Global Competitiveness Report

Challenging Conventional Wisdom about the Philippines

We could characterise our country as being stuck in a developmental trap where the only way to make it more competitive is to improve the productivity of its labour force. The primary way to do that is through capital deepening. But without capital, productivity declines relative to other countries where investments flow. The nation’s inability to raise productivity deters future investors, and on it goes.

It’s that time of the year, the month of Janus, when people take stock of what has gone before and produce an outlook for what lies ahead. Most balanced and fair commentators in the Philippines (and there are some) often highlight the things that year in, year out don’t change. It is funny because year after year, all they seem to offer are the same old platitudes, which our leaders do take to heart, but it all seems to lead to the same old results.

Let us start with the economy. Most analyses about the economy point to our strong macro-economic fundamentals. This year is no different. The growth registered in 2012 was 6.5 per cent. It is about the same as the average for the financial years 2000-01 to 2009-10 which was 6.1 per cent based on the national statistics board. The first two years of PNoy’s presidency have tracked closely to that long-run average. Nothing new there.

Aside from respectable growth, the country has experienced a relatively mild inflation rate of 3.2 per cent in 2012. Again, over the past half dozen years, apart from the blip in 2008 when the global financial crisis was in full swing and food prices soared, the country’s annual inflation rate has fluctuated within a narrow band of 3-5.5 per cent. There is nothing new or surprising here either.

The third item is employment. The latest data shows that from October 2011 to October 2012, the country suffered a net loss of 900,000 jobs. That would seem alarming. But considering that in the previous year, employment rose by 2.5 million, a truly anomalous situation, the recent decline (or correction in my view), means that over the two years, the nation created an average of 800,000 new jobs per year. Again, there is nothing new there. Net job creation has hovered around that mark for the past decade.

In order to prove that there has been some progress made, most analysts usually point to the intangibles. A change in the national mood due to renewed efforts to address intransigent issues is usually heralded as a precursor to better times ahead. Again, this year is no different. Without a doubt, there has been progress with the enactment of several laws, the impeachment of the chief justice, the improvement of budget rules for transparency, and the reaching of an agreement that might settle the conflict in the south.

Another way to argue that there has been renewed confidence in the Philippines is by pointing to the property market, buoyed by the business process outsourcing industry, the peso, buoyed by the country’s credit rating upgrades, and the stock market, buoyed by our sound macro fundamentals.

The only problem with all this is that it has yet to translate into what really counts —growth in fixed investments. Again, there seems to be no change here. In 2012, foreign direct investments have amounted to a mere $1.5 billion. That is about 3 per cent of the total that flowed into the ASEAN-5. This is a very dismal result, as usual.

The question here is why? The reasons given usually are a lack of competitiveness, restrictive investment policy, and poor governance and institutions. I would like to tackle these one by one, and offer my own insights into why I think the conventional wisdom surrounding them are misguided, and offer my own solutions.

Competitiveness

It is a bit farcical but after the National Competitiveness Council’s efforts over the past two years to improve the country’s score in the World Bank’s Ease of Doing Business report by talking to foreign experts, understanding their methodology and working to satisfy their requirements, the result for 2013 was that the country slipped by two places down to 138th place in a league table of 185 nations. There had been a change in methodology, as there often is, which did not reflect the nation’s efforts, the NCC said, but needless to say, it is still a dismal record.

Disparities in administration across local government units as well as in- and outside of special economic zones and inefficient systems at national agencies are often cited as the causes for the abysmal performance, as is petty corruption among bureaucrats. While the Ease of Doing Business report indicates that government regulatory red tape has not improved, it would be wrong to say that the country’s overall competitiveness has not.

The Global Competitiveness Survey by the World Economic Forum takes a broader look at the issue –not just at how different a country’s rules, regulations and tax policies are from the leading economies of the world where most investments come from, but also at how well its labour force, infrastructure and innovation systems, to name a few, stack up in comparison. Here the country performed a bit better by advancing 22 places. It is now in the upper half of the league table. Whether this is enough to make investors change their minds is subject to speculation. We have to wait and see.

