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Philippine Economic Prospects Under the Estrada Administration
The Asian Economic Crisis
February 1999
Introduction
The Philippine economic prospects under the administration of President Joseph Estrada (1998-2002) are relatively bright in the context of the East Asian economic crisis. The Philippines is expected to have one of the most rapidly growing economies in the region, starting its recovery in 1999 at 3 percent growth in Gross Domestic Product (GDP), accelerating to over 6 percent in the early years of the next millennium.
These brighter prospects can be mainly attributed to long-term political stability combined with market-oriented policies that were pursued during the previous administration of Fidel V. Ramos, basically retained, and expected to be enhanced under the present dispensation.
The performance of the Philippine economy could be further improved in the next five years if the Estrada government succeeds in addressing the major bottlenecks to foster economic growth, which are a low rate of domestic savings; the poor state of infrastructure, especially in the agricultural sector; and inefficient tax collection that can be partly attributed to corrupt practices in government.
Even if the economy grows at 6-8 percent in the next five to six years, however, the Philippines will continue to have one of the highest poverty incidences in the region (above 15 percent). It may take some twenty years of continuous market reforms and the appropriate social policies before the Philippines can attain the single-digit poverty figures of some of its neighbors like Singapore and Malaysia.
The private business sector has a major role to play in converting the relatively positive outlook into business opportunities in consumer goods and in export-oriented industries that capitalize on the highly educated and skilled manpower of the country, such as semiconductor and electronic components, car parts, software products, and so forth. The diversification of export markets, the implementation of productivity measures, the strong support to quality university and technical education, and the promotion of social assistance programs addressed to the poorest of the poor are some of the other corporate strategies that the private sector is expected to adopt in the coming years.
Star Performer in 1998
The Philippine economy has distinguished itself in 1998 as a star performer in the beleaguered East Asian region. It is being singled out by many independent analysts as the least affected by the Asian financial contagion and the first to recover from the turmoil. The following table shows the relative forecasts of the leading Asian economies, including those not directly affected by the crisis, i.e., China, India, and Taiwan (see Table 1).
In 1998, thanks to the gradual recovery of agricultural production in the third and fourth quarters from the devastation caused by El NiÕo, Philippine GDP is expected to post an increase of at least 0.5-1 percent, in contrast with the declines (as large as 15 percent for Indonesia) that will be suffered by all the East Asian economies affected by the crisis. In 1999 most of these affected economies will still see negative GDP growth figures, albeit smaller, except for South Korea and Singapore. Especially noteworthy is the very rapid growth of Philippine exports at 16 percent in 1998, a real feat, considering the significant slowdown of world trade during the current year.
No Johnny-Come-Lately
What is happening in the Philippines is not the result of fortuitous events but the fruit of 12 years of political and economic reforms. Already in early 1997, a few months before the outbreak of the East Asian crisis precipitated by the Thai baht devaluation on July 2, 1997, the Philippines was perceived as the most attractive country in East Asia in which to invest. In the Asian Executive Poll appearing in the February 13, 1997, issue of the Far Eastern Economic Review, Table 2 summarizes the answers to the question "which of the following will be the best place to invest in during the Year of the Ox?" asked of the chief executive officers of leading companies in East Asia.
The Philippines was singled out as the most attractive country in which to invest because of its long-term political and social stability, especially when compared to some neighboring countries that had not yet resolved the thorny political succession issue. Subsequent events in 1998 reinforced the image of the Philippines as one of the most politically stable countries in the region after the peaceful and democratic elections of May 11, 1998, in which President Joseph Estrada was elected by a significant majority. This was the second time in twelve years that there was a peaceful transfer of power. In contrast, the fragile political situations in Indonesia and Malaysia enhanced the image of the Philippines as having a politically stable society.
There are already clear signs that foreign direct investments are shifting away from Indonesia and Malaysia toward the Philippines. This is the exact reverse of what happened during the second half of the eighties and early nineties, when the Philippines was avoided by investors because of the seven attempted coups and the aggressive campaigns of the communist guerrillas and Muslim rebels to destabilize Philippine society.
Thanks to the efforts of the administration of former president Corazon Aquino to slowly and patiently restore the democratic institutions that had been dismantled by the authoritarian Marcos regime (1972-86), by June 1992 the Philippines was enjoying relative political and social stability. Building on the improved political climate, the administration of the former president Fidel Ramos worked to advance the market-oriented economic reforms that had been started as early as 1981 but were thwarted either by oligopolistic Marcos cronies or by political instability during the Aquino era.
