Effect of the Global Financial Crisis to Enterprise Development

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Filomeno S. Sta. Ana III, Executive Director of the Action for Economic Reforms discusses the global recession and it's impact in the Philippines.

Filomeno S. Sta. Ana III, Executive Director of the Action for Economic Reforms discusses the global recession and it's impact in the Philippines.

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  • 1. Crisis and Crisis Global and National, Political and Economic Crises Filomeno S. Sta. Ana III Action for Economic Reforms
  • 2. Global Recession
    • Global Crisis: Green Shoots or Brown Weeds?
    • Green shoots argument: Recession seems to be bottoming out--rate of contraction has slowed down.
    • Other indicators: rise in commodity prices and stock prices; pick-up in electronics.
    • Fiscal stimuli in US. EU and other large economies like China have at least prevented a deeper slide.
  • 3. Global Recession
    • But preventing a worse situation is different from having a quick recovery. The fear of a long period of stagnation is real.
    • Further, we are not certain if the worse is over. Overconfidence may lead to backsliding, a lesson from the Great Depression.
    • Brown Weeds argument: high unemployment in the US (9.4 percent as of May 2009, the highest in 25 years), anemic retail sales and industrial production, weak housing, etc.
  • 4. Long road to recovery
    • Problem is insolvency, not liquidity.
    • Highly indebted consumers and high unemployment mean consumption won’t easily pick up. For the medium term, US can no longer depend on consumption and borrowing to boost growth.
    • Financial system is badly damaged.
    • Global imbalances have to be addressed--countries with high current account surpluses (e.g., China) and countries with large current account deficits have to make difficult adjustments.
  • 5. How the Global Crisis is Transmitted to the Philippine Economy
    • Weak investments, including capital flight.
    • Slowdown in Trade: weaker exports (and imports)
    • Weak trade and investments translate into job losses (jobs that provide wages) and deterioration of quality of jobs.
    • A fall in private-sector growth also transaltes into lower collection of revenues--and therefore less spending for essential services.
    • Slowdown in foreign exchange remittances of overseas Filipino workers: actual figures show either a flat growth or an insignificant growth, thus dampening consumption (driver of Philippine growth).
  • 6. Philippine economy
    • Philippine economic recovery, unfortunately, is dependent on global recovery.
    • Not enough measures have been taken to stimulate domestic demand. Fiscal stimulus is not felt.
  • 7. Philippine economy
    • Economic performance of 0.4 percent GDP growth for the 1st quarter of 2009 is on the verge of “technical recession.” The fact is there has been a contraction of growth on a quarter to quarter basis (negative growth, comparing 1st quarter of 2009 to 4th quarter of 2008). And the measly growth is below the annual population growth rate, which estimates ranging from 1.95 percent to 2.3 percent Low growth in developing countries (or emerging markets) should be cause for alarm. (Philippine authorities treats the almost 0 percent growth as “good news.”
  • 8. Philippine economy
    • Philippine fiscal stimulus is a myth--mainly to serve partisan politics. In fact, there was no vigorous spending (nay, under-spending) in the 1st quarter of 2009, which violates the very objective of a fiscal stimulus to immediately jumpstart the process of recovery.
    • For the medium term, a fiscal crisis is emerging, if not firmly addressed soon. The Philippines is suffering from low tax effort, mainly because of poor tax administration.
    • For the first quarter of 2009, tax effort (tax collection as proportion of GDP) fell to a historical low of 11.54 percent.
  • 9. Philippine economy
    • Problem is compounded by weaknesses in tax legislation: excise taxes on sin products are not properly indexed to inflation; fiscal incentives are too generous (worse, latest Congress bill is worse than existing law).
    • Main binding constraint: aside from weak revenues, governance and state failure.
    • Quality of institutions is also a determinant of long-term growth.
    • Philippine institutions have been badly damaged--Executive, Congress, judiciary, local governments, etc.
  • 10. Political Crisis
    • The House Con-Ass’s resolution is re-igniting mass upheavals, thus deepening the political crisis.
    • The political crisis aggravates the economic crisis.
    • At the same time, the economic crisis is feeding the political crisis.
  • 11. Conclusion
    • We face a hostile global and national environment for sustained growth as well as investor and consumer confidence.
    • An unfavorable macro environment hinders the growth of specific sectors, including social enterprises.
    • But opportunities also emerge in times of crises: the urgency of reforms, collective action for reforms, repositioning of firms, etc.