However, one of the main obstacles is the rising peso. It appreciated by 7 per cent last year. This makes the cost of producing things in the country for export relatively more expensive, particularly for the labour-intensive business process outsourcing industry. We could characterise our country as being stuck in a developmental trap where the only way to make it more competitive is to improve the productivity of its labour force. The primary way to do that is through capital deepening. But without capital, productivity declines relative to other countries where investments flow. The nation’s inability to raise productivity deters future investors, and on it goes.

Something has to break the cycle, and this won’t occur by simply relying on the Invisible Hand of the market, as private players suffer from the free rider problem—waiting for the first mover to take action before joining in. It will take some coordinated effort by government, and I will have more on this, shortly.

Investment Policy

Another oft-cited problem is the country’s overly restrictive policy on foreign ownership in selected industries. The 1987 Constitution is identified as the culprit. Actually, prior to adopting the present constitution, there were more industries in which foreigners could not invest or own a majority stake in. Under the present charter, foreigners are restricted from owning a major share in the mining, utilities and education sectors. They are also prohibited from owning land.

Removing these restrictions analysts say will unlock the investment potential of the country, creating jobs for millions of Filipinos, allowing them to escape poverty and the country to realise its true growth potential. The representatives of the foreign chambers, local economists and some foreign bankers claim this is what is needed. Are they right?

If we look at the size of the industries in question, mining accounts for about 0.9 per cent of our gross national income, utilities 2.7 per cent, and education is so small it does not even merit a separate line in our national accounts reporting. With respect to employment, the mining industry employs 250 thousand, utilities 153 thousand, and education 1.2 million. That is about 1.6 million out of a total work force of 37.7 million!

That means that to make a serious dent in the number of  unemployed which was at 2.7 million in October, 2012, we would have to at least double the size of these industries so that they could employ twice the number of people. I cannot really see this happening in the utilities sector or education. To double the size of those sectors would require a doubling in the demand for their services, which is close to impossible.

Mining, one might argue could double its size, but it only employs 250 thousand. Also, the problem here is in guaranteeing world-class labour and environmental regulations while ensuring that the nation derives a fair share of the profits from mining operations, since what is being dug up out of the ground belongs to the nation, and mining firms are only seeking ownership of the right to mine it on their behalf.

When it comes to the ownership of land, foreign investors do not really see that as a deterrent since they can obtain long-term leases and very favourable rates at the special economic zones in the CBDs of the nation and in the regions. Where it proves a deterrent is to small-time investors who want a piece of the property boom. Again, does the property sector look like it needs a boost? I would even argue that it needs to be slowed down because of possible overheating.

Governance, Institutions and Political Reform

The final missing ingredient that is currently the flavour of the month among our business and political elite is good governance and institutions. The improvement in this aspect is cited by the World Economic Forum as the reason why the country improved its business environment in 2012. Faith in institutions is grounded on the belief that this is why the Industrial Revolution took place in England in the 18th century and not in China, which was just as prosperous as Western Europe at the time.

To attain the foundations for rapid economic growth, the same set of of superior cultural norms, institutions and technology have to take over the ways of “traditional societies” or the “primitive mode of production” found in the the developing world today, so the theory goes. According to one author who has written a very short introduction to global economic history, however

The English constitution had many features that promoted economic growth, although they were not the ones stressed by modern economists, who emphasize restrictions on taxation and the security of property. Parliamentary supremacy actually resulted in the reverse…the English state collected about twice as much per person as the French state and spent a larger fraction of the national income.

