The Philippines has been in the spotlight in the last year with a number of high-profile developments linked to the country. The electoral victory of firebrand President Rodrigo Duterte (aka DU30) in 2016 has been making regular headlines for his fiery rhetoric and controversial policies such as a war on drugs that has seen more than 3000 killed. The Philippines is also embroiled in a territorial dispute with China in the South China while Duterte attempts to reshape Manila’s foreign policy by pivoting away from traditional ally the U.S. towards a rising China. With these developments as the backdrop, what is the story of the Philippines’ economic development, and what plans does President Duterte have during his term in office?
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Like Indonesia, the Philippines is an archipelagic state with more than 7000 islands. It has a population of more than 102 million with 37% in the economically active age range of 25-54. Approximately 83% of its people are Catholic, a legacy of Spanish missionaries and colonists dating back to the 16th century; there is also a 5% Muslim minority who mainly live in the southern Mindanao region.
The Philippines has been on a steady path of economic growth in recent years. GDP growth has been a creditable 6% per year from 2011 to 2015, and the Philippines is expected to remain the fastest growing economy in 2017 with a projected 6.7% growth due in large part to rising infrastructure spending and growing demand from a burgeoning middle class. Foreign direct investment (FDI) has been on an uptrend with $7.9 billion entering the economy in 2016, an impressive 40.7% jump from 2015. The increase was attributed to strong investor confidence in Philippines’ macroeconomic fundamentals which appeared unaffected by a change in political leadership last year. Top trading partners in 2016 included Japan, which imported $11.7 billion worth of Philippines exports, followed by the U.S., China and Singapore.
The positive headline figures aside, there is room for improvement from a domestic perspective. The unemployment rate has declined in recent years but remains a concern at 6.6% (2016). Philippine’s economy is also supported by a large volume of remittances from about 10 million overseas Filipino workers and migrants who leave the country for better prospects elsewhere; remittances flowing into the country amounted to a record $27 billion in 2016. The poverty rate is also high, affecting about 21.6% of the population (2015 estimate).
As founding members of Asean, Singapore and the Philippines have strong and long-standing bilateral ties. Singapore is Philippines’ top trading partner in Asean with bilateral trade amounting to $4.4 billion in 2016. In a bid to further expand trade ties, Singaporean firms are being encouraged to venture beyond the capital Manila to explore opportunities in cities such as Cebu and Davao, where President Duterte was formerly mayor, and invest in sectors such as infrastructure, energy, aerospace and electronics. Strong people-to-people ties are also exemplified by a sizeable Filipino diaspora of 180, 000 in Singapore.
A Walk Down Memory Lane: Dictatorship and Democracy
A milestone in Philippines’ political history was the 1986 People’s Power Revolution that overthrew the authoritarian President Ferdinand Marcos who ruled the Philippines with an iron fist from 1965 to 1986, including through martial law from 1972 to 1981. The Marcos regime was characterised by repression of popular will, corruption and plunder of national resources.
Although the Marcos regime is popularly remembered as the “golden age” of the Philippine economy, statistics by analysts prove otherwise. Although GDP per capita increased through the 1970s, it declined after 1982 and did not reach the same levels until 2003 due to unsustainable economic policies that wrought acute damage on people’s incomes. Economic growth proved unsustainable as it was based on debt-driven policies that saw external debt skyrocket from $8 billion in 1977 to $24.4 billion in 1982, leading to the 1983 debt crisis in the Philippines.
Image:National Economics and Development Authority of Philippines
Crony capitalism in the Marcos regime led to the stagnation of the manufacturing sector at a time when many of the Philippines’ neighbours such as Thailand, Indonesia and South Korea were rapidly industrialising and growing. The long-lasting damage wrecked on the economy by the Marcos regime led to the Philippines bearing the unfortunate label of the ‘Sick Man of Asia’.
Following the ouster of Marcos and the return to democracy after 1986, the Philippines underwent a series of reforms but also setbacks such as the 1997 Asian Financial Crisis, and corruption scandals and anti-government protests related to various presidencies, all part of the journey to strengthen the Philippines’ democracy, fulfil its economic potential and improve standards of living for all Filipinos.
