Last week, Brazil, Russia, India, China and South Africa, or the BRICS nations, met for their fifth summit in South Africa. The growth prospects in these economies are no longer immune to the severe debt crises in the West. In the short term, India and South Africa may be at the biggest risk of sovereign-rating downgrade.
Among the emerging economies, the Philippines is best placed for an upgrade. It is favorably positioned to sustain growth in an exceptionally grim international landscape.
During the past decade, I have used much time to analyze and to consult on the transformation of the major advanced and large emerging economies worldwide. After the global crisis of 2008-09, this transformation has only accelerated.
When Goldman Sachs identified the emerging group of potential successors to BRICS a few years ago, the Philippines also made it into the list, in the footprints of two other major Southeast Asian nations—Indonesia and Vietnam—that have attracted much more foreign direct investments so far.
In the aftermath of the Ramos era, the inclusion was based mainly on the economic potential rather than a sustained growth record. In 2002, the Philippines gross domestic product (GDP) still amounted to $81 billion, in current prices. Today, it has tripled to $241 billion.
In the aftermath of the global crisis, the Philippines is one of the few nations in which forecasts are revised up by financial analysts. In January, it reported a 6.8-percent year-to-year growth, which made it the growth leader in Southeast Asia. Almost half of the recent growth can be attributed to private consumption, which has been coupled by investment, especially in construction. Due to the impending mid-term elections in May, government spending will accelerate through the spring.
Business process outsourcing now exceeds the value of the remittances flows. Diversification is accelerating into non-electronic exports. Meanwhile, the Philippine peso has been appreciating significantly, along with resurging capital inflows. The acceleration of domestic demand since the first quarter of 2012 reflects the country’s solid macroeconomic fundamentals, stronger government finances, and high confidence in the Aquino government’s commitment to reform.
Along with current account surpluses and foreign exchange reserves, the growth record has given rise to a more diversified export basket, while shielding the economy from very challenging international headwinds.
Complacency not an option
In the past few months, one investment bank after another has argued that the Philippines is on its path for a bright BRIC future.
The beauty of the BRICS projections is that they allow policy architects to reflect on (very) long time perspectives. The trap of the same projections is that, when they create a sense of inevitability, they can lull even the most promising growth stories into complacency.
In the Philippines, delivering the growth promise is predicated on accelerated structural progress. According to various competitiveness indicators, the country has made dramatic strides in improving competitiveness, often from a very low base. The perception is that corruption and red tape are finally addressed decisively. In addition to the strong macroeconomic performance, the financial sector has become supportive of business activity.
Despite these positive trends, weaknesses remain to be addressed, including the poor infrastructure, various market inefficiencies and labor market rigidities. As the Aquino administration knows only too well, the economy needs to shift from consumption toward investment, both public and private. Sectorally, this requires rising productivity in agriculture, while requiring less dependence on low-wage and low-skill services and more on labor-intensive manufacturing and high value services.
In BRICS economies, such changes have typically preceded periods of sustained growth. However, they have required difficult policy reforms in agriculture, manufacturing, business and labor regulations, and social protection, in order to raise the incentives for entrepreneurship and job creation. In turn, these reforms make possible greater public investment in health, education, and infrastructure.
Today, the Philippines is at the verge of receiving an investment-grade rating by the major rating agencies. In the absence of adverse surprises, most agencies are likely to upgrade the Philippines economy within a year and a half, if not sooner. Nonetheless, significant challenges of poverty remain. Growth is not yet inclusive.
Except for Brazil, inequities have typically increased in all emerging economies during their high-growth phases, while job-creation has been strong and unemployment low. In the Philippines, the story is different because labor outcomes have been less responsive to growth. Even in 2011-2012, unemployment rate stayed at 7 percent, while underemployment rate rose to 22.7 percent since the number of full-time jobs declined by half a million in the same period.
In the next half a decade, GDP growth rate in the Philippines could climb close to that of China. In order to be sustained, this growth must become more inclusive, however.
In the Philippines, the BRICS future has potential for a large consumer economy, with some 150-170 million people by 2050. That objective is predicated on huge expansion of consumption, which is only viable through more inclusive growth.
Due to the historical legacies of the Philippine political and economic institutions, there remain strong vested interests in the current status quo. That, in turn, makes vital reforms challenging to implement, as the IMF and the World Bank have argued. However, the Aquino administration has proven able and willing to make difficult decisions.
In all BRICS nations, sustained growth has been neither inevitable nor automatic. It must be made to happen. It must be realized.
In addition to his consulting/advisory activities, Dr. Dan Steinbock is the research director of international business at the India, China and America Institute (USA) and a visiting fellow at the Shanghai Institutes for International Studies (China).