…France suffered because property was too secure: profitable irrigation projects were not undertaken in Provence because France had no counterpart to the private acts of the British Parliament that overrode property owners opposed to the enclosure of their land or the construction of canals or turnpikes across it. What the Glorious Revolution meant in practice was that the ‘despotic power’ of the state that ‘was only available intermittently before 1688…was always available thereafter’. [emphasis mine]

Over the past decade, there has been a new school of thought emerging called the California School of Economic History which has challenged the paradigms of the New Institutional Economics school. Its general conclusion is that the Industrial Revolution took place in England because of the discovery of coal as a cheap substitute for wood as an energy source and the Americas as a source of metals and farmland. Coal led to steam power which in turn lowered transportation costs. The so-called Scientific Revolution of the 17th century had very little to do with such inventions.

What allowed England to compete with China and India which were then the leading centres of manufacturing in the world was their investment in labour-saving technology such as coal-powered steam engines to increase the efficiency of their cotton mills. A population boom in the hinterlands of China led to labour-intensive production which made the adoption of such mechanised production technology uneconomical, since capital was expensive and labour cheap.

Multifactor productivity is what led to competitiveness which led to higher wages for English workers, which led to further productivity improvements and so on. The entire 19th and 20th century was all about the de-industrialisation of Asia and the catching up to England by other Western states such as Germany and the US and later by East Asia which belatedly includes China. This was achieved through deliberate state policy which sought to channel limited capital into strategic sectors.

Failed Wisdom

The failure of conventional wisdom to explain why the nation’s competitiveness is in such a rut should force us to look elsewhere. Posing the problem in that manner is misguided to begin with. The first question we need to ask ourselves is, why do we even need foreign direct investments in the first place? The conventional answer to that question is that we need them because we don’t have the capital to finance development ourselves.

Again, I would challenge that view. From 2000-01 to 09-10, investments in the country have grown by 7.1 per cent per year on average. That is even with our low attraction rate of foreign investors. Since the the last decade, national savings has exceeded investments, meaning we are a net saving nation now. Many have said that was because private investors were wary of investing under the Arroyo regime. But the Aquino government does not seem to have convinced them to change their minds and invest their surplus capital. There is something amiss there.

More importantly, the inward flow of dollar remittances from overseas Filipinos has created a national treasure amounting to $85 billion worth of foreign reserves. That is about the size of the Czech Republic’s entire economy. It is also about 75 per cent larger than the total official reserve assets of the Reserve Bank of Australia, which was at US$49 billion in December 2012. Let me ask then, what is an economy the size of the Philippines which produces about $250 billion a year doing with reserves of that amount compared to the Australian economy which is about $ 1 trillion a year? Do we need to maintain such a high level of reserves relative to our economy?

Policy Implications

The reason why our policy makers have not realised that they are sitting on a pile of untapped wealth is because they have been used for so long to go cap in hand to the foreign community for loans. There is a saying in business that banks will only be willing to lend to you when you don’t need to borrow. The same holds true in our case. Yet our officials continue to trumpet the ease with which they are able to borrow, without realising that they don’t need to do so anymore.

The preceding discussion leads to the following policy implications

  • Continue to raise taxes in order to close the fiscal gap. Continue tax reforms such as the sin tax law that has just been signed. Expand the tax base by closing loopholes and consider other measures to raise revenue such as fiscal incentives rationalisation and a one per cent national land tax piggy backed on local property taxes. If we can reduce the gap to within 1-2 per cent of GDP, that would be fine. If we could completely close the gap, that would be even better.
  • Undertake coordinated investments in strategic sectors by leveraging sovereign wealth. Japan and South Korea did not rely on foreign direct investments to boost their economies during their periods of rapid growth because they directed their banking institutions to lend to heavy industries with their implicit sovereign guarantees. We can adopt a new approach by setting up a sovereign wealth fund, which would serve as the main vehicle for channelling our excess foreign reserves into infrastructure, minerals exploration joint ventures, agro-industry clusters and clean technology hubs. I have outlined how this could be done here and here. There are enough internal resources currently to increase our growth rate by 1-2 percentage points a year for the next four years. Once government acts as the catalyst, other players, including foreign investors will follow. This will incidentally temper the rise of the peso, which is currently hurting our export sector.
  • Continue to improve and enhance our educational system. Higher educational attainment among our populace is one of the best ways to resolve our economic and political problems. A highly literate and skilled workforce not only is what our industries need, it is also what will help shape political reform. Tinkering with our political system won’t really address the problem. An educated voter will not be satisfied with handouts from the government but will demand much more.

