Asian Development Bank

Becoming Mexico

It could take thirty years for the Philippines to catch-up to where Mexico is.

A growing middle class, a net migration rate falling below zero, a major manufacturing power-house, these are outcomes that any developing country would happily aspire to deliver. They are what Mexico has achieved over the past decade. The Philippines can only dream of attaining them at this point.

To use a boxing analogy, the two nations Mexico and the Philippines may have started out in the same economic class back in the 1960s, but they are miles apart now. One is sparring as a welterweight, while the other is still stuck in the flyweight division. A change of regiment is needed for the latter to catch up with the former.

According to a World Bank report released in October, about 17 per cent of Mexico’s population of 115 million entered the middle class between 2000 and 2010. This means that close to 20 million began earning between $10 and $50 a day, the minimum standard for the global middle class.

The Pew Hispanic Center also showed that in 2012, net migration flows from Mexico to the US slowed, falling below zero for the first time in four decades, resulting in overseas dollar remittances to Mexico reaching a plateau following the Great Recession. This has not dampened consumer spending though as the Brookings Institution ranked its middle class within the top 10 list of “new big spenders”.

In fact, as the recession deepened in many parts of Europe, Latinos returned home joined by their Spanish compatriots to either work or start new businesses. In 2011, more than 9,000 from Spain moved to Latin America, up from about 3,600 in 2006. Between 2007 and 2011, the number of Spaniards emigrating to Mexico increased by 129 per cent.

Not only that, but the Spanish PM Mariano Rajoy went cap in hand to a Latin American summit of the Inter American Development Bank to seek investments from the former colonies to the Iberian peninsula as it reels from the EU debt crisis. This represents a reversal of fortune from the 1990s when Spanish companies took over prime assets in the region.

Jim O’Neill, the Goldman Sachs executive who coined the term ‘BRICs’ in 2001 has included Mexico in a new investment portfolio called ‘MIST’ which stands for Mexico, Indonesia, South Korea and Turkey. They comprise the four biggest markets invested in by the Goldman Sachs N-11 Equity Fund, which includes countries like the Philippines.

With the rising cost of wages in China, many manufacturers are considering re-locating production to Mexico. The country has turned into a powerful exporter and an unlikely challenger to the Middle Kingdom. As China’s working population ages, due to the one child policy instituted in the 1970s, the demographics ofMexico’s younger workforce seem to act in its favour.

The Philippines is about 30 years behind Mexico. Back in 2007, Goldman Sachs predicted that at current growth rates of 5-6 per cent, the Philippines would catch up to Mexico’s per capita income of about $8,000 by 2037. By then, Mexico would have achieved a per capita income of US$34,000 similar to what it is currently for France, Germany and Japan.

By 2050, the Philippines would attain a per capita GDP of around $20,000, around the same level as South Korea back in 2010, meaning it is about forty years behind its East Asian neighbour to the North. By then, Mexico will have attained a per capita income of $63,000, while Korea would have reached $90,000 having caught up completely with the West.

According to an Asian Development Bank report, only 4.5 per cent or 3.9 million out of a population of 93 million Filipinos back in 2006 earned $10 or above per day. About 23 per cent or 20 million live below the poverty line of $1.25 a day, while a similar amount earned between $1.25 and $2 a day and risked slipping into poverty. The remainder, about 50 million, earned between $2 and $10 a day, the ADB’s definition of middle class.

The same report says that in the two decades leading up to 2008, “the Philippines appears to have stagnated” as China zoomed past it in reducing poverty and increasing the middle class. In fact by 2030 under its most optimistic projection for developing Asia, only the Philippines along with India, Indonesia and Bangladesh would still have a significant proportion of people living in poverty.

If the growth of the middle class in Mexico is helping it avoid the “middle income trap” a term economists use to denote a country that can neither compete with low wage countries nor leapfrog into higher value economies, slow upward mobility in the Philippines is keeping it there.

