Lesson 1

GDP - Gross Domestic Product

 Total production of the country
 Amount from imports & exports
 Goods should be brought & sold in a market
 Market value of all finished goods and services produced within a country in a year

STOCK MARKET
 Companies issued shares and other securities for trading
 Bullish – rising share prices
 Bearish – falling share prices

NEGATIVE (deficit)
Stock market: bearish trend (falling share prices)
 Declining prices of the stocks as displayed in a stock market

Recessions vs Depression

Recessions - negative GDP

 GDP will only last its rate for 2 or 3 consecutive period
 Downward trend in the business cycle
 Decline of production and employment

Depressions – a condition where GDP is negative for longer period more than 3 years
 More severe; reduction of trade & capital movements, widespread of unemployment and industrial
production.

Impacts:
 Unstable monetary unit - decrease the value of Philippine currency
 Devaluation – decrease the value of PH peso
 Inflation- increase the price of commodities
 Decrease in spending/purchasing power
 Decrease in production - people refrain from buying/spending
 Increase in unemployment rate
 Decrease in government collection (taxes)
 Debt acquisition - lessen the value of our currency
 Increase in tax rate
 Credit crunch

BSP
 Reserve requirement – amount of money that bank possess w/c cannot lend out to its clients or investors.
 Prime rate – basis with regards to the computation on the interest rate on debt w/c is charge to clients
 Development – it will not stop, standby/stunted
 it will still continue to develop/establish improvement but using DEBT
Lesson 2

POSITIVE (surplus)
 Income exceeds the expenses
 Income > government expense
 Exports is higher than imports

Stock market: bullish trend/market

- Increasing trend in stock prices

STATUS OF THE ECONOMY

 Since it has a positive GDP, the economy is doing well

IMPACTS:
 Stable monetary unit - expected that the value of peso will appreciate or REEVALUATE – increasing the
Peso value – as to increase the value of money
 Deflation - decrease the price of basic commodities
 Increase in spending/purchasing power
 Increase in production - compelled the businesses to produce more since purchasing power increases
 Decrease in unemployment rate
 Improved standard of living
 Increase in government collection (taxes) - more people, more taxes
 Debt repayments - enough funds and start to pay debts
 More improvement/development -
 LAX Credit provision ( Lower reserve requirements, lower prime rate---as imposed by the BSP)

Lesson 3

THE POLITICAL ENVIRONMENT AS A DRIVER OF ECONOMIC DEVELOPMENT

PREVIOUS ADMINISTRATION VS CURRENT ADMINISTRATION

PREVIOUS ADMINISTRATION

DOMESTIC POLICY
 No Wang-wang policy
 Formation of the truth commission
 Executive orders
 Hourly broadcast of original Filipino musical compositions on radio
 Launch of official Presidential website
 PAGASA reorientation
 Education Reform
 Reproductive Health
ISSUES
 Metro Manila Traffic
 Quirino Grandstand Hostage Crisis
 Corona Impeachment Trial
 RH Law
 Pork Barrel Scam
 Super Typhoon Yolanda
 Mamasapano
 Mary Jane Veloso
Difficulties Experienced by the Citizens
 Increase in the Price of Rice
 Increase in Poverty
 Stunted Economic Development
 MONETARY POLICY: INFLATION TARGETING
 Is the BSP successful in controlling inflation?
NO, inflation soared high beyond the inflation target.

BSP - ensure inflation rate kept at a minimum to ensure economic

development and ensure the standard of living of citizen to be stabilize

CURRENT ADMINISTRATION

DOMESTIC POLICY
 Anti-drug campaign
 Capital punishment
 Mindanao Insurgency
 Terrorism
 Communist insurgency
 TRAIN law
ISSUES
 Human Rights
 Extra Judicial killings
 Comments
 Catholic Church
INFLATION RATE
 Is the BSP successful in controlling Inflation?
 YES,
 Stable currency
 PH peso (appreciated)
 Inflation kept at its minimum of 2%

Lesson 4

Growth and the Asian Experience

Theory of Economic Growth

 Traditionally labor and capital were introduced as the only variables determining the level and the growth of
output. Y = f (K, L).
 Land was assumed to be included within capital.
 Other factors were not considered until it was noted by Solow that there was a large residual factor that was
unexplained.
 Substantial time has been spent explaining this residual.
 This residual has been called total factor productivity (TFP) or sometimes multifactor productivity.
 TFP is very large in industrial countries, explaining as much or more than 50 percent of economic growth in
the postwar era.

