The recent State of the Nation Address by Gloria Macapagal-Arroyo painted a rosy picture that, for a lack of a better way to describe it (pardon my French): broke a lot of people’s bullshit threshold. Before you characterize this post as yet another dissenting opinion, I enjoin you to read because the Filipino nation requires us to look at ourselves with fresh, honest and open eyes.

The economic upheaval going around the world certainly makes today, an interesting time. To speak of the Philippines in relation to the global financial “meltdown” alone will be missing the point. To speak of millions of lost jobs and uprooted lives as simply, “hurt” is deflecting from the absence of jobs that has long existed in the Philippines, global economic crisis or not. To say, “crisis” in front of the Filipino is nothing new, yet there is no sense of urgency, no zen-like calm that we are in the zone, hard at work in meeting the test of generations, and strengthening of our national resolve.

“We are weathering the storm,” is the gospel Filipino leaders have been selling for years. In my humble opinion, relatively unscathed, is a false gospel. Truth is, the multiple-shocks to the global economy is opening opportunities everywhere even as the world requires greater energy to fuel the digital, always connected lifestyle that is transforming the world. The Filipino nation requires one to look at ourselves with fresh, honest and open eyes.

It has been asked often enough: economic indicators are telling us of growth. More than 30 quarters of positive growth yet why can’t the Filipino feel this?

Take a look at this snap:

Those two graphs are from the World Bank. It is from a paper “On the Rising Growth and Declining Investment in the Philippines: The Puzzle of the Philippines”.

Bocchi wrote:

“Three reasons explain this puzzle: in the Philippines, investment does not grow at the pace of GDP because the public sector cannot afford it, the capital-intensive private sector does not want to expand that fast, and the rest of the private sector does not need it.”

What does he mean? The Filipino Government, Alessandro Magnoli Bocchi says, can no longer sustain spending because it has to make up for years of weak performance. It has to pay for debt. On the other hand, an oligopolistic private sector, he adds: “does not find it convenient to expand investment at the economy’s fast pace, as it expects little return”. Lastly, Bocchi says the fast-growing businesses in the Philippines: BPOs, electronics assembly, even information and communication does not need to increase investment at rate the economy is growing to enjoy growth in their business.

if there is any doubt that the Philippines has not performed as well as it ought to, a quick look at the recently compiled Global Competitiveness Report ranks the Philippines as 71, unchanged from 2007-2008 and falls behind Vietnam. This is a snap from the Global Competitiveness Index:

The Philippines was ranked 85 under basic requirements; 105 in institutions; 92 in infrastructure; 53 in Macroeconomic stability; and 90 in Heath and primary education:

In higher education and training the Philippines was ranked 60; good market efficiency 81; labor market efficiency: 101; financial market sophistication: 78; technological readiness: 70; market size, 34:

Under innovation and sophistication: the Philippines is ranked 67; specific to business sophistication, 57, innovation at 76:

What does the Global Competitive Index say of our neighbor, Thailand?

“Thailand, ranked 34th, has fallen six places since last year. The country derives certain competitive strengths from its market size as well as the efficiency of its labor market (rank 13th), the result of strong cooperation in labor-employer relations (ranked 17th) and low non-wage labor costs (ranked 20th), for example. The country’s infrastructure is also very good, particularly roads and air transport. But the country lags in technological readiness (66th), with low penetration rates for Internet use, broadband, and mobile telephones in particular. The health of Thailand’s workforce is another area of concern (ranked 76th), with high rates of HIV, tuberculosis, and malaria (ranked 108th, 96th, and 93rd, respectively). Some aspects of the financial market also require attention, especially concerns about the soundness of the banking sector. Given the political turmoil experienced over the past year, it is notable that the decline in the overall ranking this year can be traced in part to a weaking assessment of government institutions, with increasing concerns about the transparency of policy making and public-sector efficiency more generally. (emphasis mine)

That last point is most interesting, isn’t it?

Here’s what GCI says about Vietnam:

Vietnam, at 70th place, enjoys specific key advantages in various areas, particularly related to its relatively large market size and the functioning of its labor market, with strong female participation in the labor force (ranked 10th) and a strong relationship between pay and productivity in the economy (ranked 17th). But the country’s overall competitive position is eroded by weakness in the quality of infrastructure and institutions, as well as in higher education and training. Vietnam’s infrastructure gets a poor rating overall (93rd), especially with regard to roads and port facilities. In terms of quality of its institutions Vietnam suffers from burdensome government regulation and weak auditing and reporting standards, where it is ranked 105th and 106th, respectively. And given the increasing importance of innovation for the country’s competitiveness, its low university enrollment rate (placing the country 106th) and the poor assessment of the quality of its educational system (ranked 120th) require urgent attention.