Last week, the government announced that the economy had beat expectations and grown at 7 per cent in the third quarter, the fastest in Southeast Asia. Cielito Habito, a self-proclaimed professor of ‘Aquinomics’ was quick to point out however that though the GDP growth figure was stellar, jobs growth in the year remained dismal as only half a million net new jobs were created between 2011 and 2012, half of the targeted 1 million.

For the Philippines to become more like Mexico, it will have to foster growth in its manufacturing sector. Habito supports this view. Only sectors like tourism and manufacturing employ low-skilled workers who form the bulk of the unemployed and underemployed, according to him.

To reverse the premature stunting of our industrial sector, Raul Fabella, former dean of the UP School of Economics says that something will have to be done to limit the rise of the peso. This he says is causing severe stress to our exporters.

My question to these experts is given that the Philippines has lost its competitiveness in low skilled manufactures such as textiles and footwear and is focused more on elaborately transformed manufactures such as electronics, how will the low-skilled unemployed land a job in this sector assuming it is revived?

In boxing terms the two countries might be competitive, but economically, Mexico packs a much larger punch.

In Mexico the return to power of the PRI which ruled the nation for 71 years prior to 2000 after spending just 12 years in opposition is a stunning turnaround. Many had thought that this party which managed the country with an autocratic, transactional approach would be consigned to political oblivion for much longer.

From 2000 to 2012, the rise of China and the recession in America began to hit the Mexican economy hard. Having lost its majority in Congress, the successor to the PRI failed to pass structural reforms, and focused its energies on waging war with the drug cartels which has left 60,000 casualties in its wake. As a result, growth averaged a mere 1.8 per cent per annum. The newly installed president ran under a pledge to restore that growth to 6 per cent.

At his inaugural address the incoming president Enrique Peña Nieto departed from tradition by avoiding grand symbolism or rhetorical flourishes and honed in on two specific areas: education and competition policy. This signaled his willingness to take on the powerful teacher’s union and the two largest business groups that control the media.

The 46-year-old former state governor then went on to forge a pact with the five major political parties in congress to support his road map for the development of Mexico around five broad themes. There was no beating around the bush, here. No spending the first 100 days to settle in, no six to nine months to develop his legislative priorities. This president wasted no time in laying down a plan, spending political capital and getting the major players behind it.

For the Philippines to become more like Mexico, it will have to demonstrate the same sense of urgency at reforming itself from the top in a manner that Nieto has shown. Part of that requires arriving at a consensus on the way forward, forging an agreement around a shared set of values that would provide an organising principle to shape the development of policies and programs.

The Philippines may be thirty years behind economically, but if it reforms itself now, it might have a fighting chance to catch-up with Mexico much more quickly than previously thought. The question is whether our leaders have the courage to pass the much needed structural reforms that promote middle class values and reduce poverty before their time runs out.

The 800-Pound Gorilla

What are the blind-spots that the administration is ignoring?

image from be-the-bear.blogspot.com

Those who chide us for telling the President not to lose sight of the economy in the hunt for Mrs Arroyo might remember the experiment conducted by Daniel Simon and Christopher Chabris.

In this famous study looking into visual perception and selective attention, participants were told to view a short video clip depicting two groups passing balls around, one group wearing black shirts and the other wearing white. They were told to count the number of times a ball was passed between those in white. Here is the video for those unfamiliar with it.

At the end, most participants were able to provide the correct number of passes made between white shirted people. But then, when asked if they had noticed the gorilla in the room, about half said they did not. As it turns out, the act of focusing too much attention on the ball prevented many from even noticing something as glaringly out of place as a person in a gorilla suit walking right into the middle of the set and thumping his chest, even when it was staring them in the face!

To those supportive of the president’s actions against his predecessor, Mrs Gloria Arroyo, she represents the eight hundred pound gorilla in the room. Any other concern such as the economy even during a deteriorating global economic crisis is a mere distraction to the task of bringing her to justice. They would rather have the president focus his energy and attention on the task of ending her ‘monkey business’ than worry about sustaining the growth of the Philippines and along with that the job security of present and future workers.

