The New York Times

May 5, 2009
Op-Ed Contributor

The Philippines: Looking Good for Now


MANILA — “So the last will be first...”

It may be premature, but the Philippine economy looks as though it may outperform most of its East and Southeast Asian neighbors, at least for a couple of years. That says something about improvements in economic management, and much more about the different ways in which countries are being affected by the global crisis.

The Philippines expects GDP to grow by 2 to 3 percent this year, a rate superior to anything in East Asia other than China and Vietnam, and a sharp contrast to the negative numbers elsewhere.

This would follow seven years of an average of 4.5 percent growth. That may not sound like much to boast about, particularly in a country with a population increasing by 2 percent a year, but it’s high by local standards and the most sustained improvement since the mid-1970s.

So has the Philippines really turned a corner?

The relatively strong performance this year will be largely due to what is also the Philippines’ biggest long-term weakness — reliance on overseas worker remittances, which account for 10 percent of GDP and the bulk of foreign exchange earnings.

Although these are now expected to fall from the $16 billion that Philippines abroad sent home in 2008, such remittances have held up well thus far.

A second bright spot — in contrast with the woes of Asian electronics manufacturing — can be found in call centers and business process outsourcing, which should keep growing, albeit more slowly.

Another boost will come from government spending. The success that the Arroyo government has had in stabilizing the fiscal position over several years has allowed interest rates to come down, reducing the cost of debt service and making room for money to be spent on badly needed infrastructure, health and education.

Even agriculture, long a drag on the economy, has been achieving steady growth of 3 percent a year thanks to increased investment and higher prices.

The bottom line in all this is that the Philippines is doing relatively well because of its lack of dependence on export manufacturing. But therein also lies it greatest weakness — the failure to make use, at home, of its abundant labor force.

Industry accounts for only 33 percent of output and has been in decline for three decades. Physical infrastructure is poor mainly because of low budget revenues. Governance issues and the dominance of a few big groups in commercial life are further disincentives.

Remittances have become a crutch which sustain consumption but do little for investment, other than in housing, and are unevenly distributed. Business outsourcing absorbs some educated labor but does little for the unskilled.

Despite several years of positive GDP growth, according to one survey the poverty level actually rose between 2003 and 2006. Inequality has certainly risen.

Of course, there is nothing in principle to stop the country continuing on today’s path for several years once the global economy has overcome its current difficulties.

Philippine labor will continue to be sought overseas — particularly in an East Asia, which is aging fast. The country may be able to build on gains in fiscal stability and balance-of-payments equilibrium. Remittances will remain less vulnerable than manufactured exports to global developments.

Yet without a much broader industrial base, without much bigger commitments to long term investments, public and private, and better governance, it is hard to see the Philippines breaking out of a 40-year pattern of relative decline.