The Philippine Q3 2025 “4.0% GDP Shock” That Wasn’t

 

There is enormous inertia — a tyranny of the status quo — in private and especially governmental arrangements. Only a crisis — actual or perceived — produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes politically inevitable—Milton Friedman  

In this issue

The Philippine Q3 2025 “4.0% GDP Shock” That Wasn’t

I. Q3 GDP Shock: A Collapse Few Saw Coming; The Loose Cauldron of Policy Support

II. Why Then the Surprise?

III. The Echo Chamber: Forecasting as Optimism Theater

IV. Statistics ≠ Economics: The Public’s Misguided Faith

V. Ground Truth: SEVN as a Proxy — Retail Reality vs. GDP Fiction

VI. The Consumer Slump is Structural, Not Episodic; Hunger as a Better Predictor; CPI Is Not the Whole Story

VII. So What Happened to Q3 GDP?

VIII. Household Per Capita: The Downtrend

IX. The Real Q3 2025 GDP Story: Consumer Slowdown

X. Government Spending Didn’t Collapse — It Held Up Amid Scandal; Public Construction Implosion

XI. External Sector: Trump Tariffs’ Exports Front-Loaded, Imports Slowing

XII. Corruption Is the Symptom; Policy Induced Malinvestment Is the Disease

XIII. Increasing Influence of Public Spending in the Economy

XIV. Crowding Out, Malinvestment, and the Debt Time Bomb

XV. Statistical Mirage: Base Effects and the GDP Deflator

XVI. Testing Support: Fragility in the Data, Institutional Silence

XVII. Overstating GDP via Understating the CPI

XVIII. Real Estate as a Case Study: GDP vs. Corporate Reality

XIX. Calamities and GDP: Human Tragedy vs. Statistical Resilience

XX. Calamities as a Convenient Political Explanation and Bastiat’s Broken Window Fallacy

XXI. Expanding Marcos-nomics: State of Calamity as Fiscal Stimulus

XXII. More Easing? The Rate-Cut Expectations Game

XXIII. A Fiscal Shock in the Making, Black Swan Dynamics

XXIV. Conclusion: Crisis as the Only Reform 

The Philippine Q3 2025 “4.0% GDP Shock” That Wasn’t 

Behind the typhoon-and-scandal headlines lies the real story: a shocked consensus, overstated aggregates, expanded stimulus, and a political economy running on malinvestment.

I. Q3 GDP Shock: A Collapse Few Saw Coming; The Loose Cauldron of Policy Support 

The Philippine government announced that Q3 GDP growth slumped to a mere 4%, the slowest pace since the pandemic recession. This came as a ‘shock’ to mainstream forecasters, who had projected a modest deceleration—not a plunge. 

Statistics must never be viewed in isolation. This GDP print must be seen in context. Q3 unfolded amid a deepening BSP easing cycle—six rate cuts (with a seventh in October or Q4), two RRR reductions, and a doubling of deposit insurance coverage. 

This stimulus-driven environment was reinforced by all-time-high bank lending, particularly in consumer credit, even as employment—though slightly weaker—remained near full employment levels. 

In short, Q3 growth occurred under the most accommodative financial and fiscal conditions in years—a cauldron of policy backstops. 

II. Why Then the Surprise? 

Forecasting errors were not only widespread—they were flagrant. 

Reuters called the result “shocking,” citing a corruption scandal linked to infrastructure projects that hammered both consumer and investor confidence. The report noted that growth came in “well below the 5.2% forecast in a Reuters poll and significantly weaker than the 5.5% expansion in the previous quarter.” 

BusinessWorld’s survey of 18 economists yielded a median forecast of 5.3%.

Philstar’s poll of six economists projected 5.45%, barely below Q2’s 5.5%. 

A 50-bps drop was labeled a ‘slowdown’? Really? 

That’s not analysis—it’s narrative management. 

Why such a brazen forecasting error? 

III. The Echo Chamber: Forecasting as Optimism Theater 

The DBM chief claimed that Q4 growth would “normalize,” insisting that the 5.5–6.5% full-year target “remains attainable.” 

Implicit in that projection was a soft but stable Q3—a forecast that proved disastrously optimistic. 

This consensus blindness mirrors past failures: the Q1 2020 COVID shock and the 2022 inflation spike. 

This isn’t ideological—it’s institutional. Forecasts aren’t tools for analysis; they are marketing vehicles for official optimism. Economic statistics are not used to diagnose, but to promote and reassure. 

Hence the futility of “pin-the-tail-on-the-donkey” forecasting: a guessing game played on deeply flawed metrics. 

IV. Statistics ≠ Economics: The Public’s Misguided Faith 

Statistics is NOT economics. 

Despite repeated misses, the public continues to cling to mainstream forecasts. They fail to see the incentive mismatch—institutions seek fees, commissions, and access, while individuals seek returns. 

Agency problems, asymmetric information, and lack of skin in the game define this relationship—core realities that mainstream commentary refuses to admit. 

V. Ground Truth: SEVN as a Proxy — Retail Reality vs. GDP Fiction

Figure 1 

Take Philippine Seven Corp. [PSE: SEVN]. In Q3: 

• Revenue rose just 3.8% YoY, its weakest since Q1 2021.
• Same-store sales contracted 3.9%, the worst since the pandemic.
• Store count rose 8.6%, yet total sales fell—signaling demand erosion. 

This downtrend, persisting since 2022, mirrors the slowdown in real retail and household consumption GDP, which posted 5.1% and 4.09% in Q3, respectively. (Figure 1, topmost and middle windows) 

Yet the gap between SEVN’s data and official GDP implies potential overestimation in national accounts. 

If major retail chains show a sustained slowdown or outright contraction, then headline consumption growth of 4–5% either overstates economic reality—or implies that GDP should be even weaker than reported. 

These trend declines offer a structural lens into the economy’s underlying deterioration. 

VI. The Consumer Slump is Structural, Not Episodic; Hunger as a Better Predictor; CPI Is Not the Whole Story

The consumer slowdown did not emerge from the corruption scandal or recent natural calamities (earthquakes and typhoons)—it preceded both. The underlying weakness has long been visible to anyone looking beyond the official narrative. 

While economists missed the turn, sentiment data didn’t. 

