The Philippines Economy: Ready for Take-Off?

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The Philippines Economy: Ready for Take-Off?

As its rise in the Global Competitiveness Report shows, the economic conditions are improving. Still, many challenges remain.

In the World Economic Forum’s new Global Competitiveness Report just released last week, the Philippines continued its recent trend of rising in the rankings, moving up 10 spots from last year’s position and 20 from two years ago to 65. The Philippines is one of only two countries to improve their position in the rankings by 20 spots over the past two years and has now surpassed Vietnam, though it still lags behind Indonesia.

The rankings rely on a mix of hard data and surveys from top executives in the country to measure the perceived competitiveness of an economy on a weighted formula of 12 pillars of productivity and growth potential. The release of the rankings adds to the growing sentiment that the Philippine economy is preparing for lift-off.

Major Gains
The Philippines’ rise in the rankings has been fueled by improvements in the categories classified as basic requirements by the report: institutions, health and primary education, infrastructure, and macroeconomic environment. Large gains in public trust in institutions and improvements in the macroeconomic environment have been the two primary factors driving the Philippines rise in the ranks.

Trust in government officials and institutions has seen great progress since the beginning of the Aquino administration. Since campaigning on the slogan kung walang kurap, walang mahirap (if there’s no corruption, there will be no poverty), the administration has made a concerted effort over the past two years to strengthen transparency in budgeting processes, ensure competitive bidding in procurement, and reduce influence peddling within government agencies. The Department of Budget Management has strived to increase transparency by reducing lump sums in the budget, making the executive drafts of the national budget available to the public in spreadsheets, insisting on competitive bidding for projects, and avoiding unsolicited project proposals. Along with a more open procurement process, increased trust in government has enhanced the perception of secure property rights which has encouraged investment.

The other major factor behind the Philippines’ rise in the rankings has been its improved macroeconomic position. The savings rate as a percentage of GDP has been steadily increasing – from 2011 to 2012, the national savings rate increased from 20.1 percent to 24.6 percent. In the past two years, there has also been a reduction in budget deficits to a nearly balanced budget in the past year, and there has been a substantial decline in government debt-to-GDP, which is nearing 40%.

A Note of Caution
While these gains are encouraging, they still come from a very low ranking, especially in institutions. Nearly 40 percent of respondents still listed corruption and government inefficiency as the most problematic factors in doing business in the country. In addition, it remains to be seen whether the current administration can sufficiently strengthen government institutions and processes to forestall any return to previous corrupt practices.

Poor infrastructure was the third-most commonly cited problem in doing business, especially in sea and airport infrastructure. While the Philippines’ overall rank in infrastructure improved, the raw scores have barely moved, suggesting that the increase in rank was due more to other countries’ worsening infrastructure rather than significant improvements in the category. The heavily-congested state of the country’s main gateway airport and main international port, Ninoy Aquino International Airport and the Port of Manila, creates a logistical bottleneck for the archipelago. The administration has continued to liberalize aviation policy to address the country’s poor international connections by signing an executive order last March authorizing an Open Skies policy at secondary gateways. However, the necessary hard infrastructure to accommodate significant volumes of international flights will take time to come on-line, a process The Asia Foundation is supporting with technical assistance. In sea transport the government has pursued the creation of a regional Roll-on, Roll-off network to improve regional maritime connectivity, another area of Asia Foundation support, but tensions with China over the South China Sea have stalled any further developments in that area.

The Aquino administration’s insistence on proper budgeting, bidding, and procurement practices, while perhaps good for the long-term, has hampered the government’s ability to address the poor state of infrastructure in the short-term. Under the nine-year Arroyo administration (2001-2010), corrupt and non-transparent informal practices and rules were established and understood by all. Even the development agencies’ projects were tainted by corruption. In its first two years, the new “practices” under Aquino upset the ecosystem of corruption surrounding infrastructure procurement and led to under-spending in 2011 as the Department of Public Works and Highways and the Department of Transportation and Communications struggled to comply with stricter enforcement of regulations and stiffer reporting and audit requirements. There is hope, however, that as suppliers, bureaucrats, legislators, and contractors adjust to the new public procurement business practices the pace of projects will increase. Indeed, there are already signs that suggest that this is underway: so far this year government spending on infrastructure has increased 66 percent since last year and the responsible line agencies are moving to further streamline project execution.

Obstacles Remain
The challenge for the current administration will be to turn the current gains in governance, institutions, and the macroeconomic environment into real and sustained improvements in the competitiveness and productivity of the country. As the Philippines experience has shown in the 26 years since the restoration of electoral democracy, improvements in governance are fragile and easily reversed once an administration with less than pure intentions comes to power. Also, the increasing savings rate has yet to be turned into large gains in productive economic investments. In the long-term, the Philippines must vastly improve its primary education system, which is mediocre, or see one of its core strengths, a highly educated workforce, disappear. Dropout rates from primary to secondary in public schools are approaching 40 percent and are a major obstacle to sustainable growth. Early signs show a growing potential and an improving outlook for the Philippines, but one that is yet to be converted into enduring, concrete gains.

Jon Morales is the assistant officer in the Philippines program at the The Asia Foundation, where this piece initially appeared. The views and opinions expressed here are those of the individual author and not those of The Asia Foundation.