Does the Philippines have a chance?

by Peter Wallace
President

EIU Philippines/AYC Consultants


In the past 25 years the Philippines has averaged 3.1% annual GDP growth, with a population growth of 2.5%. Which means almost no improvement for the Filipino over that 25 years. This is about half, or less, the rate achieved by other nations in Asia.

Why?

1. Politics - vested interests vs national good

2. Uncontrolled population growth

3. Weak educational system

4. Corruption

5. Inadequate infrastructure

6. An agriculture system that hasn't improved in 25 years

7. An inadequate focus on job creation

8. A judiciary in need of major improvement

9. Security

If these 9, and it must be all 9 of them, aren't fixed the Philippines will average 3.1% for the next 25 years too.

At its present rate of growth of the population (2.36%), and the economy (3%) it will take 30 years to catch up to where Thailand is today.

25 years ago it was ahead of Thailand. 40 years ago it was second to Japan.

Mr. James Fallows was right. This is a damaged culture. It is a selfish culture where too many think only of themselves (and family) and care little for others, or the nation as a whole.

I cannot emphasize too strongly that without absolutely fundamental change in these 9 issues, and the cultural change to go with it, the Philippines will be the basket case of Asia one generation from now.

It won't change if the culture, the attitude (of the leaders) doesn't change.

It will not be easy, it will not be popular, it will need a skillful balancing act between pandering to politicians, generating public support and effecting major reform. Great leaders were so because they had a long-term vision and gambled their careers to achieve it.

A 9-year presidency gives the chance for that change.

Will it be done?

This is the challenge for the Macapagal-Arroyo administration.

INTRODUCTION

Nothing that is said in this report hasn�t been said before, but I am hopeful that by tieing it together in one concise report it may help focus attention on a serious rethink of Philippine society and the recognition this is possibly the last chance for a long time to effect that change.

Critical, and most difficult, will be explaining why drastic action is necessary�and will be to the benefit of all in society, particularly the poor and underprivileged.

Selling its policies and reforms is something the government (all of them) has been particularly poor at. Government seems unable to bring explanations down to the level of simple people and counter the emotional arguments of the opposition (the irrational, emotional arguments against the power bill, oil prices, and debt abrogation are just 3 current examples).

There will be antagonistic reaction, to much of what I�ve said, but its said by someone who loves the country and is convinced after over 30 years of analysis very fundamental change must occur if poverty is to be eradicated and the average Filipino have a chance for a decent life in his own country.

The quality of life can be good in the Philippines - but only if we face up to the reality that these changes must occur.

The trouble is none of them show much in the way of short-term results, which is one (by no means the only) reason they�ve not been tackled before. Short-term, high impact solutions won�t solve the Philippines problems. Addressing these issues will.

THE SAD STATISTICS

The Philippines has averaged a GDP growth of 3.1% over the past 25 years. (see chart)



The best it ever did was 8% - and that for only 1 year (1976). From time to time it hit 5%, but couldn�t sustain it. Political crises were the main "pull-down" factor, but so too were the economy�s structural and physical weaknesses.

Clearly 3.1% is not good enough. Too many others have done better:

25-YEAR AVERAGE GDP GROWTH OF SELECTED ASIAN COUNTRIES

China................. 9.7%
Korea................. 7.8%
Singapore........... 7.7%
Malaysia............. 6.8%
Thailand............. 6.5%
Indonesia........... 5.4%
Philippines ......... 3.1%


And some of them have hit 9% averages for up to 9 years. Even during the Asian Financial Crisis most did better than the Philippines 25 year average.

Worse, if you look at it on a compounded basis, calculating from a base of 100 in 1976 then China has grown 5 times more than the Philippines, Thailand (the country we can most reasonably compare with) has grown at least two times more. And on a per capita basis, the Chinese have become 7 times richer than Filipinos, and the Thais 3 times.



COMPOUNDED PER CAPITA GDP INDEX

The Philippines, as currently structured, cannot aspire to these growth rates. It will remain Asia�s laggard unless it makes massive, radical change. It cannot tinker at the fringes, the change must be radical.

