Philippine Economy in the Asian Century

John West argues that the Philippines now has great potential to become one of the success stories of the Asian Century, especially if it draws some lessons from its neighbours.

The Philippines appears to have been a relatively minor player in the renaissance of the Asian economy, these past 70 years or so. Rather, Asia’s economic dynamism was initiated by Japan, and has been dominated more recently by China and India, as documented in my book, “Asian Century…on a Knife-edge”.

But the Philippine economy has come a long way over the past couple of decades. It has enjoyed solid economic growth. Philippine lives are improving. The Philippines has decisively thrown off the nickname of the sick-man of Asia. And the Philippines now has great potential to become one of the success stories of the Asian Century, especially if it draws some lessons from its neighbours.

1. Measuring up the Philippine economy

It is instructive to first situate the Philippine economy among its regional peers.

The Philippines’ GDP per capita is about $9,000 in purchasing power parity terms, and well behind countries like Japan, Korea, Malaysia, Thailand, China, and Indonesia. But the performance of the Philippine economy has been impressive, as it regained domestic political stability, and navigated the Asian financial crisis and the global financial crisis. Indeed, since the early 2000s, the Philippine economy has been one of the world’s fastest-growing economies.

When it comes to life expectancy, the Philippines is behind many of its neighbours, including Vietnam, with 71 years. But again, it has shown a steady improvement over recent decades.

Finally, the fight against poverty appears successful. The share of Filipinos living on less than $1.90 a day, a measure of extreme poverty, has fallen from 14% to 6% over the past 15 years. However, the fact that some 55% of Filipinos are living on less than $5.50 a day, suggests that a large share of Filipinos are living either in poverty or in “near-poverty”.

Indeed, the Philippines’ poverty reduction performance has been weaker than its many of its neighbours, including Vietnam. In other words, while the Philippine economy has been quite strong these past two decades, not everyone has been benefiting from this strength. Income inequality, the gap between rich and poor, is high in the Philippines, and higher than countries like Thailand, Vietnam and China, while the same as Indonesia and below Malaysia.

The Philippines has long seemed to march to its own tune. But does it have a regional soulmate? In my opinion, India would be the Philippines’ soulmate. The two countries have similar GDP per capita and life expectancy, although the Philippines does better on poverty. Both have weak manufacturing and strong services sectors. And they are also noisy democracies.

My argument is that the Philippines can draw many lessons from its Asian neighbours to become one of the success stories of the Asian Century.

2. Getting value out of global value chains

The very successful development of emerging countries like China, Thailand, and Malaysia has been in large part thanks to their participation in global value chains (GVCs) for manufacturing products. The classic example of a manufacturing GVC would be the iPhone, which is not produced in any one country. It is produced through a GVC which starts with design in California, includes high tech components from Japan, Korea, Germany and elsewhere, and concludes with assembly in China.

These days, most manufacturing production is conducted through GVCs. Many factors have driven the creation of GVCs: more open trade and investment; lower transport costs; and IT which enables the complex coordination of GVCs.

GVCs are important because they can provide a fast track to development. A low-income country can participate in global trade by just performing one task like assembling iPhones. They do not need to produce a whole product.

GVCs can be a source of many benefits such as: jobs for the local population (especially women); business for local companies; and above all, knowledge and technology transfers for local workers and companies, who learn how to produce goods for international markets.

Participation in GVCs also entails risks. One risk of GVCs is that you can get stuck doing a low-value-added activity like assembling iPhones. So, once you have entered a GVC, the challenge becomes increasing your contribution, lifting your value-added.

China is showing us how this can be done. When China was assembling the iPhone 3, a decade ago, its contribution to the iPhone’s value-added was very low. Today, its contribution to the iPhone 11 is much greater, as Chinese companies are now making some of the components. What’s more, China is now producing its own smartphones thanks to companies like Huawei, Xiaomi and OPPO.

How has China managed to increase its value-added in GVCs? Some of the key factors are its impressive investments in human capital and research and development. Joint venture partnerships with foreign companies have also provided access to technology.

