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Manila’s Economic Headache

The Philippines has achieved economic growth, but it is extremely unequal. Aquino needs to make changes now.

After almost a decade of democratic hollowing and shallow economic growth in the Philippines, the Benigno Aquino administration has been relatively successful in restoring confidence in markets, strengthening democratic institutions, and bringing back a semblance of political stability.  Indeed, the last two years have witnessed relatively high levels of economic growth, poverty-alleviating programs, encouraging signs of democratic consolidation, and popular satisfaction with the new government’s policies.

However, Philippine democracy remains fragile, and the greatest threat to the country’s political stability and democratic viability may lie in its shaky economic foundations. The country continues to suffer from a number of structural and cyclical economic weaknesses, including high levels of youth unemployment, weak infrastructure, industrial hollowing, and food insecurity. The middle class, meanwhile, is small, with many people needing government services and overseas workers’ remittances to get by.

Although democratic elections are, theoretically, the greatest source of legitimacy for a government, economic performance is still a crucial factor, and determines the medium and long-term viability of a specific administration. Given the gravity of poverty and economic difficulties that have plagued Philippine society for decades, the Aquino administration’s greatest challenge is to position the country on a sustained path of economic growth and national development. The problem is that Aquino has inherited a highly complex package of structural economic challenges that might undermine his administration’s democratic agenda in the long-run. The new government isn’t only expected to restore and build democratic institutions, but it is also expected to reverse one of the worst rates of poverty, inequality, and unemployment in the Asia-Pacific region.

In the last decade, annual economic growth has hovered around 4.5 percent, but has been anything but inclusive. Most of it has been concentrated in a few major sectors, mostly in services and retail, dominated by economic tycoons. Crucially, there has been no significant expansion in the middle class, which is an anchor of political stability, economic dynamism, and democratic politics.

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More than 40 percent of the population is living in poverty, while the GINI coefficient (0.44), a measure of income equality and distribution, is among the worst in the Southeast Asian region. Additionally, the Philippines has one of the highest rates of population growth in Asia. Unemployment rates are also among the highest in the region, while underemployment is in double-digit territory. Real wages have practically stagnated in the last three decades, while food and oil inflation – predominantly determined by movements in the volatile global commodity markets – continues to depress income growth, pushing many low-income families below the poverty line.

The only way for the Philippines to reverse these structural trends and tackle its huge youth bulge is to maintain robust levels of annual GDP growth – probably something around 7 percent. However, there are major obstacles to attaining and sustaining such levels of growth.

In recent years, the Philippines has experienced robust rates of growth while improving its overall competitiveness. However, according to the Global Economic Competitiveness Index, the country is still the least competitive economy in the Asia-Pacific region. The country scored very poorly on research and development (R&D) and infrastructure. This reflects a systemic problem in the Philippine economy. Unless the country develops its workforce, science and technology sectors, along with infrastructure, it won’t be able to attract investment and establish a vibrant economy. On top of this, corruption is still a huge problem. These factors, for instance, explain why the Philippines has been consistently outperformed by its peers in the region in terms of attracting Foreign Direct Investment (FDI).  

In fact, recent growth has been highly dependent on remittances from overseas Filipino workers, retail industry, real estate, and business process outsourcing (BPO). Moreover, this growth can also be attributed to a ‘rebound’ – thanks to an earlier economic stimulus – from a low-base in 2009, when the Philippines was hit by the global financial crisis. The problem with over-reliance on remittances and services is two-fold: the growth isn’t followed by a significant increase in decent and secure employment opportunities for the majority of the population, and the country will remain vulnerable to cyclical changes in international markets. As a result, the Philippines might not be able to considerably reduce unemployment rates and sustain high rates of growth that could reverse staggering poverty and inequality levels in the country.

In addition, the administration also faces huge fiscal limitations. Given that the country’s constitution mandates ‘automatic debt servicing’, about a quarter of the national budget is ‘automatically’ directed to debt-payment.

Meanwhile, the Philippines progressively lowered tariffs and other trade barriers. This has led to industrial hollowing as major neighboring economies, such as China, flooded the Filipino markets with cheaper products.

The agricultural sector has also suffered from cheap imports and a general state of neglect. The absence of genuine land reform and weak investment in irrigation systems has compromised efforts at improving agricultural productivity. Alarmingly, the Philippines has transformed from a self-sufficient rice producing country into the world’s biggest importer of rice. With immense fluctuations in global commodity markets, the Philippines has been ever more vulnerable in terms of food security. This explains high rates of malnutrition and food poverty.

So far, the Aquino administration has been relatively successful in providing ‘palliative’ measures such as the conditional cash transfer (CCT) scheme. This was based on similar programs in Brazil and Mexico, in order to provide poor families with the necessary means to cope with and eventually overcome hunger and poverty. However, the program has been criticized for being shortsighted, while sidelining other more urgent and structural economic measures such as land reform.

It’s clear that the Aquino administration needs to implement both structural and short-term economic measures if it wants to see concrete changes to the country’s social landscape and push forward with its democratic agenda. 

Javad Heydarian is a Manila-based foreign affairs analyst focusing on international security and development issues. His articles have been featured or cited in Foreign Policy in Focus, Asia Times, UPI, the Transnational Institute and the Tehran Times, among other publications.