The SWS hunger survey—a proxy for household stress—proved a far better leading indicator. Its late-September spike revealed deepening hardship among lower- and middle-income Filipinos—mirroring the Q3 GDP plunge. (Figure 1, lowest graph) 

Like SEVN’s revenue and the deceleration in consumption and retail GDP, hunger is not an anomaly—it’s a trend. One that has persisted since the pandemic and now appears to be accelerating.

Figure 2

With CPI steady at 1.4% for two consecutive quarters—assuming the number’s accuracy—the malaise clearly extends beyond price pressures. 

The hunger dilemma reflects deeper economic deterioration: slowing jobs, stagnant wages, weak investments, falling earnings, declining productivity, and eroding savings. (Figure 2, topmost image) 

This is the institutional blind spot—prioritizing political and commercial relationships over truth. 

VII. So What Happened to Q3 GDP? 

Aside from back-to-back typhoons, officials attributed the unexpected slowdown to concerns over the integrity of public spending and further erosion of investor sentiment. 

And it was not just investors. According to Philstar, the DEPDEV (Department of Economy, Planning, and Development) chief said consumer confidence has also been hit by the flood control probes, with many households postponing planned purchases. 

But unless there has been a call for nationwide civil disobedience (à la Gandhi or Etienne de La Boétie), why should people’s daily consumption habits suddenly be affected by politics? 

The reality is more complex. Universal commercial banks’ household loan portfolios surged 23.5% in Q3 2025—marking the 13th consecutive quarter of 20%+ growth. If households weren’t spending, what were they doing with interest-bearing loans? Investing? Speculating? Or simply refinancing old debt? (Figure 2, middle chart) 

VIII. Household Per Capita: The Downtrend 

Meanwhile, real household per capita consumption grew just 3.2%, its lowest since the BSP-sponsored recovery in Q2 2021. This wasn’t an anomaly—it reflected a downtrend in household spending growth since Q1 2022. (Figure 2, lowest visual) 

In short, the corruption scandal was not the root cause but an aggravating circumstance layered atop an existing structural slowdown. 

IX. The Real Q3 2025 GDP Story: Consumer Slowdown

Let us look at the real Q3 2025 expenditure trend, and how it compares with recent periods. 

Q3 2025 (4% GDP):

• Household spending: +4.1%
• Government spending: +5.8%
• Construction spending: –0.5%
• Gross capital formation: –2.8%
•  Exports: +7%
• Imports: +2.6%

Q2 2025 (5.5% GDP): 

• Household spending: +5.3%
•  Government spending: +8.7%
• Capital formation: +1.2%
• Construction: +0.9%
• Exports and imports: +4.7%, +3.5%

Q3 2024 (5.2% GDP): 

• Household spending: +5.2% 
• Government spending: +5%
• Capital formation: +12.8%
• Construction: +9%
• Exports and imports: –1.3%, +6.5%

X. Government Spending Didn’t Collapse — It Held Up Amid Scandal; Public Construction Implosion 

Despite the corruption scandal, government consumption remained positive and was even higher in Q3 2025 than in Q3 2024. This alone undermines the narrative that the GDP slump was simply "sentiment shock."

Figure 3

Government construction plummeted 26.6%, matching the pandemic lockdown era of Q3 2020. This single line item pulled construction GDP into a mild –0.5% decline. (Figure 3, topmost pane) 

But buried beneath the headline, private construction was strong:

• Private corporate construction: +14.4%
• Household construction: +13.3%

These robust figures cushioned the damage from the government crash.

Absent private-sector strength, construction GDP would have mirrored the government collapse. 

Government construction also contracted –8.2% in Q2, reflecting procurement restrictions during the midterm election ban. 

As we already noted last September: (bold original) 

"Many large firms are structurally tied to public projects, and the economy’s current momentum leans heavily on credit-fueled activity rather than organic productivity."

"Curtailing infrastructure outlays, even temporarily, risks puncturing GDP optics and exposing the private sector’s underlying weakness." 

The Q3 data has now validated this. 

A large network of sectors tied to public works absorbed the first-round impact—and that ‘shock’ bled into already stressed consumers. 

XI. External Sector: Trump Tariffs’ Exports Front-Loaded, Imports Slowing 

Exports rose +7% in Q3 2025, boosted by front-loading ahead of Trump tariffs. 

Imports slowed to +2.6%, the weakest pace in recent periods, reflecting consumer retrenchment. 

This divergence highlights how external momentum was artificially timed, while domestic demand faltered.

XII. Corruption Is the Symptom; Policy Induced Malinvestment Is the Disease

The controversial flood control scandal represents the visible tip of a much deeper corruption iceberg. It is not the anomaly—it is the artifact. 

Political power is, at its core, about monopoly. 

In the Philippines, political dynasties are merely its institutional symptom. The deeper question is: what incentives drive politicians to cling to power, and how do they sustain it? 

Public service often serves as a facade for the real intent: access to political-economic rents, impunity, and the machinery of patronage. Through electoral engineering—name recall, direct and indirect (policy-based) vote-buying, and bureaucratic capture—politicians commodify entitlement, turning public goods into tradable favors.

Dependency is weaponized or transformed into political capital, politicizing people’s basic needs to secure loyalty, votes, and tenure. 

Poverty becomes leverage. 

This erodes the civic ethic of self-reliance and responsibility, and it traps constituents—who participate out of a survival calculus—into legitimizing dynastic monopolies. 

This free-lunch electoral process, built on deepening dependence on ever-growing public funds, represents the social-democratic architecture of a political economy of control, centralization, and extraction—one that incentivizes corruption not as an aberration but as a structural outcome of concentrated power. 

XIII. Increasing Influence of Public Spending in the Economy 

Direct public spending reached 16.1% of 9M 2025 real GDP—the second highest on record after the 2021 lockdown recession.  (Figure 3, middle diagram) 

This figure excludes government construction outlays and the spending of private firms reliant on state contracts and agency revenues, such as PPPs, suppliers, outsourcing, etc. 

In this context, corruption is not merely a moral failure but a symptom of structural defects in the political-economic electoral process, reinforced by the misdirection of resources and finances, which signifies chronic systemic malinvestment. 

GDP metrics mask political decay, economic erosion, and institutional fragility. 

Yet even with statistical concealment, the entropy is visible. 

