The emerging Philippine tiger: Asian or Celtic?

READER’S POST

During his recent visit to Manila, Canadian Prime Minister Stephen Harper echoed many economists in hailing the Philippines as the next Asian tiger. This is something Filipinos had also heard some fifteen years ago, when the world hailed the Philippines as the next Asian tiger in the mid-1990s. The problem, however, is that the anticipated rise of this new Asian tiger never took place, and it’s highly likely that it will also not take place this time around.

An Asian economic tiger is characterized by massive influx of foreign direct investment (FDI), an export-driven economy, and a phenomenal expansion of its manufacturing base. Export-driven economic policies and a solid manufacturing base were the hallmarks of prominent Asian tigers like South Korea and Taiwan; while next-wave tigers Thailand and Malaysia were boosted by massive FDI, followed by the expansion of their manufacturing bases and the re-orientation of their policies towards an export-driven economy.

During the term of President Fidel V. Ramos from 1992 to 1998, the Philippines tried to follow the Asian tiger model by making a powerful pitch to attract a bulk of FDIs that were then going into the Association of Southeast Asian Nations (ASEAN) region. The Ramos era was a time of political stability, economic liberalization, and a vibrant economic vision with a catchy name– Philippines 2000. Key industries were deregulated and de-monopolized, public enterprises were privatized, and economic zones and free ports, coupled with financial incentives like tax breaks, were set up to attract foreign investors. These brought about significant positive results. Electronics and semiconductors manufacturing sites mushroomed in Subic Bay Free Port and various economic zones in Laguna and Cavite, for instance. Yet all of these achievements failed to compare with what the rest of the major ASEAN economies achieved.

According to data from the United Nations Conference on Trade and Development (UNCTAD), from 1990 to 1994, the Philippines took merely $4.7 billion in FDIs, while Thailand and Indonesia got $9.9 billion and $8.6 billion, respectively. It was even worse in the 1995-1999 period, when the Philippines got a measly $7.2 billion, while formerly lackluster Vietnam cornered $9.3 billion and Thailand received more than double its previous at $22.9 billion. The same story reflects the data for 2011: The Philippines got a meager $1.73 billion, while Vietnam took in $10 billion and Indonesia raked in $19.3 billion.

This failure to attract a substantial amount of FDIs resulted in an insignificant manufacturing base and a dismal performance in terms of manufacturing-based exports. Ateneo de Manila University’s Dr. Edsel Beja, in an opinion piece that appeared on the Philippine Daily Inquirer, even pointed out that the Philippines has been experiencing de-industrialization. One can simply go around Subic Free Port to know how much Philippine manufacturing has reversed.

Instead, the narrative of economic growth of the Philippines during the past decade has been characterized by the increase in foreign exchange remittances from overseas Filipino workers (OFW) and the phenomenal boom of business process outsourcing (BPO) industry. Manufacturing and export-oriented industry played very little role in comparison. This paradigm of Philippine economic growth is contrary to the Asian tiger model.

Many observers, like the Asian Development Bank (ADB), continue to argue that the Philippines needs to develop its manufacturing industry in order to attain inclusive growth. Some even assert that the Philippines should not yet aspire to be a services-based economy, since its manufacturing sector has never fully matured in the first place. However, the continued reluctance of foreign investors to set up a manufacturing base in the Philippines tells us that growth through the Asian tiger model is no longer viable, unless an indigenous Filipino company courageously decides to set up one.

There is, however, an alternative path to economic “tigerhood” that emerged alongside the Asian tiger paradigm: Ireland’s Celtic tiger model. From 1990s to 2000s, Ireland achieved phenomenal economic growth that raised its profile from being among the weaker economies of Europe to being one of its richest.

Ireland’s growth was different the path taken by the Asian tigers. Aside from the usual financial incentives to entice foreign investors, Ireland used its comparative advantage as an English-speaking nation and as a relatively cheaper location in Europe to build a strong services-based economy. The Emerald Isle became the destination of knowledge-intensive businesses like information technology (IT), financial services and BPO. This turned the country into a knowledge-based economy.

Of course, one key difference is that, unlike the Philippines, Ireland did not have to deal with poverty on a massive scale. But Ireland’s growth path through the development of its knowledge-based services industries is similar to the current path that the Philippine economy is currently taking. The Philippine BPO industry is already transforming from a voice-based services sector to a knowledge-intensive service industry.

The Philippine BPO industry is still in its infancy, and it must pursue the development of more sophisticated knowledge-based services sector like those involving IT, financial services, and similar other industries. The Philippines has the best chance of cornering investments of these nature. The competition in this field is smaller, with only India as the sole viable competitor.

Manila’s economic growth policy should therefore make a significant shift towards building a knowledge-based economy. The Philippines produces hundreds of thousands of highly skilled graduates that can meet the demands of a Celtic tiger economy. Jobs in a knowledge-intensive service sector are significantly better-paying than those in the manufacturing sector, which means that a knowledge-based economy would create a sizable middle class with a high disposable income.

