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
Business & Investment Opportunities
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