XIV. Crowding Out, Malinvestment, and the Debt Time Bomb 

The ever-rising share of public spending has coincided with a slowdown in GDP growth. Public outlays now prop up output, while pandemic-level deficits have shrunk the consumer share of GDP. (Figure 3, lowest graph) 

Crowding-out effects, combined with “build-and-they-will-come” malinvestments, have drained savings and forced greater reliance on leverage—weakening real consumption.

Figure 4 

Most alarming, nominal public debt rose Php 1.56 trillion YoY in September, equivalent to 126% of the Php 1.237 trillion increase in nominal GDP over the same period. 126%! (Figure 4, topmost visual) 

As a result, 2025 public debt-to-GDP surged to 65.11%—the highest since 2006. (Figure 4, middle graph) 

Needless to say, Corruption is what we see; malinvestment is what drives the crisis path. 

XV. Statistical Mirage: Base Effects and the GDP Deflator 

Yet, the “shocking” Q3 GDP overstates its actual rate. 

Because the headline GDP growth rate is derived from statistical base effects, almost no analyst examines the underlying price base, which is the most critical determinant of real GDP. The focus is always on the percentage change—never on the structural level from which the change is computed. 

For years, the consensus has touted the goal of “upper middle income status,” equating progress with high GDP numbers. 

But whatever outcome they anticipate, the PSA’s nominal and real GDP price base trends have consistently defied expectations. (Figure 4, lowest chart) 

The primary trend line was violated during the pandemic recession and replaced by a weaker secondary trend line. Statistically, this guarantees that base-effect growth will be slower than what the original trajectory implied. 

The economy is no longer expanding along its pre-pandemic path; it is merely oscillating below it. 

XVI. Testing Support: Fragility in the Data, Institutional Silence 

Recent GDP prints have repeatedly tested support levels. The risk is not an upside breakout but a downside violation—the path consistent with a recession.   

Q3 GDP brought both the nominal and real price base to the brink of its crucial support. A further slowdown could trigger its incursion. 

Yet you hear none of this discussed—despite all this coming straight from government data. 

The silence underscores a broader indictment: statistics are deployed as optimism theater, not as diagnostic tools. 

XVII. Overstating GDP via Understating the CPI 

And this brings us to a deeper issue that amplifies the problem. 

Real GDP is computed by dividing nominal GDP by the implicit GDP deflator. For the personal consumption component, the PSA uses CPI-based price indices to adjust nominal household spending.

Figure 5

The implicit price index is technically the GDP deflator. (Figure 5, topmost diagram) 

If CPI becomes distorted by widespread price interventions—such as MSRPs, the Php 20-rice rollout, or palay price floors—its measured inflation rate can diverge from actual market conditions. 

Any downward bias in CPI would mechanically lower the corresponding deflators used in the national accounts. 

A lower deflator raises the computed real GDP. 

Thus, even without access to PSA’s internal methodology, the basic statistical relationship still holds: systematic price suppression in CPI-tracked goods would tend to understate the deflator and, in turn, overstate real GDP. 

As noted in our August post: (bold & italics original) 

"Repressing CPI to pad GDP isn’t stewardship—it’s pantomine. A calculated communication strategy designed to preserve public confidence through statistical theater.  

"Within this top-down, social-democratic Keynesian spending framework, the objective is unmistakable: Cheap access to household savings to bankroll political vanity projects. These are the hallmarks of free lunch politics.  

"The illusion of growth props up the illusion of competence. And both are running on borrowed time.  

XVIII. Real Estate as a Case Study: GDP vs. Corporate Reality 

The GDP headline may be overstating growth due to deviations in calculation assumptions or outright political agenda— what I call as "benchmark-ism." 

Consider the revenues of the Top 4 listed developers—SM Prime, Ayala Land, Megaworld, and Robinsons Land. 

Despite abundant bank credit flowing to both supply and demand sides, their aggregate revenues increased only 1.16% in Q3 2025, barely above Q2’s 1.1%. This mirrors the slowing consumer growth trend: since peaking in Q2 2021, revenue growth rates have been steadily declining, leading to the current stagnation. The slowdown also coincides with rising vacancies. Reported revenues may still be overstated, given that the industry faces slowing cash reserves alongside record debt levels. 

Meanwhile, official GDP prints show:

• Real estate nominal GDP: +6.8%
• Real estate real GDP: +4.7% 

Yet inflation-adjusted revenues for the Top 4 translate to zero growth—or contraction. 

Their revenues accounted for 26.4% of nominal real estate GDP in Q3 2025. Real estate’s share of national GDP was 6.2% nominal, 6% real. (Figure 5 middle image) 

This gap between corporate revenues and GDP aggregates suggests statistical inflation of output. 

This highlights a broader point: The industry’s CPI barely explains the wide divergence between revenues and GDP. And this is just one sector. 

Comparing listed company performance with GDP aggregates exposes the disconnect between macro statistics and micro realities, not just episodic shocks—a motif that recurs across retail, consumption, and sentiment indicators. 

Yet, natural calamities—especially typhoons—are often blamed, but their impact on national output is minimal—much like the weak revenue trends, the real slowdown lies deeper than headline statistics suggest. 

XIX. Calamities and GDP: Human Tragedy vs. Statistical Resilience

Despite public perception, the Philippine economy has been structurally resilient to typhoon disruptions—not because disasters are mild, but because GDP barely registers them. 

In Q3 2025, ten tropical cyclones passed through or enhanced the monsoon system, with the July cluster (Crising, Dante, Emong + Habagat) causing an estimated Php 21.3 billion in officially reported damages and the September cluster (Nando/Ragasa, Bualoi/Ompong + Habagat) adding another Php 1.9 billion in infrastructure and agricultural losses. 

The combined Php 23.1 billion destruction sounds enormous, but in macroeconomic terms it is equal to just 0.37% of quarterly nominal GDP. 

This pattern is consistent with past experience: Yolanda (Q4 2013, 5.4%), Odette (Q4 2021, 7.9%), Ompong (Q3 2018, 6.1%), Pablo (Q4 2012, 7.8%), and Glenda (Q3 2014, 5.9%) all inflicted large localized damage yet barely dented national output. (Figure 5, Table) 

The reason is structural: GDP is weighted toward services and urban economic activity, while disasters strike geographically narrow areas. Catastrophic in human terms, typhoons seldom materially affect national accounts. 

The Q3 2025 storms fit the same pattern: human tragedy, fiscal strain, and regional losses—but minimal macroeconomic imprint. Resilience in the data conceals suffering on the ground, because GDP measures transactions, not destroyed livelihoods. 

