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Rousing Asia’s Tiger: Managing the Philippines Growth Momentum
Speech by ADB Vice-President Stephen P. Groff on 23 October 2013 at the 39th Philippine Business Conference, Manila Hotel
Attorney Miguel B. Varela, President of the Philippine Chamber of Commerce and Industry
Ambassador Alfredo M. Yao, Chairman of the 39th Philippine Business Conference
Ladies and Gentlemen
It is a great pleasure for me to address you today during the 39th Philippine Business Conference. It is my privilege to have the opportunity to speak to members of the premier business association of the Philippines. The Philippines is not only a shareholder and a development partner of ADB, it has also been our home and our host for the past 46 years. I therefore consider it a special privilege to speak on the topic - Rousing Asia’s Tiger: Managing the Philippines Growth Momentum. And dare I say that if measured by its current economic performance, this Tiger is indeed roaring!
Regional economic outlook
Let me start by briefly sharing with you our assessment of the economic outlook for the developing countries of the Asia and Pacific region (henceforth developing Asia). Early this month, the Asian Development Bank released the Asian Development Outlook 2013 Update. The aggregate gross domestic product growth for developing Asia is expected to slide marginally from 6.1% in 2012 to 6.0% in 2013. The region as a whole faces external and internal challenges. Externally, while the worst of the global economic crisis is behind us, recovery in advanced economies has yet to translate into a robust turnaround in exports from developing Asia. Internally, moderation in the growth momentum of its two largest economies, namely India and China, has pulled down the economic outlook for developing Asia.
Though lower than recent high rates, GDP growth for developing Asia remains formidable in the global context. The region is also making the transition to economic growth led by domestic and regional demand. Recently, prospective tapering of quantitative easing in the United States put financial markets of emerging Asian economies under pressure, igniting fears of a repeat of the 1997 financial crisis. These fears are unwarranted. As a result of significant reforms undertaken and foreign reserves accumulated in the aftermath of the 1997 financial crisis, developing Asia as a region is now far more resilient.
These achievements make all of us proud. The rapid rise of Asia during the past four decades is truly unprecedented. But we should not be complacent. Developing Asia remains home to the world’s largest number of poor with more than 800 million people still living in absolute poverty. Malnutrition, infant and maternal mortality, and gender disparities are among region’s persistent challenges. Brisk economic growth has also given rise to new challenges such as growing income inequality and environmental degradation. The region must find pathways to inclusive and environmentally sustainable growth. I will return to these issues later in the context of the Philippines.
Philippines economic outlook
While external and internal challenges weakened the economic outlook for developing Asia, the outlook for the Philippines has improved. Accordingly, we raised the 2013 GDP growth forecast for the Philippines to 7% from 6% earlier in the year. The Philippines is the only major developing Asian economy with that distinction.
The Philippines has not only weathered the global economic crisis, it has emerged economically stronger. The blistering pace of economic expansion in 2012 and the first half of 2013 make the country one of the fastest growing emerging market economies globally. The growth has been achieved with moderate inflation, fiscal consolidation, declining public debt, and a current account surplus. The country’s external debt has been declining and the current stock of international reserves is more than enough to cover 12 months of imports and the total external debt of the country. As you well know, in recognition of this stellar performance, major global rating agencies upgraded the country to investment grade this year.
Please allow me to share with you our assessment of the reasons that underpin the current strength of the Philippine economy and the challenges that it faces to sustain this momentum.
Developed countries that were dealing with the worst recession since the Great Depression undertook significant monetary easing after 2009. One consequence of this was that capital chasing higher returns flowed into emerging economies creating ample liquidity and pulling down the cost of financing government deficits. Many emerging countries took advantage of this situation to suit their different needs and circumstances. The Philippines used it to strengthen its resilience to future economic shocks and to lay the foundation for sustainable economic growth.
The government also undertook significant fiscal and debt consolidation over the past three years. At the outset, President Aquino announced a clear fiscal road map for his Administration setting out targets for revenue, expenditures, fiscal deficit, and public debt. With this roadmap, the government has stayed the course scaling back the fiscal deficit and putting the country firmly on a track to reduce public debt. As a development bank, we are extremely pleased to note that the government did so while increasing investment in key public goods, notably education, health, and social protection.
The Philippines also used the favorable liquidity environment to improve the quality of its debt. It increased the share of long-term debt and shifted the bulk of the borrowing onshore thus raising its resilience to external economic shocks. Even in the recent market volatilities, the economy is well equipped to ride out turbulence based on its improved macroeconomic fundamentals.
Underlying these positive macro developments has been President Aquino’s push to improve governance. Bold governance reforms and prudent macroeconomic management have gone hand in hand. Tighter oversight on the use of public funds and more stringent tax administration allowed the Government to increase spending on key public goods in a fiscally sustainable way. Winding down non-performing programs allowed the Government to use funds more efficiently, literally getting bigger bang for the buck. A good example is shifting funds from a rice subsidy program to a conditional cash transfer program and for building classrooms. Recent reports on the alleged misuse of the Priority Development Assistance Fund should only toughen the resolve to strengthen public financial management.
Good governance has been good economics more broadly as well. International rankings of the Philippines on indices of corruption perceptions, competitiveness, institutional quality, and political stability have trended upward. The private sector appears to be positively responding to these developments. The rate of fixed capital formation has edged up and there is positive news on the FDI front as well. We have also noted stronger growth of the manufacturing sector over the past twelve months or so. We have every hope that these gains will be consolidated as they are critical to making economic growth inclusive.