The lessons from the success of other countries can be learnt.

1. POLITICS AND POLITICIANS

Politics is at the heart of the problem. There are notable exceptions but, in the main, Philippine politicians are driven by their own agendas. Just one small example, we are proud that there were only 2 deaths during the May 1 rebellion. BUT there were close to 100 deaths related to the elections! No developed democracy kills its opponents just to gain a position of power. If the killers (those who mastermind the assassinations) go to jail, the culture starts to change for the good. And too many of them are elected into power for no other reason but they are popular.

Martial law, 7 coup d�etat attempts, the recent rebellion are just the more extreme examples of wanting personal power regardless of what�s good for the nation. Running for office when you are clearly untrained to handle it (as Mr Estrada highlighted) is another example.

The millions of pesos spent and cheating that were reported in the recent elections are actions of people desperate for power, not actions of people genuinely wishing to serve.

No society is perfect in this regard, but the Philippines is at the bottom end of the scale.

No business would put an inexperienced, poorly educated person in charge of a company, yet too many cities and regions, which are at least as complicated as a corporation to run, are run by people without adequate experience or training. And the low government pay ensures most of his/her support staff is of mediocre capability.

Politicians if they seriously care about their country need to start considering what�s best for the country, not what�s best for them. And Filipinos have to vote more wisely and demand honesty and competence from their leaders. Two facts that are confirmed by 1) EDSA 2 (the result of not voting wisely), and 2) the recent rebellion (power-hungry politicians uncaring about what impact their actions have on the country).

Education (see more later) is probably the basic solution. In 3 ways: First, if everyone is educated then those elected will be part of that educated lot; secondly, an educated populace will be more aware of the issues and vote more wisely. Thirdly, it provides social mobility as President Macapagal so well demonstrated, rising from being a farmer to president of the country.

On top of that is the need to clean up the political system by charging and convicting - and jailing - those guilty of illegal activities.

2. UNCONTROLLED POPULATION GROWTH

Successful countries became so, in part, because the growth of the population was at a pace that support services could provide for and, hence, individual wealth could grow more rapidly. Fewer people sharing the national wealth are richer�and so spend more on high value-added products, helping drive the economy up. Thailand had 38.9 million people in 1972, the same as the Philippines. Today, Thailand has 60 million people, the Philippines an official 78 million (and probably, almost certainly, considerably more). Thais average US$1,960 per capita, the Philippines is struggling at US$1,020. And it will be another 30 years before the Philippines meets this modest level.

A fast-growing population is a primary reason.

I know this is a contentious subject and do not wish to discuss the theological view. But the constitution clearly delineates between Church and State because the State must be responsible for the people's well-being/quality of life. And of all Filipinos, not just Catholics. The Church has the more limited responsibility for the moral values and beliefs of its flock.

What must be pointed out is what is inevitable if the current rate of population growth continues. And that is that there will be 160 million Filipinos by 2030.

The Philippines, demonstrably, can't support 78 million. 160 million will be, quite simply, disastrous.

Better education gives educated parents the capability of understanding the importance of education for their own children and the need to have only those children they can afford. Over time, this leads to lower population growth rates. However, it is very slow. The Philippines is in a population growth crisis, and cannot afford generational change any more than can Africa. And that will be the comparison if population growth doesn�t slow.

The State should provide the option and accessibility to family planning as a responsibility to the society it serves. It should then be up to the Church to convince its flock not to accept practices they believe go against God's wishes.

3. EDUCATION

The Philippines missed the Industrial Revolution, it�s companies (with a few notable exceptions) can�t compete against global competition. They need to become "niche" companies, or support companies for the global behemoths. Wiring harnesses for motor cars is an excellent example of this.

But there is now a chance. It is in domination in the Information Age. The Philippines could be a priority country to consider for information technology (IT) services�but it won�t realise that potential if it doesn�t change. And change rapidly. As it is, it currently ranks 39th of 60 countries reviewed for their readiness for e-commerce.

