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|The Philippine Economy at Year-end 2001: Still on the Brink?
|26 November 2001|
A year ago, as the first year of the New Millennium wound down, I wrote a series of rather dark and anxiety-ridden Pearls about the disintegration of the Estrada administration, the chaos on the streets, and the incipient economic meltdown facing the Philippines. Wasn't much else I could write about at the time given the importance of the events and the fact that I was stuck in the middle of 'em.|
By the time People Power II unfolded and the new administration was anointed, there was seemingly no way to go but up. There was an air of excitement early on - rightly so, given the striking contrast between the honest, intelligent, professional economist on the one hand and the crooked, not-so-smart womanizer on the other. Pundits noted that the economic fundamentals still weren't all that bad by regional standards and that, with good economic leadership and common sense, the country might be able to (finally) make an economic breakthrough.
But it didn't take long for reality to set in. Gloria Macapagal-Arroyo (GMA) faced major, major problems from Day One: for starters, a devastated economy, a frightening and accelerating polarization between rich and poor exacerbated by out-of-control population growth, a persistent Muslim rebellion down south, and rampant kidnappings in Manila (to name only a few). Things were already a mess before 9-11 made the whole situation threaten to spin out of control (see Apocalypse on September 11th for some random reflections).
So where do we stand as the end of 2001 draws nigh? As usual, I claim no particular expertise and I still haven't found a good crystal ball. (Always on the lookout, though, so if you have a reliable one lying around send it along). However, following are few notes that may help put things into perspective as the holidays approach.
The military aid, not surprisingly, was tied to Philippine support for the new Mutual Logistics Support Agreement (MLSA) (details not yet released). The Americans have already been using Clark for refueling and limited logistics support, and the Visiting Forces Agreement in effect the last couple of years has allowed joint military training exercises to proceed. But the MLSA goes a lot further, with critics here calling it the "return of the bases." Definitely a political hot potato.
The trip also netted over $2 billion in investment pledges and some $250 in multilateral aid. The Americans may help the Philippines reschedule some of its massive debt, and the USAID Mission down on Roxas Boulevard will be hopping as funds roll in for badly needed development projects in Mindanao. Hopefully a substantial portion of the donor funding will go for the fundamental problems of poverty alleviation and population control.
On the investment side, GMA took full advantage of the trip for photo ops and contract signings, bringing back a variety of MOAs, MOIs, and MOUs. Several friends of mine were in the retinue (which, at over a hundred folks, was one of the largest entourages anybody in DC could remember a head of state bringing along for a "working visit" (as opposed to "official state visit.")). At least six investment deals of some size were announced, although those announcements will need to be translated into on-the-ground reality and jobs.
One highlight took place in the ballroom of the Big Apple's Waldorf Astoria, a Filipino booster event with considerable emphasis on the IT sector. One plum was the signing of a MOA between Customer Contact Center, Inc. (C3, pronounced "C-Cubed," the contact center operation of the Lopez Group) and Source One Communications, based in New Jersey. The resulting JV will operate out of Manila to provide outsourced customer care, help desk, technical support, and consumer affairs services. (For some insights into this exploding industry see Globalization Revisited; for specific information on outsourcing services to the Philippines check out the website of ITECC (the Information Technology and E-Commerce Council), located at www.i-philippines.ph). The promise of US aid and fresh private sector investment, combined with fairly positive deficit reports, has created a (very) short-term boost in economic prospects. For the first 10 months of 2001, the government is three percent over its deficit target, which is attributable, according to the DOF, to "significant improvements in revenue collection and prudent spending." The peso strengthened and the stock market closed up three percent to a six-month high the day after GMA's triumphal return. According to the National Economic and Development Authority, there is "underlying strength in some sectors which will sustain economic growth." NEDA cites in particular growth in volume and value of manufacturing production. Nevertheless, the government has significantly scaled down its targeted 2001 growth to 3.3%, and even this will be difficult to achieve in the face of the continued global slump.
To place these developments in perspective, perhaps we should reflect briefly on a few rather disturbing underlying trends that may render all the donor aid and call center/outsourcing investments in the world insufficient to make any difference in the long run.
Security: Kidnappings are still a major problem and the security situation shows few signs of improving. The KFR (kidnap-for-ransom) gangs are increasingly nabbing foreigners and the random violence on Manila streets continues to escalate. Down south, the Abu Sayyaf are still on the loose (although the new military aid may help). Without being jingoistic, I think everybody knows that GI Joe would get the job done a lot faster, but the political tradeoffs involved would be tricky at best and politically devastating at worst. But until the security situation is resolved, the tourist industry is dead in the water. The bottom line is that the Philippines has to find new sources of foreign exchange besides electronics exports and remittances from OFWs (overseas foreign workers). And the current security situation does not exactly add to the appeal of the country for foreign investors.