Search for inclusive growth
As we hail the improved economic indicators and improved profile of the country, we must also recognize that not everything has changed for the better. Surging economic growth has failed to reach all corners of society. It is too soon to celebrate when poverty incidence in the country remains stubbornly difficult to reduce with little evidence of statistical improvement since 2006. More than one fourth of the labor force remains either unemployed or barely employed. Income distribution remains highly unequal and unresponsive to economic growth. Clearly there is much to be done - and done more urgently - to tackle inequality and make Philippine growth more inclusive. While this is a challenge for virtually all emerging economies of the region, I cannot over emphasize the centrality of inclusion to the sustainability of growth.
The Government of the Philippines has responded by making poverty reduction a national priority, and introducing and expanding programs to improve the living standards of millions of poor people. ADB has been a strong supporter of scaling up the country’s conditional cash transfer program, and is working with national authorities to develop a far-reaching community-driven development program that provides targeted resources to poor geographic areas to finance development projects identified as priorities by the local population.
These and other public sector programs will make a difference on a large scale. But they will not be enough to break down barriers that hinder many from a sustainable progression out of poverty. As in other countries, the private sector in the Philippines occupies a critical role in creating employment opportunities and delivering basic services.
The ability of the economy to generate an adequate number of productive jobs is a sine qua non for inclusive growth. The central reason for elevated levels of poverty incidence in the Philippines lies in the lack of productive job opportunities in the economy. Creation of quality jobs must continue to be the policy focus – establishing clear linkages between economic growth and poverty reduction. Let me share a couple of quick facts before offering our perspectives on the way ahead.
First, employment growth during the past three years has been barely adequate to absorb new entrants into the labor market. The economy needs to create many more jobs to absorb more than 10 million unemployed and underemployed Filipinos.
Second, the growth of aggregate labor productivity in the Philippines over the past three decades or so has been significantly less than its regional peers such as China, Indonesia, and Thailand. Labor productivity growth is a key determinant of a country’s ability to improve its standard of living over time.
My institution has analyzed in considerable detail the fundamental causes for the apparent disconnect between economic growth on the one hand and job creation and poverty reduction on the other. I would not take your time to go through the technical details but allow me to quickly summarize the key findings.
Economic development in the Philippines took a different route than its peers. Economic development usually takes a linear route, or a sequential approach. At the onset of development, least developed countries are predominantly rural economies. By the time countries reach middle income status, the industrial sector becomes the predominant driver of growth and employment. The services sector becomes more prominent as the economy shifts gears towards higher income status. China, South Korea, and Thailand have followed this sequential approach to development.
In the case of the Philippines, however, the progression to middle-income status was accompanied by a reduction of industry’s share in GDP and employment and a corresponding increase in the share of services sector. Why is this important for the quality of growth?
Developing countries are characterized by large productivity gaps between different sectors of the economy. These gaps can be an important growth engine, since economy-wide productivity can grow by reallocating resources from less productive to more productive sectors. We have tracked sector productivity in many Asian countries and found that it has been the highest in the manufacturing sector, followed by services and then agriculture sector. China, South Korea and Thailand fully exploited productivity gains from this so-called process of structural transformation by moving resources from agriculture to the manufacturing sector. Philippines did not achieve similar productivity gains due to relatively slower growth of the manufacturing sector.
Our analysis of historical trends in fact shows that industrialization has been nearly essential for an economy to achieve high income levels. In the Philippines context, it is also important to note that the lack of industrialization has even hampered the development of high productivity service sub-sectors.
What will the future bring? In the Philippine Development Plan 2011-2016, President Aquino defined inclusive growth as high growth that is sustained, generates mass employment, and reduces poverty. Defined this way, what should be the key components of an inclusive growth strategy? How can we address the challenges I have just described? We suggest the following:
First, a dearth of infrastructure has been a binding constraint to inclusive growth. At about 3% of GDP, infrastructure investment in the Philippines is significantly lower than that in other countries in the region – the average for Indonesia, Malaysia, Thailand and Vietnam, for instance, is over 5% of GDP. Therefore boosting infrastructure investment – public and private – needs to be a priority.
Second, Agriculture has to “industrialize” by deploying infrastructure, introducing technological improvements, developing agribusiness, and increasing linkages to global value chains.
Third, improvements in both quality and access to basic education matters for industrial upgrading and, in general, for the development of new industries that can compete internationally.
Fourth, although it is important for countries to exploit their comparative advantage, some form of government intervention is often necessary to expedite economic transformation. Policymakers ought to focus on facilitating firms and workforces to develop the capabilities they need to manufacture new products, to enter new markets, and to move up the development ladder. Given its cost-competitiveness, there are opportunities for the Philippines to benefit from the growing cost of production in some economies in the region and the consequent relocation of industrial production from those economies.
Expanding regional integration in ASEAN, and more broadly in Asia, also brings immense economic opportunities for the Philippines. It will be important for the country to strengthen its position in regional industrial production networks and supply chains.
Fifth, and finally, deepening and entrenching governance reforms is the key to building the trust of the private sector, which will ultimately provide an avenue out of poverty for many by creating more and better jobs.
Ladies and Gentlemen, I have briefly outlined strategic economic shifts underway that are positioning the Philippines as a more resilient and a more confident economy. As the country grows and expands its footprint in the regional economy, it will require a different pattern of growth that is more inclusive and sustainable. In this endeavor, ADB will remain steadfast in its support to the Philippines through our partnership, our finance and our knowledge.