3. Philippines’ experience in manufacturing GVCs

In contrast to China, the Philippines has been slow to take advantage of manufacturing GVCs for its development. This is a great pity. It has a large workforce in low-productivity agriculture and service sector jobs, which would be well placed to undertake higher-productivity work in labour-intensive manufacturing GVCs.

Indeed, while unemployment and underemployment are not great problems in the Philippines, the poor quality of jobs is. Some three-quarters of Philippine workers have “informal jobs”, meaning that they have no contract, enjoy no regulation or protection and receive no benefits. This is one reason why poverty remains a problem in the Philippines.

The Philippine government is well aware of the issue, as reflected in the Comprehensive National Industrial Strategy. But much more needs to be done to seize the opportunity of manufacturing GVCs.

For example, GVC participation usually starts with welcoming foreign direct investment (FDI). But studies point to Philippine FDI policies being among the most restrictive in East Asia. Indeed, the accumulated stock of FDI in the Philippines is much lower than Indonesia, Malaysia and Thailand.

Second, foreign investors prefer countries with good infrastructure. Although the Philippines is now making impressive efforts to improve its infrastructure through the “build, build, build” programme, infrastructure remains a weak point. For example, the Philippines infrastructure is ranked 96th out of 140 countries by the World Economic Forum. China is ranked 36th, and Vietnam has ranked ahead of the Philippines at 77th.

The third is the issue of human capital. Beyond elite educational institutions like Ateneo, education skills and training have also been a weak point. The Philippines was the lowest-ranking of the 77 countries covered in the OECD’s latest PISA survey (Programme for International Student Assessment), while China, Singapore, Macao and Hong Kong topped this study.

For several reasons, now is the time for the Philippines to address these concerns urgently and take advantage of manufacturing GVCs as a motor of rapid development. First, as China has developed, its costs have gone up, and it is now a more expensive place for business. So some companies have been shifting their GVCs out of China. International trade tensions have also affected the attractiveness of China as a base for GVCs. And now the coronavirus has highlighted the importance of greater diversification of GVC production bases.

But while the time is ripe for the Philippines to hook onto manufacturing GVCs, the evidence shows that Vietnam and Mexico have benefited from such opportunities, instead of the Philippines.

4. Exploiting demographic opportunities

In contrast to many of its neighbours, the Philippines can still exploit some demographic opportunities.

Over the past couple of centuries, we have seen demographic transitions as infant mortality declined sharply, life expectancy increased, and fertility rates fell dramatically. Countries like Japan, Korea, China etc all enjoyed a “demographic dividend” during their high-growth periods, thanks to an increase in the share of their working-age population, which was reasonably well educated, and able to find productive employment.

In the case of the Philippines, infant mortality has also fallen, life expectancy rose, and the fertility rate has declined from over 7 children per woman in 1960 but is still today at 2.9. The Philippines’ working-age population has also increased and might creep up further over the coming decades. And with fertility still high, the total population of the Philippines could increase from 108 million in 2019 to 144 million in the year 2050.

All things considered, the working-age population of the Philippines could increase from almost 70 million in 2019 to 97 million in 2050. This growing working-age population could make a major contribution to economic prosperity if they were productively employed in manufacturing GVCs. But unless, the Philippine government addresses issues like openness to FDI, infrastructure and human capital, the risk is that these new workers will end up in low-productivity jobs in the service or agricultural sector.

Alternatively, they may look for work overseas and become part of the nation’s wasted human potential. Despite some prevailing anti-immigration sentiment, most Western countries are suffering from rapidly ageing populations, and are keen to recruit foreign talent.

5. Managing the urbanisation wave

A giant wave of urbanisation is sweeping across Asia, as people move from the countryside to towns and cities. In the Philippines, about half the population lives in urban centres. This means that the urbanisation journey still has a long way to go. For example, Australia’s urban population is 86% of the total, while in Japan over 90% of the population lives in urban centres.

Urbanisation can be a great positive force for the economy. In particular, as people move from the countryside to towns and cities, they can move from low-productivity to higher-productivity jobs in manufacturing GVCs. Moreover, at their best, cities can become hubs of innovation and creativity. In Asia, Singapore may come the closest to being an innovation city, although Bonifacio Global City (BGC) also has that feel. But in reality, cities like San Francisco, Boston, New York, London and Sydney are the world’s best examples of innovation cities.

