gross capital formation

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.

Where’s the beef? On the missing “spoils” from P-Noy’s second US trip

Does good governance mean good economics?

In an earlier piece last week meant more to mark the 39th anniversary of martial law in the Philippines, I tried to downplay expectations regarding the “spoils” that P-Noy’s US trip would bring describing the situation there as dire and nearly on the boil.

As P-Noy was to deliver a report to the World Bank, Mr Olivier Blanchard, Chief Economist of the IMF gave an uncharacteristically downbeat outlook for the world economy saying that the global recovery had stalled, revising forecasts of growth down to 4 from 5% (a more significant slowdown for advanced economies with growth prospects halved from 3 to 1.6% and less drastic cuts for emerging economies whose growth prospects decline slightly to 6.1 from 6.4%–the Philippines has seen its growth prospects slashed from 6-7% down to 4-5%).

Sure enough, on the day he arrived back from the US, the Dow Jones plunged nearly 400 basis points undoing the Federal Reserve’s measured response to prop up confidence. This was in reaction to what has been going on in Europe where Italy, the third largest economy received a credit downgrade from S&P and where a Greek default on sovereign debt looms. Meanwhile the Washington elite remained at odds over how to keep the government running with a measure to keep the lights on until November 18 passed literally at the eleventh hour.

With that as an unfitting backdrop, the president remained upbeat upon planting his feet back on home soil. Unlike his more recent trip to China which was expected to yield 2-7 billion dollars worth of investment of which 1.3 billion dollars was realized in firm commitments and cost the Filipino taxpayer 25 million pesos (a return of 52 dollars worth of investment for every peso spent), there were no numbers to be quoted this time around.

The president instead spoke of the keen interest and enthusiasm of US investors who were “lining-up” to come to the Philippines. Strange that the president did not even mention the figure of $15 million over the next four years the only firm commitment to come from Pepsi to be invested in developing a coconut juice processing facility.

That after all would be good news for the struggling farmers the intended beneficiaries of the Marcos era’s coco levy fund which was meant to provide them support in exporting their crop, but instead went to a bank which then lent to the fund’s manager, P-Noy’s once estranged uncle, who because of that now owns a controlling stake in San Miguel the food and beverage giant thanks to the high court’s ruling earlier this year.

So why the omission, which is so uncharacteristic of arrival statements; could it be because the spoils of this trip are so meager when compared to the nearly 25 million pesos spent on it? It would depict it as representing less value for money by producing a mere 6o cents for every peso spent.

This should not detract from the overall mission of the trip which according to the president was fulfilled by him reporting to the World Bank the advances of his administration this past year and greeting the Filipino community there. There was also the side trip to credit agencies to try and convince them to boost the ratings of the country. After all, the budget deficit no longer seems to be a problem with a surplus reported in August bringing the cumulative deficit for the year to be 85% below its ceiling, right?

This is what the president trumpeted as a success in his drive to stamp out corruption. In the spirit of transparency and openess, which were the themes of the Open Government Partnership that P-Noy inaugurated at the Waldorf Astoria (which incidentally means more foreign trips in the near future to Brazil, Chile, UK, Tanzania and Latvia), the Palace should have at least acknowledged that perhaps the Americans were in no position given the state of their economy to be exporting their capital and jobs to countries like the Philippines.

Never gonna happen

That transparent recognition of the state of affairs of course was never going to happen, for the simple fact that doing so would expose the president to accusations of junketing which given the nature of his presidency is something his entourage wants to avoid. For if the question were really to be asked, what would be the real urgency of making this trip to the US a second time in a row within the space of a year, what would be the answer?

His remarks at the World Bank was like that of a star pupil performing a didactic exercise of parroting his tutor. His visit to Fordham University was a sentimental journey mirroring his mother’s footsteps (similar to his visiting an ancestral hometown in China). His co-inaugural of the OGP lent legitimacy to an initiative sponsored by the World Bank which has struggled to make itself relevant.

Finally, his trip to the IMF was unnecessary given that the Philippines exited their program right before he entered office. The only point of this trip it seems was to highlight the advances of his young presidency in proving that “good governance is good economics”.

Unfortunately, the jury is still out on that. For one, the US haul was a pittance compared to the Chinese catch. And China has not really been deterred from investing because of perceived corruption or lack of openness. In fact, China’s development spending in emerging countries devoid of any concerns about corruption in the recipient nation is the main reason why western aid agencies have been struggling to maintain their relevance.

That and the fact that their anti-poverty programs have proven to be inconsequential. So much so that they have jumped on the bandwagon in supporting ideas developed independently by their clients. Programs such as Bolsa Familia which is now called “conditional cash transfers”. Yet as shown in an earlier post, the Philippines could have funded its own variant of this scheme without resorting to multilateral financing.

Second, the “interest” from US companies to invest was sparked not because of a greater sense of openness but from the relative advantages the Philippines has in a couple of areas. One is in the form of coconut plantation; and, two is in the form of a call center industry that has grown from strength to strength even during the period in which corruption supposedly reigned.

Now before you start arguing that the austerity exhibited by P-Noy in his travels is in stark contrast to the “impunity” demonstrated by his predecessor, let me say first of all that this habit of constantly bringing up ex-president Gloria Arroyo as the benchmark for this president’s conduct in office is not really very useful (although I am sure her supporters would be happy to have that conversation). I would prefer to think he should set the bar much higher.

The proper benchmark

Before questions of efficiency and effectiveness are raised, it is important to cross the threshold of appropriateness. How appropriate was it to make the trip at all? If as the president says it was important to send a message about the reforms undertaken by his country, then perhaps it would be pertinent to look at Indonesia’s example. The president of Indonesia the only other Asian country in the steering group of the OGP has trodden the path that P-Noy has just embarked on.

After the anti-corruption campaign started under Susilo Bambang Yudhoyono’s first administration, Indonesia has clearly effected a change in its image abroad. It is sometimes accorded “BRIC” status with  gross capital formation as a ratio of GDP about double and foreign direct investments several multiples of that in the Philippines in recent years. This was another successfully home grown program not driven by donors, the main reason it went from being seen as a basket case after the fall of Suharto to joining the Group of 20 nations.

Yet after accomplishing all this, its president felt no compelling reason to preach the virtues of his nearly decade long administration to other world leaders choosing instead to send a “trusted aid” to the event. Our president on the other hand felt so convinced that his administration after just over a year in office was performing sufficiently well that he saw the need to share his country’s “success story” with people abroad.

Unlike the case of Indonesia where the anti-corruption campaign supported growth, the Philippine government’s attempts to rein in corruption seem to have detracted from that growth as the latest four quarters of GDP reporting have shown (ironically it is in the area of growth where the Philippines over the last decade has not performed too badly against its southern neighbor–but never mind that, lest this statement of fact be interpreted as me giving “props” to the previous dispensation).

While it is understandable for the president acting as Salesperson-in-Chief to present a positive image abroad of our country and his administration, it is equally important for that image to be translated into tangible results over a sustained period of time. Only then will the image correspond to reality. Until then, we can only keep asking, “Mr, Presidentwhere’s the beef?*

*Fresh from his US trip, the president rushed off to Japan for four days. The contrast between the East Asian and North Atlantic nations could not be more stark with one billion dollars expected to be signed off with a taxpayer’s bill amounting to 20 million pesos.