which the firewall might break is when populist decisions affect the country’s fiscal balance. When widescale populist projects are implemented without careful and thorough consideration of how these programs will be funded, government efforts to trim down resulting fiscal deficits will eventually have grave repercussions on the economy. Fiscal and monetary policies that aim to raise revenues usually involve printing more money or increasing tax revenues. Thus, while populist projects are advocated in the interest of increasing social welfare, they inadvertently harm the economy, since the brunt of financing such programs are passed on to the public through higher prices and taxes.
On the other hand, intentionally altering the playing field to favor persons close to the administration (e.g., cronyism) diminishes productivity and discourages healthy competition. When institutions value connections more than merit or productive activity, people would have less motivation to improve their qualifications and output, and more incentive to seek political connections that they can benefit from. Altering the playing field to benefit particular persons or groups also impedes wealth creation. When businesses devote funds to obtain government favors, they expend resources that could have been allocated to productive activities. Moreover, such government favors usually involve rigging the market by erecting barriers to entry that restrict competition, or creating tariffs and quotas that protect domestic firms. These, in turn, decrease economic freedom.
Political events that erode trust and confidence in the government can also cause the firewall to collapse. If consumers believe that they can no longer rely on the government to function effectively or provide them their needed support, they will cut back on spending to create a larger cash safety net in preparation for a potential economic downturn. In extreme cases, distrust in the government may result in unrest and strikes, which can interfere with the normal operations of businesses, and reduce the number of hours worked by the employed population. The country had a glimpse of such political event when Ninoy Aquino was assassinated during Marcos’s time.
When political institutions continue to be eroded and/or destroyed such that it cannot function properly, it will affect government services. When government services crumble, there will be increased dissatisfaction, especially among the middle class. This can trigger massive protests, especially when other related and complementary issues crop up in the political arena.
The Philippine economy is fortunate to have a firewall as it allows us to continue enjoying high growth rates. However, the state should be aware that this firewall can break despite it being formidable in the beginning of the new administration. If this happens, all the economic benefits we are currently enjoying may dissipate in just a short time. The firewall has been built because of sound economic policy decisions but political events louder than mere noise may gradually crack it. The “writing on the wall” must be heeded. Eventually, when the state does not watch out, it may suddenly break.
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