In the Celtic model, inclusive growth can be achieved when the knowledge-intensive service sector produces a multiplier effect that boosts allied sectors. The demand for office spaces, for example, would boost the real estate industry, while the proliferation of offices would result in an increase in demand for fast foods, convenience stores, retail outlets like malls and supermarkets, and building maintenance and security services, among others.

In so far as the traditional Asian tiger economic growth model is concerned, the Philippines has arguably lost its comparative advantage to the other major ASEAN economies. The country should therefore explore growth paths where it enjoys overwhelming advantage. Instead of aspiring to be an Asian tiger, perhaps the Philippines should aspire to be a Celtic one.

Readers may indicate their wish to contribute posts in the blog’s comment section.

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14 thoughts on “The emerging Philippine tiger: Asian or Celtic?”

  1. Knowledge based is good. That is essentially underpinning the call center boom, right? Are casinos knowledge based?

    I think Ireland had poverty, maybe not as bad as that in the Philippines. However I do know that Jonathan Swift, author of the famous “Gulliver’s Travels”, wrote “A Modest Proposal” in which he proposed that the Irish eat their excess babies. A shock wave of poverty awareness reverberated throughout the country, the congress passed new programs to fight poverty, and matters improved.

    Maybe we need to find the Philippine Jonathan Swift, too.

  2. I think what the author is trying to say is that Irish poverty in the 1990s were not as bad as that of the Philippines. The reason, of course, is that the Emerald Isle has fewer people than the Pearl of the Orient.

    As Jaime Augusto Zobel de Ayala said in the “Invest in the Philippines” video, the greatest asset of the country now is its young people. Go around Manila and you’ll see young workers who are competent and driven, and live a comfortable life. The same is true in Cebu, Davao, Baguio, Ilo-ilo and other urban centers. Life is good in the Philippines if you are young and work in the city, as the New York Times said.

    The author was spot on in saying that the BPO industry should further evolve. It has evolved significantly from being mostly voiced-based customer service (call centers) in nature. Now, even American law firms rely on Filipinos to do legal research for them, while a friend of mine earns big bucks in Manila by being part of the team that runs the technical infrastructure of the New York Stock Exchange. I know of a Manila-based guy who got out of slum poverty by working as an accountant for an American company. The future is towards more heavy knowledge-intensive IT services, banking and finance, etc.

    But the BPO sector can only go so far. It might give us, at most, around a couple of million direct jobs, which would probably create, at most, around 4 million indirect jobs, sure, but the archipelago is a country of 100 million. Not all of the young population are educated enough to be absorbed by the BPO sector, or are in the city to be absorbed by blue-collar allied services sector. The government should pursue education for the population aggressively, and revive the country’s English proficiency which Filipinos are losing fast.

    Also, massive industrialization that would provide jobs for everyone should still be pursued. The way I see it, upstream mining should provide the manufacturing pillar of the Philippine economy. Another pillar would be the tourism industry– yes, those casinos!– which, thanks to a visionary Secretary of Tourism, is marginally improving. But to develop these two industries need massive investment in infrastructure, which, unfortunately, the Aquino administration– for reasons that are valid, in fairness– are quite timid about.

  3. Interesting. So if we are to be a Celtic tiger, then BPO is the priority, not manufacturing. So no need for that much industry-intensive FDIs right? So what’s the use of those credit ratingss?

    1. Well, the BPO industry is still driven by FDIs. Also, good credit ratings allows the country to borrow at low interest rates. It also decreases the interest rates of the country’s outstanding debt, making it easy for the government to do debt service.

      1. Nutbox is correct. Upgrade of credit ratings is directly related to low interest rates. In effect, it will improve the impression of international business about the vibrant condition of Philippine economy.

        FDIs are everything that are invested in the Philippines or any country for that matter in actual business production or facility from external sources. This is in contrast to portfolio investment which are external money invested in securities (stocks) or bonds, not in actual business production/facilities/offices.

        Now, the problem is Philippines is historically and still currently being skipped by FDIs going to manufacturing industry. The reality is Phils has lost its competitive advantage as a manufacturing base. This calls for re-assessment of the economic growth model of the Phils, hence the offer to look at the celtic tiger growth model.

  4. A major problem for industrial development of the Philippines is its high power costs. Electricity is a big cost component of manufacturers . . . unless it is labor-intensive. On the other hand, the problem with competing based on labor cost is our manpower costs more than that of China and third world Asian countries.

    Personally i think that during the time of President Ramos, if China’s doors were still closed that time, we would be one of the newly-industrialized countries by now. China would not have taken those pontential FDI’s. But fate was not so kind to the Philippines. Unlike during the time when Thailand and Malaysia were developing, China was still isolated from the world economy.

