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A business perspective on the Philippine economy

04:16 AM November 25, 2019

We have many things going for us. A young, literate population, with a median age of 23 and with 60 percent of working age. This, together with decades of increasing earnings from BPOs and OFW remittances, is expected to fuel the continuing growth of the middle class. Poverty levels have declined from 26 percent in 2015 to 20.8 percent in 2019 and are expected to decline further to 18.7 percent in 2021.

Despite the global uncertainties, the macroeconomic environment remains favorable. Notwithstanding the slower growth in the first half of the year, GDP has been growing at over 6 percent since 2010, and we expect this trend to continue in the next few years, powered by the “Build, Build, Build” program of the government and the continued implementation of market reforms.

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Reforms began in the 1980s with trade and foreign exchange liberalization, opening up of the telecommunications and financial services sectors and the privatization of power. More recently, the passage of TRAIN drove another ratings upgrade.

Important reforms

Important reforms that had languished for years had finally been passed—the rice tariffication law, instrumental in bringing down inflation which spiked last year; the national ID, which in turn should greatly help in implementing the ease of doing business law; the Bangsamoro Basic Law, which has the potential to unlock the wealth of the ARMM and end decades of conflict.

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The BSP is doing its part to support growth, aggressively lowering interest rates and reducing the reserve requirement ratio for banks.

While the BSP has been doing a stellar job for years despite being hampered by an obsolete governing law, the passage of the new Central Bank Act allows it to align with global best practices and gives it more levers to act proactively in response to changing market conditions.

In the World Bank’s Ease of Doing Business Report, we received the welcome news that we moved up to 95th place from last year’s 124th out of 190 countries.

Yet despite all of these, foreign investments, so critical to moving the country forward and turning it into a middle-class economy, continue to significantly lag those of our Asean neighbors.

The reasons are many, and you have probably heard this over and over.

First, it is simply not easy to do business here. The DTI, and now the ARTA, have done much to improve the business climate, and for this they deserve to be lauded, but much more needs to be done.

It was said that constitutions, while supposed to be lasting, were often influenced by the issues of the times in which they were written. Ours is no different. But in the over three decades since it was ratified, the world had moved on and globalization had changed the environment dramatically.

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Foreign equity restrictions have prevented sorely needed investments in vital industries such as telecommunications, transport and energy. Competition is restricted, which protects unproductive or poorly performing firms at the expense of more productive ones, and reduces the incentive for firms to innovate.

Limited competition in key sectors has significant consequences for the economy. Witness the impact of poor transport on logistics, and on every industry which relies on the movement of goods. Trade costs could be greatly minimized by improving our port and logistics infrastructure.

To catch up with our Asean neighbors, we need to lift these restrictions to encourage the entry of capital. We can start by simply reducing the number of sectors on the negative list. Why, for instance, do we bar foreigners from teaching at the tertiary level? Singapore jumpstarted its tech industry by building excellent universities, understanding the heavy reliance of technology development on human capital. And to attract good students, they brought in well-known and highly respected educators from overseas.

The Ease of Doing Business Act has great provisions and we have been eagerly awaiting its implementation. In particular, we need to make it easier to start new businesses, get approvals and pay taxes. Burdensome administrative procedures not only deter new businesses from starting up and existing ones from expanding, they also encourage corruption, as do complicated tax rules and processes. They also hold back badly needed infrastructure such as new power plants, many of which are mired in the approval process despite the looming power shortage.

Labor market rigidities

Labor market rigidities make it difficult to do business here. I remember numerous instances when I had to explain to our corporate and regional offices overseas why we couldn’t fire an obviously incompetent employee. And worse, why we had to give him a separation package after months, or even years, of nonperformance. While we need to ensure that employees are protected from abusive employers, we also need to ensure that our laws adapt to the times.

For example, rather than security of tenure, why not portability of benefits? Everywhere in the world we see employees moving away from lifetime employment to taking on varying roles in different industries throughout their working life. But each time they move, they lose all the benefits, such as pensions, which they may have accumulated. If they take those accumulated benefits with them as they move, they would have a nest egg by the time they retire.

Biggest factors

Addressing all these issues will definitely help, but we also need to remember that one of the biggest factors which make investing attractive is predictability. Money is the most cowardly of things, and when you are investing billions, even hundreds of millions, you need to know that the conditions under which you invested would not suddenly change.

I ran a Canadian company which had been in the country for close to 125 years, through wars, coups, changes in government. Our contracts with clients lasted decades. Knowing that the rules would not suddenly change has helped the company prosper and invest more in the country.

One of our biggest strengths and our most valuable asset is our human capital. I truly believe the Filipino is world-class. We note that the government’s medium-term Philippine Development Plan, its development blueprint to 2022, is people-centered, focusing on inclusiveness, resilience and a competitive knowledge economy.

