Philippines' 'Mirage' Economy: Why It's Worse Than a Bubble

Recent weeks have been abuzz with a tantalizing debate over whether the Philippine economy is a bubble posing as a miracle. And to be fair, both sides of the debate have raised a number of interesting issues, which reveal the strengths and weaknesses of the country's upward economic trajectory.

Yet, what the debate tends to miss is that even if the Philippines is not another bubble waiting to burst at any moment, the recent economic uptick is inherently hollow -- for it is unlikely to trickle down to the greater impoverished masses anytime soon. The country's overreliance on remittances to boost domestic consumption and maintain healthy balance of payments (BOP) is another indication of its inability to generate endogenous growth engines.

Moreover, as the Haiyan tragedy has revealed, many rural areas in the country are yet to benefit from marginal improvements in basic infrastructure and state services. And for leading academic institutions in the country, which will prove crucial to the country's long-term transition to knowledge-based economy, they have suffered declining global standings just when the Philippines joined the high-growth tier of emerging markets. The recent onslaught of corruption charges implicating the top tier of the bureaucracy and legislature is another reminder of the country's creaking state institutions, which are barely immune to manipulation and infiltration by special interests.

Yet, as astute Filipino observers such as Oliver Segovia succinctly put it, the Philippines hardly resembles a bubble economy, since real estate prices, credit card balances, and consumption growth rates as well as investment rates are well within a manageable and healthy range.

Thus, the Philippines, this author contends, will most likely retain a positive growth trajectory for the foreseeable future, emerging as a growth pole in Southeast Asia, but whether the growing economic pie -- and here lies the real question -- will translate into collective well-being is very much under question, unless there are significant reconfigurations in the country's economic and political institutions during the Aquino administration -- and beyond.

Whither Economic Reforms?

Morgan Stanley's Ruchir Sharma has been among the most enthusiastic proponents of the "Philippine tiger economy" narrative, basing his rose-tinted prognosis on the country's political leadership and the advent of outsourcing: "Aquino has overseen economic reforms that have made government spending more transparent and pushed for more tax revenue. And thanks to success in the [Business Process] outsourcing industry, the Philippine economy has watched incomes grow and new wealth spread."

Technically speaking, Sharma is correct in his observations. But he overestimates the impact of recent political and microeconomic developments, rendering his bullish conclusions highly questionable. As far as the current administration's macroeconomic policies go, they are almost identical to those implemented in the latter years of President Arroyo's term: the emphasis on stable inflation and interest rates, trade liberalization and reliance on hot money inflow, expansion in infrastructure projects with private and foreign capital, and streamlining the national budget to rein in public debt. The Aquino administration's key added value was its "good governance" initiatives, which initially succeeded in raising market confidence -- owing to Benigno Aquino's impeccable pedigree and gestures of moral conviction.

Three years into Aquino's leadership, however, it has little to show in terms of major infrastructural projects and cutting down of red tape and bureaucratic uncertainty. With barely three years left in his office, the introduction of decisive measures to arrest the decline of the manufacturing and agricultural sectors are yet to kick in. The government has missed its targets on the implementation of the Comprehensive Agrarian Reform Program Extension with Reforms (CARPER), to the fury of millions of farmers and rural citizens, while the impending integration of the Philippines into a regional common market will most likely batter its already fragile manufacturing sector, which has been struggling with declining demand in the intra-regional production chains in recent years.

Historically, agricultural reform and industrial development have been the harbinger of poverty alleviation, establishment of a robust middle class, and the long-term stability of democratic institutions, especially among industrialized Asian economies. But the Philippines is yet to establish an economic regime that begets sustained economic development and political stability. Foreign Direct Investment (FDI) hasn't poured in yet, despite the government's aggressive lobby for garnering "investment grade" status by the world's leading credit rating agencies.

Aquino is already struggling with declining popularity due to his perceived mishandling of the post-Haiyan relief efforts, while potentially facing impeachment over his alleged re-channeling of executive discretionary funds for political purposes. Given his declining political capital, it is far from certain whether the current administration has the wherewithal to bust special interests, crack down on tax evasion by big businesses, and mobilize a broken bureaucracy to finalize infrastructure projects and implement egalitarian policies for the benefit of farmers and the rural population. It will take a herculean political strategy to overcome deep-rooted structural challenges in few years time and rally the Filipino people to this purpose.

Dragon vs. Cub Tigers

For years, experts have passionately discussed China's overarching economic dilemma: that it may get old before it gets rich, thanks to decades of relentless demographic manipulation by the Chinese Communist Party (CCP). But critics have overlooked/downplayed how the Chinese economic model is responsible for the most dramatic case of poverty reduction in human history, that its leading universities are starting to knock at the door of their Western counterparts, that China boasts one of the most ambitious and well-developed infrastructure landscapes in the world, that per capita income growth has been among the fastest in any developing country, that China is dominating cutting-edge manufacturing sectors such as green technology, and that the leadership is constantly re-inventing its economic policies lest it face a large-scale political fallout. After three decades of stellar economic development, China has built substantial wealth at home in order to shift its economy from an export-oriented world factory into a robust domestic consumption-driven knowledge economy. And Premiere Li Keqiang, and his "likenomics," seems to be as determined and incisive as his brilliant predecessor Zhu Rongji, who engineered China's seismic post-Tiananmen integration into the global economy.

Same experts, however, have been showering democratic emerging markets such as India and the Philippines with praise, depicting them as recipients of demographic bonus, thanks to a surplus of cheap, young labor. But what this analysis tends to miss is that rapidly growing economies with weak states have been suffering from a more pernicious trend: The GDP is growing, but per capita income rates and productivity levels have been largely stagnant. With the exception of a few billionaires at the top, the middle class -- predominantly reliant on retail, real estate, and Business Process Outsourcing (BPO) sectors -- is hardly expansive and consequential enough to lift the country to a higher state of (manufacturing-led) development. Sharma's obsession with BPO boom in the Philippines (and India for that matter) is misguided, since (a) only a minority of (fluent English-speaking) Filipinos can land such jobs, (b) the BPO industry lacks economies of scale and can easily move out of the country whenever it wishes, and (c) it doesn't facilitate technological transfers and innovations that tap into the country's millions of engineering and science graduates.

The result, as many critics have lamented, is staggering levels of wealth concentration without a significant reduction in unemployment and poverty rates. But the illusion of growth, anchored by formalistic participation in elite-dominated elections, has allowed these countries -- the so-called cub tigers -- to stave off criticism and avoid painful and much-needed structural adjustments that performance-based authoritarian states such as China have been forced to undertake.

Today, the Philippines is undergoing a difficult period of political transformation, as exemplified by rising middle-class activism and anti-corruption mobilizations, but the underlying economic regimes that have held back the country's development trajectory are yet to be untangled. If the Philippines' economic growth were a bubble, then we could expect a post-crisis reconfiguration of economic regimes. But most likely, the current growth patterns will keep apace, maintaining an illusion of growth and mobility for tens of millions of citizens outside the hothouse of the exuberant elite.