"The world has been passing the Philippines by, literally. Back in 1960, the country had the second-highest per capita income in Asia, lagging behind only Japan. But by the following decade, South Korea and Taiwan had surpassed it, and by the 1980s, Malaysia and Thailand had, too. China overtook it in the late 1990s. And now—an event that many Philippine elite thought they would never live to see—Indonesia has sailed past the Philippines.A recent visit to Manila after a 12-year gap confirmed that little had changed. I was back at the same hotel, as no other worthwhile option had surfaced in the interim. There were hardly any new companies to meet with, and the same handful of family-owned businesses still dominated the market. Jeepneys that trace their origin back to World War II remain the preferred mode of public transportation. While most other Asian cities boast fancy new airports, international travelers to Manila still have to trudge through a piece of work commissioned in the 1970s.
All this marks a severe fall from grace for a nation that was billed in the 1950s and '60s as Asia's most promising story, alongside Burma and Sri Lanka. The Philippines is now a somber reminder of how long-term projections often go awry and why economic catch-up is not inevitable, even for a country rich in human capital and natural resources. From Brazil in the 1970s and '80s to Thailand more recently, history is littered with instances of countries that lose their way following a few years of success because of weak institutions and the lack of political will to enact tougher reforms. After growing at an average pace of 6 percent in the 1950s and '60s, the Philippines missed out on the successive waves of -investment-led booms in the region due to constant political instability and failure to liberalize the economy. Investment as a share of GDP is merely 15 percent—the lowest in its post–World War II history. Although the economy has expanded at an average 4 percent annually in the post-Marcos era, it has translated into little progress for a nation with a population growth of more than 2 percent a year.
The continuing saga over the opening of the new airport is a prime example of why the country remains a laggard. It was originally scheduled to start operating in 2002, but legal disputes between the government and the project's main contractor have continuously delayed its final completion and full opening. The controversy surrounding the project again shows that the interpretation of laws is a highly subjective exercise in the Philippines and that the rules can often be changed midway through the game. Little wonder, then, that flows of foreign direct investment (FDI) remain anemic. Both Indonesia and the Philippines attracted just over $1 billion in annual FDI a decade ago. Last year Indonesia sucked in nearly $8 billion in FDI, while the current run rate in the Philippines of $1.2 billion in FDI a year is unchanged from the levels of the late '90s. On several other metrics, too—from auto sales to cement consumption—the Philippine economy has flatlined for many years.
The question now is whether the presidential election set for May can be a game changer in the same way that Susilo Bambang Yudhoyono's ascension to power was for Indonesia in 2004. Six years ago, Indonesia and the Philippines were not far apart in terms of per capita income, and had other similarities, from political turmoil to an untapped domestic consumer base. Indonesia is hardly a paragon of economic virtue, but its relative success over the past few years shows that it takes only a modicum of political stability and some basic economic reform in a low-income country to usher in the good times.
A free and fair presidential election would be a start. The agenda for a new government is fairly clear-cut. Investment has long been the missing component in the growth equation, so the government needs to begin by creating a better environment for investment. This means stronger contract enforcement, less judicial interference, and breaking up the stranglehold of some oligarchs in key businesses. An important measure of the country's success will be if it manages to slow the pace of emigration. More than 10 million Filipinos have left the country since the early 1980s for better prospects abroad. The country needs some of that talent to return home and add to the economy's underlying productivity."
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