The first place is in education. And the first action is to bring English back as the primary language. A previous education Secretary�s belief that children learn better in the language they speak at home is correct. But what is wrong is that this is the local dialect (not even Tagalog). Give it one generation of English as the prime language and the language at home is English. This doesn�t demean nationalism. Language doesn�t connote nationalism, look at America (and Australia). They speak English, yet are staunchly American (or Australian) not English. Thirty years ago, English was the dominant language in the Philippines. Today only one TV channel operates in English, and that not always.

English opens a country to the world - and to IT. Which is in English - not Tagalog or, worse, a local dialect. Whose spread is measured in square kilometers.

But more than that education overall must be greatly improved. Some 35% of children don�t get beyond primary school. Only 46% graduate from secondary school (and these are the official, probably exaggerated figures).

And in college the focus is misaligned. The Philippines ranked third from the bottom in a recent exam of students in maths and science amongst some 38 countries. You won�t get ahead in the IT world with lawyers, you will with computer literate graduates. The Philippines can be a services center of Asia in many ways - since human resources are its foremost resource. Therefore, we must attract top partners in these fields to be a center for IT & education in those fields where the Philippines can build upon its rich experience - eg, health, community - oriented leadership training, accountancy, banking and finance; economic planning etc.

Yet Philippine law doesn�t allow foreigners to open schools. So you can�t have a Harvard campus (as an example) in Manila that would open opportunity for thousands of Filipinos to world class education at an affordable price. Instead of restricting it to the few who can afford to study overseas for several years. As in business, international competition (at the tertiary level) could improve the quality of education dramatically.

4. CORRUPTION

Bad as its been throughout Asia, it�s arguable, that stealing (corruption) was less in the more successful countries. Whether it was, or not, at least much of what was stolen was directed back into the economy through corporate building, rather than exotic mansions and fancy motor cars and girl friends. The current budget deficit that concerns everyone wouldn�t exist if corruption could be minimised. The expected deficit this year equates to 23% of the budget. Most assessments of the level of corruption in government put it at 20-30%, ie, no corruption, no deficit. And the money can be used to build the infrastructure essential to economic development.

Putting Mr Joseph Estrada in jail will do wonders for beginning the clean-up. There is no doubt in my mind that if he now escapes conviction, or it�s so delayed as to be ineffectual, the Philippines will indeed be a "banana republic" for at least my (somewhat limited now) lifetime. But it must be followed up with prosecution of the many other large-scale corruptors to get the message through very clearly: You can�t get away with it.

5. INFRASTRUCTURE

It takes too long, is too often too controversial, and mired in legal argument. Infrastructure is a "no brainer". You put it in, you get business. You don't, you don�t. It will go elsewhere.

In every survey we have done it is the number 1 disadvantage of the country. As of 1998, the Philippines was behind Malaysia by 11 years and Thailand by 6 years. If historical trends continue, by 2008 the Philippines will be behind Malaysia by 70 years and Thailand by 20 years.



CUMULATIVE LEVEL OF INFRASTRUCTURE SPENDING: 1980-1998 (US$ billion)

Right-of-way arguments, Congress probes TRO�s and Court cases, and too often, the need to strike deals lead to excessive delay.

Given government's limited funds as much of it as possible must be done by the private sector. Government should be prepared to pick up the difference between what would be the normal charge for the service (based on achieving a reasonable, and agreed rate of return) and whatever fee is imposed due to social concerns.

This differential cost will be far less than shouldering the full cost of the project. And even when 75% of the cost is offered the government can�t pick up the rest. There is US$13 billion of offered aid to build infrastructure in the Philippines, US$8 billion hasn�t been used. The Philippines is only drawing down 58% of the amount scheduled for release.

COMPLETION TIME OF WORLD BANK�FUNDED PROJECTS
---------------------------------------------------------------------------------
PROJECTS.............RP...........REST OF REGION......% DIFFERENCE
---------------------------------------------------------------------------------
Water Supply......9.29................6.04.........................53.8%
Highways............7.41................5.89.........................32.6%
Power.................7.14................5.89.........................21.2%
Irrigation.............8.48................7.85.........................8.0
Ports...................6.58.................6.73........................ --
Area Devt............7.63 Yrs......... 7.05 Yrs.................. 8.2%

Investors are going to be reluctant to invest the large capital cost for the many years of involvement at this time of uncertainty in the Philippines, so some "inducement" will be needed.

