Random Notes on the Philippines Economy: Six Months Into the GMA Experience
from Clarence Henderson's Pearl of the Orient Seas

 

Index to Pearl of the Orient Seas by Clarence Henderson
Well, President Arroyo has been in office for six months now, six months characterized by political upheaval, major security problems, major doubts in the international community about the viability of the country's institutions, and continued uncertainty about most everything. The situation also features the apparent near-meltdown of some rather important economic partners, namely Japan and Uncle Sam. Other than that, things are fine.

Without much premeditation and with absolutely no pretense of inside knowledge or superior analysis, following are a few thoughts about what's going on now and where we might be heading.

 

Growth Projections and Foreign Investment

Most experts have been progressively downgrading their growth estimates. The good factors (the seeming return of at least some foreign investors) are being overshadowed by the bad (the international economy and continued political concerns). The government itself has scaled back its growth projections for 2001 due to concerns about the global economic slowdown and the domestic situation. The Department of Trade and Industry's (DTI's) growth target for 2001 has fallen to 3.3%-3.8% from an earlier 3.8%-4.3% projection. When GMA approved the lowered forecast, she said: "It's because of the realities we're faced with. There is an international downtrend to begin with, not to mention our own internal problems. We are being realistic." The US Embassy's Economic Section lowered its forecast for real GDP growth in 2001 from 3.2-3.9% (February estimate) to 2.7-3.2% (June estimate). Most economists seem to feel that the country will do well to muster 3% growth this year.

At least foreign investors appear to be coming back into the country (slowly and hopefully surely?). GMA has been receiving a steady stream of big shot foreign guests, top guys from foreign firms with Philippine projects either in place or in the works. Heading the list: Intel President and CEO Craig Barrett, who put in an appearance at Malacañang to announce an expanded investment of $7.5 million for the first assembly site for the company's newest microprocessor (designed for mobile computing). Intel now employs 6,300 workers at its Makati and Cavite plants, and this is sure to expand. According to Barrett: "...We have been operating here for 27 years....very successfully....we are very excited about the future of this country...we plan to increase our investments here..."

Intel also showed its corporate citizenship, including a commitment to train some 1,000 teachers to use computers in education and the signing of a MOA with the Department of Science and Technology (DOST) to develop a mobile information technology classroom (MITC). This project will equip buses with PCs to visit the boondocks. Intel also linked up with the Ayala Foundation to establish a Computer Clubhouse in the Friendship Home of Mater Dolorosa Parish in barangay East Rembo, an urban poor community in Makati.

There's encouraging evidence that the Philippines economy is not totally dead in the water. Total investments registered with the Board of Investments (BOI) and the Philippine Economic Zone Authority (PEZA) during first half 2001 were up to P51.1 billion from P26.8 billion, as compared to same period last year (a jump of 91%). The estimates for jobs created: 11,938 for BOI-approved projects and 21,328 for PEZA-registered projects. Almost 80% of the BOI-registered projects (representing investments of P24.1 billion) will be outside of Metro Manila. Examples:

 

The IT Sector

GMA, in her SONA (State of the Nation) address on July 23, emphasized the key role of foreign investment, with particular emphasis on the IT sector. While the Intel decision reflects the importance of electronics manufacturing, there is also huge growth right now in IT-enabled services, primarily involving outsourcing (see Globalization Revisited). Sharp young Filipino professionals are now busy manning seats in customer contact centers, writing Javascript on web development projects, doing medical transcriptions, and teaching English for clients scattered about the globe. The country's bandwidth problems are all but solved, and the pool of human resources is deep and extremely affordable by Western standards.

Other positive developments in the IT sector include:

 

  1. The country continues to offer good investment incentives, especially in the economic zones. PEZA used to require IT parks to have five-hectare minimum areas, but now single high-rise buildings are eligible. There are numerous IT parks, including Northgate Cyber Zone (Filinvest Corporation) and Eastwood City Cyberpark (Empire East Group). RCBC Plaza, a glistening high-tech building that hosts the Yuchengco Group of Companies (featuring a world class city view from the glass-enclosed 47th floor auditorium) is one of the new high rises that are designated as IT Parks
  2. The E-Commerce Law (Republic Act No. 8792), signed into law by Estrada in June, 2000, made the Philippines the sixth country in Asia to enact such legislation (the others being Singapore, Malaysia, Thailand, South Korea, and India). Key features included:
    • Electronic data messages, documents and signatures are legally recognized and admissible as evidence
    • Government agencies were mandated to accept e-messages and documents for official transactions within two years
    • Significant penalties for computer hacking, creating viruses (thanks to Love Bug), and piracy of copyrighted works (penalties of at least P 100,000 (US $2,000) and sentences of six months-three years)
  3. The recent restructuring of the Information Technology and E-Commerce Council (ITECC), originally known as the E-Commerce Promotions Council, is also evidence of the administration's seriousness about the IT sector. GMA was explicit in her commitment to the IT sector and IT-enabled services in her SONA. ITECC should also be more effective now that it is headed by a real IT private sector professional with first-rate management and people skills (Vergilio "Ver" Pena, former head of IBM Philippines). (Ver and I share in common having programmed in Fortran and COBOL on IBM mainframe computers using punched cards, but that's another story altogether…) The President herself now chairs the ITECC. And she's not just a figurehead, as she insists on attending each monthly meeting, reading the background documents and minutes, and occasionally calling people on the carpet for not having followed through on this or that commitment.

