Meanwhile, stock prices surged by 42 per cent in the same period. Prudent management by the Bangko Sentral ng Pilipinas (the Philippine central bank) has helped contain inflation to an average of 3.8 per cent in the first eleven months of 2010 despite the increase in capital inflows and strong economic recovery.
In the medium-term, the Philippine government has to achieve fiscal consolidation. The national government deficit is expected to reach 3.9 percent of GDP in 2010 which is the same as last year. Improved tax administration is the most effective and efficient way to address the deficit. Another channel is streamlining or even abolishing the National Food Authority (NFA) which is the biggest single source of misused funds. Both strategies require a great deal of institutional strengthening and political will. The new President won handily on an election campaign anchored on anti-corruption and he should use the strong mandate to implement tough reform measures.
Greater fiscal space will allow the Government to address structural problems. These deal mainly with a relatively high incidence of poverty and supply-side constraints which affect the competitiveness of domestic firms. The most prominent example of a supply-side constraint is poor infrastructure. This includes not only roads, bridges, ports, and transportation, but also power and electricity. The Philippines has recently overtaken Japan as the economy with the highest cost of electricity in Asia. Supply-side constraints are reflected in the low investment-to-GDP ratio in the Philippines. In turn, lack of investment limits the number of employment opportunities which then leads to the high incidence of poverty.
Recently the Government launched the Public-Private Partnership (PPP) program. Through this contractual arrangement, the private sector can provide financial support and expertise in implementing government projects more efficiently, while the government can focus on its core responsibilities such as project prioritisation. However, supply side constraints cannot fully explain the lethargic investment rate in the Philippines during the past 12 years. There are countries with the same state of infrastructure and similar perceptions of corruption that have much higher investment rates.
An interesting issue would be whether institutional factors can partly explain the low investment rate. A World Bank study cited the dominance of corporate conglomerates in strategic sectors such as agriculture, maritime and air transport, power, cement, and banking. These corporate conglomerates do not have an incentive to invest and expand their operations since their main source of profitability is a captured market. In turn the resulting higher costs in these sectors discourage investment in sectors that have strong backward and forward linkages with them, particularly in manufacturing.
The corporate conglomerates are symptoms of an oligarchy in the Philippines. Weak institutions and an oligarchic private sector are actually two sides of the same coin. A gridlock has evolved wherein stronger institutions are required to loosen the grip of the oligarchs but at the same time the influence of oligarchs has to be reduced in order to strengthen institutions.
Crafting appropriate development policies in the Philippines requires a political economy framework supported by a variant of the new institutional economics. For example, some experts emphasise the need to nurture and reinforce existing groups and constituents that adhere strongly to democratic principles. This will strengthen these groups vis-à-vis the oligarchy.
Meanwhile, the Philippines can take advantage of the trend towards rebalancing economic growth in East Asia. For example, the development of the Western region of China and the likely increase in consumption expenditures in the whole country will provide export opportunities. Rebalancing will also involve reallocation of financial flows. Instead of accumulating foreign exchange reserves and purchasing US treasuries, resources in the region will be used to support infrastructure projects to ensure greater connectivity in Asia. Infrastructure projects in the Philippines can be financed through this mechanism.
Josef Yap is President of the Philippine Institute for Development Studies (PIDS) and is one of the Philippine’s most prominent economists. Dr. Yap has acted as a member of the Committee on Social and Human Sciences to the UNESCO National Commission of the Philippines. The author gratefully acknowledges the excellent research assistance of Ms. Kris A. Francisco, Research Analysts II at PIDS.
This is part of a special feature: 2010 in review and the year ahead.