The key word is "action", infrastructure just must be built, and built quickly. The 3 to 7, or more years just to get a project started is totally unacceptable. It should take no more than 1, from inception to project awarding. It's time to work fast.

6. ANTIQUATED AGRICULTURE

The biggest revolution for most countries was in agriculture. The sector that dominates fledgling economies (it accounts for 30% of the country�s economy and directly supports 50% of the workforce, highlighting its importance to be first addressed). The trouble is it is too highly politicised in the Philippines. Commonsense has been thrown out the window.

And, as in too many other comparisons, it performs poorly compared to its neighbours.

AVERAGE GROWTH OF AGRI GROSS VALUE ADDED
---------------------------------------------------------------------------------
.....................1970-1980..........1980-1990..........1991-1997
---------------------------------------------------------------------------------
Philippines..........4.9%..................1.0%....................1.8%
Indonesia...........2.0......................4.9.......................3.3
Thailand..............4.2.....................3.9.......................2.9
China..................2.7......................5.6......................0.2
India...................1.8......................3.2......................2.8
Pakistan..............3.0......................4.3......................3.6
Nepal..................0.8......................2.7.......................2.1
Bangladesh.........1.4.....................1.9.......................1.7
Sri Lanka.............1.8.....................2.1.......................2.4

Rice, the primary crop, needs a 60% tariff protection against Thailand just to begin to compete - and even then Thai rice is of better quality.

And it is the same with all crops, hugely inefficient. Rice yields are half those in China, Australia produces 97 tons/ha of sugar cane versus the Philippines 68, and so on.

The reasons are multitudinous: Post harvest losses are huge - 30% in rice, when it should be 5-6% as in other growing countries (no sensible nation dries its palay on the road). The inability of farmers to understand and accept modern agricultural practices - and pay for them. Irrigation is a typical example - El Ni�o becomes irrelevant if you can draw from a dam. But the users should pay for the service. Just as urban people do for the water used in their homes. Use of hybrid seeds is another, they can dramatically improve yields and the quality of the crops - but are vehemently opposed in the Philippines.

IRRI has done some excellent work on providing superior seeds and planting methods. And in developing low cost machinery and equipment that can dramatically improve efficiency. The Philippines is not taking advantage of this research.

But the biggest deterrent to efficiency is land reform. You just cannot be efficient on 5 hectares (7 for rice) of land. This is so obvious that it�s frightening that politicians refuse to see it. Yes, it�s nice to own your own land. But farmers on 5 hectares make up the bulk of those in poverty. And owning land doesn�t pay the bills, a job does. Plantations can provide such jobs. What is needed is a sensible balance where plantations co-exist with small plots.

Bananas, pineapples, mangoes, etc can be major export earners but no new corporation is going to invest under the present law.

Allied to agriculture in that it also provides - or can provide - income in rural areas is the exploitation of natural resources. But, this is another controversial issue where the Philippines could generate significant wealth - and do so in the countryside where it could really help - but doesn�t. Doesn�t because of some poor laws and misunderstanding of weighing benefits against disadvantages. And opposition by far too many NGO's who don't understand the issues, and often have their own agenda.

The Philippines could export US$5 billion as a minimum annually from mineral production, and it could be a lot more. But actually exports less than US$700 million.

Australia exports US$20 billion annually, and uses US$5 billion domestically, and with little long-term damage to the local environment.

Modern mining techniques are environmentally compatible, weighing benefit to the people versus some degradation to the land. Maintaining pristine beauty is a nice concept, but look at a starving child and decide which is more important.

