By the numbers: GDP growth and the private sector

WE generally expect well-run private companies to outperform the economy. At times of high economic growth, we assume (correctly) that corporations are growing even more rapidly. With the Philippines currently in a high-growth phase, having just posted GDP growth of 6.4% for the second quarter, it seems like a worthwhile exercise to quantify the extent of corporate outperformance, and to tease out any insights from those instances when they do underperform.

The question is not an idle one. The current government’s One Big Idea is to leverage the strengths of the private sector in order to close the infrastructure gap. This has the advantage of getting projects done without actually needing to mobilize public funds -- a consideration surely not lost on a government determined to defend its credit rating. It does bear mentioning that this process of shifting responsibility for the country’s infrastructure away from government became politically acceptable only because of the staggering record of corruption and inefficiency accompanying public projects.

To help answer these questions, we tapped the BusinessWorld Top 1,000 Corporations database for the leading companies’ revenue performance between 2002 and 2012 and compared them with the corresponding GDP growth rates for the same period. What we found was that corporate growth did indeed outperform the economy during periods of stability or expansion. That is likely because during stable periods, when conditions are more or less predictable, companies are free to optimize their operations to suit the prevailing conditions - how much debt to take on, how much to invest in capital goods, how many people to hire, and so on.

During downturns, however, the revenue growth of private corporations tends to plunge to well below the rate of economic expansion. The top 1,000 corporations are more volatile than the broader economy, and the top 10 are even more volatile than the top 1,000. This seems to suggest that the higher you go up the corporate league tables, the more professional the management, and therefore the more operations are finely optimized for stable economic conditions. It takes a truly disruptive event to expose the flaws in the business plans of the best-run companies -- as the events of 2008 demonstrated.

The government appears committed to the idea of privately-funded infrastructure, which has already raised questions about the inclusiveness of its brand of growth when corporations are allowed corner the market for public goods. The growth figures appear to point to one more thing to ponder: how will these flagship projects fare during a downturn? - Agbayani P. Pingol II and Virgil S. Villanueva


source:  Businessworld