I am not an economist. However, for the last 20 or so years, my passion has been in management and technology, and along the way, I have written over a thousand articles and talks on making management and technology more understandable to everyone. Over the last few months, I have heard a lot of discussions about the economy, and I sincerely feel some of them were knocking on the wrong direction. I would like to humbly present my own understanding and simplification, for those of you who may want to understand a little bit of what I believe is a very crucial point in our nation’s development.
I might be oversimplifying certain things, but hopefully this analysis will give a better idea of what I believe we should focus on.
GDP and GDP per capita.
GDP or Gross Domestic Product refers to all the goods and services produced within the nation in a given year. This is one of the standard by which a nation’s economy is gauged vis a vis how it is performing against its neighbors.
For the periods from 1980 to 2009, the country’s GDP grew from 32 billion dollars to 158 billion dollars. That’s five times! On paper, that looks good. But wait a minute! It’s not good, because during that period of time, we also almost doubled our population, from 48 million to over 92 million in 2009. That means that while output grew almost five times, there were twice as many people to share or output that, so at the end, per person, you are only about 2.5 times better off!
If you glean the country’s per capita GDP, you will note that our GDP (adjusted for purchasing power parity or PPP) actually grew from $1247 per capita in 1980 to $3437 in 2009. That’s only about 2.7 times in almost 30 years.
That might seems impressive until you see what China has accomplished. For the period of 1980 to 2009, China grew GDP from $309 billion to $4.757 trillion. That’s a growth of about 15 times. But it gets even better because in that period of time, their population grew from around 987 million to 1.334 billion. That’s a growth of only 35% over 30 or so years.
If you can grow your total faster than the people you are dividing it into, then that means that each person can, on average, get more, and in this case, it shows. That translates into a per capita GDP of China that went up from $251 to $6,546 today.
So while we might tap our shoulder that on average, we are 2.7 times better off in 30 years, the average Chinese was 26 times better off in the same period of time. That’s close to a 10 times better performance.. On another front, you can say that while we were five times better off than the Chinese in 1980, they are now almost twice better off on average than us today.
Our score is terrible, but can you imagine if our population had grown only at the same rate as China, we would be almost 4 times better off, instead of just about 2.7 times?
A Corporate Dissection.
If the country were a company, how would you dissect it? As a company, what is important for a CEO to understand is that what is the criteria or benchmark that matters? Is it sales? Is it profits? Or is it revenue or profit per employee? There have been many postulates that have been put forward that more people are good. Among the debunked theories was Mao Tse Tung’s attempt to increase the population radically during the 1950s in his attempt to raise millions for the army. He probably had visions of millions of feet overrunning the enemy’s territory. In the period of China from 1950 to 1980, population almost doubled, as it did in the Philippines when we went from 1980 to 2010. He figured not a lot of countries could raise or defeat a multi million strong army, but we know now that does not hold water. As recently as a few years ago, tens of thousands of US troops defeated Iraq’s army that was probably over 20 times as many with modern weapons and technology.
Talking merely of sales or number of employees is meaningless when you figure that there are many companies in the Philippines with 500 employees whose sales may actually not even reach some American companies with only 20 employees. And while a lot has been made that China is now poised to become the second largest economic power just overtaking Japan, it is still meaningless to the average Chinese since the average Japanese is still at least 10 times better off than the average Chinese.
The road to take obviously is that while increasing sales is good, revenue per employee has to increase as well. In short, the yardstick is how much you can pull people up in their standard of living while minimizing your increase in headcount. It is always good to add employees, but you don’t make the company better off in five years if in that period you double your sales and double your headcount. The average would still be the same.
By the same token, I always believe that if you have a bad and unskilled sales person, the remedy is to replace that person with skilled and effective sales person. You don’t become better off by hiring another 9 unskilled sales persons. In fact, you might just simply increase your cost and your problems.
The argument is not whether the Philippines should grow its population by 1.5% or 2% or 2.5%. As a company, I would not mind growing headcount by 30% every year, if I can train and equip them to double sales! But as the army theory proves, headcount is only as good as well as long as you can train them, and provide them the proper equipment and skills to be productive. The worst army is one with so many soldiers, that all the budget is exhausted just feeding them, that there is no more money to buy guns, ammunitions or proper uniforms, which is where our economy is.
Obviously, headcount still matter and you can only push productivity so much. Eventually, no matter how smart the US is, they will be challenged because if they stay at 300 million, then they will be overtaken by China which has 1.35 billion because then the average Chinese needs only to be 25% as good before China’s totals eclipses theirs, but then again, Norway may never be a superpower since they still have only less than 5 million people, but definitely their people enjoy some of the highest standards of living in the world.