There is however another reality to urbanisation. Many people are moving to urban centres, even though their lives may only be a little bit better. They often have low-quality jobs in the services sector, rather than working in GVCs. Some people are simply moving from rural poverty to urban poverty, and slums are mushrooming up in many Asian cities like Mumbai, Jakarta and Manila. According to the World Bank, two-thirds of the world’s slum dwellers live in Asia. Some 38% of the Philippines’ urban population would live in slums.

What is the key to successful urbanisation? If we look at the cases of cities in Japan, Korea, China, Hong Kong and Singapore, their success is based on jobs, jobs and jobs, and infrastructure, infrastructure and infrastructure. So for successfully managing urbanisation, we come back to the importance of manufacturing GVCs for creating decent jobs for Filipinos.

6. Business process outsourcing — a Philippine success, but no panacea.

Not so long ago, the typical business office in a country like Australia would include an accounting department, legal department, human resources department, call centre, the marketing department and so on.

Today, many of these business processing functions are no longer in Sydney or Melbourne. They are in the Philippine cities of BGC, Makati, Cebu and even Davao, or perhaps in India. Business administration has now been split up into various tasks. New GVCs have been created for business services.

Business process outsourcing (BPO) has been very beneficial to the Philippines. Good paying jobs are created. There is an opportunity to learn new skills. BPOs also provide an incentive to stay at home, rather than migrating to other countries. According to some estimates, the sector contributes 8% or more of total Philippine GDP.

But the BPO sector only employs about one million or more Filipinos out of a total working-age population of over 70 million people. And those Filipinos working in BPOs are mostly skilled workers. The BPO sector does not provide jobs to the millions of lower-skilled Filipinos looking for decent work. Further, the BPO sector involves lots of overnight work which is damaging for the health of workers — the US call centre shift works from 8.00 pm to 5.00 am Philippine time.

As attractive as the BPO sector might seem, it must also master the ubiquitous forces of progress to remain competitive. Looking ahead, jobs in the Philippine BPO sector will be threatened by automation and artificial intelligence, which highlights the importance of always improving human capital and skills.

7. Gender and development — where the Philippines leads

It is true that the Philippines is not yet one of Asia’s leading economies. But there is one area where the Philippines does lead and has much to teach the rest of Asia. That is the topic of gender and development, the importance of offering more equal opportunity to women.

The Philippines is the highest-ranked Asian country in the Global Gender Gap Index of the World Economic Forum. It is ranked 16th out of 153 countries, well ahead of Australia (44th) and the US (53rd). Elsewhere in Asia, Singapore comes in at 54th, China at 106th, Korea 108th, India 112th and Japan 121st!

The Philippines also topped a recent Women in Business report with the most number of women occupying senior management positions. The Philippines outranked countries like US, UK, UAE, South Korea, Germany, France, and Spain. Japan ranked last in the survey.

Japan is a country that could take inspiration from the Philippines in the area of gender and development since the Japanese government has adopted a “womenomics” programme to help revitalise its stagnant economy and ageing society. This is important because Japan’s GDP could be lifted by some 15% if women’s labour force participation rate converged to that of men.

8. Concluding comments — be ambitious!

My message is simple. The Philippines has come a long way over the past two decades. But there is much more that could be done to realise the full potential of this great country.

Looking at the experience of some of its Asian neighbours, there is much that could be done to hook onto manufacturing GVCs, exploit the full potential of the young and talented population, and to make urbanisation a success, rather than a nightmare.

Moreover, the experience of the Philippines’ neighbours shows that very rapid progress is possible and that there are good grounds to be very ambitious. For example, from the ashes of war in 1945, Japan rebuilt itself and then hosted the 1964 Olympic Games. In 1960, South Korea was a very poor country, and well behind the Philippines at that time. Today, Korea is one of Asia’s most advanced economies. And lastly, Vietnam was also a country that suffered from war, but today is one of Asia’s most dynamic economies.

Acknowledgements

This is a condensed version of John West’s recent speech to the Ateneo Economics Association, Manila, Philippines. This was very skillfully organised by Jose Humiding and Paula Birung.