XX. Calamities as a Convenient Political Explanation and Bastiat’s Broken Window Fallacy 

Given this historical consistency, attributing the Q3 slowdown to typhoons is politically convenient but analytically weak. It reflects self-attribution bias—positive outcomes are claimed as accomplishments, negative ones pinned on exogenous forces. 

GDP simply does not respond to weather shocks of this scale. At most, calamities intensify pre-existing consumption weakness rather than create it. They add entropy to a deteriorating trend; they do not determine it. 

The same applies to earthquakes. The deadly July 1990 Luzon earthquake claimed over 1,600 lives and caused Php 10 billion in damage, yet Q3 1990 GDP posted +3.7% growth. The slowdown that followed led to a technical recession in Q2 (-1.1%) and Q3 1991 (-1.9%), driven more by political crisis (coup attempts, post-EDSA transition) and the US recession (July 1990–March 1991) than by the quake itself. 

Recovery spending from calamities gets factored into GDP, but as Frédéric Bastiat taught us, this is the broken window fallacy—a diversion of resources, not genuine growth. 

XXI. Expanding Marcos-nomics: State of Calamity as Fiscal Stimulus 

The administration has relied on this same narrative today. 

The cited calamities—Typhoon Tino and Uwan, plus the Cebu and Davao earthquakes—occurred in Q4 2025. These events contributed to entropic consumer conditions but did not create them. 

But their political and bureaucratic timing proved useful. 

Authorities tightened the national price freeze a day before the USD/PHP broke 59 (see reference discussion on the USDPHP breakout) 

Typhoon Tino, followed by Uwan, justified declaring a State of Nationwide Calamity for one year—the longest fixed-term declaration in Philippine history. (By comparison, the COVID-era State of Calamity lasted 2.5 years due to repeated extensions.) 

This one-year window: 

• Reinforces the price freeze, aggravating distortions.
• Enables liberalized public spending under relief and rehabilitation cover.
• Allows budget realignments, procurement exemptions (RA 9184 Sec. 53[b]), calamity/QRF access, and inter-agency mobilization (RA 10121). 

In effect, the national calamity declaration acts as a workaround to the spending constraints imposed by the flood-control corruption scandal. It restores fiscal maneuvering room under the guise of emergency relief and rehabilitation. 

This is emergency Marcos-nomics, designed to lift headline GDP via public-sector outlays—on top of pandemic-level deficits, easy-money liquidity, and the FX soft-peg regime. 

XXII. More Easing? The Rate-Cut Expectations Game 

Layered onto this is the growing consensus expectation of a jumbo BSP rate cut in November. One must ask: 

• Are establishment institutions applying indirect pressure on the BSP?
• Or is the BSP conditioning the public for an outsized cut to stem a crisis of confidence? 

Both interpretations are possible—and neither signals macro-stability. 

Meanwhile, supermarkets warn that “noche buena” food items may rise due to relief-driven demand—a symptom of distortions. 

This is the predictable byproduct of a price-freeze regime: shortages, hoarding, cost-pass-through, and black-market substitution.

XXIII. A Fiscal Shock in the Making, Black Swan Dynamics 

At worst, emergency stimulus during a slowdown widens the deficit and accelerates fiscal deterioration—pushing the economy toward the fiscal shock we warned about in June: 

"Unless authorities rein in spending—which would drag GDP, risking a recession—a fiscal shock could emerge as early as 2H 2025 or by 2026.  

"If so, expect magnified volatility across stocks, bonds, and the USDPHP exchange rate."

Figure 6 

Market behavior is already signaling intensifying stress: the USDPHP and the PSE remain under pressure despite repeated rescue efforts. (Figure 6) 

XXIV. Conclusion: Crisis as the Only Reform 

A political-economic crisis—a black swan event—doesn’t happen when expected. It occurs because almost everyone is in entrenched denial and complacency, blinded by past resilience. Like substance abuse, they believe unsustainable events can extend indefinitely: It hasn’t happened, so it won’t (appeal to ignorance). 

But history gives us a blueprint: 

economic strains → political tensions → revolution/reforms

• EDSA I followed the 1983 debt crisis.
• EDSA II followed the 1997 Asian Financial Crisis.

Economic strains were visible even before the flood-control scandal. This is Kindleberger’s and Minsky’s late-cycle phase: swindles/fraud/deflacation emerge when liquidity thins, growth slows, tenuous relationships and political coalitions fracture. 

More improprieties—public and private—will surface as slowing growth exposes hidden malfeasance, nonfeasance, and misfeasance. 

The sunk-cost architecture of vested interests, built on free-lunch trickle-down policies, points to a grand finale: either EDSA 3.0 or a putsch. 

A crisis, not politics, will force change. 

To repeat our conclusion last October, 

In the end, because both political and economic structures are ideological and self-reinforcing, reform from within is improbable.  

The deepening economic and financial imbalances will not resolve through policy, but will ventilate through a crisis—again the lessons of the post-1983 debt restructuring of EDSA I and the post-Asian Financial Crisis of EDSA II.  

____

References

Prudent Investor Newsletter, When Free Lunch Politics Meets Fiscal Reality: Lessons from the DPWH Flood Control Scandal, Substack, September 07, 2025 

Prudent Investor Newsletter, The 5.5% Q2 GDP Mirage: How Debt-Fueled Deficit Spending Masks a Slowing Economy, Substack, August 10, 2025 

Prudent Investor Newsletter, Is the Philippines on the Brink of a 2025 Fiscal Shock? Substack, June 08, 2025

Prudent Investor Newsletter, The Political Economy of Corruption: How Social Democracy Became the Engine of Decay, Substack, October 26, 2025 

Prudent Investor Newsletter, The USD-PHP Breaks 59: BSP’s Soft Peg Unravels, Exposing Economic Fragility, Substack, November 02, 2025

  

Natural Disasters: Loss of life means reduced economic growth

At the Mises Institute, Professor Frank Hollenbeck makes a splendid case against the "broken window fallacy" or why “Natural Disasters Don’t Increase Economic Growth”

I’d like to add my humble two cents. 

Disasters usually costs human lives and or injuries. This means dislocation in the economic sphere. Yet each human life lost entails loss of economic activity. Therefore, the loss of human capital simply means reduced economic growth. And no government action will replace lives that had been lost.

