Economic and Political Challenges in the Philippines

IMGXYZ3784IMGZYXThe Philippine economy has grown by about 5 percent a year on average over the last ten years, significantly higher than in the previous two decades. Yet the number of people living below the poverty line has actually increased. What does the administration of President Benigno “Nonoy” Aquino III —now in office for nearly two years—need to do to be able to maintain rapid economic growth while making it more inclusive?

On the eve of the bilateral strategic dialogue between the Philippines and United States on April 30, Bert Hofman, Chief Economist for the East Asia and Pacific Region at the World Bank, John Nye, Frederic Bastiat Chair in Political Economy at the Mercatus Center at George Mason University, and Steven Rood, Country Representative for the Philippines and Pacific Island Nations at the Asia Foundation, joined Carnegie’s Vikram Nehru to discuss the economic and political prospects and challenges facing the Philippines.

A System Designed Against Development

Lagging growth has its roots in regulations and distortions that drive a wedge between the productive and unproductive sectors of the economy, largely to the benefit of elites, Nye argued.

• Structural Problems: The roots of underdevelopment lie in the underlying structure of the Philippines’ economy, which is mostly rural, agricultural, and suffers from low productivity, Nye said. He added that China, the greatest developmental success story in recent decades, owes much of its growth to the migration of rural workers from the rural inland to highly productive coastal regions.


• Regulations: Commercial, regulatory, and labor market distortions have prevented a similar transition from taking place in the Philippines, Nye argued. High minimum wages and “regularization” policies that prevent companies from firing employees apply only to the formal commercial sector, hobbling its growth. The result has been two classes of workers—the privileged few who can enjoy the benefits of these regulations in the modern sector and the vast majority with low productivity jobs in the informal and agricultural sectors.


• Land Reforms: While the government has transferred land to poor Filipinos, the recipients are prohibited from selling their land or buying additional land, explained Nye. As a result, most beneficiaries resell their land to agricultural elites through shadowy arrangements, further entrenching inequality.


• “Legalism” Not the Answer: Additional laws and regulations would do little to solve the paradox of the Philippine government, which does both too much and too little to promote growth, concluded Nye. Instead, policymakers should identify which rules are productive and crucial to development and jettison those that are not.

Reason for Optimism

The fact that the proportion of the Filipino population living in poverty has remained steady over 30 years is cause for concern, Hofman said. Given the surge in population during that period, the absolute number of Filipinos living on roughly $1.25 per day has increased dramatically. Hofman identified several reasons for persistent underdevelopment, as well as reasons for optimism.

• Uneven Growth and Job Creation: Too little growth has occurred in the modern sectors, and the growth that has occurred in manufacturing has been capital-intensive, producing relatively few jobs. At the same time, the low-quality education received by many workers excludes them from accessing higher-paying jobs.


• Political Risk Deters Investment: Foreign investors are worried by the volatile and unpredictable shifts in national politics. A history of mass protests, coupled with the Supreme Court’s frequent revisions and reversals of laws, have created a climate of uncertainty.


• Momentous Reforms a Positive Sign: However, the current Aquino administration has undertaken major reforms in state enterprise governance, public finance management, and social programs. These reforms have created a stronger basis for inclusive growth.


• Targeting Poverty: One successful program is the conditional cash transfer (CCT) program, which has harnessed powerful incentives to reduce poverty and is slated for expansion. The Department of Social Welfare, which administers the CCT, is one of the cleanest government agencies in the Philippines, Hofman added.


• China and the Region: Rising real wages in China are encouraging a shift away from labor-intensive manufacturing, creating an opportunity for its poorer Southeast Asian neighbors to fill the gap. If the Philippines can make itself into an attractive destination for foreign investment, its growth could accelerate significantly.

Political Leadership a Catalyst for Reform

In contrast to some of his predecessors, President Aquino has been a driving force behind controversial but necessary structural and anti-corruption reforms, Rood said. Sustained high-level commitment suggests that these reforms may actually have a chance to reach fruition, he added.

• Public Support: President Aquino has enormous political capital from his popular support, Rood observed. Approval ratings have held steady at 46 percent, compared to roughly 32 to 35 percent in the Ramos and Estrada eras.


• Empowering Voters: The CCT programs have had the added benefit of freeing poorer voters from the influence of local officials and elites, Rood added. Similarly, the Aquino administration has accelerated grants of property titles to urban residents, giving citizens greater land security.


• Mixed Results on Peace Process: The Aquino administration has succeeded in gaining the trust of some of the country’s insurgent groups, like the Islamic Liberation Front in Mindanao, but at the same time, it has seen the peace process with others, like the communist New People’s Army, stall.


• Anti-corruption Efforts: Most controversially, the Aquino government has launched high-profile prosecutions of members of the Arroyo administration—including former President Arroyo herself, Rood said. After encountering repeated efforts to obstruct anti-corruption efforts by members of the Supreme Court, the Aquino government proceeded with prosecution of the Chief Justice as well.


• Beyond the Election Cycle: With midterm elections coming up in 2013, foreign observers will have to look beyond the fanfare of the election media coverage to monitor the progress of “below-the-radar” structural reforms, Rood stressed.