Total Factor Productivity

Question: What factors are contained in the residual? Y = f (K, L, A)

o Such a list might include:
- the adoption of new technology,
- better educated workers,
- better management,
- better coordination within the organization,
- more efficient production techniques,
- better inventory management,
- better and cheaper distribution and marketing skills and organization.
 Testing Different Growth Theories
 Many different approaches have been devised to test these alternatives. In doing this, it is useful to
distinguish between embodied and disembodied technical progress (TFP).
 Embodied TFP can be measured by adjusting the factor inputs of labor and capital. Disembodied
TFP cannot – it has to go into the residual.

GROWTH THEORIES

1. Keynesian Theory/Harrod-Domar Model

2. Solow Model
3. Power Balance Theory
4. Structuralist Approaches
5. New Growth Theory

The Harrod-Domar Model

Dynamic version of a simple Keynesian model.

 Growth is dependent on the rate of capital formation and the efficiency of the use of capital (capital/output
ratio).
 Population growth can be added and it reduces the rate of growth ceteris paribus.
 Ceteris paribus is a Latin phrase that generally means "all other things being equal." In economics, it acts
as a shorthand indication of the effect one economic variable has on another, provided all other variables
remain the same.

The Solow Model

 It introduces diminishing returns to capital and focuses on the long run.

 Convergence to a steady state level of per capita income occurs despite differences in initial conditions.
 Total income grows at the same rate as the population.
 The higher the rate of saving, the higher the steady state level of per capita income.

Law of diminishing returns or principle of diminishing marginal productivity

o Is an economic law stating that if one input in the production of a commodity is increased while all other
inputs are held fixed, a point will eventually be reached at which additions of the input yield progressively
smaller, or diminishing, increases in output.

Example:
A farmer plows a specific area of land, adds more workers = lesser productivity = unless new processes
are instituted to increase productivity
Company- hires more workers – lesser productivity

 When we add technical progress to the Solow model in the form of more efficient workers, then we have
growth in per capita income at the same rate as the rate of growth in worker efficiency.
 There is still a steady state but it now relates to efficiency units of capital.

Power Balance Theory

 Emphasized exploitation of poor “southern” economies by the rich industrial “northern” economies.
 Deterioration of terms of trade of agricultural products in poor economies further aggravates the situation.
 The theory has generally been discredited.
Structuralist Approach

 The theory has generally been discredited.

 The structural approach was developed in the 1960s and 1970s by Hollis Chenery. Chenery was initially
trained as an engineer and this approach reflects his training.
 Structural approaches stress the shift in output among the sectors of the economy and the rigidities that hinder
them.
 A shifting balance between the three major sectors of the economy – agriculture, industry and services.
 Agriculture diminishes over time and industry increases. Productivity is higher in industry so higher growth
depends upon this shift.
 A stereotypical pattern of economic growth which has been observed in many countries.
 Initially, agriculture has a large share of output when the economy is at a low level of development. Share of
industry and services are small.
 As industrialization takes place, the share of agriculture declines and that of industry and services grow.

Two Sector Model of Growth

 The Lewis-Fei-Ranis model (LFR), named after the three economists that developed it, is a two-sector model
– a modern and a traditional sector.
 Resources move from the traditional to the modern sector and this spurs growth. More on this in chapters 4
and 5.
 The beauty of the LFR model is that it describes many of the characteristics of the Asian economies when
they were just beginning on the path to rapid development in the 1960s and 1970s.
 That is why it has become so popular among development economists studying Asia.