The government of President Ramos (1992-98) diagnosed the roots of the Philippine economic malaise. While all of its East Asian neighbors had increased their per capita GDP by an annual average of 6-7 percent from 1960 to 1990, the Philippines posted a pathetically low 1.5 percent annually during the same period. Even worse, all of its neighbors, including Indonesia, brought down poverty incidence to below 15 percent while the Philippines was unable to reduce the percentage of its population falling below the poverty line to less than 30 percent.
The major cause of such a failure of the Philippine economy, touted to be the most advanced (next to Japan) in East Asia after the Second World War, was the inward-looking, protectionist, mercantilistic, and interventionist policies adopted by the successive governments from the 1950s to the 1980s. By the beginning of the 1980s, the Philippines started to become known as the "sick man of Asia," resembling more in economic performance the basket cases of Latin America rather than the tiger economies of Asia.
Following the level of countries like Chile, Argentina, and Mexico, which had earlier taken the path toward more market-oriented policies, President Ramos pursued a policy of privatization, deregulation, and liberalization-the antidotes, respectively, to state interventionism, mercantilism, and protectionism. Among the major economic reforms during the Ramos administration were:
The First Six Months of the Estrada Administration
Since newly elected President Joseph Estrada took office on June 30, 1998, there is sufficient evidence that his economic managers have the strong determination and professional competence to continue on the path of deregulation, privatization, and liberalization. In the meeting of economic leaders of the 21 countries belonging to the Asia-Pacific Economic Cooperation (APEC) held in Kuala Lumpur November 15, 1998, President Estrada declared in no uncertain terms that he has no intention of following the example of Prime Minister Mahathir of Malaysia who imposed capital controls on his country. The Philippines continues to be strongly committed to WTO, AFTA, and APEC goals toward trade and investment liberalization and facilitation.
In a technical report that accompanied the first State of the Nation Address of President Estrada on July 27, 1998, major policy statements were made concerning the economic directions to be taken in the next six years.
As regards the macroeconomy, there is a commitment to low inflation and to a competitive market environment. There is evidence in the last six months that the key players in the cabinet can actually target inflation at the 4-5 percent level, barring a repetition of the highly abnormal weather conditions of the El NiÕo phenomenon, which caused a precipitous drop in food production. The fiscal managers have also shown their ability to control government deficits. It is notable that it was the International Monetary Fund (IMF) that actually convinced the Philippine Government to raise its targeted deficit level for 1999.
What is questionable in the avowed policy is the "reduced reliance on foreign funds." The financial news during the first weeks of 1999 has been replete with reports of the Philippine government raising more than a billion U.S. dollars through bond flotations. It seems clear that the Philippines, having the lowest domestic savings rate in the region, cannot avoid relying heavily on foreign funds, which is not necessarily an unwise policy.
The directives to be taken in the fiscal sector appear to be the right ones. It is doubtful, however, that the Estrada government can be successful in the initial years to significantly improve tax administration in order to generate revenues. The Bureau of Internal Revenue (BIR) seems to be reluctant to go after some of those suspected of massive tax evasion. Until the business sector sees a strong political will to implement the CTRP, there will continue to be creative ways of evading and avoiding taxes. Even the mere consideration of a Tax Amnesty Program is considered by some as a sign of weakness. It is utopian to expect those in the underground economy to surface as a result of a Tax Amnesty Program.
Over the last seven months, there has been a clear trend toward lower interest rates, despite temporary inflationary pressures resulting from El NiÕo. Thus, the objectives set forth in the monetary and fiscal sector appear realistic. The strengthening of the peso in the first weeks of 1999 and the increase in international reserves augur well for the attainment of a competitive foreign exchange rate and stable prices. The further liberalization of the entry of foreign banks will improve market discipline. It is not clear, however, how lower mandatory reserve requirements will automatically increase credit facilities for the poor. What is needed are innovative institutions like the Grameen Bank pioneered by an economist in Bangladesh. It is highly unlikely that the traditional Philippine or foreign banks can change their corporate culture, which has been biased against low-income borrowers.
The active participation of President Estrada in the last summits of economic leaders under APEC and ASEAN is a healthy sign that the Philippines will be adhering to the commitments to free trade, despite the temporary reverses resulting from the recent currency and banking crisis. In the domestic market, there is no reason to doubt the government's resolve to allow foreign investors to own retail establishments in the country.