Of course in an ideal world, the president and his cabinet would be able to do more than one thing at a time, but that is not what the evidence suggests. Witness the latest downgrade by the ADB of the Philippines’ growth prospects. It demonstrates how the government has not kept its ‘eye on the ball’, so to speak by failing to prime the economy with public capital expenditures.

Ok, some would say. So, perhaps aside from keeping track of the ball, the president could also monitor the gorilla, but then as this next study shows, something else could be happening. When respondents were told about the gorilla after viewing the first clip, they were then asked to view a second one, which is shown below.

This time around, everyone noticed the movement of the gorilla, since they had by this time been primed for it. However, not everyone noticed the color of the curtain changing or that one of the players in a black shirt exited the frame. This again should be of concern to those who feel confident of the government’s cognitive abilities.

Even if say next year, P-Noy’s team were to start putting a greater emphasis on ensuring that his government did its job to prop up demand in the economy by spending its budget for public construction (a task it performed miserably this year), while prosecuting the Arroyos, what other crisis could catch it off guard? A power crisis for instance is already looming on the horizon. Presumably a temporary downturn will reduce demand for power, but decisions with regard to its future supply have to be taken years in advance. Remember how the Cory government failed to address this issue?

It was former president Fidel Ramos who likened the presidency to a juggling act which is performed by someone on a unicycle on a high tension wire several hundred feet off the ground wearing a blind-fold with one hand tied behind the back and no safety net. A simple distraction or loss of concentration could spell disaster. It appears that the president is already too emotionally involved not only with Mrs Arroyo’s case but with delegitimizing the Chief Justice as well. The rage he expressed recently could blind him and his administration from pursuing important reforms.

Already several balls seemed to have fallen to the ground (or slipped off the radar) such as the RH bill and revising the EPIRA law (only 3.25 of the 33 priority measures have been passed so far, which at that rate will take ten years for all of them to succeed), such as appointing competent ambassadors (yes, I am referring to that confirmation hearing of Domingo Lee which was lampooned here), and the like.

Personally, my take on this is that the ball represents the president’s poll numbers. His handlers are so keen on tracking them and on focusing on what would drive them up or down (prosecuting the Arroyos for instance and railing against the Chief Justice) that they have perhaps lost sight of their own short-comings and failings which they dare not speak to the president about lest he get upset with them for ‘distracting’ him.

Witness the justice department’s conduct in investigating the former president, now congresswoman Arroyo which did not square with the norms and institutions of the judicial system making it appear more like a witch hunt than a proper legal proceeding. The president’s transference of blame to the Chief Justice and the Supreme Court does not excuse the shameless way he went about seeking to detain Mrs Arroyo which was reminiscent of her own extra-constitutional and extra-legal antics. This dangerous precedent of the executive undermining the judiciary is something more hazardous to the survival of our fragile democracy than just this case alone can pose.

But the president seems dead-set on playing the biggest trump card up his sleeve, his massive popularity, in order to impose his will on the high court. These ‘animal spirits’ once unleashed could lead to disastrous consequences. The country now sits on the precipice of further decay. Waiting for just a slight nudge from the president which could plunge it into a downward spiral of political instability and risk uncertainty in the coming years which will dissipate any investor confidence that had been returning.

Many will balk at this characterization of the situation saying that what is going on is nothing out of the ordinary for the Philippines. But that is exactly my point–the country was well-poised to become a more mature, more stable democracy. Apparently not now by the looks of it. Was it too much to ask for the elite to rise above their familial squabbling? They seem so focused on who gets the ball and how it changes hands, keeping track and keeping score of each player that they ignore the wider context and how their actions affect the country’s progress. Ignoring in the process, the 800 lb gorilla in the room.

Indonesia Rising, Philippines Waning

What could be the reason for their divergent paths?

The September update of the Asian Development Bank’s Asian Development Outlook 2011 painted a contrast between the two most liberal ASEAN democracies Indonesia and the Philippines. Based on these countries’ first half performance, the Bank gave a slight upgrade to Indonesia and issued a slight downgrade to the Philippines.