Solow Growth Model

• (1+ h) k (t+1) = (1- d) k (t) + s y (t)

• where k and y denote the per capita units of capital and output, respectively, i.e. k(t)= K(t)/P(t)
and y(t)=Y(t)/P(t).
• This fundamental Solow equation says that the amount of per capita capital in the current period depends upon
the per capita capital in the last period, the saving rate in the previous period and the rate of population growth.

Solow Model

 From the foregoing, it follows that as the economy moves to a steady state level of per capita capital stock
regardless of initial conditions.
 In the steady state, there is no deepening of capital and the amount of capital per capita remains unchanged
from period to period as does the level of per capita income. That is, there is no long run growth in per capita
income.
 Total income growth rate h is thus assumed to be the same as the rate of growth for population.
 Further, in the Solow model framework, the saving rate has no effect on the long run growth rate of per capita
output which is zero.
 However, the saving rate does affect the equilibrium level of per capita income.
 The higher the saving rate, the higher the steady state level of per capita income.

New Growth Theories

 New growth theories that go beyond Solow have been developed in the past decade.
 They stress the importance of externalities and the possibility of increasing returns to scale rather than the
decreasing returns to scale of the Solow model.
 The key to this is human capital formation.
 Higher per capita incomes tend to slow growth because of diminishing returns but higher endowments of
human capital tend to speed up growth.
 Returns to such investments may be increasing.
LESSON 5

Computation:

GDP__ = GDP per Person $ x Average Exchange Rate = REAL GDP per Person ₱
Population (per year) ( Yearly)

REAL GDP per Person ₱ ÷ 12 months = GDP per Person ₱ ÷ 26 days = GDP per Person ₱
(Yearly) (per month) (per Day)

FORMULAS:

GDP PER PERSON ($) = GDP / POPULATION

GDP PER PERSON (₱) PER YEAR = (GDP PER PERSON IN $) (AVERAGE EXCHANGE RATE)
GDP PER PERSON (₱) PER MONTH = GDP PER PERSON ( ₱) PER YEAR /12
GDP PER PERSON (₱) PER DAY = GDP PER PERSON (₱) PER MONTH / 26 DAYS

GROWTH OF GOVERNMENT AND ECONOMY

Composition of the Government:
 Representatives – elected politicians
 Bureaucrats – appointed by the elected representatives to run the government
 Leaders; managers
 Although these individuals maybe appointed by the president or members of Congress, they
have their own objectives
 Agencies of the government may grow because of the self-interested behavior of its employees.
- Means they perform very well so that they will be noticed by someone and become
popular which led to higher places.

EFFECT OF ECONOMIC GROWTH

 Improves the standard of living
How we measure standard of living?
- by looking the GDP and the real GDP per person
 Dependent on the self-interested behaviors of politician
 If politician is ambitious, he will do his best in order to owe the people and to get the
complement of the people.
REAL GDP per PERSON
 Tells us how much each worker can produce
 Tells us how many people (as a fraction to the total population) are working
- Real GDP per person becomes smaller if a huge person of the country or/ location is
not working
 lower real GDP - massive unemployment rate
 higher real GDP- majority of the people are working
 Real GDP per Capita is a basic indicator of living standards

Formula:
Real GDP per Person = GDP
Population
DETERMINANTS OF AVERAGE LABOR PRODUCTIVITY
 The skills and training of workers called human capital.
- human capital - If country wishes to improve productivity it has to develop human
resource
 The quantity and quality of physical capital – machines, equipment, and buildings
 Availability of land and other natural resources
 The sophistication of the technologies applied in production
Technology - speed up production and standardized the production of a certain
products
 the effectiveness of management and entrepreneurship
Entrepreneurs - People who create new economic enterprises
- establish businesses, as a result, they hire more workers
- more workers - increase productivity
- contribute through payment of taxes
- increase labor productivity
 the broad social and legal environment (the political and legal environment)