If we focused on these three policy areas: improving our tax revenues, coordinating investments and enhancing educational opportunities, then we will be on our way to unlocking the development trap that we find our country in. It is important for our leaders to challenge conventional wisdom regarding what is hampering our nation’s growth potential. Otherwise, we might find ourselves attempting to improve our situation using the same methods, year after year, decrying the same problems, but achieving the same dismal results.

Use your coconut: Of investment gaps and how to fill them (conclusion)

The Philippines has been trying to crack open the investment nut by lifting its competitiveness for such a long time but has not been getting very far. Here’s why.

Continuing on from the first part where we looked at the country’s investment gap of over half a trillion pesos a year, we now turn to the problem of how to fill it and bring unemployment down. The imperative to boost competitiveness is based on the notion that low social returns on investment are due to a lack of opportunities to invest due to poor governance, inadequate infrastructure, and bad local finance.

Government failures caused by macro risks like poor fiscal, monetary and financial policies along with micro-risks including corruption, high taxes and weak property rights lead to a lack of incentives for investing in new ideas. These failures block the supply of innovation and investment. While this forms conceivably part of the problem, it does not necessarily explain the entire puzzle.

A missing piece is the demand not forthcoming from entrepreneurs for existing technology and capital even when it is available due to market failures. Dani Rodrik and Ricardo Hausmann talk about how this comes about when there are significant hidden costs associated with information and coordination. I will try to explain these failures using the coconut analogy.

Imagine that several decades after Robinson Crusoe left the island of Despair, a number of coconut plantations were established. The owners of these plantations were competing for a shrinking share of the coconut trade that existed between several islands in the vicinity. To improve their earnings, they each could find different ways of using the coconut. The process of discovering what types of products could be made comes with a cost caused by free-riders.

The evidence shows that low income countries actually develop first by diversifying their exports. The degree of specialization follows a U-shaped curve with income (diversifying more until reaching about the same level of income as Ireland before specializing). They do this by imitating technology already developed in rich countries. Instead of competing by creating new technology, they find cheaper ways of using existing modes of production in diverse sectors.

This process of “self-discovery” as Rodrik termed it often comes at a cost to the first-mover within a country, a cost which imitators do not incur. This creates a market failure because no one is willing to invest in this process since the information generated by it (“which goods can be produced more cheaply at home”) usually cannot be protected by patents.

This random process of discovery is why such countries as Pakistan and Bangladesh with similar levels of development and competitiveness produce very different products (the former produces soccer balls while the other produces hats). Korea and Taiwan also offer the same lesson (one produces microwave ovens and hardly any bicycles unlike the other). For the entrepreneurs who first ventured into these markets and were protected from the free-riding copycats, huge profits were on offer.

Bailey Klinger and Daniel Lederman have shown that their measure of export diversification, the frequency a country introduces new products into its export mix, is directly related to the height of entry barriers. This is a stunning result since it goes against the prevailing consensus on efficient and well-functioning markets.

Rather than the Global Competitiveness Index cited in the first part of this piece, which is based on subjective surveys, Klinger and Lederman used the World Bank’s Doing Business indicators for measuring barriers to entry which are based on objective measures like the number of days for starting and closing a business. They found that the higher the cost, the greater the returns to innovation from self-discovery.

The barriers in effect performed the role of greenhouses, protecting fragile innovative start-ups from the harsh winds of the free market. This counter-intuitive conclusion robustly supported by the evidence is consistent with the market failure argument. It violates the prevailing theory that increased specialization for poor countries and lowering costs of doing business is the way they should attract investments.