Tourism also deserves a closer look for the medium term (5-6 years) because of the forex generating capability, potential investor-drawing possibility, and a more global outlook for the population at large. And it spreads wealth and creates jobs in the countryside. But it will call for reforms that will strengthen other service sectors�eg, the airline industry (which should be fully "open skies". Countries don�t need their own airlines, they need huge numbers of people coming in and out) telecoms industry, entertainment, etc. And, of course, the safety of the tourist. Given the recent kidnappings this has taken a predominant role�but it will settle down over time. In the meantime encouraging Filipinos to tour their own country could well be a successful strategy to help develop the industry.

7. JOB CREATION

Addressing poverty directly isn�t the answer. Poverty is an outcome from other factors. It�s the old saw, give a man a fish and he has a meal. Teach him how to fish, and he�s fed for life.

Give the poor a job, and they are no longer poor. The focus should be on job creation. Providing the environment that will attract investment. And this, as we�ve said a hundred times, must address what businessmen most complain about.

Number 1 always is the inadequate infrastructure. President Fidel Ramos understood this�look at what he did for power. And more. Lack of funds cannot be an excuse, the money must be re-directed�and the theft (corruption) stopped.

Corruption is Number 2. And corruption reduces the amount available to build by anywhere from 20% to 50%. Corruption occurs in 2 areas: "Commissions" from the contractors and, sub-standard construction. You pay more for a lesser product.

Number 3 is to simplify, and speed bureaucracy. And provide a stable, generally predictable business environment.

Do these 3 and watch the economy grow. Watch businessmen invest in businesses. Watch poverty disappear. Fixing this isn�t rocket science. Getting politicians to understand it does require a rocket though. Too often, they are the problem.

NET FOREIGN DIRECT INVESTMENT (US$B)
-------------------------------------------------------------------------
........................1998................1999.................. 2000
-------------------------------------------------------------------------
China ..............41.1 .................37.0 ................. 35.8*
Singapore........ 7.0 ...................3.0 ....................4.5*
South Korea..... 0.7 ..................5.1 .................... 3.5
Thailand............7.2 ..................5.9 .................... 3.0
India.................2.6 ...................2.1 ....................2.4*
Indonesia.........-0.4 ..................0.5 ....................1.5*
Philippines**.....2.1 ..................1.2 ....................1.1
Malaysia***......1.3 ...................0.2 ....................0.9*
Vietnam.............0.8 ..................0.7 ....................0.7

* Estimates
** Equity capital, based on new BSP reclassification in July 2000
*** Foreign currency controls introduced

As the chart shows, the Philippines is not attracting the investment it could because it has yet to make the changes enumerated in this paper.

8. THE COURT SYSTEM

The mining act has been sitting in the Supreme Court for 4 years, unacted upon. Billions of dollars of investments and exports and job creation have been lost.

Any society that wishes to be civilized must have a blind court system, one that looks dispassionately at each case. Yet no one I�ve ever talked to believe it is. The miniscule number of top level people in jail is sufficient proof of this.

As the Estrada case has highlighted, there are thousands of poor people languishing in jail for years under appalling conditions for petty crimes they�ve often not yet even been convicted of.

The courts accept too many nuisance and harassment cases.

There is a widely held perception that the courts often do not make impartial decisions.

The bedrock of any democratic society is a justice system that is fair, swift, and impartial. Deciding only on the facts. The Philippine court system is, it would seem, far from this.

There is hope with the Supreme Court Chief Justice, but his task is monumental and it�s doubtful one man can make the massive change necessary. It will need help.

CONCLUSION

Is this too harsh on the Philippines? I don�t think so. The numbers say it all: The Philippines is behind. I know it can do better - but it must, really must change its culture. Develop a sense of national pride and doing things for society, not for the individual.

President Gloria Macapagal-Arroyo has the unique opportunity to effect that change. A possible 9 years of continuity to address the underlying root causes of Philippine failure to develop like its neighbours. To do better than its neighbours. At worst, 3 years to get it started. But I venture to suggest that getting these 8 (the last is up to the courts) started will help capture the next 6 if properly explained.

But for it to succeed it must be supported by the people. However, the government has always done a lousy job at explaining its position, its policies, its ideas, and ideals.

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