GOVERNMENT
 has a role to play in fostering improved productivity

Key contributions of the Government:

 provide a political and legal environment that encourages people to behave in economically
productive ways:
o to work hard
o save and invest wisely
o Acquire useful information and skills
o provide goods and services that the public demands
 Establishment of a well-defined property rights
- Refers to the protection of businesses/ entrepreneurs/ investors
 Political and legal conditions (instability- can be detrimental to economic growth)
- More business and investments will come into the country
 Protection in relation to product and services
 People will be compelled to establish business
How can we promote economic growth?
 policies to increase human capital (through free public education)
 policies that promote saving and investment
 policies that support research and development
Use population for economic growth
 focus on human capital improvement, the talent and skills because it effectively performed well
 increase production inefficiency

Selecting the best politicians, it will contribute economic growth to avoid economic difficulties;
improve economy
Why economy should improve?
- improve standard of living
- measure: if employees received their salaries (higher income)
 checking it out by the real GDP per person
LESSON 6

BACKGROUND

Debt accumulation has an established history in Philippine economic policy. Debt Financing was used to
alleviate persistent balance of payments problems in the 1950s and 1960s. Loans from international
institutions had figured prominently in the government’s development strategies. It is apparent that the
country's spiral into debt has plenty to do with the state's role in the economy and how it played that
role.

Overview: Philippine Debt Crisis

Imposition of Martial Law, Debt driven
growth; external development
Debt Build- financing, encouragement of foreign
1972-1975 up direct investments.

Continued external borrowing, public-

sector initiated investments in capital
intensive industries, lifting of Martial
1975-1983 Debt Crisis Law, debt-moratorium.

Lessened government expenditure,

tighter monetary and exchange rate
Debt policies, lessened distortions on
1983-1985 Management imports and exports.

Where Did Things Go Wrong?

 Accumulated debt spread from long term to short-term maturing debt with variable interest
rates, making it harder to manage.
 Large-scale development projects required massive funding.
 Officials tasked with auditing the use of the funds and the management of the economy had
their authority subverted by the executive.
 GOCCs added to the problem by themselves accumulating debt that the government had to
underwrite.

Other Factors

 Adverse economic conditions.

 the relative ease with which loans could be acquired
 concerns over the country's financial and political instability
On the Role of the State

Manifestations of
Embedded Autonomy

Custodian Conventional role of the state as regulator: the state regulates and restricts initiatives by
private actors. Preference is given to policing over promotion as policy.
Demiurge Traditional role of the state as producer: the state competes with private firms in the market
to achieve development objectives given insufficient capital.
Midwifery Apart from competing in market activity, states also offer incentives to market players to
achieve development goals.
Husbandry States undertake activities to complement the those of market actors in order to achieve
development goals.

The State as Custodian?

Argument: The Philippine Debt crisis can be explained in terms of the state’s role as custodian before
and after the crisis set in.
 The very nature of Martial Law, under which the country careened into crisis, resulted in a
strong regulatory role both over economic activity and over access to the state machinery.
 After the crisis set, the constraints facing the government disciplined its exercise of its
regulatory function (i.e., both over the market and over the state machinery).

1986

After People Power in 1986, the Philippines had a unique opportunity to address its debt problem.
Possibility: Refuse to acknowledge the debt accrued by the deposed regime.
Concern: What would be the political-economic implications of doing so, considering the revolution
unseated a demure government?
In the end, the administration chose to honor the country’s debt obligations.

Developing Country Dilemma

 Sovereign debt is usually denominated in dollars.

