Philippines: Off its sick bed?

Could the country perennially described as the sick man of Asia be reviving? Its economic vital signs are unexpectedly better than thought possible, with growth in gross domestic product that could hit 6 percent in 2007.

On the other hand, the Asian Development Bank and the United Nations released a report this week putting the Philippines in the same boat as the region’s worst laggards because it is falling behind in a number of categories related to the achievement of the UN’s Millenium Development Goals by 2015.

While much of the region is doing relatively well in eradicating poverty, the Philippines has shown no progress at all in five development goal areas: Reducing the number of underweight children, improving the number of children reaching Grade 5, raising forest cover, reducing carbon dioxide emissions and improving water access in urban areas.

The UN groups countries into four areas based on their progress toward reducing poverty and improving the lives of their people – the Philippines is in the bottom group, along with just seven others: Bangladesh, Indonesia, Laos, Mongolia, Myanmar, Pakistan and Papua New Guinea, according to the report.

But despite the poverty, the burgeoning slums, the country’s perennial political chaos and rumors of military coups, on a macroeconomic level Gloria Macapagal Arroyo’s government seems to be doing a decent job. A flock of outside experts and economists have been reporting that government spending has been cut, a hike in the value-added tax has increased government revenues, excise taxes on tobacco and alcohol have been increased, and the corporate tax rate has been raised.

Lehman Brothers economists Rub Subbaraman and Mingchun Sun, for instance, in a report last week pointed out that government efforts at actually getting people to pay taxes, an enduring problem in a country where avoiding the taxman is a national past time, are starting to pay off. The government has been finding taxpayers at an increasing rate, partly with a system of carrots and sticks for tax officers, rewarding them when they find people to pay up. Audits have been stepped up. The taxpayer registration and payment system is being computerized.

Inflation, another perennial Philippines problem, has begun to fall, from 7.5 percent annually to below 6 percent. A mechanism has been established to reduce nonperforming loans in the banking system, cutting the NPL ratio to well under 10 percent. Interest rates could start to fall. The peso has been steadily revalued upwards from its low during the Asian Financial Crisis of 1997 and 1998. The ratio of public debt to GDP, as high as 130 percent in 2002, has fallen below 90 percent and is expected to fall further over the next couple of years. Exports are rising.

At the heart of all this, besides some rare government prudence, are inward remittances from the 8 million-odd Filipinos working overseas, which have risen by more than 15 percent in 2006, and the discovery by overseas companies that a country with vast numbers of cheap English-speaking workers would be a good site for call centers.

Of course, its very reliance on remittances from abroad is seen by many as a sign of the country’s failure to provide opportunities at home. In the early 1960s the Philippines had a higher GDP than any country in Asia save Japan, and also had the best human development indicators – longest life expectancy, lowest infant mortality rate, highest primary school enrollment ratio, and lowest illiteracy rate – of any of its neighbors. That is far from the case now, of course.

Beginning with a series of financial scandals under former President Ferdinand Marcos in 1981, the country went into a tailspin. Communist insurgency grew, political assassinations became commonplace, intrigue, chaos, and vigilantism rose. The birth rate soared as the Catholic Church maintained a high degree of political influence. The cities choked on garbage and shanty towns. Many Filipinos lost hope in the country.

Maybe, just maybe, things are finally getting better. With crude oil prices finally beginning to subside after two years of skyrocketing increases, the Philippines’ fuel subsidy program is in for a certain amount of relief. Real estate values are on the rise. Japan’s economic resurgence and the Chinese juggernaut both appear certain to benefit most of Southeast Asia. Although Thailand and Singapore will probably be the biggest beneficiaries of renewed Japanese investment and trade, the Philippines is also expected to benefit. China’s growing demand for raw materials, for example, has spurred a local boom in the mining industry.

“The reforms have reached the critical point where virtuous spirals are developing, Subbaraman and Mingchun Sun write. “One involves better economic fundamentals lifting foreign investor confidence, which in turn helps to improve the fundamentals.

But, they write, “The Philippines must stay the course on reform. And in our view the country will, now that it has seen the benefits. Continued reform should help unlock the economy’s productive potential.

They argue for upgrades by the investment ratings agencies. The Philippines has not had a sovereign rating upgrade by Fitch, Moody’s or Standard & Poor for nine years.

But maybe the ratings agencies know something. Although Philippines exports soared upwards in August, rising 21.5 percent over the same month in 2005, there is a troubling lack of export diversity. Electronics comprised 64 percent, most of that in semiconductors, which will eventually suffer partly from the peso’s rising exchange rate, now up 6.1 percent against the US dollar, and partly in the event of a global economic slowdown. Electronic data processing – those call centers – constitutes another 12 percent of exports

It is still inward remittances that drive far too much of the Philippines economy, rising 12.2 percent over August 2005 and topping US$1 billion in each of the last four months. If the global downturn materalizes, the Philippines will once again be in trouble. It is remittances that are driving high levels of consumer activity.

The Philippines is the last country in Southeast Asia with a communist insurgency, a sure sign of continuing unrest. While elsewhere, even China, the language of Marx and Lenin is reduced to kitsch, here it is alive and well and leftist groups – both legal and underground – remain a factor in labor and land disputes. Guerrillas of the New People’s Army, while far below their peak of 25,000 in the 1980s, are said to number about 7,000 armed fighters nationwide and they are capable of high-profile attacks, such as a recent assault on a new airport being constructed on the island of Negros.

The ongoing, never ending Muslim insurgency also continues, with bombings and terror attacks common on the southern island of Mindanao. Criminality is being battled by extra-judicial killings in half a dozen major cities, prompting lawyers’ group to descry the return of vigilante justice.

Sadly, the reaction of the government to insurgency seems also to have been a campaign of terror, with human rights activists claiming that as many as 750 above-ground activists have been murdered in recent years as part of the government’s counterinsurgency drive. Virtually all of these murders are unsolved and both Amnesty International and Human Rights Watch have sharply criticized the government recently over the killings.

It is a strange phenomenon indeed – activists disappearing in the countryside, guerrillas battling the army and the government earning praise for its economic record. It is almost as two different countries are being discussed. One is progressing towards a brighter future built on better economic fundamentals. In the other, poverty fuels an insurgency that in turn spurs outrageous human rights abuses.

In the end, it may be the same country after all. First, there are real questions whether the Philippine economic resurgence is built on sand. The world appears to be sliding into an economic slowdown, with the engine of world growth, the United States, expected to grow no more than 1 percent to 1.5 percent in 2007. A serious downturn in the American housing market could trigger a full recession driven by debt-burdened consumers who have maxed out their credit cards and who are over their heads in overvalued property.

If that were to happen, the dramatic growth in Filipino workers overseas would slow. Inward remittances would flatten. Call centers are not factories feeding a healthy domestic market. They are dependent on western companies and a downturn abroad could cut the heart out of this new industry. The chain effect of a slowing American economy could hurt Chinese and Japanese exports, the two countries to which Philippine exports are growing dramatically.

Then there is always the politics of the country. A messy battle looms over the administration’s desire to change the constitution to allow for a parliamentary system – opponents say it is just an excuse to perpetuate Arroyo and Co. in power. Local elections are scheduled for next year. The military remains restive.

In other words, stay tuned. It is too early to conclude much of anything in a country that remains, as ever, poised to shoot itself in the foot.