Rising Growth, Declining Investment: The Puzzle Of The Philippines Breaking The “Low-Capital-Stock” Equilibrium

Abstract

The Filipino economy is open to trade and capital inflows, and since 2002, has grown fast. Over the last 10 years, however, domestic investment, while stagnant in real terms, has shrunk as a share of GDP. In an open and growing economy, why the decline? Three reasons explain the puzzle. First, the public sector-constrained by fiscal pressures-cannot afford expanding its investment at GDP growth rates. Second, the capital-intensive private sector-discouraged by insufficient public investment and a high cost of inputs-does not find it convenient to raise investment at the economy's pace. Third, the fast-growing businesses in the service sector do not need to rapidly increase investment to enjoy rising profits. Yet, the economy keeps growing; and this is because its least protected sectors-the informal labor market and the non-capital-intensive activities-stimulate demand and drive supply. On the demand-side, massive labor migration results in remittances that fuel consumption-led-growth. On the supply-side, free from rent-capturing regulations, a few non-capital-intensive manufactures and services boost exports. The economic system is in equilibrium at a low-level of capital stock, where all economic agents have no incentive to unilaterally increase investment and the first-mover bears shortterm costs. As a consequence, growth is slower and less inclusive than it could be. To make it speedier and more sustainable, and to reduce unemployment and poverty, the economy needs to move to a "high-capital-stock" equilibrium-attainable through better-performing ecozones, a competitive exchange rate, greater Government revenues, and fewer élite-capturing regulations.

Financial Centres Index and GDP Growth

“…There is no unique and prescribed route for growth, and countries can reach a high level of economic growth rate by adopting different and even conflicting policies. Because of this, many factors have been put forward as main drivers of economic growth including: (a) culture and religion (Sala-i-Martin, 1997); (b) good luck (Easterly, Kremer, Pritchett, & Summers, 1993); (c) foreign direct investment (FDI) (Lucas Jr, 1993;Romer, 1993;Carkovic & Levine, 2002;Chauffour & Hoekman, 2013); (d) trade liberalization (Sachs, Warner, Aslund & Fischer 1995;Rodriguez & Rodrik, 2001;Barro & Sala-i-Martin, 2004); (e) financial openness (Francois & Schuknecht, 1999); (f) services trade (Karam & Zaki, 2015); (g) international shocks (Rand &Tarp, 2002;Didier, Hevia, & Schmukler, 2012;Poshakwale & Ganguly, 2015); (h) institutional factors and weak institutions (Nelson, 2007;Bocchi, 2008); (i) oil prices (Hamilton, 1988;Zhang, 2008); (j) energy consumption (Lee, 2006;Belloumi, 2009); (k) nuclear energy (Aslan & Ç am, 2013); (l) sovereign debt (Reinhart & Rogoff, 2010;Lof & Malinen, 2014); and (m) electricity consumption (Yuan, Kang, Zhao, & Hu, 2008). For the last several decades financial development has gained importance, and its effect on economic growth (King & Levine, 1993;Al-Yousif, 2002;Hur, Raj, & Riyanto, 2006;Shahbaz, 2009;Lartey, 2010;Zhang, Wang, & Wang, 2012;Barajas, Chami, & Yousefi, 2013;Shahbaz & www.ccsenet.org/ijef International Journal of Economics and Finance Vol.…”