The Next Five Years
As the administration of President Joseph Estrada continues the market-oriented programs put in place during the previous two terms, prospects for the Philippine economy are among the brightest in East Asia. The Institute for Policy Research of the School of Economics of the University of Asia and the Pacific came out with the following five-year economic forecasts for the Philippine economy (see Table 3).
As can be seen on Table 3, personal consumption expenditure has been the least affected by the economic slowdown because Filipino consumers spend the bulk of their incomes on very basic products, such as food, beverages, clothing, personal care items, and so forth. Except for the big-ticket items, such as cars and appliances, consumer markets have continued to grow at 4-5 percent. It is government consumption that has been drastically cut as a result of the austerity measures of the Estrada government. It is ironic that the IMF is now pushing the Philippine government to practically triple its planned budget deficit of P17 billion in 1999 to close to P60 billion. The IMF is now convinced that countries such as the Philippines, which have had several years of macroeconomic stability, can benefit from some pump-priming during the ongoing slump in the world economy.
Capital formation or investment is experiencing the largest decline among all the items in the GNP account. The decline of close to 12 percent can be explained by the high rates of interest that prevailed for most of the year, the wait-and-see attitude of investors, and the reluctance of most banks to lend even to good borrowers. The year 1999, however, will see a growth of over 8 percent, followed by double-digit growth rates in 2000 and beyond. Those investment figures are expected to be bolstered both by private and public investments, especially in some large infrastructure projects that will average about $4 billion a year till the year 2004.
Exports of good and services will grow at 4 percent in 1998, with merchandise exports literally booming at 18 percent. Although these exports are still heavily accounted for by electronics and semiconductor exports (more than 50 percent of total exports), the danger of a sudden slowdown is unlikely because the abundance of highly educated technically skilled manpower in the Philippines is attracting multinational enterprises to relocate their operations to the export processing zones and industrial parks of the country in the same way they did to Malaysia for 15 years. Industry leaders are confident that double-digit growth rates in their exports will continue for the next ten years. Thus, total exports will increase at over 20 percent annually for at least the next five years. The outward-looking strategies that have been the result of at least the last ten years of economic reform are now paying off. What the East Asian tigers achieved in the seventies and eighties will be attained by the Philippines in the next ten years.
Imports will recover in 1999 after the decline by 1.2 percent in 1998. The growth of exports, however, will outpace that of imports, resulting in smaller trade deficits, especially in relation to the GDP. Current account deficit as a percentage of GDP will be much below the critical level of 4 percent. Especially helpful in keeping the current account deficit at very manageable level are the foreign exchange remittances of over 4 million Filipino overseas workers who faithfully send to their relatives $8 to $10 billion annually. This amount has been largely unaffected by the East Asian crisis because the bulk of it comes from the United States, Europe, and the Middle East.
The Philippine peso will, however, continue to depreciate slightly in the next five years because Philippine inflation, although decelerating to about 5 percent during the early years of the next century, will continue to be higher than the inflation rates of the country's major trading partners, especially Japan and the United States.
As Philippine agriculture recovers from the serious weather disturbances of 1997-98, inflation will decelerate from the double-digit rates of the second half of 1998. Peaking at an average annual rate of 9.4 percent in 1998, inflation will slow down to an annual average of 4.6 percent in the early years of the next millennium.
There is now agreement between the fiscal and monetary authorities that interest rates should be managed downward, especially after IMF officials no longer insist on using high interest rates to prevent further devaluation of the peso. The IMF has learned that the high-interest solution, applied to Latin America during the 1980s, is inappropriate in East Asia, where foreign debt is covered mostly by the private sector and hyperinflation is not a serious threat.
Thus, interest rates will be tending downward in the next three to five years, reaching single-digit levels in the early years of the next millennium. The low-interest rate regime is expected to boost further local investments in sectors where the Philippines has a comparative advantage, such as tourism, health care, information technology, fashion goods, high-value crops, home furnishings, and other industries requiring a highly literate and creative work force. Agriculture as a whole, however, will continue to be a drag on the economy as a result of several decades of policy biases against the farm sector. The focus of the Estrada administration on agricultural development will take time to reverse this trend.
Focus on Agricultural Development
The Estrada administration is determined to make agricultural development the centerpiece of its economic program. This policy has been clearly articulated in the technical report accompanying President Estrada's State of the Nation Address on July 27, 1998.
