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Recipe for economic growth in the Philippines: invest in infrastructure, education, and job creation

Rogier van den Brink's picture
The report says that a highly-educated, healthier and skilled workforce will enhance productivity.

Economic news coming from the Philippines is surprisingly positive, and this has not gone unnoticed in international circles, judging by the number of inquiries we—the World Bank economic team in Manila that I am now leading—are getting. Our GDP growth forecast for 2012 (included in the new Philippines Quarterly Update report) is a solid 4.6 percent, while the first quarter saw an even more respectable growth rate of 6.4 percent. Other good news: foreign direct investment doubled in the first quarter, exports were up by 18 percent, and two ratings agencies upgraded their outlook on the Philippines.

However, the economy faces two challenges going forward: it will need to defend itself against a global slowdown, and it will also need to create a more inclusive growth pattern—one that creates more and better jobs, because performance on job creation has not been part of the positive news coming from the Philippines for quite a while now.

While the economy has proven quite resilient during previous global crises, the current European debt drama and the slowdown in China will undoubtedly also affect the Philippines. Vulnerability to external shocks is moderated by a current account in surplus, international reserves at very comfortable levels, a flexible exchange rate, and a banking sector which is not unduly exposed to foreign liabilities. These are good first lines of defense. The second line of defense will need to come from higher productivity and improved competitiveness.

Why is the economy still facing the challenge of creating more and better jobs? Hasn’t the Philippine labor force already shown itself to be internationally quite competitive? The remittances sent home by Filipino workers have held up well during past crises, and are even now continuing to grow.  International business process outsourcing firms (e.g. call centers) have also discovered the efficiency of the workforce. They are making the country a world class destination for such services. The challenge exists because of lack of overall investment which would make even more laborers productive and wealthier.

In short, Filipino labor needs more capital. Only then will growth become more inclusive, and create more and better jobs. That capital needs to come from government investing more in infrastructure and education, and it needs to come from businesses investing more; businesses, both large and small.

However, is it possible to invest more in such an inclusive growth pattern, while the world economy is slumping? We think it is—because to prepare for a slowdown, or to invest in infrastructure and education, you need the same things. First, you need to create fiscal space, i.e. you need to raise more revenues, so that you can continue to spend more on infrastructure and public services even during a global downturn. But raising public revenues has been a perennial problem for the Philippines. A young Paul Krugman pointed this out as early as 1992 in “Transforming the Philippine Economy.” In this regard, one is waiting with bated breath for the passage of a strong “sin” tax law—named for its sharp increases in the taxation of cigarettes and alcohol.

And second, to remain competitive in a more difficult global environment, and to allow more businesses to grow and create jobs, you need an improved investment climate, so that firms of all sizes can thrive and produce the jobs needed. For instance, the country still has its work cut out for itself on reducing the cost of doing business and addressing infrastructure bottlenecks.

However, the current administration is clearly committed to getting the job done, and not afraid to tackle corruption and vested interests at the highest levels in its quest to achieve inclusive growth. When commitment, opportunity and necessity align, as they do now, the chances for success look as good as they have ever been. If I am right, the Philippines would beat the global trend, and become the next success story. Or am I too optimistic?

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Comments

Submitted by Anuja Kar on
Dear Sir, Thanks - this is a good piece. There's another factor, which I believe though has remained a concern for the country's long term sustainability is governance. Some areas, like tourism for example needs more attention. Lack of proper governance, has left the country behind its counterparts in Asia with regard to tourism. If, the government focuses more on infrastructure and areas like active promotion, the country may reap benefits of large tourist inflows towards Asia and thereby boost growth. The export sector, again I believe lacks competitiveness. In addition, the country needs to open its business more to foreigners. Inequality again has remained a concern which mars the prospect of attaining inclusive growth going forward. Food policy, especially, ensuring food security needs more attention, the number of undernourished people as a proportion of total has remained high. It would be helpful to know your view on the matter of the attaining self-sufficiency in rice? If, as announced recently, the government stop importing rice, it might contain inflationary pressure going forward in light of rising food prices. Good to have your view. Thanks. Best regards, Anuja

Dear Anuja Indeed, the factors you cite are all important. But there is definitely a new willingness to tackle them. Starting with governance. One of the books that is rapidly becoming very popular among senior policymakers and analysts here is "Why Nations Fail" by Acemoglu and Robinson. That in itself should tell you something, because the book is powerful tale of how good governance and good economics go hand in hand throughout the world's history. On self-sufficiency, I am also an optimist! While I do not support market distortions and subsidies, because they lead to ineffiencies and invariably get captured by those who least deserve it, I think that the country would be perfectly able to feed itself if it refocused on its neglected agricultural sector. Filipino family farmers need to be better supported through rural infrastructure provision, investments in agricultural research and extension, and linking them up with agro-exporters.

