The Philippines Gets a B+ Report Card

With Philippine President Benigno S. Aquino III now effectively two-thirds through his term, attention is shifting to how far economic, social and administrative progress is likely to be sustained past 2016.

Whether or not he is succeeded by a president equally committed to improving standards of governance lies the question of whether there is sufficient momentum now behind the nation’s progress to enable it to continue whoever occupies Malacañang.

The recently published mid-term review of the 2011-2016 Development Plan gives a good indication both of what has been achieved and of how much remains to be done. And beyond the domain of specific policies and actions lie questions about whether issues ranging from the social structure to monopoly business to the constitution itself remain immovable roadblocks to the nation achieving the persistently high (7-10 percent) growth previously achieved by most east Asian countries.

Average gross domestic product for the two years 2012 and 2013 of 7 percent has just reached the bottom of the Plan’s 7-8 percent target. Tax collection has improved, enabling more to be spent on social services and infrastructure while continuing gradually to reduce government debt to GDP ratio – now just 45 percent, which in turn has cut funding costs and improved its rating by all the international agencies.

Cautious monetary policy has kept the currency stable thanks in part to a continuing large surplus on the current account. Meanwhile capital spending has edged forward, reaching 21 percent of GDP in 2013. The Philippines has just begun to narrow the wide gap between itself and most ASEAN countries in availability and quality of transport and communication infrastructure.

Impressive gains – albeit it from a low base – have been made in primary education and direct grants have helped to alleviate some of the worst poverty. Taxes – particularly on tobacco - have been restructured and the eventual triumph of the Reproductive Health legislation is facilitating access for the poor to family planning services.

Perhaps most significant, confidence and trust in the president remain high, suggesting that his reform agenda is viewed as a welcome change from the massive scandals which beset the Estrada and Arroyo governments. The cleaning up of the Supreme Court, the prosecution of Arroyo and the ongoing public campaign to end the system of pork barrel politics, and its attendant corruption, have all raised public expectations of what voters should expect from government.

The administration itself has, given the circumstances, been mostly free of the corruption usually associated with public projects, by and large a tribute to Aquino’s appointment decisions. Just possibly future presidents – and members of congress – will now be held to higher standards than their predecessors as public awareness of such issues gradually supplants name recognition as the principle determinant in elections.

So much for the progress. The mid-term review is also refreshingly open about the failures. The most obvious is that growth has been very poorly distributed, most occurring in the regions that were already most developed – three out of 17 account for two-thirds of GDP.

Poverty incidence has declined only marginally, a key reason being that job creation has been weak. It admits: “Simply stated, the gains have yet to materialize into actual, tangible improvements in the lives of the majority of people”.

The review admits too that vital infrastructure projects have been avoidably delayed and costs of doing business remain high compared with neighboring countries. Agriculture and transport infrastructure all need more resources to create the conditions in which growth in the poorer and more remote areas can become self-sustaining.

Indeed, regional imbalances are such that there are suggestions, even from free-market economists that tax breaks and wage subsidies may be needed to attract investment to new areas.

Progress in housing has been significant but the need and potential is even greater.

Job creation also needs better standards of education, especially of the technical and vocational sort to support the growth of new industries. Although manufacturing is beginning to show signs of life after years of abysmal performance, GDP growth remains far too dependent on remittances funding consumption while manufacturing suffers from high power and labor costs, poor infrastructure and lack of scale of the sort which has driven auto manufacturing in Thailand and now Indonesia.

Overall investment is still feeble relative compared with most Asian countries and particularly relative to needs. A persistent current account surplus of 2 percent or more of GDP is more a reflection of weak investment than a well balanced economy.

Manufacturing also continues to suffer from smuggling, which also depresses government revenues. Efforts to reform the notorious Bureau of Customs are still a work in progress. The sums involved have reportedly long been a funding source for politicians as well as departmental officials.

Indeed, unless revenue collection can continue to improve it is hard to see how infrastructure, education and health gains can be sustained. Revenue growth has been significant but is still only 14.5 percent of GDP. Public-private partnerships are helping with some infrastructure but mostly in relatively developed regions. Delays in power development threaten the return of brownouts.

Beyond these policy issues are others which weigh on economic and social development.

Key issues identified in a recent speech by former (under President Ramos) Finance Secretary Roberto de Ocampo included:

The small size of the educated middle class which results in control of politics by a feudal elite while poorly educated masses elect film stars and feudalists. The answer lies partly in better education but also in the introduction of a competition law which would end the dominance of a few business groups. Democracy has been only a name while oligarchs have continued to rule. Continuation of administrative and institutional reform is essential to achieve social progress. Policies and investment priorities must be set according to efficacy not subject to short electoral cycles.

Likewise amendment of the constitution to allow foreign investment in most industries would increase investment and competition, lower costs and reduce the power of the few business groups which dominate the modern economy. The Philippines has failed to take advantage of the ASEAN-wide market or engage with the US-sponsored Trans-Pacific Partnership project.

In Ocampo’s view investment in mining continues to be unnecessarily obstructed and agrarian reform has been too slow and piecemeal to do much for farm workers while it now obstructs creation of efficient size farms.

On the brighter side, it is possible to see the growth of a more influential middle class springing both from the surge in BPO activity and small businesses growing out of remittances by overseas workers and migrants. Likewise the millions of overseas Filipinos have been able to see conditions abroad and raise expectations for the future of their country. Even before the RH bill was passed, the fertility rate was falling, presenting the real possibility that over the next 20 years the Philippines will be helped by demography as its neighbors were in previous decades.

Indeed given that development in countries such as Thailand and Malaysia now appears to have stalled with both caught in the middle income trap, the Philippines has an opportunity for rapid catch-up. Will it disappoint again? Or is it really different this time/

It is 40 years since this correspondent wrote a magazine cover feature: “Philippines: Asia’s Next Miracle?”

The country can now do without talk of miracles and faith healers: better governance and more competition should suffice.