The Estrada government will be the first since the end of World War II to make agricultural productivity the major thrust of development. For close to half a century, the countryside was sacrificed on the altar of industrialization with tragic results. The large majority of poor households are in rural areas.
The underdevelopment of the Philippine agricultural sector can be attributed to the state's neglect of such vital infrastructures as farm-to-market roads, irrigation facilities in the coconut and sugar regions, and postharvest facilities. Also harmful to food production were price control policies that supported an inward-looking import-substitution industrialization strategy and an agrarian reform program that gave more importance to land redistribution than to the farm support services needed by the farmers to make these lands productive.
The Agricultural Development Program of the Estrada administration is committed to directing significant resources to infrastructure in the rural areas. Part of the funding for agricultural development will be made available by modifying the pork barrel system used by the Philippine Congress in allocating government money to local projects, many of which had doubtful productivity. These pork barrel funds will be reallocated toward farm-to-market roads, irrigation facilities in coconut- and sugar-producing regions, postharvest facilities, rural credit, and agricultural extension services.
The World Bank, in a series of consultations with various groups on Restoring Stronger Growth with Greater Equity held in October-November 1998, made the following observations:
"The mediocre performance of the agriculture sector since the early 1980s is, to a large measure, the result of inadequate private and public investment in rural areas. Taking affordability and implementation capacity into account, we recommend that public expenditures (capital outlay) on rural development be doubled by 1998. The major thrust of the increased allocations should be on rural infrastructure, particularly barangay/rural roads and irrigation, and on upland resources management. While the Medium Term Agricultural Development Plan (MTADP) strategy based on a comparative advantage is appropriate, its main implementation weaknesses are the lack of involvement of the major stakeholders and weaknesses in the implementing agencies. These need to be tackled to realize the expected impact from increased budgetary outlays."
Immediate Prospects for Agriculture
Since the efforts of the Estrada administration may not yield immediate benefits, the prospects for Philippine agriculture in the immediate future will be shaped by the existing strengths and weaknesses of the sector. The low production of Philippine agriculture is immediately evident from the fact that it accounts for more than 40 percent of the labor force but only 20 percent of GNP. During the period 1993-96, the agriculture sector posted a rather modest growth of 2.1 percent annually, with the highest growth in 1996 at 3.1 percent and the lowest at 0.85 percent in 1995.
In 1997 the sector posted a surprising growth of 2.8 percent despite the onset of the dreaded El NiÕo in March. The contingency measures of the Department of Agriculture (DA)-including cloud seeding, completion of farm reservoirs, and shallow tube wells-have paid off. As a result, rice production was maintained at the same level, disproving the negative forecasts of many analysts and mitigating the impact of rice on inflation (as the commodity accounts for about 13 percent of the CPI) (see Table 4).
The prospects of 1998 may not be rosy as the country continues to suffer El NiÕo's wrath. The scarcity of water supply will cause reduced hectarage and lower crop yields; higher temperatures could cause slower weight gains and more deaths among livestock and poultry; the shift in migratory patterns will influence fish catch; and the low rainfall and high evaporation will reduce water supply and salinity in fish ponds.
Agriculture is projected to see a decline of 5 percent in 1998. That is the optimistic scenario and a minus 6 percent is the pessimistic scenario. A 4 percent recovery is attainable in 1999.
If agricultural subsectors register a less-than-satisfactory performance, El NiÕo will not be the only factor to blame. There is still the peso depreciation, high interest rates, and soft market demand.
The peso depreciation will have varying effects on the sector, depending on whether a particular product is exported, is an import substitute, or has a high import content. Exports such as coconut, banana, pineapples, and mango will gain from higher peso revenues, provided overseas buyers do not demand discounts. Import substitutes, particularly those with low import content-among them corn, sugar, pork, and chicken-will benefit from less competition as the high peso-dollar rate makes imported goods increasingly expensive for Filipino consumers.
Products sold domestically that have high import content will face severe constraints in the light of market softness. For instance, processed meat, which is contingent on imported beef, will have less leverage in raising prices to compensate for cost increases, thus making some segments of the fast-food business (such as burger chains) less profitable.
Crop reduction is expected to contract by about 10 percent in 1998 because the products concerned (rice, corn, sugar, and coconut) were the most vulnerable to the El NiÕo drought.
