Is the Philippines Ready to Become An Economic Leader in the Region?

By webadmin on 01:35 pm May 21, 2012
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Philip Bowring

Is the Philippines destined to become an Asian economic growth leader, matching China, India and Vietnam?

Yes, according to a set of statistics in the draft document “Asean, the PRC and the Great Transformation?” put out by the Asian Development Bank at its recent annual meeting in Manila.

The ADB is forecasting the Philippines’ annual average gross domestic product growth of 7 percent between now and 2030. This is in the same projected growth league as China, India and Vietnam, and it is way ahead of Indonesia, Thailand and Malaysia.

Is this anything more than wishful thinking on the part of the Asian Development Bank Institute, the ADB’s Tokyo-based research arm, or could the Philippines become the first populous developing country to use the services sector as a basis for an economic takeoff?

The investment climate in the Philippines has improved significantly since the advent of the Aquino administration two years ago. Its commitment to attack corruption, smuggling, tax evasion, inflexible labor laws, cozy insider deals which profited well-connected businesses but deterred competition and foreign investment has been noted at home and abroad.

There is a chance that four more years of the Aquino administration could permanently raise standards of governance and put in place some of the physical and educational infrastructure needed to raise the long-term growth rate. But government revenues remain low and some is spent on subsidies to keep the poorest in school, leaving very little for roads and ports. Public-private partnerships are in the works but must overcome a history of regulation and political interference.

It will take time to build a base from which an industrial economy can grow and take workers from very low value-added services and farming to labor-intensive manufacturing.

The Philippines’ failure to develop its manufacturing sector, which accounts for 21 percent of GDP compared with 34 percent in Thailand, has long been a curse which kept the nation poor and forced workers overseas. But now this weakness may be a strength as global markets for low-technology manufacturers are glutted by a combination of over-investment in China and the almost boundless availability of labor in South Asia. It is to the Philippines’ advantage that most of its foreign exchange now comes from remittances ($20 billion a year and rising) and business process outsourcing, now at $13 billion. These dwarf physical exports, led by electronics which are around $35 billion. Both are more stable income sources than manufactures or resources.

BPO, which requires educated people but little financial capital, is creating a significant class of educated lower-middle income salary earners who have spawned building and consumption booms. Though their numbers — about 450,000 directly employed by the industry — are relatively small in the context of a nation of 90 million, and BPO success has scant impact on the poorly educated masses, the middle-income class is expanding and, with it, an appreciation of the value of education and of expectations of standards of government.

Even the birth rate is falling and families are taking to the use of contraception, so while other East Asian nations face the challenge of rapidly aging populations, the Philippines will be less burdened than in the past by a rapid increase.

Tourism is also beginning to acquire some momentum, helped by the expansion of domestic and international air services. Though still far behind, it has become a favorite destination for South Koreans.

Even the Scarborough Shoal dispute could be a benefit, raising the country’s international profile and strengthening its often fragile sense of national identity.

Eventually all the gains from services and remittances will have to be reflected in the creation of manufacturing industries, but the infrastructure can be laid from the existing income streams.

The ADB projection of 7 percent a year until 2030 looks optimistic. But the tables may finally be turning as the Philippines begins to catch up with the likes of Thailand and Indonesia.

Asia Sentinel

Philip Bowring, a former editor of The Far Eastern Economic Review, is a founder and consulting editor of Asia Sentinel.