This is also borne out by the development experience of Japan which used “administrative guidance” to encourage many players within emerging industries to consolidate into oligopolies, Korea which offered loan guarantees as a way to subsidize the discovery costs of large diversified business conglomerates, India with its licensing raj which allowed a few pioneering software companies to gain economies of scale without the fear of new entrants, and Brazil which sponsored competitions for innovation with significant exclusive licenses going to the winner.

Klinger and Lederman state that this does not imply that there are no negative effects due to protection. What their study shows is that the positive effects swamp them. This means that rather than justifying protectionism, what it does is build a case for state support for emerging industries. I will have more to say regarding this in a moment.

Moving on to the second form of market failure which is due to coordination costs, picture the island once again. To transport various coconut products to other parts of the area, investments in seafaring ships and the training of sailors are necessary. These complementary investments are needed for an expansion of production to occur. Unfortunately, no one is willing to coordinate with the other inhabitants who live near the shore who could profit from such activities, so nothing happens.

Taiwan’s experience with the orchid industry is illustrative. When the world price of sugar declined, the state figured that shifting farm production to this high end product would prove beneficial. This required coordinated investments in things like greenhouses and storage facilities which the state encouraged and subsidized. The same type of intervention was performed by Fundacion Chile a partly state-owned enterprise which gave rise to a new salmon exporting sector.

The faltering seaweed industry located mostly in the Autonomous Region of Muslim Mindanao and the nascent industry of coco juice seem to be suffering a combination of the market failure problems discussed above. Our electronics industry which is highly specialized in “screwdriver” assembly operations as South Korea once was could be expanded likewise to incorporate more value adding steps in the manufacturing process.

The usual ways by which governments address these market failures is by offering subsidies to defray the costs of “self-discovery” (by sponsoring contests which award a prize to the best solutions for example), financing high risk ventures at the pre-commercialization phase and coordinating complementary investments in specific areas such as research and development, infrastructure and general training.

Think of it this way: instead of borrowing from foreign governments to pay their suppliers to develop our infrastructure (think broadband and high-speed rail) we should be licensing their technologies and awarding these to local firms which can prove they can use it cost effectively to build what we need. This should also apply to contracts awarded to private firms partnered with foreign companies. They should be conditioned on meeting certain local content requirements. Defense contracts should increasingly source local producers as well.

The Department of Transportation and Communication is already on the right track by seeking to borrow to pay for the build while privatizing the operations and maintenance of certain projects like light railways. In time we could be exporting some of these products and services if we create local expertise. South Korea did this with its ship building industry in the 1970s with Hyundai Heavy Industries becoming the world’s leading exporter within a decade. It did this even as global demand for ships declined.

Where will the government get the money to do all this? From itself, by using the savings remitted by overseas Filipinos and stored with the central bank in the form of foreign currency reserves–an unorthodox view that even the “humbled” former dean of the UP Economics School holds! If the government were to set aside a third of the currency surplus flowing in each year (see previous posts on this) amounting to around fifteen billion dollars to fund these activities and assuming a one-for-one investment multiplier, a total of four hundred and fifty billion pesos worth of spending could be generated annually (adding 4.5% points to GDP growth!). This would fill up to eighty percent of the investment gap.

The need to diversify our exports is already apparent with an inordinately high specialization in electronics posing a huge risk to future growth in the face of uncertainty of demand from advanced economies. It is also clear that despite very benign inflation and low real interest rates, private firms fail to undertake investments that would lift the productivity of their idle capital. This underinvestment problem is why such a large proportion of our workforce remains unemployed or underutilized.

Stimulating demand for innovation and investment by addressing market failures should be the priority. The biggest barrier for the Philippines to adopting such a strategy will not be an inadequate bureaucracy as many of our top bureaucrats are well-informed and educated; it won’t be for lack of funds as a substantial amount of national savings remain untapped; it won’t be for lack of ideas as there is a wide gap between domestic and foreign technology that can be filled.