Quote of the Day: The difference between Typhoon Haiyan (Yolanda) and Hurricane Camille

The difference, which is more than an order of magnitude, is largely (but not completely) due to poverty. Despite experiencing roughly five landfalling tropical cyclones per year, Philippine infrastructure simply isn’t as sound as it is in wealthier countries. As a grim example, a number of Haiyan’s casualties actually occurred in government-designated shelters that collapsed in the roaring eyewall. 

In addition, the transportation infrastructure simply couldn’t handle a mass evacuation. If a similar situation applied to the U.S. Gulf Coast, Camille would have killed thousands at landfall, a fact noted in the Hurricane Center’s report on the 1969 season. Where Haiyan hit in the Philippines, there simply weren’t any roads capable of evacuating the citizens of Tacloban City safely inland, forcing them to ride it out dangerously close to the invading ocean and exposed to winds that pulverized most structures.

So, while we really don’t know which storm had higher winds, we do know that more affluent societies are much less affected by even the strongest storms. As Indur Goklany, (who writes frequently for Cato) has pointed out, if left to develop, the entire world will be much more resilient to climate change than it would be if the ineffective policies to “stop” it slowed economic growth.

This from Patrick J Michaels, climatologist and director of the Center for the Study of Science at the Cato Institute

Typhoon Yolanda: From Natural to Man-Made Calamity; Spontaneous Order Thrives!

What alone enables mankind to advance and distinguishes man from the animals is social cooperation. It is labor alone that is productive: it creates wealth and therewith lays the outward foundations for the inward flowering of man.-Ludwig von Mises

There is something wrong with the system[1]. 

That comment came from an exasperated Defense Secretary Voltaire Gazmin who caviled over why relief goods have barely found its way to the victims of the storm.

Before I proceed to elaborate on this, let me add more compelling quotes from Ground Zero[2]:

But there is another reason the looting had abated.

"There is nothing left to loot," said Pedrosa. [Note: Christopher Pedrosa is a government aid worker]

You must have heard a popular saying: Money can’t buy everything. Here is a living proof, from the same article:

Rusty Lacambra, 42, is joining the exodus along with his wife, two sons and niece. On Monday night he hitched a lift in an army truck bound for the airport to wait with hundreds of others hoping for a free flight on a cargo plane to Manila.

"My house is destroyed," he said. "Even if you have money there is no food to buy. There is nothing here.

Massive Supply Disruption and Money Throwing Solutions

Two very important insights from the two quotes above.

First, massive supply disruption in the aftermath of Typhoon Yolanda on crisis stricken areas have been the central problem that has led to a near breakdown of community relationships.

Trade or voluntary exchanges has been incapacitated for the simple reason of lack of access to basic goods (food, water, medicine) to fulfill physiological needs (Maslow’s Hierarchy of Needs[3]).

The basic question is why this, when there had been copious number of relief goods waiting to be distributed? This is the kernel of the Defense Secretary’s griping.

Second, the same comments put into the spotlight money’s role as medium of exchange: money’s exchangeability is ultimately founded on its purchasing power. Plenty of money with no goods or services to acquire equals zero purchasing power.

The unfolding developments from the unfortunate Typhoon Yolanda tragedy represent a testament to the fundamental economic truism where money, in and of itself is not wealth, rather it is the purchasing power of money (or what money can buy) that reflects on wealth.

Curiously every ‘expert’ seems to know of costs of the destruction and what is required for a recovery.

One expert jumps to the conclusion that the Philippine President’s 18.7 billion pesos funds may not be enough, where the Philippines should immediately resort to borrowing from the bond markets given the low interest rate and abundant liquidity[4].

[As a side note, funds available from the Office of the President are Php 16 billion in ‘savings’, Php 6 billion President’s Social Fund and Php 1 billion from calamity and contingency funds[5]]

A local politician, who is an economist and recently appointed as the head of a multilateral environmental agency, predicts Php 604 billion (USD 14 billion) impact to the economy, based on economic modelling data from a climate modeller. He postulates that the Philippine government should spend anywhere this amount to replace lost economic capacity[6].

These are what I call as populist politically correct shortcuts in approaching social ailments, specifically, throwing money at problem, replacing the politically incorrect authorities, demanding for more regulation or prohibition and or taxing the problem. Little goes beyond these.

But there are major problems with the above.

One, the accuracy of actual costs of damages. These are estimates; some of them are model based which barely seem as reality. 

Typhoon Pablo (December 2012) and Typhoon Pepeng (October 2009) have been the most destructive with costs pegged at Php 42.2 billion (USD 1.04 billion) and Php 27.7 billion (USD 608 million) respectively[7]. Note these typhoons have been recent. 

From a back of the envelop assessment of the potential costs from Typhoon Yolanda, looking at the National Statistical Coordination Board’s data[8], we can note that Eastern Visayas, which has been the hardest hit region, represents 2.29% of the 2012 statistical economy (constant prices).

If we add Central and Western Visayas, these regions account for 12.7% of the economy. But while the damages vary from locality to locality, my impression is that the damages in other regions won’t be as substantial or unlikely comparable with the scale of the damages in the epicentre: Eastern Visayas.

But given that I am not in the position to assess on the actual costs from the Typhoon, I will leave the tallying to those involved and will refrain from quibbling over statistics.

However in my view, while Typhoon Yolanda may top Pablo and Pepeng, which I have reservations on, I am even vastly suspicious of the Php 604 (USD 14 billion) estimates—which based on a non-statistical argument, particularly the use populist politics to justify a splurge in government spending via alarmism

As the great journalist, essayist and libertarian Henry Louis “HL” Mencken warned[9],

the whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by an endless series of hobgoblins, most of them imaginary

As of this writing property damages have been estimated at P10,339,290,061[10]

And a possible example of the “focusing illusion” or “anchoring” or the human tendency to rely too heavily on the first piece of information offered[11] could be the status of Yolanda as the “strongest” Typhoon to hit the country.

The Wall Street Journal notes that based on “maximum sustained winds”, it turns out that Typhoon Yolanda represents the 7^th strongest—based on Pag-Asa data[12]. There may be technical contentions on these but a more important aspect will be the degree of destruction and overall impact on society.

Two, these experts assume that it is the responsibility of the government to undertake all the reconstruction efforts as if the private sector exists in a vacuum.

