That Gordian knot of challenges

It was a paradox of sort.

The World Economic Forum (WEF) at Davos, Switzerland has been suffering for years from an image problem. Forum attendees have described it as “out of touch, ineffective, and irrelevant” because the WEF has not done its homework of solving global problems for which it was established. Instead, it seems more adept at reframing serious issues than in actually working out their solutions. It subscribes to the stakeholder theory which asserts that an organization is accountable to all parts of society, but it has turned the tables on the consumers for them to solve the problems of poverty, inequality, climate change, and the environment rather than on governments and markets.

In 2019, for instance, CNBC reported that Dutch historian Rutger Bergman went viral in Davos “when he called out billionaires for tax avoidance.” His argument was irrefutable in that tax avoidance leads to inequality. Bergman felt that he was in a fire-fighters conference but no one was allowed to talk about water.

And this year’s Davos summit is no exception. The forum’s perennial celebration of globalization coincides with many economies increasingly becoming more protectionist, and multinationals going back to their home economies. Global value chains are becoming more localized.

And while this year’s Davos theme is all about the global collaboration village, the IMF’s Kristalina Georgieva pointed out that the global policymakers and business leaders are now facing that Gordian knot of challenges: global recession, climate change, inflation, high debt levels, and geo-political tensions. What make it even more complicated is the contemporary version of Cold War that could very well result in fragmentation “into rival economic blocks.” There is no sense reversing the benefits of post-Cold War economic integration.

To Georgieva, this would be a major collective policy error with nobody getting any better and more secure.

However, the Fund official herself admitted that global integration has not been a panacea to all. While globalization has seen the world’s output tripled in the last 80 years, and more than a billion escaped extreme poverty, the accompanying trade and technological gains have brought pains to some communities in terms of increased inequality and environmental decay. For these reasons, we have seen some decline in cross-border flows of both goods and capital as well as higher trade barriers.

The motivation is clearly corporate decision. Reports of higher corporate earnings are now derived more from re-shoring, on-shoring, and near-shoring of key operations. Thus, one of globalization’s offspring, outsourcing, now faces risks of contraction all because public policies have been implemented to ensure economic and national security, or synonymously, nationalism and populism.

Fragmentation could be very costly. The Fund’s computation of long-term cost varies from 0.2% of global output in a limited scenario to a high of 7% in a worst scenario, or, in the Fund’s estimate, equivalent to the combined annual output of Japan and Germany. With technological decoupling, some countries stand to lose around 12% of GDP. Even worse, the cost could rise further if the impact on migration, capital flows, and international cooperation is considered.

While the Philippines’ external link is admittedly limited relative to other countries in the Asia Pacific region, the fallout cannot be underestimated. The set of assumptions could become too ambitious.

This is the global context of the Philippines’ representation that it is poised to grow by the targeted 6.5% this year even as “there are signs” that growth could rise to as much as 7%. In his conversation with the Fund’s Georgieva, President Bongbong Marcos was reported to have underscored the country’s strong macroeconomic fundamentals, fiscal discipline, structural reforms, and liberalization of key economic sectors. It was correct for him to have linked these to the economy’s ability to roll with the negative shocks due to the pandemic and economic recession. It was doubly correct to point out that these factors were behind the country’s quick economic recovery.

But while there was really no global audience to speak of, the President should have concluded his discussion with potential business in the country in renewable energy, agro-processing, transportation, infrastructure development, and several public-private partnerships in the pipeline.

Instead, the President and some of his economic managers went on trumpeting the Maharlika Investment Fund, an idea that is still in the legislative womb, and one that is anchored on existing resources of government. In short, there is no new money. That being the case, sourcing the money from the Land Bank of the Philippines, the Development Bank of the Philippines, the Bangko Sentral ng Pilipinas (BSP), PAGCOR (the Philippine Amusement and Gaming Corp.) and other government-owned and -controlled corporations, would necessitate additional taxes or additional borrowings to cover for the foregone revenues from these sources. No way could this fund generate additional income to improve fiscal sustainability.

Pursuing infrastructure projects does not require an investment fund. All we need to do is to put to good use the 2023 budget minus all the fat, and wisely leverage on public-private partnerships whether existing or in the pipeline.

The Philippines is indeed credited with having achieved consecutive, positive economic growth from 1999 through 2019. But this success did not involve any wealth fund or investment fund even as our external payments position showed some significant gains between those years. There was no exotic tweak of public policy, whether monetary, fiscal, trade, or energy but a simple vanilla of competence and hard work focused on fundamentals, stability of prices, and the financial system, debt and fiscal sustainability, leverage on public-private partnership, and concessional loans.

Ironically, the Maharlika Investment Fund trumps all these old reliable tenets of public governance and economic management.

It should not surprise us that if this proposed vehicle of portfolio diversification gets through in the early part of this year, the downgrading of economic growth for 2023 as announced by various international financial institutions and research outfits might become self-fulfilling.

It all began with the country’s economic managers who announced in December 2022 that the Philippines was looking at lower growth of 6-7% from the original target of 6.5-8% on account of global headwinds this year. Following this, the ASEAN+3 Macroeconomic Research Office (AMRO) this January trimmed its corresponding growth outlook from 6.3% to 6.2%. Earlier, the Asian Development Bank (ADB) projected Philippine real GDP growth at 6% from an original forecast of 6.3%. The World Bank’s recent assessment indicated that the Philippine economy “is expected to lose momentum in 2023” from 5.8% to 5.7% due to lower consumer demand, high inflation, and high interest rates.

On the part of the IMF, Georgieva’s comment that what the current administration has done is “quite commendable” squares off with the country’s expected slowdown from 6.5% to 5% for 2023 as contained in the public information notice at the November conclusion of Article IV consultation. She must be attributing this to the Gordian knot of challenges that was called at the time as “unsettled conditions in major advanced economies” overshadowing the positive outlook.

Finally, one could relate these less optimistic macroeconomic prospects with what it means to the banking sector in the Philippines. Fitch Ratings expects asset quality across the banking systems in the ASEAN region, including the Philippines, to weaken due policy tightening by central banks. As a result, it is expected that profit growth could be dampened or even delay the post-pandemic rebuilding of capital buffers. With the BSP’s significant adjustments in the overnight rate, the fallout could be substantial without a corresponding decline in leverage. Fitch continues to rate the country’s outlook at negative.

The point is to recall that King Midas’ Gordian knot would be impossible to untie, and it could waste so much time figuring out how. But the Alexandrian solution of a simple sword swipe may not work in this fragmenting global village. We might need to go back to the fundamentals and even if incremental progress is made, we avoid silver bullets that solve nothing.”

Diwa C. Guinigundo is the former deputy governor for the Monetary and Economics Sector, the Bangko Sentral ng Pilipinas (BSP). He served the BSP for 41 years. In 2001-2003, he was alternate executive director at the International Monetary Fund in Washington, DC. He is the senior pastor of the Fullness of Christ International Ministries in Mandaluyong.