The Philippine economy on the comeback

The good news on the horizon about the economy comes from diverse sources that monitor the country’s economic problems and performance.

These assessments begin with work at home by those managing the economy. Getting the major levers of policy right so that economic fundamentals are strengthened is a major task. Thus, the government in charge is fully responsible for outcomes. When positive outlooks dominate, the prospects are bright and perceptions about the country become receptive to even better assessments.

As far as the macro-fundamentals are concerned, the government of Noynoy Aquino has done a good job in improving the framework. It has also been helped by auspicious developments continuing from earlier governments.

“Role of institutional observers.” Oftentimes, the International Monetary Fund and the World Bank provide a useful channel. These institutions are in the business of assessment and advice as well as action concerning a country’s economic conditions. Reviewing a country’s macroeconomic and development prospects is in line with their professional mandate.

As development actors, they are not infallible, but their opinion carries weight in influencing the actions of other institutions. What they say provide the triggers for other opinions about a country’s forward motion. In recent periods, those comments, including those fromAsian Development Bank, have been very encouraging and positive.

The conclusions they make have wide implications. The credit rating agencies and the investment banks take them seriously. Then the business consultants weigh in with theirs.

Investors, other development and financial institutions, lenders, consulting companies, think tanks, and countries – all those with a stake in the country’s current and future developments – try to make use of the information they gather and then act according to their own assessments.

The result is that an overwhelming set of optimistic reports have appeared in recent weeks from all quarters. As result, the Philippines becomes among the few countries that are weathering those economic difficulties.

“President Aquino’s speech.” On the back of these developments, PresidentAquino airs more confident optimism. Speaking before the Business Forum of Joint Alumni Clubs of various graduate schools in the US (Harvard, Wharton, Columbia, Northeastern, Cornell, Stanford, and MIT) in Makati last week, he cited, among others, the following points:

• Accelerating approvals of new foreign direct investments by the Philippine Export Zone Authority (PEZA).

• The new high levels of the Philippine stock exchange index which has breached 5,000 , indicating optimism.

• The Philippines is now the 4th ranked shipbuilder in the world.• The new large prospective investors – two more shipbuilders and two steel mill private investors – are interested in coming to the country.

• The reforms needed to make the investment climate improve, and

• Scheduled lining up this year for contracting out of eight large PPP (Public-Private Partnerships) in infrastructure projects.

“How the future would evolve.” In the development game, nothing follows automatically. The outcome is likely to be influenced by a number of forces working together.

Favorable causes could already be in place. Then, other external events of substantial influence over which the government has no control could be transpiring. Finally, there are constructive actions that the government could, by choice, make.

“Favorable factors already in place.” There are three important positive developments already in place.

The first is the existence of the ASEAN as a grouping that has decided to become an integrated market by 2015 – in three years – with the final coming into being of the ASEAN Free Trade Agreement. Tariffs among the ASEAN economies will vanish, spawning deeper competition among the members within a larger regional economy This is undeniably a strong enabler for the expansion of the community and which has been encouraging the entry of foreign investments to the member countries.

The second is the change in production costs in some major countries, especially China and Japan – as a result of massive currency appreciation and the economic adjustments they have been experiencing.

In the case of China, labor costs have risen so that labor using industries have become subject to migration to other countries with lower costs. Foreign investors in China (US, Japanese, Chinese, Korean, and even Philippine) are relocating to new areas.

Third is the existence of JPEPA (Japan-Philippine Economic Partnership Agreement), which is a bilateral investment and free trade agreement between the two countries. Japanese investments which have felt the need to diversify from overexposure in a single country of investment destination now favor the Philippines.

“Where government choice or action matters.” The Philippine economy is well-positioned today compared to those of many other countries during these crisis-laden times. Its balance of payments is healthy. External remittances, earnings from business processing industries and exports have strengthened the country’s external payments position.

The banking system is liquid, thanks to years of reforms to strengthen the capitalization of domestic banks. The inflows of international money in fact are becoming a problem for balance of payments management because of the healthy position.

With dark clouds hovering over the Euro debt problems, the Philippines is traditionally less dependent on European trade. The country is more insulated than most countries that have large trade volumes to the countries of Europe.

Opportunities to pursue stronger economic performance are available to the government in at least three major directions.

First, the government has sufficient resources to engage in a public expenditure program that is directed at reducing its backlog in infrastructure. Through the prudent rise in budgetary resources and the backing of a healthy external payments surplus, the government has more capacity to engage in public investment expenditure. It can address the improvement of transport, ports and airport infrastructure and to deal with the problems of expansion of public utilities to improve their services.

The overall improvement in international assessment of Philippine development potentials could to provide a momentum for sustained economic growth. The government can even permanently raise the scale of economic success by pursuing deeper economic reforms in two other major directions.

The first is to enhance the investment climate especially for foreign direct investments. There are restrictions still in place that hinder the participation of foreign capital in some economic activity. I have written much on this issue that needs repeating.

The second area is in the matter of labor market policies. There are critical policy areas that need to be opened up in order to raise labor productivity and encourage more employment in productive enterprises.



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