What guarantee will government spending “replace lost economic capacity”? If government spending equals the economy then why not let government spend ad infinitum and we just enjoy the fruits of their undertaking? The problem is, what government spends it has to take from someone. And that someone is us, the taxpayer, and us, the Peso holders.

Three, who determines where all the spending should be focused on or what constitutes as lost economic capacity? Recall that the dead victims from the storm had been part of the lost economic capacity, can the government spend to bring back these lost lives?

The problem with speaking in aggregates is like talking political motherhood statements, they rely on opaque presumptions. They sound plausible, but will this be practical or even feasible?

Fourth, all these “throwing money” solutions assume free lunches or no consequences from government borrowing and spending. However bigger spending means more taxes and inflation which tends to reduce economic capacity, or worst, shrink the purchasing power of the peso. What guarantees that additional debt burdens will not increase the risks of an economic Typhoon Yolanda, via a debt default or hyperinflation?

Yet these pathetic obsession to use statistics as policy setting instruments or image enhancement has been illustrated by the Philippine President’s attempt at rebutting the initial 10,000 estimated death toll.

Interviewed by the CNN[13], the Philippine president dismissed 10,000 estimates as ‘too much’ and offered a range of 2,000-2,500 instead. The Philippine president also even blamed global warming from the catastrophe.

In response to critics, the Philippine President even reportedly sacked the Police General[14] who allegedly had been the source of the 10,000 casualty estimates.

Obviously the President sees rising death toll as negatively influencing his popularity instead of the addressing the apparent mismanaging of relief operations post-Typhoon Yolanda.

As of this writing, official figures via National Disaster Risk Reduction and Management Council have been posted at 3,681[15] far larger from the President’s estimate. The United Nations tally has been at 4,460[16].

This focusing on the death figures leaves a bad taste in the mouth especially for the victims of the storm. “The death of one man is a tragedy, the death of millions is a statistic” is quote popularly (mis) attributed to USSR despot Joseph Stalin[17].

Each lives lost is a tragedy. And tragedies, used as tools to promote political goals, are reprehensible.

As for climate change as the cause of Typhoon Yolanda (Haiyan), a Time report says that scientists “can't yet find a clear signal between global warming and killer tropical storms”[18]

All these shows that the popularity addicted President appear to be grasping at the straws to pass the blame of the catastrophe to save his image.

The Failure of Centrally Planned Disaster Relief Operations

We will hardly ever know the fatalities incurred directly from the powerful typhoon as distinguished from government failure.

In the same article where the Defense Secretary bemoaned “There is something wrong with the system”, a foreign aid team Médecins Sans Frontières (Doctors Without Borders), complete with medical supplies, arrived in Cebu as early as Saturday looking to fly to Tacloban but this group hasn’t left even by Tuesday.

How many of the people, who perished just after the typhoon could have been saved by this volunteer medical aid group?

Yet what has kept relief goods from reaching the victims?

The Defense Minister’s lamentation has actually been an allusion to the “inclusion of politics in distribution of relief goods”[19]. This seems to have been affirmed by Cabinet Secretary Jose Rene Almendras who said that survivors complained of distribution of goods based on “political considerations”.

In short politics inhibited the flow of goods to fill in the supply-side disruption.

This stunning quote is a demonstration of what has led to Tacloban’s near social breakdown. (bold mine)

“If you want to make it fast, the government can open every airport in the Visayas then the [United Nations] and other entities can come in immediately,” Abdul Mutalis, of the private Putera Malaysia club, said.

“People are hungry. People need help,” he said, adding that the slow delivery of relief is prolonging the suffering of the typhoon survivors.

“We have to expedite [the delivery of aid] if we want to help them now. Action speaks louder than words,” he said.

For the last 20 years, Mutalis’ club has been responding to disasters, including the 2004 tsunami in Indonesia and the 2011 earthquake and tsunami in Japan.

“This is the mother of all disasters. There’s no word I can use right now (to describe this Philippine tragedy),” Mutalis said.

Again another private volunteer group wanting to reach the victims but has been impeded by politics.

Let me just say that the key for any recovery from a disaster is to incentivize people to stay within their territories for them reestablish their sources of livelihood and lifestyles.

As the illustrious 19^th century English philosopher and political economist John Stuart Mill explained[20] (bold mine)

The possibility of a rapid repair of their disasters mainly depends on whether the country has been depopulated. If its effective population have not been extirpated at the time, and are not starved afterwards; then, with the same skill and knowledge which they had before, with their land and its permanent improvements undestroyed, and the more durable buildings probably unimpaired, or only partially injured, they have nearly all the requisites for their former amount of production. If there is as much of food left to them, or of valuables to buy food, as enables them by any amount of privation to remain alive and in working condition, they will in a short time have raised as great a produce, and acquired collectively as great wealth and as great a capital, as before; by the mere continuance of that ordinary amount of exertion which they are accustomed to employ in their occupations.

This is the role played by temporary relief operations which politics almost crippled

Apparently the supplyside bottleneck has forced people to consider fleeing depressed areas, not because of security, but mainly because of the lack of goods to fulfill physiological needs. Reports say that people stampeded into the airport wishing to be flown out, as Tacloban seemed to have been “thrown back to the primitive age”[21] says an official.

Based on all the accounts that I have gathered, it seemed that the incumbent administration originally planned to conduct relief operations from top-to-bottom process. Unfortunately Typhoon Yolanda exposed on the administration’s knowledge problem through several unforeseen factors that proved to be major hindrances:

-scale of devastation from the storm

-breakdown of local and national governments at the storm stricken areas

-rapid depletion of basic goods (e.g. “Money seemed to have no value in the city—people would rather have food, water, electricity and means of communication”)

-damaged roads and infrastructure

-insufficient logistics (teams from Philippine government teams have reportedly been ferried by the US military planes)

-partisan politics in the grassroots level (e.g. distribution of goods, closed roads on adjoining areas)

-political obstacles such as red tape that inhibited volunteer groups to conduct decentralized relief missions

Remember this is the same government which earlier trumpeted “implementing precautionary measures” with the aim for "zero casualty” as I pointed out last week

Yet unfolding events above seem to be validating my observations[22]

Leyte’s natural disaster tragedies (Typhoon Uring 1991, Typhoon Yolanda 2013 and 2006 Southern Leyte mudslide) have hardly been random: Destitution, steep cultural dependency on political solutions and geographic vulnerabilities account for as a deadly cocktail mix when confronted with Mother Earth’s tantrums.