The presidency of Benigno Aquino III from 2010 to 2016, Duterte’s predecessor, saw a period of strong economic growth. Since 2010, GDP growth was an average 6.2%, the highest in four decades, and in contrast with average GDP growth of 4.4% between 1999 and 2009. While Aquino was successful in moving the economy forward, observers say his administration was not as successful in tackling structural problems such as unemployment and income inequality, and pervasive ones such as corruption. Notably, the Gini index which measures income inequality remained unchanged at .46 (out of 1.0, a lower score being better) since Aquino took office. An opinion poll by The Economist also suggested that 46% of Filipinos believe Aquino had failed to curb corruption.
Dutertenomics: A Cure in Sight?
President Duterte was elected on an anti-establishment campaign promising radical change that would cure the many structural ills that plague the Philippines. He announced an ambitious vision to transform the Philippines into a high middle-income economy by the end of his 6-year term in 2022, and released a 10 point socioeconomic plan outlining an economic strategy. The plan addresses vital areas such as tax reform, the ease of doing business and infrastructure.
Tax reforms are an essential part of any effort to improve social governance, a priority for Duterte. To that end, his administration is working to increase social spending by lowering the tax burden on the working-class while increasing taxation on the rich. There are also efforts to incentivise consumption and investment by decreasing lower-tier personal income tax rates and corporate tax rates. To counter the revenue loss in these areas, proposals have been made to increase excise taxes on petroleum products and automobiles. An important hurdle for Duterte in implementing these reforms will be to win the support of the Senate that acts as a democratic check against the President.
The ease of doing business is a crucial competitive advantage that Philippines’ emerging economy needs to achieve given the keen competition from Asean counterparts such as Indonesia, Vietnam and Myanmar. And like its regional counterparts, the Philippines has made steady progress in this area: in the 2017 World Bank-International Financial Corporation Doing Business Report, the Philippines placed 99 out of 190 countries for 2016, a four-place climb from 2015 and a 49-place gain from 2011. To further climb the rankings, the Duterte government plans to use local cities such as Davao as successful models for the rest of the country to emulate in creating a business-friendly environment. One area being looked at is streamlining investment application processes – Duterte has announced intentions to shorten the processing time for permits and licences to the minimum of three days for local-level governments.
Traffic snarls that have come to be known as “carmageddon” and poorly-maintained rail lines have come to symbolise the infrastructure problems that plague the Philippines. Much like its Southeast Asian counterparts, the Duterte government looks to increase spending for critical infrastructure development not just in urban centres but also rural parts of the country to increase connectivity in the archipelago. The Duterte government coined the term “Dutertenomics” to refer to an ambitious economic blueprint that will spark a “golden age of infrastructure” with new roads, bridges, railways, airports and seaports. An investment target of $14.6 billion, which is 4.6% of GDP, has been identified for this year. Over the next five years, that amount is slated to increase to approximately 7.4% of GDP, more than twice the 3.3% expenditure in 2015. It remains to be seen if Duterte and his administration can realise the ambitious agenda they have set out for the country.
Way Forward: Other Illnesses to Tackle
In addition to the policy priorities identified, there are other long-standing issues related to the Philippines’ national security and political power structure that Duterte, and likely his successors, must tackle. Bringing peace to a decades-old secessionist insurgency by Muslims in the Philippines south that has left more than 120,000 dead and led to heightened threats from jihadist groups like ISIS is a major national security challenge. The government, with the assistance of Malaysia, has been engaged in a long-running process of negotiations with the goal of brokering a peace deal with the Moro Islamic Liberation Front (MILF), the largest group secessionist group. It would be a major achievement for Duterte if peace is brokered under his leadership after close to two decades of talks under various administrations.
Last but certainly not least, a distinct feature of the Philippines is the political and economic dominance of an elite circle of business oligarchs and political dynasties who have historically collaborated to subvert Philippines’ democratic system into a corrupt plutocracy. The collective wealth of the country’s 50 richest individuals in 2014 accounted for a significant 25.7% of the country’s full-year GDP, illustrating the extent to which wealth and influence is concentrated in a select club in a country of 102 million.
Duterte has directed much of his rhetoric towards taking down the cabal who make up the plutocracy – oligarchs who unlawfully interfere in politics, tax cheats, and corrupt bureaucrats in bed with oligarchs, to name a few. It is vital that reform-minded leaders like Duterte act firmly against this oligarchic power complex if the Philippines is to move up the economic value chain and improve the lives of its citizens. That being said, achieving real progress in this deeply-ingrained feature of life in the Philippines is surely a long-term condition that will outlast Duterte’s treatment plan.