Still Awaiting Lift-off

The UN Conference on Trade and Development’s annual World Investment Report released back in July this year revealed yet again that the Philippines, a country that ranks on the second tier of potential destinations for foreign direct investments has languished at the bottom of actual investment flows in 2011.

This is a familiar tale, one that both natives and foreign observers alike have come to recognize: the country since its independence has always been touted as a land rich with potential, but it rarely ever lives up to it. Here is what the report says

A group of developing countries with emerging market status and with growing investment potential nevertheless is currently receiving FDI flows below expectations, including the Philippines…

The following chart taken from the report shows where the Philippines lies in relation to other emerging economies:

The UNCTAD is saying that based on our current policy settings and economic fundamentals, the country ought to be attracting more investments than it has actually drawn.

Another exceptional piece of work by Harvard Kennedy School’s Ricardo Hausmann shows that based on a concept called economic complexity the country ranks among the top twelve nations in terms of expected growth of incomes. According to the analysis, our current growth of income per capita is less than what is expected given our level of education and technical sophistication as demonstrated by the things we are able to produce and export.

From 1999-2009, the growth in the average income per person (computed by deducting the population growth rate from the growth rate of the economy) was a mere 2.6%, but based on the country’s underlying economic structure, Hausmann predicts it should grow at 3.5% over the next decade to 2020. That is given the present state of our revealed abilities, the country’s average level of income ought to be rising much more rapidly.

At 2.6% growth per year, the nation’s per capita income doubles every 27 years. At 3.5% it takes only 20 years. Here is a table from Hausmann’s book, the Atlas of Economic Complexity which shows the Philippines ranked 11th among 128 countries in terms of potential income growth per head of population.

Scholars and commentators alike can’t seem to pin the reason for our underperformance down to any logical explanation. Those who take a dispassionate view of our fundamentals are perplexed at our inability to see our economy take off. Perhaps like in the movie Moneyball (see video below), investors are biased, relying on their subjective “gut feeling”, overlooking a potential “star” on the field. Could these biases be causing them to put their money on other high profile picks (the Chinas and Indias) to the detriment of others that represent better returns?

In other words, is the Philippines being undervalued because of these perception biases?

In the past, for instance, it was said that our overprotected industries were the reason for our stagnation. Yet, even when we acceded to the WTO and became an open trading economy in 1995, a rush of investments did not flood in the way it did in China and Vietnam following their accessions in 2001 and 2006.

Then experts turned to our peace and order problem and corruption as the culprits for our underachievement. But then all they had to do was turn their attention to our southern neighbour Indonesia which had worse bombings by terrorists and corruption in high places but has now joined Singapore and Malaysia (according to the latest UNCTAD report) as a highly attractive destination for foreign investments.

Perhaps as the experts say, it is the weak rule of law and lack of democratic accountability that have dampened investor sentiment. Well then, that doesn’t explain why China which has no rule of law or accountability to speak of continues to be the top destination in the world for FDIs. One just has to look at the way the state has kept the whereabouts of its president in waiting Xi Jinping over the past fortnight as an example of its lack of accountability.

All of the above counter arguments make 2012 a critical “breakout” year for the country. As FDIs to China have slowed down as a result of the crisis in Europe, so much so that outward investments or OFDIs have outstripped inward bound FDIs for the first time, as India’s attractiveness also falters due to a stalling reform program, the Philippines has a chance to shine by contrast.

Some are beginning to think that this time around, things might be different for the country. Two years into his six year term and no major scandal has erupted involving the president or any in his cabinet as has been the pattern with his predecessors. Major infrastructure projects have been approved and are now in the pipeline. The nation averted another constitutional crisis during the impeachment trial. Commercial and residential projects dot the landscape.

The naysayers will run the argument that the recent growth experienced in the first half of the year is merely some fluke, the result of good fortune and the flow of remittances from overseas workers. Some will recall the time of the first Aquino presidency which promised economic deliverance based on a return to democracy. The nation held its breath for six long years.

Much like the Obama presidency now in its bid for re-election, the mantra then was that the Marcos dictatorship had left the country in such a deep hole, that it required more than one term to climb our way out of it. Here we are, twenty years since the first Aquino president left office, and we are still waiting for economic lift off.

Will the second Aquino president finally deliver the goods? Is there a compelling reason to be hopeful this time around, that for once the nation will live up to its top billing? I sure hope so, simply for the sake of not having to write the same sort of article again around this time next year. But perhaps we should stop listening to the naysayers.

Perhaps we should channel FDR and think that the only thing to fear is fear itself. Maybe we ought to change the nature of the game and put more faith in the bean counters rather than the old boy’s network. Perhaps it is time to give the Philippines a second chance. A chance to step up to the plate and hit a homer. And then just maybe, we might begin to see the nation take off and fly.

Doy Santos aka The Cusp

Doy Santos is an international development consultant who shuttles between Australia and the Philippines. He maintains a blog called The Cusp: A discussion of new thinking, new schools of thought and fresh ideas on public policy (www.thecusponline.org) and tweets as @thecusponline. He holds a Master in Development Economics from the University of the Philippines and an MS in Public Policy from Carnegie Mellon University.


  • ricelander

    Place yourself in the shoes of a foreign investor with billions of dollars of funds to spare: will you invest in the Philippines?

    With 60/40 restrictions, you would have to enter into some “creative” legal arrangement to go around the restrictions. Now, you ask, how long will such a “creative” arrangement hold? Will your investment remain safe from the next administration assuming a regime hostile to the present takes over?

    I think they call it the Six Year Syndrome reflecting the actual duration your investment stays safe before bolting out.

    Aha, this may yet be an argument for an extended PNoy presidency.

  • UPnnGrd

    not enough years left, six more years needed, 2016 NoyNoy is needed!!! And PersiNoynoy handling the helm over the last 2 years and his stellar demonstration of respect for constitution surely has conviinced Pinoys and Pinays in and out of Pinas — Noynoy can be trusted with another term.

    Include me among the others who are laying the groundwork — 2016 Noynoy, yey!!!

  • I was reading an article the other day that confirmed that the US recovery from the 2008 crash is in line with historical precedent, neither being ahead nor behind the normal recovery track for a severe shock. Five years is the time it takes to get over the shock. That makes sense, considering the trillions of dollars of asset values ripped from homeowner and investor balance sheets.

    The Philippines has been engage, not in solely economic depression, but a depression of accepted values. Values that place cheating and absconding with government funds, or using them for personal benefit, to be okay. This has been a mainstream value since Aguinaldo. President Aquino has been a shock to this “cheaters economy”. It is likely to take 25 years to get to a straight, productive, ethical government IF the choice of the next few presidents is wise. That is, if they can continue the breakout started by President Aquino. The economy and FDI follow confidence and track record. Confidence is up, track record takes a little time.