Spontaneous Order Helped Saved the Day

I noted of observations where “spontaneous order” supposedly “failed” to emerge as social disorder dominated. This view confuses cause and effect. The reason why money became of no value is that, as pointed above, this has been due to a major dislocation, particularly the lack of access to basic goods (food, water, medicine) to fulfill physiological needs. There had been plenty of money but nothing to eat or drink.

Voluntary trade has been undermined because what has been demanded has been unavailable. The absence of basic goods led many towards desperate acts just to survive. Some resorted to looting. Others scampered away from Tacloban. Others just died.

On the other hand, the distribution of available relief goods have been politicized.

Remember people respond to incentives. When people perceive unfairness or polarization due to the politicization of distribution of goods, some people may resort to violence or aggression. Co-opting the resources of others has been one of the relevant evolutionary impulses[23] on why some people resort to violence.

I don’t deny that there have been criminal elements who employ dastardly acts such as the random stabbing of a 13 year old child[24]. But this hasn’t been a sign of failure of spontaneous order. Criminals exist everywhere at any class or category of community.

And more than that, a 5,000 strong communist rebel group operates in Leyte. The rebels initially became an obstacle to aid groups whom feared of being kidnapped. The rebels only declared a ceasefire last November 16^th almost a week after the ferocious storm[25]. Yet how would one determine if the illegitimate acts during the post-storm transition have been committed by rebels or by criminals or by a dysfunctional society?

What you see depends on where you stand. When we do data mining to prove a point while ignoring the other evidences, such would be selective perception[26]—ignoring data that contradicts one’s belief. Maintaining rigid biases are hardly helpful in learning or discovering truths.

What then is spontaneous order?

If I go by the great Austrian economist Friedrich von Hayek’s definition[27], Spontaneous order would represent a “system which has developed not through the central direction or patronage of one or a few individuals but through the unintended consequences of the decisions of myriad individuals each pursuing their own interests through voluntary exchange, cooperation, and trial and error” (bold mine)

The reason I earlier placed in bold emphasis voluntary aid groups as Doctors Without Borders or the private Putera Malaysia club has been to show “voluntary exchange, cooperation, and trial and error” in motion.

And these have been only two of the stream of voluntary groups from NGOs, to private enterprises, individuals, family members or even publicly listed companies undertaking relief efforts[28].

I was even surprised when one of the US financial based website I frequently visit has a “Typhoon Haiyan Holiday Drive: Please Help Now”[29]

The internet has internationalized “spontaneous order”.

Even from the local levels we see “voluntary exchange, cooperation, and trial and error” in action. One private shipping company Starlite Ferries, offered at its expense, services to the Philippine Red Cross for a week to carry relief supplies and aid workers on calamity stricken areas.

A Tacloban based gasoline station businessman gave away his fuel inventories to people within the area as part of his relief effort[30].

One may object to the idea of charity as way of cooperation, but as John Stuart Mill pointed out above, disaster recovery would have to begin at home. People will have to rebuild their lives, and charity is one of the main paths to bridge any deficits brought about by calamities in order to attain this goal.

During the post Typhoon Ondoy calamity, I wrote that Charity is the province of the Marketplace[31] (bold original)

Remember it is in the vested interest of the private sector to be charitable.

This is not only due to self esteem or social purposes but for sustaining the economic environment.

Think of it, if retail store ABC's customer base have been blighted by the recent mass flooding, where a massive dislocation- population loss through death or permanent relocation to other places- would translate to an economic loss for the store, then, it would be in the interest of owners of store ABC to "charitably" or voluntarily provide assistance of various kind to the neighborhood in order to prevent such dislocation from worsening, or as a consequence from indifference, risks economic losses.

Hence, such acts of charity is of mutual benefit.

The benevolent acts of the Tacloban businessman and of Starlite Ferries reinforce my view.

And spontaneous order shouldn’t be mistaken for impulsive or knee jerk reactions but of a social process which evolves through time. Again F.A. Hayek[32] (Fatal Conceit)

To understand our civilisation, one must appreciate that the extended order resulted not from human design or intention but spontaneously: it arose from unintentionally conforming to certain traditional and largely moral practices, many of which men tend to dislike, whose significance they usually fail to understand, whose validity they cannot prove, and which have nonetheless fairly rapidly spread by means of an evolutionary selection — the comparative increase of population and wealth — of those groups that happened to follow them. The unwitting, reluctant, even painful adoption of these practices kept these groups together, increased their access to valuable information of all sorts, and enabled them to be 'fruitful, and multiply, and replenish the earth, and subdue it' (Genesis 1:28). This process is perhaps the least appreciated facet of human evolution.

A good example would be private aid groups who respond to natural disasters. They have organized their institutions to specialize on catering to communities suffering from natural disasters. This has been why their comments with regards to political shortcomings have been especially noteworthy and influential

The great F. A. Hayek[33] in the Law Legislation and Liberty presciently wrote about how the spontaneous orders are undermined

The spontaneous order arises from each element balancing all the various factors operating on it and by adjusting all its various actions to each other, a balance which will be destroyed if some of the actions are determined by another agency on the basis of different knowledge and in the service of different ends.

In other words, when the forces of decentralization have been obstructed by the forces of centralization. This represents exactly the logjams or bottlenecks in the relief goods distribution encountered by the private aid groups post-Typhoon Yolanda tragedy

Nevertheless, I am very pleased to see how the forces of “spontaneous order” have managed to influence the political order.

From the opening of paragraph of Friday’s headlines[34]; (bold mine)

The distribution of food, water and medicine to typhoon survivors here picked up speed on Thursday after a barrage of criticisms from aid workers and the Philippine and international press forced the Aquino administration to bring order to its response to the calamity caused by Supertyphoon “Yolanda.”

Forces of spontaneous order have once again helped saved the day!

Phisix: Will Typhoon Yolanda be a scapegoat or relegated to the history pages?

As expected, Typhoon Yolanda became a popular post hoc rationalization of stock market behaviour. The Phisix fell 1.4% on Monday which has mostly been blamed on the storm. But through the week, the Phisix crept higher to recover most of its losses. The Phisix closed on Friday with a marginal loss of .14%. In my view, the weekly performance fits the current trend of sideways movement. And this only proves that typhoons are essentially a non-event for the stock markets.

