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Index to Pearl of the Orient Seas by Clarence Henderson
Two Years with Erap

July 2000

Clarence Henderson
Henderson Consulting International
Manila, Philippines

This Month's Focus: The Estrada Administration enters its third year, a look back on the past 2 years and what has been achieved for the Philippines in stimulating growth and foreign investors. A down to earth look at the Philippines from Manila.

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This week I find myself "celebrating" the two-year anniversary of being in country, although the verb "celebrate" doesn't quite capture the nuances of relocating as an entrepreneur to the Philippines. Let's just say that I've paid some serious dues getting established here and that Year 3 should be heck of a lot better than the first two.

Coincidentally, the Estrada Administration also just had its two-year anniversary, although the celebration was decidedly low key compared to last year's self-congratulatory 1-year anniversary proclamations. I suppose the folks at Malacanańg are also hoping that the third year will be the charm. The first two years haven't exactly anything to write home about, as they say.

Like a lot of foreigners in Manila, I regularly receive e-mails from back home and indeed around the world asking if things are really as bad here as they appear on CNN and BBC. What's going on with those bombings in the malls? Is it safe for the kids? When are the Muslims going to march into Manila? Did you drown in the typhoon? Why do people live amongst piles of garbage? I generally avoid the questions, equivocate, or downplay the hazards of life in the Occidental Orient.

Being an inveterate positive thinker, I'm still trying hard to give the administration the benefit of the doubt. However, even Dale Carnegie would have to admit that another year like the one just past and Erap's mid-term performance review (i.e., the three year point of his six year term, coming up June 30, 2001) will be brutal indeed.

The Economy

The Philippines' economy at mid-Y2K is, if not in shambles, then clearly in disarray. Although the country survived the Asian crisis in better shape than most of its neighbors, the momentum has not been maintained (see Philippines Economic Capsule). And that's putting it kindly.

At one level, it is plausible to blame international, macroeconomic factors. The peso is weak as weak can be, now flirting with the huge psychological barrier of P45/$1. Many economists expect it to settle in at the 46.5 range. This currency weakness reflects regional trends and is to some extent a predictable reaction to Uncle Sam's increased interest rates. But it also reflects very real capital flight - money generally flows where the grass is greener, and it is turning brown here. Not to put too fine a point on it, but people are scared to death of what they see happening in the Philippines.

The stock market continues to be a disaster. Stock trading in Manila has long been dominated by the old line business families or hotshot nouveau riche tycoons (see The Philippines Stock Exchange). "All investors are created equal, but some are more equal than others." One would have thought that the BW scandal would have precipitated reform, but such rational thinking would be misplaced. Symptomatic is a recent ruling by the SEC allowing "private arrangements" that continue to favor the elite investors who have controlled the market for so long. The pervasive lack of transparency at the PSE has caused fund mangers to avoid the Philippines like the plague. The bottom line is that South Korea's Samsung Electronics or Hong Kong's Hutchison Whampoa look a heck of a lot more attractive than anything the Philippines has to offer. There are supposedly changes coming in the form of a new and improved Securities Act, but it's going to take a long time to heal the wounds and resurrect the image of the PSE, which to be honest was never all that great to start with.

Felipe Medalla, head of the National Economic Development Administration (NEDA), keeps reminding everybody that "the fundamentals are okay." GDP growth has increased from zero at the height of the crisis to 3.4% in 1st quarter, 2000. Inflation during that same time frame decreased from 9.7% to 4.1%, and is now the lowest in over a decade. Car sales are up, beer sales are healthy (that's considered an important leading indicator in this San Miguel crazy country), and investment in the eco-zones, led by the IT sector, continues to soar. However, such statistics carry little weight given the overarching concerns about the political situation.

About Those Politics

There's no denying that the country's malaise reflects a growing lack of confidence in the current political leadership. The "C" word continues to be a powerful subtext for the administration (see Cronies and Booty Capitalism). According to a recent survey by PERC (Political and Economic Risk Consultancy), the Philippines ranks right up there with Malaysia and Indonesia among the most politically risky countries in the region.