Here is what the ADB had to say about Indonesian prospects:

Forecasts for economic growth are edged up from April’s Asian Development Outlook 2011 reflecting a strong performance in the first half of 2011 and a positive outlook through this year and next. Increases in fixed investment, private consumption, and net exports boosted the first-half result [emphasis added].

Meanwhile, its report on the Philippines was summarized as follows:

Growth for the first half of this year was hampered by weaknesses in exports and government spending, though private consumption and private investment remained strong. A better overall performance is projected for July–December, but the GDP growth forecast for the full year is trimmed from April’s Asian Development Outlook 2011 [emphasis added].

The update concludes that Indonesia’s economy is set to grow by 6.6% in 2011 and 6.8% in 2012, meanwhile the Philippines is set to experience a rise of 4.7% in 2011 and 5.1% in 2012. In assessing the risks, the Bank noted the preparedness of Indonesia to manage the impact of any sudden reversal of foreign capital, while it highlighted the weakness of investor sentiment in the Philippines if “no progress is seen on the government’s reform efforts, including public-private partnerships.”

It was not too long ago, that Indonesia was considered a basket case. The pain it suffered after the Asian financial crisis with riots erupting in the streets, the independence of East Timor, the secession in Aceh, a tsunami and the terrorist activities of Jemaah Islamiyah left the growth and stability of the Suharto years in tatters at the start of the third millenium.

The Philippines in contrast experienced a second “peaceful revolution” in 2001 and was for once outperforming until recently its southern neighbor in the pace of its economic uptick (see Figure 1). Ten years later, Indonesia is once again outperforming the Philippines on many fronts. It joined the Group of 20 nations that convened at the height of the Global Financial Crisis and is considered to be the only other country in our region to have considerable clout in economic affairs after China and India.

So what was it that changed the fortunes of Indonesia in the latter half of the previous decade that has allowed it to regain its stature in the world community while the Philippines remains locked into a slower growth trajectory?

Some would say it was the emphasis on anti-corruption and good governance that produced such sterling results. The election of its president Susilo Bambang Yudhoyono back in 2004 (the first directly elected president after ammendments were passed in Indonesia’s constitution) on the back of an anti-corruption platform, many say heralded a new era of clean and honest government, which is credited with restoring Indonesia’s fortunes. If this is true, it would provide some reassurance to the current Philippine president who was given the same mandate in 2010.

To assess the validity of this argument, we would have to turn first to investments in both countries during this period. Figure 2 shows gross capital formation as a percentage of GDP for both nations from 1960 to 2009. What we find is that after falling off a cliff following the 1997 crisis, Indonesian investments were already on an upward V-shaped trajectory even prior to 2004 having gone from 11% in 1999 to 26% in 2003. In 2009, investments were simply restored to their previous levels in the 1990s during the height of Suharto’s crony capitalism.

Investments in the Philippines on the other hand tracked a continuous descent from 1997 onwards. Even during the high growth years of the Arroyo administration, it continued to plumb the depths not seen since the mid-1980s after the Aquino assassination.

While it is true that during SBY’s first term from 2004 to 2009, a very vigorous anti-corruption campaign was launched which successfully prosecuted many high profile figures including a former central bank deputy governor and the president’s son’s father-in-law, corruption continues to persist. In fact since his re-election, some of the powers of the anti-corruption agency have been clipped or put under the supervision of their legislative assembly.

Recent US diplomatic cables uncovered earlier this year by Wikileaks in fact seem to indicate that Yudhoyono’s reputation for cleanliness and good governance may not be as justified as the public thinks (although none of this is substantiated with evidence at this point). Given all these factors, why is it that investor sentiment does not seem deterred?

Mining and Military

The usual suspects in explaining this are the growing demand for minerals and greater political stability. Unlike the Philippines whose electronics sector comprises the bulk of its exports, the Indonesian economy is still heavily dependent on oil and other commodities. Mining projects account for a large bulk of capital formation in the latter, while expansion into higher value sections in the electronics supply chain has been hindered by a highly liberal trade policy and incoherent investment incentives in the former.