Submitted by Jim on
I enjoyed this material you have presented. I am a big fan of the Philippines but I have always remained bearish on the islands. The current administration has made positive steps in many reforms and corruption battles. However for the over all growth of the Philippines it still remains the same. There is Manila and then there is the rest of the Philippines. Without a judicial system that is constant and reliable, individuals and companies who are interested are not going to consider the Philippines in their growth plans. For all intent and purpose the islands are off limits to outsiders who can provide the needed capital to create growth outside of the Manila arena and it is just too risky of a play at this time. Each area outside of Manila plays by it's own rules and most of those are made up as they go along. I spend a good deal of time traveling to and from the Philippines. Immigration has no set rules they are made up at each entry point. Citizens who should have every right to exit and return are harassed each time they attempt to leave and some turned away because of a facial expression. Now this does not affect me personally but it affects my thought on conducting business in a otherwise lawless and extremely slow moving judicial system. The people of the Philippines have so much more to offer the world beside a corrupt business, non-welcoming immigration and slow judicial system. But first impressions are made and until that changes and the welcoming mat goes out to foreign business and people, the Philippines will remain trapped in a slow growth and poverty stricken nation. You cannot run your economic base off of call centers. They for the most part are an easy sale to government officials because of the proposed employment factor but they eventually collapse because there is not much economic base to them and they move with the economic winds of change. No, I would be the first to invest in the Philippines if it were safe. But with iffy infrastructure, high utilities and the above reasons when I come through the gates of immigration you better hug me because you have a lot of problems that I have to sort out before I invest money there. It was a great article you present and I hope you write more about this subject. Sincerely Jim

Dear Jim Your account is sobering and lays out the challenges very clearly. They largely explain why the country has lagged behind its neighbors. What I try to argue, however, in my blog is that at the moment there is a great opportunity and willingness to tackle these issues. Those who did invest here continue to tell me that they are glad they did, because the dedication and skill of Filipino laborers compensate for a lot of the things you complain about. But you are right, the country needs more than its excellent labor force to attract more capital.

Submitted by Vic on
Dear sir: Other that the GDP, may we also look at, for instance, at the dropout rate in the formal education system, to get a net development index, which would reflect the loss due to the dropouts from the system. The GDP, which substantially benefits the top 400 (or less) families in the Philippines, may not be good measure of development, since it assumes to benefit the country as a whole. Job creation is still an issue. Yet, the overseas Filipino workers (OFWs) have propped the economy for so many years so we have "a current account in surplus, international reserves at very comfortable levels, a flexible exchange rate, and a banking sector which is not unduly exposed to foreign liabilities." Take out their remittances from the picture, and all the said positive characteristics disappear. Yet, the government is satisfied with paying lip-service to these "modern heroes." It does not have enough people nor a fully working organizational mechanism (Department of Foreign Affairs, Department of Social Welfare, Overseas Workers Welfare Administration) to service the OFWs. I am sure that your analysis of the situation is on the right track. Allow me to say that a bank is still a bank. With the bank paradigm at work, we have the decades and millions of dollars of investment to show for the bank efforts, and not really that much to show as a result. More kilometers of roads, more irrigation systems, improved judicial system, better health facilities? And we are still looking at job creation. Without good governance to match economic efforts, graft and corruption, smuggling, waste of government resources, and red tape, another 68 years would mean looking at the same issues we have today.

Submitted by Carmela Zabala on
Dear Mr Van den Brink Thanks for your thoughts here. You are indeed right in saying that you are quite optimistic. And the comment by the above writers suggests a more convincing reality to this country. In the last decade many economist like yours from the World Bank have been recommending recipes for economic growth to the Philippines. And they all failed with their very optimistic prediction. Why? I think there is no linear relationship that you can concoct to come up with a formula to achieve sustained economic growth to this country without ever incorporating behavioural economics which explains for that reason why apathy reigns and mediocrity from government and public services and lawlessness are widely ignored and just accepted. You did not mention culture (collective will of the people and the leaders to move this country forward), innovation and research and development (public services are not transformative, and I agree quality of exports is not competitive and innovative enough), you failed to suggest a robust solution to achieve inclusive development (majority of the growth of this country goes to corporations and the wealthiest families which account for 1% of the population), social mobility (labour practices are quite backward, how do we distribute employment or economic opportunities and democratic rights to rural provinces, people with disability and caring issues, etc.). Also, there is so much to be overhauled here around culture starting from mind-set and attitude. Many thanks. Best, Carmela

Dear Vic and Carmela Allow me to react to the last two comments together. Because they both argue that not much will be achieved economically if governance does not improve also. My optimism stems from the fact that that is exactly what every senior policymaker I meet also believes. And, may I add, that is also what my "bank", the World Bank, believes. In my answer to Anuja above, I mentioned that the Acemoglu and Robinson book "Why Nations Fail" is becoming very popular here among senior leaders and local economists. Here is the website for the book: http://whynationsfail.com/ That book's entire point is that economic growth will not be sustained, if it is not accompanied by better governance, or, as the book calls it "inclusive" political and economic institutions. PS: James Robinson, one of the authors, has agreed to work with us on these issues here in the Philippines. So stay tuned...

Submitted by Gary K. Anderson on
It also makes me wonder why Philippines has not yet unleashed its potentials. The BPO industry is booming there making them recognizable worldwide especially when it defeated its long time rival - India (http://www.firstpost.com/business/how-philippines-beat-india-at-the-outsourcing-game-364872.html) I had my share of working with Filipinos when I've hired remote workers through Remote Staff (http://www.remotestaff.com.au/), which is the largest provider of home based careers in the Philippines, and I admire their professionalism. They might be in a 3rd world country but their competitiveness can surpass those in the 1st world countries IMHO. I would be bothered if the Philippines' potentials would just go down the drain...

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