Mindanao is basically a mess, what with the stubborn Muslim insurgency, high visibility bombings in Manila malls, and the interminable hostage crises. MILF chief Hashim Salamt just declared a jihad against the government, and Defense Secretary Orly Mercado pledges to duke it out with the rebels.

The government is trying to implement a P 20 billion rehabilitation program in Mindanao, and to say it is badly needed would be an understatement. A delegation from the Mindanao Business Council is journeying to Brunei, Indonesia, and Malaysia in search of foreign investment for the region (call it a hard sell). Admirable in concept.

However, the administration's insistent requests for emergency powers in Mindanao are likely to backfire. Old-line cronies are licking their lips in anticipation. The administration's rationale is that such sweeping powers will eliminate lengthy public bidding processes for development projects and reduce uncertainty about property rights. In defense of the latter point, they argue that landlords seeking to avoid land reform have been converting farmland to industrial or residential uses, leading to a deteriorating agricultural sector and accelerating deforestation.

True enough, but the "emergency powers" strategy ignores the political sensitivity of anything that reeks of martial law, however many cousins removed. For that matter, even FVR's flirting around with emergency powers to deal with the brownouts was counterproductive. Exercised early in his administration, such powers led to various abuses and misadventures. The bottom line is that granting emergency powers would lead to pork barrel politics writ large. Further, it's coming up on an election year, and you can't realistically expect self-respecting cronies to restrain themselves when presented with such sterling opportunities to feed at the trough.

At a broader level, the lack of transparency that characterizes the Filipino socio-economic-political matrix is a continuing and major problem for the country. Some folks are working on the issue. Examples include the Presidential Committee on Effective Governance, now focusing on the priority sectors of agriculture, social service, and infrastructure and committed reformers trying to change the Bureau of Internal Revenue. Various grants to local government units (LGUs) are focused on transparency issues, the Development Academy of the Philippines is currently working on a new anti-graft and corruption strategy, and USAID funds some low-profile programs working on various transparency fronts. But it's still just a drop in the bucket given the intractability of the problem.

Other structural problems are deep-seated and difficult to remedy. Rapid population growth has yet to be addressed, and the Catholic Church continues to do all it can to block even the most bland family planning programs. Today's 4% growth rate in the economy will continue to fall short of generating the number of jobs needed for new labor market entrants each year. The labor market is increasingly competitive, wages are already too low, and an ever-larger proportion of the population faces unemployment or underemployment. More generally, the pressing issues of inequality and pervasive poverty pose major problems for the country's long-term development (see Globalization Part 1 and Globalization Part 2).

Basura

Much of the news this past week has focused on basura (Spanish for garbage). The now infamous dump that collapsed and buried those poor people was ironically originally known as Lupang Pangako (the promised land). What a symbol of social despair and dire poverty! Despite years of talking about finding alternative dump sites and "doing something" about the scavenger community that inhabited the site, nothing changed until it all came to a crashing denouement in the wake of typhoon-fueled downpours. Authorities had issued a series of warnings about the dangers of serious mudslides during what has been a heavy rainy season, but what's a poor person to do? People forced by circumstances and lack of economic opportunity to live in a garbage dump are living at the survival level, and the risks of Mother Nature are a secondary concern when you're facing starvation. Even now, in the wake of this terrible human tragedy, the scavenger community is begging the city of Manila to keep the dump open so they can still scrounge out a living, however meager (it's better than starving). (As an aside, the authorities are desperately searching out alternative landfill sites, and uncollected garbage is piling up in the streets of Manila).

Psychodynamics

Well, I suppose all of the above paints a pretty bleak picture. And, no question about it, the psychology of the situation is lousy. Ricardo Puno, the Press Secretary, is working overtime trying to find a positive spin that will overpower the negative vibes surrounding the Palace, but it's not working.

