The opportunity for the Philippines in the Asian century

The 300-year reign of the west as the world’s economic epicenter is coming to a close. By next year, the collective size of all Asian economies will eclipse that of the rest of the world combined. Thus, the year 2020 marks the official beginning of the Asian Century, declared the United Nations Conference for Trade and Development (UNCTAD).

Asia is now the new center of the world as it is home to more than half of the world’s population and half of the world’s middle class consumers. It is also where 21 out of the world’s 30 largest global cities are located. Experts agree that the average growth rate of Asian economies will be more than double that of the rest of the world in the next 20 years.

Driving Asia is the phenomenal rise of China, India and ASEAN as economic powerhouses. To provide perspective on the phenomenal rise of the continent, Asia accounted for only one-third of global output in the year 2000. It now comprises 50 percent of the planet’s gross domestic product.

On a purchasing power parity (PPP) perspective, China’s economy is now bigger than that of the United States. India has overtaken Japan to become the 3rd largest economy. Within ASEAN, Indonesia is well on its way to becoming the 7th largest economy while Vietnam has overtaken 17 countries to take 32nd position. The Philippines, despite challenges in its manufacturing sector, has overtaken seven countries and it now has 26th largest economy. If the Philippines plays its cards right, it can be the 16th largest economy by the year 2050.

Prospects are promising for ASEAN. With China and India slowing down due to the trade war, ASEAN is in the position to take center stage as the world’s engine of growth. ASEAN’s economy is now bigger than that of Great Britain.

ASEAN’s development came in waves with Singapore and Brunei being the first to achieve high income status. Thailand and Malaysia achieved rapid growth in the 90’s and are now counted among upper middle income economies. In the last ten years, however, Indonesia, Vietnam and the Philippines have lead the way in as far as economic development is concerned. The three nations have clockedin an average annual growth rate of between five and six percent since 2010. The Philippines is seen to graduate to upper-middle income status next year.

As I mentioned, China and India’s slowdown have made Indonesia, Vietnam and the Philippines the most dynamic global economies today. All three are in stiff competition to attract foreign investments. But to compete on an equal footing, the Philippines must resolve several structural weaknesses.

The gaping hole in the Philippines’ growth story is its manufacturing sector. It is weak, to say the least. For context, our merchandise exports revenues of $67 billion is less than a fourth of Vietnam’s $297 billion. We have become a nation dependent on imports – from simple ball pens to heavy equipment. This is why our budget deficit (and current account deficit) is growing at an alarming rate every year.

Deficits are covered by debt so it goes without saying that the country’s debt load is growing at an alarming rate too. Sure, it is still manageable today, but if government fails to balance the national budget soon, we could face a serious debt crisis.

To put it simply, we need to export more to pay for the debts government is amassing for its infrastructure program and for its massive importations of consumer goods.

The crux of our woes is our inability to attract foreign investments. Again, for context, the Philippines attracted $9.8 billion worth of investment last year while Vietnam attract $35.5 billion. Foreign investments are the silver bullet to our problems since they bring both capital and technologies needed to build factories. These factories export goods and provide the local market with what it needs, thus, making the country less import-dependent.

The structural weaknesses I referred to earlier are those that contribute in making the Philippines unattractive to foreign investors. They include the constitutional provisions that restrict foreign investments in certain industries, expensive power cost, insufficient infrastructure and difficulty to do business (due to bureaucratic red tape). Exacerbating matters is that corporate income tax in the Philippines is 30 percent, compared to only 20 percent in Vietnam and 25 percent in Indonesia.

The Philippines must address these structural weaknesses if it is to compete. Our economic managers have numerous reforms waiting to be approved by Congress. Whether our legislators have the political will to enact these reforms without watering them down is another story.

On corporate income tax, the CITIRA Law proposes to gradually reduce corporate income tax from 30 percent to 20 percent over a ten-year period. I reckon, however, that 10 years is too long. If we are to be a real contender, this should be accelerated to just three years. Indonesia just passed a law to reduce its rate to 20 percent next year. The CITIRA Law is now pending in the Senate.

As far as infrastructure is concerned, while construction of several roads, rails and ports are ongoing, it is still grossly insufficient. Only 9 out of the 75 projects in Build Build Build are under construction today. Government must work faster and with more urgency lest it fail to deliver its promise of a “golden age of infrastructure”.

Another reform we must undertake is to open up more industries in which foreigners can participate as a majority stakeholder. Unfortunately, the 1987 Constitution was written with a protectionist intent and it has been a great impediment to attracting investors. That said, only an amendment of the Constitution can fix this. Even if politically contentious, we must confront this issue eventually.

The transport and telecommunications backbone of the country needs to be strengthened if we are to be truly competitive, especially in the information and communication technology space. The Open Access in Data Transmission Act and the amendment to the Public Services Act will address this. Both bills are pending in Congress.

As for bureaucratic red tape goes, the Ease of Doing Business and Efficient Government Service Delivery Act has already been passed into law and is now awaiting implementation. When completely rolled out, it is envisioned that all front-line government services will be fully automated, making it easier to conduct business. Again, the devil is in the execution.

Apart from this, Congress must revisit the EPIRA Law which has proved ineffective to bring down power cost.

Conditions are right for the Philippines to break away economically. However, we must first get our house in order before investors come. It would be a shame if the Asian century happens and we are left behind.