The biggest barrier will be attitudinal as it would mean countering the development mindset that has dominated for such a long time which is largely donor-driven. Having drunk the policy “cocktail” put together according to their orthodoxies to no avail, giving us the title of being “the sick man of Asia”, it is about time we developed our own recipes for stimulating economic dynamism in line with local conditions. I now leave you with a song about the coconut which should punctuate this final thought.

Use your coconut: Of investment gaps and how to fill them

The coconut serves as a good analogy for our under investment problem.

The five year Philippine Development Plan (aka “the Plan”) released by the government of President Aquino earlier this year identifies a number of “structural defects” underpinning the country’s poor economic performance. Depicting the problem was easy enough. Without a significant uptick in investments, inclusive growth will remain elusive and poverty will continue to hound us, so the Plan says.

Using an analogy inspired by Robinson Crusoe to grasp this, imagine living on an island where the only resource is the coconut and inhabitants keep arriving. The only way to feed a growing population is to plant more coconut trees. “Investing” in more trees requires hiring more laborers to climb them in order to harvest the coconut. Some coconuts could be consumed, while others could be traded for products from other islands.

The Philippines has lagged behind its Asian neighbors in investing, which explains why it is so poor. Exhibit A as provided by the Philippine Development Plan is reproduced here (see below). Since peaking at 25% in 1997, the country’s investment-to-GDP ratio has been steadily declining, underperforming Indonesia, Malaysia and Thailand. A familiar story for Philippine-watchers–we have all heard or read about this before.

Chart 1. Investment-to-GDP Ratios of Selected Asian Countries: 1994-2010 (in percent)

So what is the reason for this underinvestment? The answer given to us is a lack of competitiveness. The country’s lagging infrastructure, its poor governance and inadequate skill base are increasing the cost of doing business in the country. On the island for instance, a lack of tools to harvest coconuts, a lack of laborers with the skill at converting coconuts into useful products and a lack of boats to transport them offshore is the problem. Now what? Well, according to this narrative, massive infrastructure spending, improved governance and human capital development is warranted.

So beginning next year, the government will be bidding out four initial infrastructure projects amounting to twenty five billion pesos to improve infrastructure in the country. After a year of delays, the amount is about a quarter of what was originally slated. The projects include the construction and maintenance of three airports in Cebu, Bohol and Misamis Oriental and the ticketing system for Manila’s three light railways.

The government has also been busy this year fixing the internal procurement systems within the public works, agriculture and education departments. Much of the budgeted expenditures for this year was held back (a little over half of infrastructure budget as of September has not been spent) due to these efforts, but beginning next year, we are told, they should proceed much more smoothly. The DepEd also has a plan to close the gap in school buildings within the next five years mainly through build, lease transfer agreements with the private sector.

Assuming all these projects go ahead without further delay, we should expect the nation’s problems to be fixed in five years, right? Well, not exactly. One needs to get a sense of the scale of the problem first. This is why I did some very rough back-of-the-envelope calculations to determine the overall size of the employment and investment gaps. Using our island analogy it is like asking the question, how many coconut trees need to be planted to provide enough work for its growing number of inhabitants?

Climbing the coconut tree

Using data from 2005 to 2010, I tried to compute how much additional investments would be needed in the next five years to bring unemployment down from where it is currently at 7.4% to a more manageable level of say 4%. The country has about three million unemployed workers out of a total labor force of thirty-nine million in 2010. Each year about seven hundred thousand new entrants are added to this pool, which means a workforce of about forty-three million by 2016.

So for the country to produce jobs for all of these new entrants and reduce the pool of unemployed workers down to about 1.7 million consistent with an unemployment rate of 4% by 2016, about one million net new jobs need to be created each year. This is consistent with the government’s employment target. There is nothing new there.