What of the Philippines?

Here is a copy of the Global Information Technology Report 2008-2009:

Global Information Technology Report

“… at 71st place, benefits from its relatively large market size (rank 34th). In addition, the country has seen an improvement in its macroeconomic stability since last year, with a shrinking government budget deficit and lower public debt. On the other hand, the main obstacles to greater competitiveness are related to the quality of the country’s public institutions and a lack of efficiency in its labour market. The institutional environment is characterized by the perception that government spending is highly wasteful (ranked 120th), a lack of evenhandedness in the government’s dealings with the private sector (117th), and general concerns about corruption in the public sphere. In addition, the threat of terrorism imposes significant costs on businesses in the country (ranked 125th). With regard to labor market inefficiencies, wages are not flexibly determined by companies (108th), regulations impede firms from hiring and firing workers (ranked 108th), all of which hinders job creation.”

“Government spending is highly wasteful,” and “the lack of evenhandedness in the government’s dealings with the private sector” is a huge accusation. Jarius Bondoc recently wrote about a letter from Gernman Cancellor Angela Merkel to Philippine President Gloria Arroyo. The letter is about the unpaid millions the Philippine government owes German company Fraport-Piatco for the construction of a new international airport terminal in Manila:

Three administrations allegedly extorted from Fraport-Piatco. Worst was the Arroyo team, for which they hired in 2001 a “PR consultant” as $20-million briber, Sen. Ed Angara said then. In Mar. 2007 Malacañang hurriedly gave Fraport-Piatco $62 million (P3 billion) in belated down payment for the expropriation. Reports had it later that only half the amount went to Piatco, while the other half went back to admin hands for the elections in May that year. In Sept. 2008 Malacañang prepared to pay another $400 million through two state banks. But a group associated with ex-Sen. Bobby Tañada exposed the scam to reimburse Fraport $136 million (P6.8 billion) more than it had sunk into NAIA-3.

Merkel must have heard of the shenanigans. “As you know, Fraport suffered substantial losses as a result of the expropriation,” she reminded Arroyo. “Fraport has already been promised compensation several times by the Government of the Philippines, but unfortunately the full amount has not yet been paid. This has cost the German taxpayer Euro 42 million, because in 2008 Fraport had to call on a Federal Government guarantee for that amount.”

That’s just one. How does the old adage go again? Where there is smoke there is fire?

Neither Global Competitiveness Index nor the World Bank paper on Rising Growth and Declining Investment in the Philippines have even mentioned any needed constitutional reforms. In either paper, has there been no mention of economic constraints that the Philippines imposes because of its constitution. The GCI mentions this: “With regard to labor market inefficiencies, wages are not flexibly determined by companies (108th), regulations impede firms from hiring and firing workers (ranked 108th), all of which hinders job creation.” Certainly, this labor problem is a matter of law, a matter that Congress can readily address with public policy.

On the one hand, Bocchi notes what the Global Competitive Index skips (because the GCI is not concerned with it):

“Yet, despite the resulting decline in investment, the economy keeps growing; and this is because its least protected sectors – the informal labor market and the non-capital-intensive activities – stimulate demand and drive supply. On the demand-side, work-seekers – denied entry into the formal labor market – migrate massively to industrialized economies, attracted by better remuneration; the resulting remittances and transfers (which, combined, account for over 13 percent of GDP) fuel consumption-led-growth – and lower the penalty for élite-apturing policies. On the supply-side, the service sector and a few non-capital-intensive manufactures, free from rent-capturing regulations, boost exports.”

The puzzle according to the world bank is that private sector, in spite of the favorable business climate refuses to reinvest in the Philippines. Bocchi keeps stressing that:

“… but there is still little willingness to invest. Despite the more favorable environment, the savings-investment gap widened in recent years and the domestic appetite for investment remained stagnant (Table 2 and Figure 10). As a result of present growth and deficits, the “public debt-to-GDP ratio” is declining, but public investment has not picked up. The low and declining lending interest rate (Figure 9) suggests that, in spite of the ample liquidity, the demand for credit is not increasing. Also, despite the favorable lending-deposit spread, banks are cautious in their lending to the private sector (Figure 12), preferring to finance the government in local and foreign currency.14 In short, the private sector still invests little. Without a deeper reform of the investment climate, businesses are unlikely to lift spending on new plant and equipment (World Bank, 2005c).”

