Loss aversion, economic scars and economic prospects

By this time, we should already be familiar with how we fouled up our handling of the viral pandemic. It all started with years of neglect of the public health system. We also failed to act promptly on the brewing Wuhan threat. After crossing the border, the virus simply brushed off our less than desirable level and quality of testing, tracing, quarantining, and treating. Finally, our lack of vaccination policy has further eroded consumer and business confidence because somebody dropped the ball. What follows is an abject lesson in theatrical obfuscation.

Such weaknesses in putting together public health measures and executing them defy the arguments of Nobel laureate Daniel Kahneman about loss aversion in his book Thinking Fast and Slow. “Loss aversion refers to the relative strength of two motives: we are driven more strongly to avoid losses than to achieve gains.”

Human brain reacts faster even to symbolic threats. Kahneman wrote that even “loaded” words like “war” and “crime” elicit more decisive responses than “happy” words like “peace” and “love.” Between a defender of a territory, and an aggressor, whether human or animal, it is the possessor of the territory that usually fights harder. This is one big reason why the status quo generally continues. Conservative forces to Kahneman produce stability in the neighborhood, it is what holds together institutions and values.

Even in law, the same principle applies. Significant distinctions are made between actual losses and foregone gains in some legal decisions. Businessmen who actually sustained losses from goods lost in transit were compensated, but were seldom upheld in cases involving lost profits. From a legal standpoint, “people who lose suffer more than people who merely fail to gain, they may also deserve more protection from the law.”


The COVID-19 pandemic, without a shadow of doubt, is a game changer. It has infected nearly 480 thousand Filipinos with more than 9,300 deaths — and still rising — and should therefore evoke repulsion. It’s a threat to life and the economy. Based on the principle of loss aversion, Philippine authorities are expected to have fought harder to prevent the virus from establishing its beachhead and multiplying the casualties. It involves avoidance of loss of life, for there is nothing to gain from a virus.

It’s hard to imagine how our health authorities, despite the proliferation of fintech specialists, data science and Big Data experts, failed to establish a nationwide network of COVID-19 data base feeding from test results and mobility indicators through QR codes as well as putting up sufficient and proper quarantine and treatment facilities. Without these facilities, strict lockdown might be imposed again with business and jobs as direct casualties. Everything is a race against time and probable deaths of the infected. Urgency, the concept of what is imperative, seems lost on those who have public accountability.

These considerations are crucial to our growth prospects in 2021.

As we should have been in survival mode since the beginning of 2020, Kahneman’s hypothesis should have produced more positive results in both public health and economic management in the Philippines. Otherwise, we stand to sustain more economic scars after economic scars. Unfortunately, this is what seems to be happening.

On Jan. 4, the National Economic and Development Authority (NEDA) pushed for further opening of the economy, expecting “further improvement in gross domestic product (GDP) during the fourth quarter despite ending 2020 in a recession.” This would not be possible unless the health authorities and the rest of the bureaucracy shape up in terms of governance and, yes, loss aversion. Every misstep produces an economic scar. More missteps mean more economic scars.

The squabble between the Palace and the Senate on the Presidential Security Group (PSG) vaccination could only produce a costly stalemate and a further drop in public confidence. It would be asking too much for the public to go out and spend when uncertainty lurks everywhere, especially at this time when two variants of the original virus have been sighted in many territories.

In fact, UP’s Octa Research announced a few days ago that “the new and more infectious COVID-19 variant may have already entered the country due to its late detection, as well as lenient border control in the Philippines.” Some 21 passengers from relevant jurisdictions have been quarantined.

We would not want to be in the same crossroad again where we have to choose between life and livelihood. Japan’s own dilemma might force Prime Minister Yoshihide Suga to again consider issuing another state of emergency declaration. Infections in Japan have topped the 4,000 daily mark. What prevents the Prime Minister from undertaking a more decisive action is the economic cost as well as his government’s slipping support rate. Respondents in surveys demanded that he should do more to halt the spread of infections.

In the UK, despite the rollout of the new Oxford AstraZeneca vaccine, schools and colleges across the country closed ahead of the national lockdown contemplated because of the risk of overwhelming its healthcare system.

We all wish the best for the Philippine economy in this new year of 2021 but we have to square off our aspiration for a quick recovery this year with recent developments.

This week, we saw further shrinking of factory output based on IHS Markit Philippines Manufacturing Purchasing Managers’ Index (PMI) from 49.9 in November to 49.2, still below the 50-neutral mark and therefore indicative of contraction in the last two months of 2020. IHS Markit observed that “operating conditions across the Philippines manufacturing sector worsened in the final month of 2020.” With Malaysia at 49.1 in December, the Philippines recorded the lowest PMI compared with Vietnam’s 51.7, Indonesia’s 51.3 and Thailand’s 50.8.

This finding seems to be confirmed by the recent survey of the Japan External Trade Organization (Jetro) in the Philippines. Some 59 Japanese manufacturer respondents disclosed that they had “no more room for further cost reduction.” Cost consideration has made Vietnam more attractive. Other statistics sound grim. Eight percent of the respondents said they would scale down their operations and 1% would pull out.

We share the optimistic reading by IHS Markit economist Shreeya Patel and that of some local economists that the level of PMI “showed some positive signs.” The challenge indeed is “to restore confidence in both businesses and consumers to lift the recovery further.” But this is a tall order given our authorities’ ability when it comes to public health management and lately, integrity in public governance in as simple a matter as determining who gets the vaccine.

But vaccination, or the prospect of its availability, may not suffice to shore up confidence. Octa Research reported two days ago that based on the Tugon ng Masa survey conducted between Dec. 9-13, 2020, only 25% of the 600 respondents in Metro Manila “are willing to get vaccinated.” What is worrisome is that 28% were unwilling to go through the motion, more than those who are prepared to get the vaccine. Some 47% were undecided. The survey is independent and non-commissioned.

Our external payments position is equally challenged.

Exports, particularly electronics, for October declined again after September’s short bounce back, reflecting sustained volatility in global demand as major trading partners like the US and Europe and Japan started to restrict health protocols. Imports which could motivate higher production for both exports and local consumption declined for the 18th consecutive month in October. Year-to-date imports retreated by over 25%.

With more than 300 thousand overseas Filipino workers repatriated in 2020 and weak jobs markets abroad, only a modest contribution is expected from remittances. For the first 10 months of 2020, workers’ cash remittances stood at only $24.6 billion or 1% lower. BPO revenues are uncertain with lower global demand for services as indicated by lower demand for office space.

What about the BOP’s capital and financial accounts?

Two days ago, the Bangko Sentral ng Pilipinas (BSP) was quoted declaring that “given the old facts that we have, we intend to keep interest rates low until maybe the next few quarters.” That signals sustained negative real interest rates. Other things being equal, that could drive fixed-income foreign portfolio investors away. On the other hand, stock market players who could borrow local funds at lower interest could elevate equities trading. Net foreign direct investments for the period January-September 2020 dropped by 9% due to “the continued effects of the prolonged COVID-19 health crisis on the global economic outlook.”

Altogether, this is how economic scars are formed. As The Economist last December showed in this interesting chart on economic scarring, the Philippines recorded the highest pandemic score and therefore the longest expected time for recovery. Economic scars may be attributed the most to the deepest decline in our growth, the structure of the economy, economic and financial imbalances and policy offsets.

Unless our authorities imbibe the loss aversion hypothesis of Kahneman, and take to heart the imperative of decisive action, The Economist‘s account based on Oxford Economics and IMF data and computations could be self-fulfilling.

Let’s prove it wrong.

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.


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