Building a competitive workforce means strengthening our human capital even further. This starts with the very basic food security. It is estimated that 26 percent of Filipino children are malnourished. The damage to health, physical development, and brain development from malnutrition is often irreversible, affecting children for life. The World Bank, in its Human Capital Index, estimates that at the current levels of nutrition, health care, and education, today’s children will only be 55 percent as productive when they grow up as they would have been had they been able to enjoy a complete education and full health support.

Thus, ensuring affordable food is important. The rice tariffication law is a step in the right direction. Helping Filipino farmers by giving them the tools and know-how to grow more lucrative crops and increase productivity not only helps ensure food security but also helps farmers escape poverty and drive inclusive growth. Secretary Dar deserves our full support in his efforts to modernize the agriculture sector.

The universal health care law is also very welcome. There remains a gap, however, in its fulfillment, as we need to build an additional 2,600 health care centers. Perhaps LGUs should also find a way to engage private practitioners to provide certain packages of services.

Education is another critical area. Prior to 2012, the Philippines was one of only three countries in the world and the only one in Asia with only 10 years of basic education. The shift to K-12 has brought us more in line with the rest of the world and should allow even high school graduates to find jobs. Not everyone is cut out for college and it has always puzzled me why we require a university diploma for people being hired as clerks and data center operators.

Free education in state universities and colleges sounds good, but one wonders how the government can fund all our SUCs, in addition to all the other services it is trying to provide. Quality education is costly. Perhaps rather than free tuition for everyone, we can implement a voucher system so that the more economically disadvantaged students get the support they deserve, while those who can afford it pay more. This would also allow private universities to participate in educating the youth—with the lack of facilities, we need both public and private universities.

An educated population is critical if we are to build a competitive society. In a rapidly changing world where whatever you know today will be obsolete in five years, the ability to learn and adapt will determine how we evolve as a nation.

Innovation

Which brings me to my last point, innovation. This is one which is a personal advocacy, as we have seen technology render once dominant companies obsolete. History is littered with the carcasses of business giants who have gone bankrupt, forced out by new technologies and new business models—Kodak, Nokia, Blockbuster, Sears—household names which are gone or are about to disappear.

When we look at what drives our economy, we see the twin engines of BPOs and OFW remittances. These are what have powered our GDP growth over more than a decade. But both are being impacted by technology.

Some months ago I was speaking with a colleague visiting from Singapore, and he told me of a call center operation which had just closed 3,500 seats. Eighty percent of the seats were replaced by machines, powered by artificial intelligence. The remaining 20 percent required more complex skills which the BPO had difficulty finding locally, so they decided to bring back the seats to Singapore, where talent was more expensive but also more readily available. As AI becomes more advanced, we can expect the need for large backrooms to decline even further, perhaps to the point where companies which are currently offshoring simply take those functions back to their home countries. We are already seeing this in manufacturing, where some companies have relocated their factories back from Asia to the United States. As AI and robotics have allowed them to operate entire plants with a minimal number of staff. It is said that as much as 89 percent of BPO jobs may be at risk.

While information technology changes are the most visible, technological change is also happening in other areas. The bulk of our OFWs are located in the Middle East, which is primarily dependent on oil.

As countries shift to green energy and lessen their dependence on oil, what will happen to the thousands of Filipinos working there? Indeed, as technology changes every single industry, what will happen to Filipinos working all over the world?

The World Economic Forum estimates that 75 million jobs will be lost by 2022 due to technological changes, but 133 million new jobs will be created, for a net gain of 58 million. But these are not jobs in the fields we know. These are jobs in data science, analytics, artificial intelligence, machine learning. We need to ensure that our human capital evolves and adapts as the world around us changes. This means not only enhancing STEM education but emphasizing critical thinking, complex problem-solving and creativity in our curricula.

This will help us to create an enabling environment for innovation so that we are at less risk of obsolescence as a nation. Further, enabling foreign capital and talent to come in will spur competition, which is key to innovation, and improve the quality of our physical and digital infrastructure. More importantly, it should enable knowledge transfer.

Tourism

While the government needs to do its part, we in the business community also need to do ours. We need to invest in innovation. The DOST has presented a whole range of technologies our scientists and engineers have developed, which are in need of funding. We also need to prepare our workforce for the future. It is estimated that more than half of them, including executive leadership, will need significant re-skilling and upskilling.

Incidentally, one area where we can innovate fairly easily is tourism, which has the potential to become another growth engine for the country.

To become a middle-class nation, as is the goal of AmBisyon Natin 2040, we need to surpass a 7.1-percent growth rate for the next 20 years. To achieve this, we need to generate 1.3 to 1.5 million new jobs a year for the next 20 years, triple per capita income to $11,000, and increase annual total factor productivity growth rate by 1.5 percent or higher in the next 22 years, double the world average since 2000.

It seems almost impossible. Yet even as we play catch up, our neighbors continue to grow and evolve even faster. Can we ever compete?

Can we achieve AmBisyon 2040? Can we keep up and even surpass our neighbors? Yes, but only if each of us does his part until we drop from exhaustion. The Philippines is a land of great promise but also lost opportunities. This time, let’s lock arms—kapit-bisig—and move forward together to fulfill our promise.

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