 Thus, an appreciating exchange rate means that it becomes easier for the government to service
its debts.
 Governments would want to do this in order to improve their credit ratings, thereby allowing
them to borrow more.
 However, this comes at a cost: the country’s goods become less competitive vis-a-vis the rest of
the world, which will eventually push down the real value of the exchange rate.
 Thus, the appreciating exchange rate need not be a good thing: it may mean the country is living
on borrowed time.
Philippine Debt Crisis

External Debt
- The portion of a country's debt that was borrowed from foreign lenders including
commercial banks, governments or international financial institutions. These loans,
including interest, must usually be paid in the currency in which the loan was made.
Internal debt
- is the part of the total debt in a country that is owed to lenders within the country. A
country occasionally needs to borrow from institutional and individual investors for
budgetary purposes.
National Debt
- Total outstanding borrowings of a central government comprising of internal (owing
to national creditors) and external (owing to foreign creditors) debt incurred in
financing its expenditure.
 A debt crisis deals with countries and their ability to repay borrowed funds. Therefore, it deals
with national economies, international loans and national budgeting. The definitions of "debt
crisis" have varied over time, with major institutions such as Standard and Poor's or the
International Monetary Fund (IMF) offering their own views on the matter. The most basic
definition that all agree on is that a debt crisis is when a national government cannot pay the
debt it owes and seeks, as a result, some form of assistance.

Major Risks of Debt Crisis:

1. High external debts are believed to have harmful effects to the economy.
2. The reputation of a country is also at stake when external debt is looked at and may discourage
investments to enter into the country.
3. The present foreign investors in the country would be expected to pull capital out of the
country.
4. It would lead to a decline in the Peso, making the debt burden (which is largely denominated in
dollars) more onerous.

 Generally, Government debt as a percent of GDP is used by investors to measure a country

ability to make future payments on its debt, thus affecting the country borrowing costs and
government bond yields.

HOW DOES THE PHILIPPINE GOVERNMENT PAY ITS EXTERNAL DEBT?

Debt Service-
- The cash that is required for a particular time period to cover the repayment of
interest and principal on a debt. Debt service is often calculated on a yearly basis.
Debt burden
- is the cost of servicing the public debt. Most of this debt burden is a really transfer
from one generation to another.
DEFICIT FINANCING
- a practice by the government of spending more than what it receives as revenue

Advantages:
 best use of resources
 helpful to developing countries where it is difficult to secure resources
through taxation
 additional purchasing power
Limitation:
o rise in prices
o increase money supply
o speculative activities
o adverse effect on savings
o less investment
o unequal distribution of income and wealth
o

LESSON 7

Country PRODUCTS

China electronics

Indonesia palm oil

Thailand vehicles

Philippines agriculture

Singapore electronics and electrical equipment

Malaysia palm oil

Vietnam garments

Cambodia garments

Brunei oil

PRODUCTION
LEVEL CLASSIFICATION COUNTRY CLASSIFICATION DESCRIPTION
level 1 agriculture third world countries POOR
level 2 manufacturing second world countries COMMUNIST
level 3 services first world countries RICH
Agriculture & Economic Growth

• Plays a key role in the process of economic development.

• Rich source of factor inputs to feed the growing labor force in the industrial sector and other
modern sectors.
• Major source of investment and capital formation.
• Provides foreign exchange for acquisition of foreign technology.
• Finally, agriculture provides a rich market for the output of the modern urban sector.
• The transition from a primarily rural based economy to an industrial economy requires a strong
agricultural sector.
• This is because a surplus from agriculture is needed to fuel investment in industry.

Decline of the Agriculture Sector

• Experience of a broad range of countries indicates that the relative importance of the agricultural
sector to the economy diminishes with growth over time.
• As income increases, share of agricultural value-added in GDP and as a source of unemployment
declines.

Agricultural Transformation in Asia

• The decline of the agricultural sector appeared to be directly proportional to overall rate of
economic growth.
• Agriculture’s share of output declined gradually from over 60% in the 1950s in most Asian
countries to less than 20% by the 1990s.
• Growth in agriculture was high in countries where overall growth was high and vice versa.
• The tendency for agricultural sector output to fall as a percent of total output was also the result
of the Engle curve effect.
- As income increases, a smaller than proportional amount of this increase in
income is spent on agricultural products.
• Rapid rises in productivity in agricultural sector such as through Green Revolution contributed
further to declining terms of trade.
• The combination of low-income elasticity of demand for agricultural products and sluggish
prices exerted strong pressure on resources to move out of the sector.
• This facilitated and accelerated the migration to urban areas where rapidly growing industrial
establishments required more workers.

