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

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?