Three areas where the PHL economy needs urgent upgrades

There are growing indications that the coming year will be a particularly difficult one for emerging markets. For years, there has been an infusion of global capital into promising developing economies, which offered higher interest rates and more favorable returns on short-term investments.  
 

But as the dust settles in the emerging economies, with widespread corruption, regulatory uncertainty, and political instability denting their glitter, investors are turning their attention back to industrialized countries such as the U.S., which have shown perceptible signs of economic recovery in recent months. In short, the highly favorable circumstances, which allowed for rapid expansion of credit as well as investment euphoria across emerging economies, are beginning to draw to a close. 

 

The Philippines, however, is still expected to grow at above-average rates for the coming years. The post-Yolanda reconstruction and recovery efforts will drive up domestic spending and help the country sustain its largely positive macro-economic trajectory. A steady and increasing inflow of remittances from Overseas Filipino Workers (OFW) will be a crucial factor in allowing the Philippines to withstand the seismic shifts in global capital markets. 

 

A cautionary note 

 

But this shouldn’t serve as a reason for complacency. The country’s encouraging growth rates are largely a function of its relatively low development level: It is easier to grow at about 5-6% annually, when per capita incomes are barely above low-income countries. Moreover, our growth continues to be driven by our dependency on the hard-earned money sent back home by millions of Filipinos working around the world, including unstable regions such as the Middle East. 

 

As we move up the development ladder, old models of growth tend to lose their utility, and produce ever smaller additional benefit. There will be greater demand for a more equitable distribution of newly-gained wealth, as legions of unemployed and poor citizens demand their share of prosperity. And as the country faces a new and complex array of challenges, political leaders tend to buckle under pressure, undermining a modicum of stability, which previously facilitated steady economic expansion. 

 

“What [emerging markets’] experiences underscore is that political cycles are as important to a nation’s prospects as economic ones,” wrote Ruchir Sharma, one of the world’s leading experts on emerging markets, in “Foreign Affairs” magazine recently. 

 

“Crises and downturns often lead to a period of reform, which can flower into a revival or a boom. But such success can then lead to arrogance and complacency – and the next downturn.”

 

Historically, sustained periods of economic growth tend to generate two types of challenges. 

 

First, they are accompanied by rising expectations among the aspirational middle classes, which become increasingly intolerant of any indication of ineffective governance and macroeconomic frailty. The result tends to be growing incidents of protests, weakening trust in state institutions, and a more beleaguered political leadership, which, in turn, lacks enough latitude to engage in much-needed policy experimentations. 

 

Second, opponents of reform will begin to use any period of economic downturn or/and social discontent to push back against a reformist administration, frustrating efforts at effecting transformational change in the political system. The result, in semi-democratic states, tends to be more vicious attacks against the top leadership, more legislative filibustering, and a messy political discourse.

 

Towards reforms 2.0 

 

As I have previously argued, the Philippines is somehow moving in this direction – exemplified by the deepening cycles of controversies, scandals, and popular mobilization against public officials and state-sponsored projects in recent months. And as the Aquino administration feels the heat and suffers from declining popularity, some critics claim that it has become more defensive and stubborn in its posturing. 

 

By no means does this suggest that we will inevitably return to our past patterns of economic stagnation and political instability. But to sustain our current gains, we need to upgrade our policy reforms. As far as the economy is concerned, there are at least three inter-related areas in need of serious policy reformulation: 

 

1. Focus on Greenfield investment 

 

Despite all the fuzz about the Philippines’ successful bid to attain “investment grade” status form the world’s leading credit-rating agencies, the Philippines continues to be a regional laggard in attracting long-term foreign investments, which could actually enhance our productive capabilities and provide permanent employment for a large number of people. The obsession with wild runs in the stock markets has only distracted us from the real challenge of attracting quality, large-scale foreign investments. 

 

2. Build a serious infrastructure  

 

At the beginning of its term, the Aquino administration launched an ambitious infrastructure program under a Private-Public Partnership (PPP) scheme. It also promised to ramp up infrastructure spending as a share of the Gross Domestic Product (GDP). By all indications, however, we won’t expect any major development until 2015, with many PPP projects still largely speculative and hammered by regulatory uncertainty. Post-Haiyan reconstruction will drive up spending, but our target of 5% spending-to-GDP ratio in 2016 is still considerably lower than our peers in the region, which have enjoyed a better quality of infrastructure and large inflow of greenfield investments. 

 

3. Invest in human capital

 

Cognizant of the limited “trickle-down” of recent macroeconomic gains to the most vulnerable sectors, the Aquino administration has expanded the Conditional Cash Transfer (CCT) scheme, which aims to improve the health and educational circumstances of poorest citizens. But in order for the Philippines to be a competitive economy, the state will need to also focus on the quality of education of the country’s leading universities, which have suffered from declining international rankings and budget allocation. — KDM, GMA News 

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Richard Javad Heydarian is a lecturer at the Political Science Department, Ateneo De Manila University, and a contributor to the Asia Times and Huffington Post on Asian geopolitical and economic affairs. He can be reached at jrheydarian@gmail.com