    1. Good point about electricity. Some people told me that one in four light bulbs in the Philippines are powered by Malampaya gas field, which would dry out soon. I think a serious energy crisis is a real possibility, and I’m not sure if President Aquino would know how to deal with it. His trusted classmate, Secretary Almendras, has been transferred to the Palace, replaced by a former Governor of Leyte. Governor Petilla would be the first politician (non-technocrat) to be appointed Secretary of Energy; would he know how to deal with a looming power crisis?

  5. The Philippines has three major obstacles to sustained economic growth – corruption (duh), power (already mentioned), and the hippie 1987 Constitution’s economic provisions. The first one, while impossible to eradicate, can be ameliorated somewhat. The second is tricky, but not insoluble (BNPP!). The third is a highly charged political document whose modification has been resisted for so long because of lack of trust in politicians. So that will crimp PH growth for many decades to come.

    As an aside, is Angelo Reyes counted as a technocrat even if his background is military? He was appointed Secretary of Energy by GMA.

  6. Maybe we can pull off a hybrid model here, Asian-Celtic Tiger. 😛 Although I’d prefer the Celtic model since it is more green, still we can’t rule out a manufacturing boom yet since foreign investors are looking for alternative locations from China and the Philippines is well on their radar. Besides, however promising, the BPO industry simply cannot provide enough jobs to our country’s huge labor force.

  7. @DaThriller 🙂 your proposition seems practical but there are many classical theory of economic developments, one of which is the theory of comparative advantage in economic resources which I learned in my Economics 101. Given that agriculture is the largest contribution to our GNP and that this sector also has employed a sizable manpower and has immediate impact on the family in terms of income , we should not ignore and focus on the development of Agriculture industry as the main driving motor to create that multiplier effect in increasing our GNP and thus provide that so called “economic take-off”. Its time we should stop exporting OFWs whih causes social dislocation and national degradation, making our expatriaes a second class citizens all over the world.

  8. The Philippine poises as the next Asian Tiger is not impossible and foreseen by many economist and experts to be doable within the 10 to 15 years period, of course,this should be coupled with economic growth of at least 5 to 6.5% of our GDP minimum year on year. This present Aquino administration and other sectors are working very hard to consolidate strategies that will lead us to attain and sustain inclusive economic growth path.

    Part of these strategies are: the passing of RH bill in congress – waiting to be signed by the President to become a law., hence, would significantly reduce/manage PH population vis-a-vis yearly GDP growths; Cash Conditional Transfer fund is increasing unprecedented year on year and is moving smoothly – to provide food subsidy/assistance to the poorest among the poor families in PH society; educational reform through K+12 program, hence, improving/increasing the literacy and competency of young Filipinos – in able the latter to compete globally in the future; lasting peace in Mindanao is also in the horizon as initial peace agreement between the MILF and PH government have been signed recently; the new sin tax law is now going to take effect replacing the old law- not only that this new sin tax law will providing additional resources for the government. The law is also expected to reduce government subsidies or expenses due to health related issues brought by the negative effects of cigarette and alcohol intakes to the consuming public.

    Only and If all these social infrastructures are in-place and implemented/done correctly, will significantly contributes in the growing PH economy in the long term. Hence, we can see in the near future a full matured Tiger – Philippine economy; proudly and big enough to growl in Asia. And if we are lucky enough, to the world ten years from now.

  9. The Philippines needs to have a further structural macroeconomic, cultural, and especially political reforms in order to maintain the recent economic stability of our country in a LONG-RUN basis not in a short-run.

    Our current economic growth is unsustainable if we continue to rely too much on OFW remittances instead of encouraging more investments in our domestic economy like more job opportunities for millions of unemployed Filipinos, improving our infrastructure, and strengthening our national defense.

    To encourage more investments in our economy instead of relying on OFW remittances and BPO revenues, we need to amend the 1987 constitution and allow 100% foreign direct investment (FDI) participation at all economic sectors in our domestic economy instead of limiting them to 40% and find a local partner who is rich enough to front the 60% (only few locals can afford to front 60% of a large-scale foreign investments that’s the reason most large-scale foreign investment in Southeast Asia goes to Singapore, Thailand, Malaysia, Thailand, Indonesia, and Cambodia where foreign investors can invest 100% from their own capital and can own what they invest).

    To spread our economic gains not just in Metro Manila, we need to decentralize our form of governance like shifting from unitary to federal form of governance where the provinces or regions are the one who will manage the economic, cultural, and political policies of a specific province or region.

    To assure an efficient governance from the top and to fasten the implementation of laws, we need to shift from the current presidential to parliamentary form of government where the Head of State (the President what I mean) should have only the ceremonial position while the real duty of governing the nation should be vested to the Parliament led by a Prime Minister and his/her Ministries as the current system ensures conflict between the executive and the legislative branch.

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