Productivity in Agriculture

• Labor productivity is usually higher in agricultural sector than industry at the beginning of the
industrialization process.
• As industrialization moved forward, industrial productivity exceeded agricultural productivity,
which still remained high (Table 4.3).
 • This provided a mutually reinforcing positive impact on economic growth.
• In some countries, productivity came from expansion of land/irrigation and in others from
improved yields using better crop varieties (Table 4.4).

• The experience in Asia was different from that observed in other developing regions where
agricultural productivity often stagnated.
• Industrialization strategies in various Asian countries had been financed in many cases by internal
savings generated primarily from agriculture.
• One good example is Taiwan. In other cases, such as Korea, overseas borrowing augmented these
savings from agriculture.
• Agricultural productivity in Asia exceeds those of Latin America and Africa (Figure 4.2).
• Growth in per capita food production in Latin America and Near East fluctuated within 10 per cent
range; whilst Africa showed a steady decline over the last 20 years.
• In contrast, the growth of per capita food production in Asia shows a steady increase over time,
increasing by nearly 40 percent by the end of the period.
• The largest increments were achieved in the late 80s and early 90s.
• Hence, it’s astounding agricultural productivity presents a key link to the chain of developments
that led to Asia’s economic success.

Agricultural Development in Monsoon Asia

• Monsoon agriculture requires extensive labor input during planting and harvesting.
• Most agriculture was rain fed in the early part of the 20th century.
 • Farms were small and population densities high, conditions that were ideal for rice cultivation.
• Traditional agriculture was quite efficient, given its limitations.
• Irrigation and higher yielding varieties were the keys to transforming traditional agriculture and
raising productivity.
• This transformation was required to lift savings and to provide labor and investment for the
growing industrial sector.
• Adoption of more modern technology was slowed by the risk averse behavior of small farmers.
• Several new developments were key components in the transformation to higher yielding and
more progressive agriculture.
• These included adoption of higher yielding varieties, application of fertilizers, herbicides and
pesticides and greater use of irrigation.
• Other developments didn’t help much.
• These included changes in farm size and in land tenure.
• Far reaching land reform was difficult, if not impossible, and changes in tenancy arrangements
didn’t bring about any uniformly significant gains in productivity.
• Macroeconomic policies were generally supportive of agricultural development, and the sector
was not “squeezed” as it was in some other developing region.
• Nevertheless there were still taxes on the sector which were used to subsidize growth in other
sectors of the economy, particularly industry.

Lessons and Policy Issues in Asian Agriculture

• Subsidies to mechanization should be removed.
• Once this is done, mechanization should be left to the market, since its profitability and scope of
applicability will depend upon local conditions.
• Higher yielding varieties may have had an adverse effect on income distribution.
• Further development in genetic engineering are necessary to sustain growth in yields.
• These could involve breeding crops that are disease resistant, drought resistant, flood resistant
and need less fertilizer.
• It would also involve greater transfer of technology from industrial countries and development of
new varieties in Asia.
• Improved farm extension is needed to ensure that new developments in seeds, crop rotation and
new varieties can be spread to farmers efficiently and quickly.
• Greater emphasis on water conservation and improved productivity.
• Genetically modified organisms (GMOs) are becoming more important despite objections from
EU countries.
• Zero tillage an important new development
• Shift away from primary grains toward tree crops, horticulture, fishing and secondary food crops
should be encouraged.

Lessons and Policy Issues

• The demand for protection of agriculture varies inversely with the level of income and the share
of income going to agriculture.
• Developing countries must lobby more effectively for the lowering and eventual removal of these
tariff barriers.
Summary
• Importance of the agriculture sector to economic growth.
• Decline of the agricultural sector over time.
• Agricultural transformation in Asia and its high productivity levels.
• Lessons and policy implications learnt.