Let us not be obsessed with GDP, just like some companies are only obsessed with sales growth or absolute sales numbers even if they have to spend more to get that sales. WE should grow our headcount only as fast as we can properly train and equip. We should focus on productivity, and technology, and educational training to enable our people to compete with the rest. Mere numbers will not count. What matters is per capita wealth. Which goes to our next topic – we should find ways to increase investments!
Investments and Savings
This is another critical keyword. The reason why the Philippines is lagging behind is right inside its balance sheet. If you know a company that keeps growing only its sales by single digits, because it invests all it has on sustaining increasing headcount and nothing left to put into in technology, infrastructure, or education to increase its productivity, then this company will not take off. The company that will thrive is the company that knows if you only give hammer and nails to a person he can make one table a day. If it wishes to increase its output to 15 tables, it can hire 15 people, and you have 15 tables, or you can invest in equipment and training so that maybe only 2 people can produce those 15 tables. As an analyst it is not too difficult to see that the second company can probably fare better on the long term than the first one, and their products are more consistent, and appreciated.
Which is what we sorely lack - investments. Whether it is foreign direct investments or local investments. In FDI ( foreign direct investments) we are way short. From the periods of 2001 to 2008, China garnered over $500 billion in investment. In the same period, Vietnam had $36 billion, while the Philippines had a scant $12 billion. Which means that while China has 15 times our people, they got over 40 times more investments.
A study says that because of these investments, China has 10 times the productive capacity than what their people are now buying. We’re here? We import, because we cannot even produce enough for our own use. Which is why China continues to grow fast, and will continue to do so, while our future prospects is still mired in question marks. Send more people overseas so that they will send money so that we can have money to buy imports?
For local investments, we are also lagging behind. And that is because of our low savings. When a Filipino earns $1, he spends over 95 cents of it, and that’s why the household savings rate normally is below 5 percent. When a Chinese earns $1, he only spends less than 70 cents, and therefore the 30 or so percent goes to the bank. The bank can aggregate that money, and make it available to business for them to invest.
There is another reason why our investments are low. What little is saved is not lent to businesses, but to government who borrows to cover the deficit. As a consequence, you see a structural problem – in 2008, Consumption is over 70% of the country’s GDP, while investments is only 14.2% of GDP. In contrast, China’s GDP is 42% investments, while India is 31% investments. Even Thailand is over 25%.
This lackadaisical attitude towards investments permeates our whole bureaucracy. They continue to hold lip service to its importance, but the funds to promote it, and the legislation to support it is long in coming. A candidate for president probably spends more in one campaign to promote himself than the government spends to promote investments in a whole year. The Cebu Investment Promotion center despite its tangible results continues to be bugged with budgetary problems, and gets a miniscule percentage of budgets. And they are already the best in the LGU lot. Other LGUs spend way less. You know what happens to a company that says sales is important, but spends less than 1% of sales for sales and marketing? It gets clobbered in the marketplace. Last May, I attended the Korea-ASEAN CEO Summit. There were over 2,000 top executives in attendance. The leaders of Korea, Thailand, Indonesia, Cambodia, Singapore, Malaysia and Vietnam all took turns to take that opportunity to pitch their country. Our leader begged off from her speaking slot to meet a few select private businesses. Another opportunity lost.
You know what happened? When a dollar is spent on investment, there are ripple effects as this provides jobs and returns in the subsequent years. When a dollar is consumed, that is normally the end of it, and none shows up afterwards. Lacking in investments, we lack the businesses to provide jobs, which therefore means that we don’t have the establishments that will hire. So even if close to a million of our people migrate overseas every year to look for jobs, we still have a significant unemployment and underemployment. What little is earned or remitted from overseas is spent on consumption.
I know investments create competition, and as a businessman, I have to think twice. But after seeing so many countries advance, I believe we have to believe that it is better to share the ocean with competitors rather than have a small pond all by yourself.
What is the remedy? Investments and more investments. It’s not too late, we need money, and lots of it. It is a little bit too late to lament or stop the rain for the next 30 minutes, if the water level has reached already the second floor of the house. We understand that we should be producing less children but then we have already overproduced by the millions. We need high horsepower pumps, and lots of them, because there is so much water to extract and pump out. Among our 92 million people, over 30 million of them are less than 20 years old, and they will expect to be properly educated, trained, and given opportunities to work when they are ready. This is a huge number – 50% more than the population of Taiwan or Australia, and probably equal to the full population of Malaysia or Canada. There are already over 10 million of us overseas and we cannot expect to export another 20 million of our people because we have no factories or infrastructure to give them jobs. China may have overproduced babies in the 60s and 70s, but these were the people who propelled their economic miracle in the 90s and beyond, mainly because there were investments, and opportunities, and they were properly educated and trained for that boom. We should do likewise.