It would be recalled that, in 1983, the year when El NiÕo was as intense as the current one, overall crop output slipped by more than 7 percent. A 6.8 percent uptick is expected in 1999 as recovery is buoyed up by dramatic recoveries in crops, except coconut and sugarcane. Onward, growth could stabilize at about 3 percent annually following implementation of the Agriculture and Fisheries Modernization Act.
Palay production was the hardest hit in 1998, with a projected fall of 17 percent. About 2.2 million tons of rice had to be imported in order to stabilize prices. The good news is that rice production can recover at 15 percent increase in 1999. Corn supply, which declined by some 15 percent in 1998, will grow to 12 percent in 1999. Coconut, which is adversely affected by drought over a longer period, will suffer successive declines of 13 percent and 15 percent in 1998 and 1999, respectively.
Sugarcane production was expected to suffer a moderate contraction of 7 percent in 1998, to be followed in 1999 by another decline since El NiÕo also affected the standing crop that will be harvested in the next season (September 1998-August 1999). Bananas, which grow mainly in Mindanao, benefited from better rainfall in that southern island. Thus, it suffered only a slight decline of 4.3 percent in 1998. Livestock and poultry, least affected by the drought, nevertheless suffered from low demand because of the significant decline in incomes of the million of farmers of the major crops.
Medium-Term Expectations
The peso depreciation will benefit agriculture exports. There will be bigger opportunities for both exports and import substitutes in the medium term, based on the impact of the following factors: productivity enhancement measures, quality standard, minimum volumes, and delivery and timing.
The recent passage of the Agriculture and Fisheries Modernization Law (AFML) serves as a significant impetus of the sector, providing for a P120 billion fund over the next seven years. However, the implementation of AFML is practically two years delayed. Due to resource constraints the total budget of DA in 1999 will only be P14.7 billion.
The first-year budget is broken down into: P4.4 billion for research, P4.4 billion for extension, P5.2 billion for irrigation, P1.75 billion for infrastructure, P2 billion for marketing assistance, and P2 billion for postharvest facilities. The big question is whether or not the government can raise these funds in light of tax revenue constraints. Part of the financing would be sourced from the Official Development Assistance (P3.75 billion) and from private investments (P3 billion).
The Center for Food and Agriculture of the University of Asia and the Pacific projects an average growth rate of 3.3 percent from 2000 to 2002. This takes into consideration one drought year but not as intense as the 1997-98 episode in which growth could decelerate to only 1 percent.
Crop production may expand by 3.8 percent every year. Rice, corn, sugarcane, and other crops are seen to build up by 4-5 percent annually. The future of coconut remains uncertain. Unless massive fertilization is undertaken, growth could average only 1 percent at best every year.
A strong recovery is expected in livestock and poultry following income increases. Livestock and poultry are projected to expand by 4 percent every year. Only minimum growth is likely for fisheries and aquaculture, given the continuing decline in the municipal fishery.
These medium-term expectations will be attainable if the Estrada government is successful in allocating substantial portions of the Miyazawa funds (about $1.5 billion), the Japanese government aid to the Philippines. Also promising are the so-called ERAP ("partner") bonds being issued by the government in order to finance agricultural projects. Expansion of irrigation facilities for rice, especially on the island of Mindoro, can boost production almost instantly. The irrigation of coconut farms also can hasten intercropping activities, rendering millions of hectares available for vegetable, fruit, and livestock production.
Tough Times for Philippine Industry
The Philippine manufacturing sector is now paying for the many years of overprotection and pampering it received from the government. It is having serious difficulties coping with competition from imported products and higher costs of financing. As reported in a recent publication titled The Philippines and the Asia-Pacific Challenge put out by the School of Economics of the University of Asia and the Pacific, the short-term prospects of Philippine industry will depend on:
Fortunately, the Estrada government is strongly committed to a low-interest rate regime, which can give a much-needed boost to companies that need to expand through debt financing. As a result of the high-interest rate that prevailed for most of 1998, investments have plummeted. The total number of Board of Investment-approved projects, for example, declined by 43 percent, while total project costs decreased by 67 percent during the first eight months of 1998.
As the GDP starts growing at 3 percent or more in 1999, there will be a gradual recovery of manufacturing, which can manage a slight 1.5-2 percent growth in 1999. Companies can continue to absorb increases in costs by improving their productivity through better technology and efficient distribution systems, especially for companies seeking to expand markets nationwide and in the Asia-Pacific region. This will also require a pro-active role on the part of the government in improving the nation's infrastructure (road, sea, and air transport as well as traffic management) in order to promote the development of efficient, integrated, and secure distribution systems.