The military establishment from where both Suharto and Yudhoyono hailed has served to steady political institutions in the past and provide a measure of coherence in government policy despite the high incidence of corruption. After a spell of political risk and uncertainty following Suharto’s fall, stability has been restored with a strong elected executive. Meanwhile in the Philippines political instability continued to hound the presidency of Mrs Arroyo.

While some regard the period between 1986-1997, the era of “freeing markets” in Indonesia as the peak in investments, it should not be overlooked that it was the period of “reform through planning” from 1965-1986 that improved Indonesia’s position from a poor investment destination in the early 60s to an attractive one in the 90s (see Figure 2).

In other words, a more robust and coherent state successfully steered Indonesia to take advantage of its natural endowments better during the early stages of its development. In fact, Figure 1 clearly demonstrates the superior growth performance of Indonesia prior to 1986 compared to the period after it.

Although a high level of inequality still persists, Indonesia with a population of 230 million has a poverty headcount ratio about half that of the Philippines (13% compared to 26%). It has an average per capita income of $2,300 compared to $1,752 for the Philippines. It is ranked 44 out of 139 in the Global Competitiveness Index compared to 85 for the Philippines.

Long-term Vision

In August the maiden issue of the Strategic Review ran as its cover story a piece by SBY entitled Indonesia in 2045: A Centennial Journey of Progress. It outlined his long-term vision for the country. This is perhaps the non-technical version of the government’s Master Plan for the Acceleration and Expansion of Economic Development 2011-2025. The time frames of these documents indicate just how far-sighted the government is.

In this statement, SBY identifies three basic pillars on which to build a national development project. These pillars are: (1) a strong and just economy (poised to become the world’s fourth largest economy of around $20 trillion by 2045), (2) a stable, strong and mature democracy adhering to the rule of law (achieving “geopolitical maturity” with a strong military), and (3) a thriving civilization and an open society having adopted the world’s major civilizations (Islamic, Oriental, Hindu, Buddhist and Western) and exporting its unique blend of culture.

From reading the document, one senses a quiet confidence of a nation unafraid of the challenges posed by increasing globalization and eager to take on the reins of regional and global influence presented to it. This expansive view contrasts with the very introspective and paranoid one that presently occupies the Philippines. There is no sense of animosity towards the dispensations that preceded it. Although it talks a lot about change and reform, one gets a sense of continuity rather than disjointedness.

Divergent Histories

Of course one could hypothesize that the reason for this divergence of temperament arises from the different colonial experiences of both countries. At the time of the European Renaissance, Java and Sumatra had been the site of Hindu and Buddhist states for over a thousand years. Their conversion into Islam only strengthened the cohesiveness of these states.The Philippines was merely a hinterland of these sultanates at the time of Magellan’s arrival.

The relative weakness and lack of cohesiveness among the tribal chieftains in the Philippines made it much easier to colonize. In contrast, the Portuguese failed to extend their influence across much of Indonesia beyond present day East Timor. Only with improved military technology did the Dutch extend their rule in the 19th century over the Javanese states.

One could argue that in Indonesia a strong state was present all along. After having had such a proud tradition of statehood, Indonesia is only now beginning to introduce reforms that strengthen the rule of law and accountability of government. The Philippines on the other hand is still building a coherent and effective state despite the outward trappings of formal democracy.

Although Suharto was just as corrupt, perhaps even more so than Marcos, governance by the state still led to sustained economic growth because corruption did not prevent the state from implementing coherent plans and policies. In the Philippines, the centralization of authority by Marcos did not produce a similar outcome. So Filipinos tended to scorn the state for failing to provide solid economic growth and sought to increase the rule of law and government accountability without creating solid foundations for the state.

This is perhaps why the Philippines finds itself in its present predicament. Even with all the best intentions in the world at instituting rule of law and good governance, it will still fall short of its dream of delivering a better future for its people because it still lacks what the Indonesians already have, and that is a strong and dependable state.

Clef two-factor authentication