Philippines: Fostering Stronger and more Inclusive GrowthPresentation by Anoop Singh at the Philippines Institute of Development Studies
March 12, 2013
The IMF’s Director for the Asia and Pacific, Anoop Singh, visited Manila for Euromoney’s Philippines Investment Forum and a seminar at the Philippines Institute of Development Studies held in March 2013. The topic of discussion at both forums was how the Philippines can sustain its recent economic growth takeoff and achieve greater inclusiveness.
Anoop Singh made a number of observations in this regard:
Favorable population dynamics in terms of one of the fastest growing working age populations within Asia should provide a “demographic dividend” to GDP growth. Beginning in 2015, the Philippines’ “home” market will expand by a factor of ten as the ASEAN Economic Community comes into full existence. The Philippines has vast deposits of mineral wealth and responsible extraction of these natural resources could contribute to growth for decades. The more than 7,000 islands, 35,000 kms of shoreline, coral reefs and natural beauty make the Philippines a natural tourist destination. Finally, the large English speaking youthful workforce can help sustain the phenomenal growth in BPOs and large remittances from OFWs in the context of an ageing population elsewhere.
Despite these growth-promoting advantages, Philippine growth has lagged regional comparators. From 1970 until the Asian crisis, growth in the Philippines averaged just 3½ percent. Meantime, many other countries underwent a growth take-off, leaving the Philippines somewhat behind. As a result, the catch-up potential is large.
It greatly helps that the Philippines’ macroeconomic fundamentals improved considerably during the past decade, closing the door on an era of recurrent balance of payments crises. Macroeconomic stability has been achieved, in terms of low inflation, moderating public debt, and a stable external sector. This is an important precondition for growth take-off as evidenced in many growth studies.
From a growth accounting framework, low investment has held back needed capital deepening. The World Economic Forum’s 2013 Global Competitiveness Rankings point to the investment climate being a factor in this regard. The Philippines lags comparator countries across key indicators such as infrastructure, quality of institutions, and innovation. The relatively low score on infrastructure quality and adequacy reflects persistently low government revenue and public investment spending relative to infrastructure needs. Timely and transparent execution of Public Private Partnerships and greater revenue financed government investment projects could also help catalyze private investment by generating connectivity benefits. Raising the relatively low level of Foreign Direct Investment would foster competition and innovation.
Turning to the labor force, the Philippines scores lower than many middle-income emerging markets in the region and globally on health and education indicators. This lowers the productivity of the workforce, and discourages investment. Persistently high unemployment and underemployment suggest the existence of labor market frictions, as indicated by competitiveness indicators, especially high redundancy costs and impediments to job creation. Raising the productivity of the labor force through better education and health care and reducing labor market rigidities would boost the quality and size of the effective labor force. The recent rise in health, education, and conditional cash transfer budgets is commendable.
By building infrastructure, easing restrictions on foreign investment and in labor markets, improving governance, and enhancing the quality of labor, it is possible to boost potential growth significantly. With broad-based reforms that increase the contributions from all factors of production, it is feasible to expect that potential growth could be raised to around 7 percent.
The government has made headway in many of these areas among their main objectives, including under the umbrella of its “Good Governance is Good for Economics” platform, and in the National Development Plan. The IMF’s Director for the Asia and Pacific commended the government’s intentions to build and broaden their efforts.