OFWs: The OFW issue is a lot more serious than most people realize (see Leaving on a Jet Plane for some insights). OFWs remitted $2.7 b. USD during first half 2001, a 13% drop from year earlier, but still a huge chunk of greenbacks and still supporting a hell of a lot of people here. But what happens as the global meltdown continues? Already, Malaysia has sent back several planeloads of Filipino workers and Hong Kong and Singapore labor markets are also contracting. While hiring is up in the Middle East and Europe, there's no guarantee that will continue. Given the Philippines' continued (high and unacceptable) population growth rate of 2.7%, the country will (implicitly and necessarily) have to keep exporting human beings.
But what if the overseas jobs dry up? What if all the OFWs come home? That would lead to both severe economic damage as the dollar remittances evaporate and social chaos as the individuals and families affected try to adapt. My guess is those workers would come home to unemployment, broken homes, and psychological maladjustment. Which brings us to...
Pervasive Poverty: The rates of poverty in the Philippines are as bad as ever, and the incredible gulf between rich and poor is not narrowing (see The Social Volcano and Globalization Part 2). If anything, it's getting worse. There is a huge, seething volcano of discontent here and if it ever blows I, for one, am not sure I want to be around to witness the damage all that smoldering lava will do. We saw a quick preview during the abortive "People Power III" riots when Erap was arrested; next time it may be a lot worse.
Endemic Corruption: Corruption continues to be a major problem in both public and private sector. In the public sector, the performance of Customs and the Judiciary continue to be embarrassing by international standards and a major barrier to economic development. The BIR (Bureau of Internal Revenue) has a pathetic collections rate and government procurement continues to be resistant to modernization. One of my colleagues at the Asian Institute of Management is consulting with various government agencies on the e-procurement initiatives mandated by the E-Commerce Bill; these clauses require government departments to move procurement online by a certain date, a deadline sure to slip. Given the deeply entrenched resistance of bureaucrats used to raking off kickbacks the old-fashioned way, I do not envy his task.
In the private sector, the Anti-Money Laundering Act (recently passed under tremendous pressure form the Paris-based Financial Action Task Force) may make some difference. Although most felt it was watered down (which it was), it may be enough to get the RP off the international bad guy black list. But the Philippines continues to be a center for boiler rooms, money laundering, and related activities. The government is trying hard to show that it means business in the fight against white collar crime, as evidenced by this week's freezing of bank accounts and other assets of a certain financial corporation and the raiding of their Makati offices. Although registered with SEC as a company providing back office services, the company was actually manned by 22 employees, mostly Canadians and Brits, dealing in registered securities without a trace of a license, duping gullible investors at a rapid rate. Just an everyday Manila scam.
Globalization as Salvation? I continue to have conflicting feelings about globalization, having to do with the tension between my intellectual reservations about the phenomenon and my experiences as a management consultant here in Manila (which now directly involves the outsourcing business). Had anyone told me 20 years ago, when I was an intellectualized graduate student in the Ivy League, that I would be aiding and abetting the capitalist system by luring foreign direct investment to a developing country to create low-paying (by international standards) jobs, I would have told 'em to take a hike.
But those investments are creating thousands of jobs that would not otherwise exist. The rapidly growing outsourcing industry based on IT-enabled services is one of the few bright spots in the bleak economic landscape here. And clearly the Wharton MBAs who dominate the Makati Business Club, World Bank, and IMF are all for free trade and globalization. The GMA administration is certainly going to proceed full steam ahead with the neoliberal agenda, and I hope it works.
But what happens when the 800-pound gorilla (China) gets up a good head of steam in the next few years? The English language schools there are doing gold rush business and the window of opportunity for countries like the Philippines is narrow indeed.
This country badly needs visionary leadership that is willing and able to address the problems mentioned above (and others, equally important, that didn't make my short list). Solving the security problem is essential, as is dealing with the population issue. While the administration has the political will and now (hopefully) the resources for the former, the latter is a major concern. There are already too many people in the Philippines and too many of them are poor and alienated. Until that fact is recognized and acted upon, the long-term prospects for this country are problematic at best.
|...from Clarence Henderson's Pearl of the Orient Seas|
|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.||
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