 

The Human Dimension

The IT-enabled/outsourcing phenomenon alluded to above (and about which I have written much elsewhere) should be seen in the context of the rapidly growing population in the Philippines and the surplus of human resources at all levels. According to a recent report by the Congressional Commission on Labor, the unemployment rate has averaged 8.9% over the last decade. There are also high levels of underemployment (i.e., lots of bright young people aren't getting decent jobs or jobs that apply their education or skills in any meaningful sense). That's why the going rate for call center agents is around US $300-400 a month, representing a cost differential of at least 1:6 relative to comparable stateside rates (which is, of course, why the foreign companies are setting up contact centers here).

The country continues to rely heavily on overseas foreign workers (OFWs), the Philippines' biggest export after electronic components seemingly being human sweat and blood (see Leavin' on a Jet Plane). OFWs are a major source of national income, contributing about 7% of GNP and 17% of foreign exchange. But things are getting tighter on the global labor scene (just ask some of the thousands and thousands of Indian software jocks with H-1 visas who have recently found themselves desperately job hunting in places like Dallas, Silicon, and Boston...). How much longer this human export strategy will remain a viable safety valve remains to be seen.

 

Basket Case or Not?

In a recent article ("Does the Philippines Have a Chance?") making the rounds of Manila business circles, my friend Peter Wallace of the Economist Intelligence Unit paints a stark portrait. To quote his opening words: "In the past 25 years the Philippines has averaged 3.1% annual GDP growth, with a population growth of 2.5%. Which means almost no improvement for the Filipino over that 25 years. This is about half, or less, the rate achieved by other nations in Asia." Peter goes on to identify nine factors holding the country back: (1) politics and vested interests, (2) uncontrolled population growth, (3) a weak educational system, (4) endemic corruption, (5) inadequate infrastructure, (6) an outdated agriculture system, (7) no priority given to job creation, (8) a judiciary in need of major improvement, and (9) security concerns.

Ahem... good points all. In fact, as I was writing the above summary of current economic projections, I was wondering if the issues of corruption and weak governance don't completely override sober, reasoned economic analysis. This country is prone to many unpredictable and tumultuous events that can quickly disillusion foreign investors (or foreigners already trying to do business here). And the vicissitudes of the Philippine political crapshoot are nothing short of amazing, as witness the current Senate narco-government hearings and the incredible scope of allegations against Ping Lacson.

The biggest Achilles heel may turn out to be the heavy export concentration in electronics, with most exports going to Japan and the states (both of which are hurting badly). The fiscal deficit threatens to grow even larger thanks to huge expenditures on the military campaigns in Mindanao and waste and corruption in government spending, and if international demand for electronics components and other exports slumps further, who knows what is going to happen.

So... not sure what the bottom line is. As reflected in the above comments, there's a lot of contradictory evidence as we seek to evaluate the Philippines' economy. Despite all the bad news, however, I believe that the Philippines still has a lot going for it. The democratic system (warts and all) remains vibrant if convoluted; the current Senate hearings represent yet another acid test, hopefully one in which the integrity of the country's institutions will finally break through the cloudy political sky. The human resource factor continues to be a major asset - the Philippines' well educated, hard working, English speaking workforce gives it a major advantage on the increasingly competitive global stage. The rapidly improving telecommunications infrastructure should also help attract foreign investment.

Without trying to predict the outcome, and contingent upon certain rather big ifs - if the administration continues its prudent fiscal and monetary policy; if the foreign investors continue to set up shop here; if the outsourcing business continues to grow; if the security issue down South (and in Manila) can be effectively addressed; and if the international economy doesn't completely implode - the Philippines may yet establish for itself a viable position in the global digital economy.

 

September 1, 2001
© Asia Pacific Management Forum and Clarence Henderson 2001

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