The political situation is complexified by the administration's tendency to blame others for the problems. Particularly scapegoated is Erap's personal bęte noire, none other than Tabac himself (FVR). This week Erap charged that former National Security Adviser Joe Almonte (and by implication FVR) was behind the pernicious letter from US Representative Robert Aderhold to Bill Clinton accusing Erap of various malfeasances. Fascinating stuff, the letter argued that Erap's extensive links with high profile Filipino-Chinese businessmen prove beyond the shadow of a doubt that he's a commie pinko. Jeez, I thought fellow traveler accusations went out with Whittaker Chambers and the John Birch society, or at least with the fall of the Berlin Wall. Anyway, this administration has long emitted paranoid vibes when it comes to FVR, including various allusions to certain shadowy groups of Makati businessmen meeting in smoke-filled rooms figuring out how to undermine President Estrada. But there comes a time when somebody needs to step up and make a Truman-style stop-the-buck statement.

Paranoia invites parody, and there are always adverse reactions to hyperbole. The recent inexcusable hatchet job in Time, replete with Erap's movie era stills, demonstrated just how easy it is to shoot ducks in a barrel and little else. Balanced media treatments of the administration in the international press are few and far between, and Malacanańg could use an infusion of well thought out corporate communications strategy. But, as is usually the case, messages communicated can only be effective if they are linked to serious substance.

How About a Positive Conclusion?

(Here comes the Dale Carnegie part). Well, to be honest, it's getting harder and harder to keep promoting this country and its leadership, but I have not yet given up hope. I often change my home page on my faithful and outdated version of Netscape Navigator. I have generally set it over the last two years to one of the local Philippines' portals. However, I recently reverted to various old international news site favorites just to avoid getting hit with each day's litany of local bad news when I awaken in the morn.

The President's upcoming trip to the states represents an important opportunity. One of the key agendas is to promote foreign investment in the IT sector. The Philippines boasts an impressive array of benefits for erstwhile investors, as reflected in a recent PERC survey rating the Philippines higher than virtually every country in Asia on the quality, cost, and availability of skilled labor. I myself have been involved in the effort to publicize the country's advantages as part of the E-Commerce Council, a public-private sector group working on internet and IT foreign investment strategy.

The administration, spearheaded by Trade and Industry Secretary Mar Roxas, is trying hard to capitalize on the country's comparative advantages. For example, the recently created Economic Mobilization Group (EMG) provides centralized support for international investors. Government policies continue to stimulate manufacturing in the form of export processing zones (EPZs) offering major concessions on tax rates and reduced tariffs for foreign investors. The former American bases at Clark and Subic Bay are important EPZs, while the Philippine Economic Zone Authority is active in supporting and attracting foreign investment. The administration appears committed to easing the paperwork burden for foreign investors, and the just-passed E-Commerce bill should create an even more supportive environment for IT-enabled services.

At the same time, however, all of the issues outlined above pose formidable challenges for President Estrada as he faces the next four years. Mr. Medala is correct in his argument that the fundamentals are for the most part still okay. However, that "okay-ness" is relative, and other countries in Asia are doing much better. Most crucially, the political uncertainty and the many missteps of the administration need to be addressed.

Longer term, the transparency issues have simply got to be dealt with. If not, then we may eventually be looking at the basket case scenarios so many pundits are predicting. The fundamental underlying issues of population control, structural inequality, and stagnation in the agriculture sector cannot be ignored. It is possible that attracting sufficient foreign investment in high tech sectors may do the trick. However, the mountains to be climbed are massive and only strong political leadership and a clearer strategic vision than we have seen the last two years will (finally) propel the Philippines into the ranks of the NICs, Tigers, or whatever you want to call them. Here's hoping that by the time I celebrate my third anniversary here and Erap celebrates his third Presidential birthday we'll all be hoisting champagne glasses and toasting one another's success.

Clarence Henderson

Comments, questions?... Post a note to the APMF discussion board (See left hand sidebar) or email Clarence direct

...from Clarence Henderson's Pearl of the Orient Seas

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Clarence Henderson Henderson Consulting International Manila Philippines

Clarence has had over 20 years of consulting experience in New York, Los Angeles, and the Philippines. He brings to the forum many years of experience in the Philippines and his monthly column integrates the experience of working in the Philippines with business tips earned the hard way! You can learn more about Clarence by clicking on his photo. Clarence Henderson: Manila, Philippines Sources - About Clarence - Other Columnists

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See also Clarence Henderson's Philippines Capsule and Prospect Reviews at Asia Market Research dot Com

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