Because of the vital role of transport in an archipelago like the Philippines, the private sector is investing more resources in distribution logistics. Transport companies are diversifying into logistics management for manufacturing companies who wish to be relieved of inventory management and handling problems that are exacerbated by the relatively inefficient transport network system in the country.
Another challenge for Philippine industries is the strengthening of domestic backward linkages, without returning to the policy bias against imported inputs. Backward linkages, after all, can also include the generation of employment, the education of the employees, and the improvement of their living conditions. It would be a welcome development, however, if more raw materials and other inputs could be sourced locally and if domestic content could be a true source of competitive advantage.
If the government succeeds in maintaining a low-interest regime, the capital goods sector and the consumer durable goods sector (cars and appliances) might be able to stage a comeback in 1999 and beyond. The non-durable goods sector (food, beverages, pharmaceuticals, etc.) can grow at anywhere from 3 to 7 percent in volume as GDP grows at 3 percent in 1999.
The Estrada government is expected to favor continuing trade liberalization that will put pressure on local industries to be more efficient. While the government is committed to support industrial development with infrastructure programs and a stable macroeconomic environment, individual companies are still responsible for introducing better ways of doing things through appropriate technology, shorter turnaround times, and greater investments on training and education of the workforce.
The Challenges of Combating Poverty
The greatest challenge to the Estrada government is to reduce poverty, the highest in the East Asian region. Even Indonesia during the time of President Suharto succeeded in bringing down the percentage of the population living below the poverty line from a high of over 60 percent to less than 15 percent. In the Philippines the level has not gone below 25 percent.
According to World Bank studies (see Table 5), the Philippines is the only large country in East Asia in which the absolute number of people living on less than $1 a day did not show a decline over the 1981-95 period. The World Bank concluded that there seems to be a core of long-term poverty. These long-term poor appear in certain geographic areas (e.g., Cordilleras) as well as in certain groups (e.g., indigenous people).
There is a consensus that the alleviation of poverty requires both the generation of stronger growth (at least 6-8 percent) and the reduction of income inequalities. Generating stronger growth is extremely important because empirical data prove that overall growth reduces poverty (as the period 1994-97 showed in the Philippines). At the same time stronger growth will help generate the resources needed to reduce inequalities. In the various consultations conducted by the World Bank in October and November 1998, there was general acceptance of the following approaches to alleviating poverty:
The above-mentioned approaches will have to be translated into action plans. Now that the Philippines is one of the pioneers in adapting the Human Development Index of the United Nations Development Program to its needs, understandable and monitorable goals can be set for life expectancy, educational attainment, income share of the lowest 20 percent of the population, and other similar assessments made by the yearly Human Development Report.
The government should assign the highest priority to the formulation and implementation of a competition policy to guarantee that the market-based reforms and privatization measures really benefit the masses in the form of lower prices and higher quality goods and services. Likewise, it may be time for the government to move toward inflation-targeting in its monetary policy. By targeting a low rate of inflation (say 2-4 percent), the government protects the poor, who are the worst victims of double-digit inflation.
In the agrarian reform program, there should be more concern with the land's productivity rather than with its ownership. There are several land-use models, which do not involve the fragmentation of land, that may address rural poverty more efficiently than outright land redistribution.
The government should tap all possible assistance from Non-Governmental Organizations (NGOs) and People's Organizations (POs) in delivering direct assistance to the rural poor in such areas as quality basic education, nutrition and health programs, and cooperative development. The assistance of the private sector is especially effective in the provision of technical and vocational education.
Threats to Long-Term Development
In addition to the most serious problem of mass poverty, there are other major threats to long-term sustainable development. The Philippines has the lowest domestic savings rate in the East Asian region. Its 20 percent of GDP is much below the region's average of 32 percent and poses a serious constraint to faster economic growth. The country has potential GDP annual growth of 8 percent or more, which it needs to realize in order to cut down poverty more rapidly. Within the foreseeable future, this higher growth is not possible because of the paucity of domestic savings, which still account for 80 percent of total investments. Thus, GDP may grow at the rate of only 6.7 percent in the early years of the next millennium. Much has yet to be done to improve government savings through more effective tax collection and through the reform of the capital market, which may include the privatization of pension funds now being managed by the government, such as the Social Security System.