And as also expected, we see the broken window fallacy and the obsession to statistical economic figures at work. This is an example “Economists say growth usually rebounds quickly after natural disasters, due to the lift from spending on reconstruction.[35]” These people have to be reminded that replacement is not value added. 

The titleholder of the most destructive storm is Typhoon Pablo (December 2012) with Php 42.2 billion in property damages. Yet the Phisix soared to a new high in May of this year and statistical growth remains at 7% through three quarters of the year.

This has been due to the massive credit expansion in the banking system which has been largely channelled to the real estate-construction and allied industries, the key drivers of Philippine statistical growth.

Yet the costs to properties from Yolanda’s fury have still been one-fourth of Typhoon Pablo. I believe the gist of the casualty and collateral damage count will peak by the next two weeks.

Yet for as long as the banking system keeps pumping money to the real economy induced by zero bound rates, my guess is that Typhoon Yolanda will hardly be a factor in the statistical growth figures.

A Typhoon Yolanda version to the financial markets and to the statistical economy is when credit boom will morph into a credit bust.

I would rather be watching two neighbors, Indonesia and China, who seem to be experiencing re-emergent signs of financial market ‘tremors’ which poses as potential risks for a shock.

The USD-Indonesian rupiah is just .6% away from the September highs. The last time the rupiah hit a milestone this coincided with the turmoil in the ASEAN financial markets.

Yet the rising rupiah has been backed by a surge in Indonesia’s 10 year bond yields but still far (about 30 basis points) from the recent highs.

Also while Indonesia’s Credit Default Swap has fallen following a recent surge, it is not clear if the USD-rupiah breaks to new highs we will see a rebound in the CDS premium. The last time the USD-rupiah set new highs Indonesia’s CDS prices spiked.

Record setting US markets has failed to inspire Indonesia’s stocks. This week the JCI closed -1.69%.

Curiously all these lethargy comes as Indonesia’s central bank “unexpectedly” raised interest rates last week[36].

While I am not saying that a panic is imminent, I am saying that current conditions requires vigilance because Indonesia’s financial markets appear to be exhibiting signs of renewed stress. And if such market strains worsen, then risks of a contagion from a panic must not be disregarded.

Meanwhile the strains in the Chinese financial markets seem present in the overnight lending rates and 10 year bonds but hardly expressed in the CDS or the stock markets yet[37]. Whether the evolving development represents an aberration or a seminal trend has to be nonetheless established.

If the Philippine market does experience a convulsion in response to a possible deterioration of regional conditions, expect Typhoon Yolanda to be a favorite scapegoat.

---

[1] Inquirer.net Logjam in aid delivery, November 14, 2013

[2] Reuters.com In devastated Philippine city, anger grows, aid elusive, November 11, 2013

[3] Wikipedia.org Maslow's hierarchy of needs

[4] Bloomberg.com Philippines Declares State of Calamity November 11, 2013 gcaptain.com

[5] Balita.com Aquino assures enough funds to help Yolanda victims, November 14, 2013

[6] Inquirer.net Economist estimates ‘Yolanda’ impact on PH economy at P604 B, November 12, 2013

[7] Wikipedia.org Most destructive Typhoons in the Philippines

[8] National Statistical Coordination Board Gross Regional Domestic Product- Data and Charts

[9] Henry Louis Mencken IN DEFENSE OF WOMEN

[10] GMA News NDRRMC: Death toll rises further to 3681; damage breaches P10-B mark, November 17, 2013

[11] Wikipedia.org Anchoring

[12] Wall Street Journal Southeast Real Time blog Was Haiyan the Strongest Storm Ever?

[13] Christime Amanpour Blog Typhoon death estimates 'too much,' President Aquino of the Philippines tells Amanpour, November 12, 2013 CNN.com

[14] The Wall Street Journal SEA Real Time Blog Police General Who Predicted 10,000 Deaths Removed November 14, 2013

[15] GMA news Loc cit

[16] Philstar.com UN : Yolanda death toll over 4,000 November 15, 2013

[17] Wikiquote Misattributed Joseph Stalin. Wikiquote says that Kurt Tucholsky may have been the origin but David McCollough points at Joseph Stalin’s conversation with Winston Churchill in Tehran as possible source.

[18] Time Science & Space Climate Change Didn’t Cause Supertyphoon Haiyan. But the Storm Is Still a Reason to Fight Warming November 11, 2013

[19] ANC Yahoo Gazmin: There's politics in relief distribution, November 14, 2013

[20] John Stuart Mill, Book I, Chapter V Fundamental Propositions respecting Capital Principles of Political Economy with some of their Applications to Social Philosophy

[21] Inquirer.net Mad rush out of Tacloban November 13, 2013

[22] See Typhoon Yolanda and the Phisix, November 11, 2011

[23] Law.jrank.org Violence - The Causes Of Violence

[24] MSN.com Slashed and stabbed as fear rules typhoon-ravaged Philippine city November 13, 2013

[25] Wall Street Journal SEA Blog Rebel Group in Philippines Declares Cease-Fire November 16, 2013

[26] Wikipedia.org Selective perception

[27] Eircom.com FRIEDRICH HAYEK QUOTES

[28] Inquirer.net Outpouring of support for ‘Yolanda’ survivors November 17, 2013; Yahoo.com Businessman gives away free fuel in typhoon-ravaged Tacloban November 15, 2013; Wall Street Journal Aid Groups Fan Out Across the Philippines November 15, 2013

[29] Minyanville.com Typhoon Haiyan Holiday Drive: Please Help Now November 14, 2013

[30] Yahoo.com Businessman gives away free fuel in typhoon-ravaged Tacloban November 15, 2013

[31] see Typhoon Onyok's Aftermath: Charity Is The Province of the Marketplace September 30, 2009

[32] Friedrich von Hayek THE FATAL CONCEIT The Errors of Socialism p.6 libertarianismo.org

[33] Friedrich von Hayek Law Legislation and Liberty Volume I page 51 libertarianismo.org

[34] Inquirer.net Aid delivery picks up pace November 15, 2013

[35] Reuters.com Despite human cost of typhoon, Philippines economy on track November 12, 2013

[36] Bloomberg.com Indonesia Unexpectedly Raises Key Rate November 12, 2013

[37] See China’s Stock Market Soars on ‘Leaked’ Reform Documents as Bond Markets Seize Up November 16, 2013