By: Undersecretary Gil Beltran, Chief Economist, Department of Finance
According to the 2018 IMD World Competitiveness Report, the Philippines’s rating ranked to 50th in a sample of 63 economies, falling by as much as 9 ranks. The apparent crash was resoundingly loud setting off alarms. A wakeup call, isn’t it? But no sooner did the alarm set off did level-headed economic managers hit the snooze button. The press release by the IMD explains that the fall in the country’s ratings is explained by “decline in tourism and employment, the worsening public finances and a surge in concerns about the education system.” All these allegations are not backed up by actual data.
First, while IMD says tourism and employment has declined, the country’s employed persons rose 6.1% in January 2018 and unemployment rate dropped to 5.3%, the lowest since the country started compiling unemployment statistics. Also, international tourist arrivals to the Philippines rose by 16.1% to 1.4 million visitors for the period January-February 2018 compared to its level in the same period last year. In 2017, Philippine tourists reached an all-time high of 6.6 million.
Second, the claim that the state of public finance is worsening is simply laughable. The statement by the IMD reflects gross research incompetence. We won’t go to lengths to dispute such statement regarding our fiscal affairs but would like to refer to other third party assessments–credit rating agencies and the IMF. If the state of our public finance was really deteriorating, credit rating agencies would have taken notice and have downgraded us accordingly. But no, we’re still investment grade! Furthermore, the IMF has even supported our increasing the fiscal deficit headroom from 2% to 3% to accommodate our ambitious infrastructure program. Take that from a stingy institution that has always prescribed the bitter pill of austerity.
What the IMD sorely misses, however, is its failure to distinguish between short-term adjustments and long-term prospects and has mistaken the former for loss in competitiveness. For example, the 2017 current account surplus earned the country a rank of 31st in the current account measure but the deficit the following year resulted in a demerit in competitiveness so that the country’s now ranks 41st. Using the current account as a measure of competitiveness is like the misguided mercantilist thinking that the greater the surplus, the better it is for the economy. In the first place, it really makes no sense to rank economies based on the size of their current account balances relative to GDP if the objective is to assess competitiveness. The depreciation in the currency was also noted and was associated with more instability. But textbook economics teaches that a country’s competitiveness improves as its currency depreciates!
In short, the ratings methodology employed by IMD mechanically ranks cold numbers without understanding the dynamics of the economy. The result is that rankings tend to be volatile. Neither does it use benchmarks with which to gauge relative performance. Nevertheless, the dip in ranking is still a wakeup call, notwithstanding its being a false alarm in some respects. We do recognize the real issues such as red tape and insufficiency in infrastructure and we are working hard to address those. We are encouraged by the progress we have made even if these have not been captured by the ratings yet.