Another threat is the perceived return of crony capitalism, which has caused so much damage not only in the Philippines but in most East Asian countries, especially Indonesia, Malaysia, and Japan. The warning was actually issued by Asia Society President Nicholas Platt in a recent forum on U.S.-Philippine relations organized by the Carlos P. Romulo Foundation in Manila on December 4, 1998. Those who speak for President Estrada may deflect the criticism by referring to the evenhanded way the president has systematically refused to bail out the financially troubled Philippine Airlines, owned by Mr. Tan, and has not intervened in the multibillion pesos tax case against the Filipino Chinese businessman.
Without underestimating the potential damage that can result from the return of crony capitalism, one can be comforted by the stronger checks and balances that are now in place in Philippine society because of a free press, an independent judiciary (especially with the recent appointment of the highly respected Hilario Davide, Jr., as chief justice), a non-politicized military, a pro-active business sector, a vibrant civil society, and a more deregulated and liberalized economy. The cronies were able to perpetrate harmful business practices during the time of President Ferdinand Marcos because his authoritarian grip controlled the press, the military, the legislative, and the judiciary. During the Marcos regime the business sector was generally timid (with the exception of a few individuals like the late Jaime V. Ongpin) and civil society-led by the NGOs-was at its incipient stages. Today the cronies will be hard put to monopolize economic sectors and will have to contend with the vigilance and critical scrutiny of numerous countervailing forces.
A threat that the Philippines shares with many developing countries is rampant corruption in both public and private sectors. Aggravated by the overly litigious approach to business and other issues, corruption can significantly increase the cost of doing business in the country. One can only hope that the Estrada government will actively institute reforms of effective governance, as the president promised in his first State of the Nation Address.
The record of the first months of the Estrada administration shows sufficient determination to improve governance. Appointments to the cabinet and other key positions have been generally acclaimed. There have been continuing improvements in the salaries and benefits of civil servants, especially those of public schoolteachers. The management style of President Estrada also has led to greater decentralization of power, both to his cabinet and local officials.
As mentioned above, however, there is a need for constant vigilance on the part of the media, the Church, the NGOs, and business sectors so that graft and corruption arising from political patronage or cronyism do not again lead to massive wastes of public funds and monopolistic and oligopolistic business behavior. There are a number of individuals close to the president who became notorious in the past for cronyism. Eternal vigilance is the only antidote to the possible resurgence of these baneful practices.
Selected Corporate Strategies
What do these opportunities and threats in the Philippine economic environment imply for corporate executives planning operations in the country during the next five to six years? I end this paper with the following suggested corporate strategies:
Conclusions
The Philippine economy has gradually lost its reputation as the "sick man of Asia" during the last 12 years. As a result of the restoration of the democratic institutions during the administration of Corazon Aquino (1986-92), followed by moves toward privatization, liberalization, and deregulation during the Ramos government (1992-98), the Philippines attained the necessary political and macroeconomic stability to attract both domestic and foreign investments, especially in export-oriented industries.
In 1997 the Philippine economy was the fastest growing among those adversely affected by the East Asian crisis. In 1998 it was the only East Asian country (except China and Taiwan) to register positive GDP growth. In the coming five years, it is expected to be among the most rapidly growing economies in the region on the bases of strong investments and exports.
Judging from the first seven months of the Estrada administration, the market-oriented policies adapted during the Ramos years can be reasonably expected to continue. Even the possible dangers of the return to cronyism can be mitigated by the checks-and-balances that a working democracy and competitive economic forces provide. The competitive advantage of the Philippines is ultimately based on long-term political stability and an abundant supply of highly educated, skilled, and English-speaking manpower.
The ability of the government to reduce the abnormally high incidence of poverty will depend on its success in implementing the rural and agricultural development program, which on paper has the highest priority in the Estrada administration. Also critical are educational reforms that provide access to quality basic education (including secondary schooling) to the poorer segments of society.
The private sector will continue to play the major role in the attainment of higher economic growth and a more equitable distribution of income and wealth. Especially helpful will be corporate strategies that bring Philippine industries to globally competitive levels in mass consumer goods and export-oriented enterprises. It is also incumbent upon the private sector to carry the larger burden of improving the quality of tertiary education, including technical schools. Private firms are also expected to introduce more effective means of implementing the agrarian reform program and supporting poverty alleviation programs through NGOs.
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