The reason why we haven’t seen unemployment decline is because the number of net new jobs created each year is usually slightly below the number of new entrants (see Chart 2 below). Thus, the number of those unemployed steadily rises each year in proportion to the growing work force leaving the unemployment rate relatively stable at around 7.5%. The question now is how much additional investments have to be raised to bring this down to 4%.

Chart 2. Supply and Demand of New Jobs in the Philippines: 2006 to 2010

If one compares the average investments over the past five years of about one-and-a-half trillion pesos per year  (roughly 15% of GDP as shown in Chart 1–see preceding section) with the average number of net new jobs created of about seven hundred thousand per year, one arrives at a figure of about four hundred and fifty new jobs for every one billion pesos spent.

The number of jobs created per peso invested has actually been declining. Back in 1994, a billion pesos in today’s prices would produce about four times as many new jobs. This means that part of the problem has been the increase in productivity particularly in the manufacturing sector where technological progress has reduced the amount of workers required for any given level of output to be produced. In other words, new tools have been created that make climbing the coconut tree a lot easier. As a result, fewer workers are needed.

Assuming that the ratio of new jobs created per peso invested remains steady for the next five years, the amount of investments required to bring unemployment down is about two trillion pesos per year (20-25% of GDP, roughly where we were in the mid- to late-90s). Compared with the average amount of investment spending cited above, this would mean an increase of more than half a trillion pesos (close to six hundred billion) a year or an increase of about forty percent from the current base.

Had the government stuck to its original plan and rolled out a hundred billion pesos worth of projects and assuming an investment multiplier of two (which means a one-for-one additional investment in complementary projects amounting to two hundred billion in total), we would end up filling about a third of the required level of additional investments. Given its planned roll-out is now about a quarter of the original, we will only be achieving close to ten percent of the investment gap. In short, the “solution” does not seem anywhere near the required amount.

“The coconut nut is not a nut”

Here is another problem with the Plan: the assumption that improved competitiveness will steadily increase investments seems straight-forward, but reading the Global Competitiveness Report produced by the World Economic Forum, I find a few anomalies. The chart below shows the various country rankings from 2005 since the Report first came out until 2011 (click the play button).

The Competitiveness Index is a composite score made up of twelve components. These “twelve pillars” that hold up an economy cover things like institutions, macroeconomic policy, infrastructure, health, education, innovation and regulation. The Plan says that the “structural defects” in these pillars as shown by our declining ranking is the chief cause for our declining economy as measured by our investments-to-GDP ratio.

Our ranking has declined alright, but only because of the addition of more countries in the league table in the intervening years. Our score (which you can see by hovering the cursor over the appropriate column) on the competitiveness scale actually rose from 3.71 to 4.08 out of six during the period covered just above Indonesia’s score of 4.05 back in 2005.

Refering back to the first chart, it is clear that in 2008 when our score was actually 4.09, our investment-to-GDP ratio did not climb to anywhere near the level of Indonesia back in 2005. This is like saying two students who scored the same on their tests, did not receive the same final grade. There is an anomaly here.

One might argue that it is our ranking and not our score that counts, so that relative to our neighbors, our score continued to lag and that explains the poorer investment-to-GDP ratio. Makes sense if the grading of students is not based on their absolute scores, but on their relative rankings within the class, right?

Well then, according to that argument, Malaysia which ranked first among its neighbors in terms of competitiveness should have outperformed them in terms of its investments, but the first chart actually shows it slipping steadily below Indonesia and Thailand since 2002 and coming dangerously close to parity with the Philippines. In fact, Indonesia which has consistently come in third in the ratings and rankings of the four neighbors has steadily risen to outclass the Malaysian and Thai investment ratios by 2009 and 2010.

So perhaps, achieving “global competitiveness” is not what it is all “cracked up” to be. It would seem that some other dynamic is driving investments. As one song goes, “the coconut nut is not a nut.” This should give you a lot to think about, which gives me a few days to conclude this. Until then, let me leave you with this tune to fuel your ruminations…