Is the Philippines Finally Reawakening?

Is the Philippines destined to become an Asian economic growth leader, matching China, India and Vietnam? Is it really possible that a nation which has been a laggard for so long can soon be growing about double its average for the past 30 years? Is it possible for a developing country to take off on the back of its services sector rather than the normal routes of labor-intensive manufacturing or resource extraction?

The answer to all three questions is “yes,” according to a remarkable set of statistics in a draft document “ASEAN, the PRC and the Great Transformation?” recently put out by the Asian Development Bank at its recent annual meeting in Manila.

The ADB is forecasting 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 way ahead of Indonesia, Thailand and Malaysia, so long the development stars of Southeast Asia which are projected by the bank to be in the 4-5- 5.5 percent range.

Even if the ADB is being overly optimistic about the whole region’s prospects, the huge relative improvement in the Philippines stands out after decades of underperformance in which average decade-term growth never exceeded 4 percent despite (or because of) very rapid growth in the population and labor force.

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 in history to use the services sector as a basis for economic take-off?

For sure 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 at least a chance that four more years of effort by 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 are having to be 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 long history of unstable regulation and political interference.

In short it will take awhile to build a base from which an industrial economy can grow and take workers out of very low value-added services and farming into labor-intensive manufacturing. So can the more prosperous parts of the service sector provide lift-off now?

The Philippines’ failure to develop its manufacturing sector, which now accounts for only 21 percent of GDP compared with 27 percent in 1980 and 34 percent in Thailand today, has long been a curse which has kept the nation poor and forced workers overseas. But now this weakness may be a strength as global markets for low-technology manufactures are glutted by a combination of overinvestment in China and the almost boundless availability of labor in South Asia. It is now to the Philippines advantage that most of its foreign exchange now comes from remittances (US$20 billion a year and rising) and Business Process Outsourcing (BPO) now at US$13 billion. These dwarf physical exports led by electronics which are around US$35 billion but no more than 20 percent of that value is added in the Philippines. Both are more stable income sources than manufactures or resources.

The BPO industry, which requires educated people but little financial capital, is creating a significant class of educated lower middle income salary earners who have spawned building booms and consumption booms in Manila and Cebu. Although their numbers – about 450,000 directly employed in 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 appreciation of the value of education and of expectations of standards of government.

The same may be partly said of the impact of remittances which come not just from low-paid domestic helpers but from professionals in North America and skilled workers in the Gulf and elsewhere. At one level remittances prop up consumption and sustain families with more children than they could otherwise afford. Much too goes into house-building. But there are signs that more remittances now being better mobilized for investment in productive assets and that slowly too the experiences of the 10 million Filipinos now abroad are raising local expectations for progress, and for emancipation from the quasi-feudal system which has overlaid Philippine democracy.

Even the birth rate is falling and families are taking to use of contraception despite the failure of the political class to follow public opinion rather than the Catholic Church and pass the Reproductive Health Bill which would support family planning for those who wanted it. So while other east Asia nations face the challenge of rapidly aging populations the Philippines will be less burdened than in the past by over-rapid increase.

The nation is not going to hit 7 percent sustained growth simply on the back of ever-expanding BPO and remittances. Although the latter continue to grow through the recent global crisis the rate of increase will surely slow, as will that of BPO where skill shortages may already be inhibiting moves to the higher value-added services. But the Philippines is already a world leader in BPO and will likely remain so.

Tourism too is at last beginning to acquire some momentum, helped by the expansion of domestic and international air services partly driven by overseas worker traffic. Although still lagging far behind its potential and the numbers seen in Thailand, Malaysia and Vietnam, it has become a favorite destination for Koreans. Even the Scarborough Shoal dispute could be a benefit, raising the nation’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 which can serve the domestic market and be competitive within the ASEAN Free Trade Area. But the infrastructure basis can be laid from the existing income streams so if costs such as power and wages can be made competitive with neighbors and the business climate predictable for investors there really is a prospect that manufacturing can at last play the role that it should.

The ADB projection of 7 percent a year till 2030 still looks optimistic. But the tables may finally be turning and the Philippines beginning the long journey of catching up with the likes of Thailand and even getting back on level terms with Indonesia.