Numbers Don’t Lie

What would it take to have the Philippines progress from a “good” nation to a “great” nation in three years?

The list is kilometric. But let me pare it down to the realm of economics and what is realistic.

To be a great nation, we must: bring unemployment rate down to below 3 percent; elevate nominal per capita income from US$3,730 to US$4,500 a year, putting us in the upper middle income category; reduce the current account deficit from nearly 3 percent of GDP to within one percent; maintain the ratio of government debt to no more than 50% of GDP; boost gross international reserves from US$83 Billion to US$95 Billion, sufficient to finance seven months of imports; and of course, rise in competitiveness from 56th position last year to 38th, the level of Thailand today.

Having a s strong economy opens the doors to other fields of development. It will allow us to further upgrade our infrastructure. It will allow us to have an armed forces with credible defense capabilities. It will give us the means to finance progressive educational programs to leapfrog in the fields of engineering, the sciences, creative thinking and innovation. It will enable us to deepen the coverage of universal healthcare and education subsidies. It will permit us to invest in sports development. It will enable us to widen our diplomatic reach and give the country a louder voice in international fora. This, among many others.

Many frowned at how the political opposition (the Liberal Party) is not aptly represented in Congress and the Senate. The legislature, many say, has become a virtual rubber stamp for Malacañang’s agenda. Be it as it may, this may be a good thing. For the first time since Marcos’ Batasang Pambansa (the Philippine’s legislative body from 1978-1986), the Palace has complete sway over the legislature and can virtually dictate the laws deliberated upon and passed. It has a chance to obliterate the impediments to our development and install statutes that would set us up nicely for decades to come.

The country’s greatest weakness is its manufacturing sector and to restore its vibrancy is to unlock the nation’s full potential.

Many believe that the country is already in the midst of a manufacturing resurgence, what with the manufacturing sector clocking in an average growth rate of 7.6% between 2010 and 2017. The statistics, however, are deceiving. The truth is that nearly 45% of our entire industrial output is attributed to food and beverage manufacturing of which 90% are consumed locally. Everything else, we import — from simple construction materials to chemicals, from food ingredients to plastics, from textiles to heavy equipment.

How weak has our manufacturing sector become? A good barometer is our merchandise exports.

Last year, revenues derived from merchandise exports amounted to just US$67.49 Billion. It was a fraction of Vietnam’s US$245 Billion and Thailand’s US$252 Billion. It is also a fraction of our imports bill which topped US$108.9 Billion. This resulted in a massive trade deficit of US$41.41 Billion, the biggest shortfall in our history. If not for revenues derived by service exports (IT-BPO), OFW remittance and tourism, the country would have fallen into a balance of payments crisis.

Interestingly, 49% of our exports are made up of electronics and semiconductors; 14.3% are composed of computers and electronic machines; 3.3% are composed of technical/medical apparatus; and 1.8% are attributed to ships and sea crafts. The balance is made up of fruits, gems, minerals and ores. We have become over-dependent on just a handful of products and lost our competitiveness in auto manufacturing, smartphones, agro-industries (e.g., frozen prawns), furniture, toys, housewares, footwear, garments, textiles, paper & pulp, leather goods, jewelry, rubber and plastic, among many others. These industries continue thrive in Vietnam and Thailand.

Four impediments have dragged down our manufacturing sector and stood in the way of our industrialization. They are:

• Expensive power cost

• Expensive logistics cost

• The negative list of industries in which foreign investors can participate

• Low government spending on research and development

To rid the country of these impediments requires acts of congress. This is where President Duterte’s sway over the legislature comes in.

Power Cost. The Philippines’ expensive power cost is the greatest disincentive to foreign investors and the most serious barrier to industries. It is the reason why multi-national corporations choose to build their manufacturing plants in Vietnam and not in the Philippines. For instance, despite the many competitive advantages of the Philippines, Samsung chose Vietnam over us for its US$2 Billion smartphone manufacturing facility purely because of more favorable energy costs. As a result, we lost out on the windfall of capital formation, recurring export and tax revenues, jobs for our people and technology transfer. This is a story we hear over and over again.

To quantify just how expensive our power rates are, the approximate base power cost in Manila is $0.20 per kilowatt hour compared to $0.08 in Hanoi and $0.12 in Bangkok. Add to this the deluge of taxes imposed by government which are passed on to the consumer. They include VAT, local franchise tax, missionary electrification tax, environmental tax, feed-in tariff and system loss charges. With all these add-ons to our electric bill, the Philippines is priced out of the market.

So this begs the question — how do we push down the price of electricity? One solution often put forward is for government to subsidize the power industry. To this, some quarters say that to offer energy subsidies provides industries with an artificial, unsustainable advantage whilst putting stress on the national budget.

I say that the cost of subsidies have to be weighed against its benefits in terms of job creation and its economic multiplier effect. I reckon the advantages far outweigh the costs. Besides, our neighbors are directly and indirectly subsidizing their power cost, why shouldn’t we? We need to step-up our game for our manufacturing industries to thrive. Otherwise, it will go through a slow painful death.

Government should ask the question — has the EPIRA Law of 2001 worked to our advantage or against it? Has our power cost structure helped build industries or render them uncompetitive? The state of our manufacturing industries says it all. EPIRA should be amended as it is the greatest stumbling block to our industrialization.

Given the scandalous profits earned by power companies and their immense lobbying power, only the President can persuade the legislature to revisit EPIRA.

Logistics Cost. Being an archipelago, we need an extensive network of roads, bridges, railways and airports to connect our islands. Government’s Build.Build.Build program has begun to address this. More importantly, however, is to improve and expand the cargo handling facilities of our seaports. In most advance countries, a vessel can dock, unload and reload in one day. It takes two to four days to do this in our ports due to congestion. The cost of downtime is passed on to the consumer. In addition, despite passage of R.A. 10668 or the Liberalization of Philippine Cabotage, inter-island cargo shipping is still operating as an oligopoly. This needs to be revisited.

Again, most local shipping lines are owned by families entrenched in the political field. Only the persuasive power of the President can overcome this.

In parallel, we need to accelerate infrastructure spending to between 5-7% of GDP from now until 2022 to truly drive down logistics costs.

Negative List for foreign investors. To open medium to large scale retail operations, private practice, build-operate & transfer contracts, utilities operations and broadcasting industries to foreign investors will open a floodgate of foreign capital and a massive infusion of technologies. The 60-40 equity ownership of companies is also outdated.

To correct this requires an amendment of the Constitution. Again, only the president can mobilize the legislature for charter change.

Research & Development. A UNESCO study shows a direct relation between R&D spending and economic and social development. The higher the R&D budget, the more rapidly industrialization takes place and consequently, the faster social development goals are met. In 2017 the Philippines spent .7% of GDP on R&D while South Korea spent 4.3%, Singapore spent 2.2%, Thailand spent 5%; and Vietnam spent 2%.

The fruits of R&D spending are not immediately apparent and therefore hard to justify when deliberating the national budget. Due appropriations can be made towards R&D if it is mandated by the Palace.

The legislature may not have the ideal mix of oppositionists. This may be the best thing that had happen to us since reforms can sail through with relative ease and without being diluted.

Everything lies on the President. His hands is the power to correct flawed laws and enact better ones. On his hands lies the opportunity to make the nation move forward to greatness. If he does, he will prove to be the vanguard we all waited for — our very own Lee Kwan Yew. For this, he will be immortal. Let’s hope the President uses his power in this way.


Andrew J. Masigan is an economist.