One thing Bocchi has missed is the fact that the Philippines still has one of the highest cost of electricity in Asia. This is detrimental to any reinvestment in Information and Communication.

*** added emphasis: ***

That said, has the Philippines reached a chicken and an egg problem?

“Gintis proposes a theory called “strong reciprocity,” arguing that bonds of trust and cooperation within a community often serve as greater motivation than material reward. The theory is based on the premise that humans evolved in small groups with strong social contracts and plenty of contact with strangers. Cooperation within the tribe was advantageous so long as free riders were punished. It was also the best gambit on encountering strangers. Cooperation, particularly in times of famine, was the only means of survival, so altruism became a favored evolutionary trait.”
The Altruism in Economics via cvj

The Freedom from Debt Coalition recently publish a post on the worsening economic conditions in the Philippines:

Conclusion: government’s underspending = worsening economy

The government is the economic actor that should take the risks and work to stimulate the economy. Following the principle of subsidiarity, the government should move in when the private sector fails to induce development and increase social welfare – and with statistics for personal consumption spending and capital formation falling, the government should have acted swiftly and strongly to avert contraction. In this respect, as the first quarter GDP data show, the Arroyo government failed dismally, showing a lack of foresight and blinded vision by not spending high enough.

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updated:

Between @caffeinesparks’ “Number-crunching, Lying and Arroyo’s SONA,” and the arguments presented here, I hope the reader is able to distill that the Philippines is standing on a house of cards.

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If we agree with Bocchi, and that the Philippine government is at the point where it can no longer spend itself out of its troubles, what now?

This is the bitter pill. Without raising taxes, the government very well need to cut operational expenditure, balance its budget and to make itself more efficient by whatever means necessary. It has to be more liberal and cut the bureaucracy. If it means seeding much of its services to local governments: health care, education, civil defense, jails to do so, it must, even at the risk of making those service less useful to the general public. It needs to find ways to collect taxes better: remove income tax but raise value added taxes to make up for the loss.

President Arroyo’s recent State of the Nation called for a Department of ICT, without much data, it hints, it signals at least deeper regulation by the government on all things digital. That would be a mistake. Yahoo! and Nielsen’s study on Philippine Internet habits point to a young Internet sector. Hardly anyone is doing online transactions. Slowly, Filipinos are favoring the Internet across the country over print, radio, and television. Here is an opportunity to break oligopolistic practices. Make Internet use more liberal. Reduce taxes on books, computers, mobile phones, information technology, whether consumer or for commercial use. Encourage the population to be more technologically inclined. With these devices in place, telecoms would have to upgrade their infrastructure to meet up with the pent-up demand.

Another area that needs to open up is the use of mobile money. Not everyone banks, so encourage the use of mobile phones as wallets and act as credentials. Money that is prepaid, existing on the phone can be used to spend for anything.

Without local banks lending to start local businesses that is a surefire way to stifle any innovation in the local sphere. No money to fund startups and venture caps. And how do you open it up? Even if the Philippine government doesn’t reduce cost for books, and technology, there must be competition and that competition can come from Filipinos already sophisticated in their thinking. While entrepreneurship is clearly not a universal gift the fact remains the Filipino diaspora: more than ten million Filipinos living outside the Philippines is the biggest catalyst to invest back to challenge the oligopolistic tendencies of the status quo. This means not just sending kids to school in the Philippines or fueling their material needs, but to build businesses and infrastructure of every sort. Filipinos need jobs, the diaspora can fund those enterprises. That does not require government at all.

When Gloria Arroyo gave her state of the nation address, twitter was fuming, so much so that it ranked as a trending topic. If you want to see some of it, here are some archived tweets:

Archive of Tweets on Gloria Arroyo’s 2009 State of the Nation Address

See, the bullshit meter really got broken.

The Philippines would be in the same state it is now, with or without the global economic challenges that have risen. The factor terrorism plays is perhaps the weakest of reasons because it is an endemic of the sociological challenges in the Philippines. The fact is, the answers to the pressing challenges of the Filipino relies less on external factors like foreign direct investment, but through investment by regular Filipinos that goes hand in hand with fixing government institutions. The moment Filipinos everywhere become open and honest about their skill set and the resources we have at hand, is the first step towards prosperity for all.

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References
*edited* i am just referencing the embedded documents to my tumblr. Think too much embedded scribds was crashing my browser.

“On the Rising Growth and Declining Investment in the Philippines: The Puzzle of the Philippines”

Spatial Disparities and Development Policy in the Philippines;

Global Competitive Report 2008-2009.

Oh, and thanks to @mlq3 and @caffeinesparks for the PDFs and links.

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