Philippine Economic Development: A Turning Point?

Introduction

Notwithstanding its sometimes negative international image, the Philippine economy has been performing well in recent years, better than is commonly recognized. Until the global financial crisis in 2008, the country experienced its longest period —five years —of uninterrupted positive per capita economic growth since the 1970s. It seems to have moved on from the "two lost decades", 1983–2003, when there was no net increase in per capita incomes. Business is beginning to insulate itself from the seemingly perennial curse of political machinations souring the commercial environment. That is, business and politics are apparently "decoupling".

The Philippines has an unenviable history of politics nipping promising economic growth trends in the bud, resulting in a volatile development trajectory around a low average growth rate.¹ The country grew quite strongly in the 1970s under Ferdinand Marcos. But this was debt-driven growth, which became unsustainable when the debts came due and political instability set in in the early 1980s. One of Marcos's enduring contributions to international polemics was the phrase "crony capitalism".

Then, under arguably the country's most successful president, Fidel Ramos, growth accelerated in the 1990s, until the onset of the Asian economic crisis. This was of course an event outside of Ramos's control. It had the effect of slowing the economy but, unlike its high-growth neighbours, the Philippines did not experience a deep economic crisis. Ramos was then succeeded by Joseph Estrada —under the 1987 Constitution, the president is not permitted to serve more than one consecutive term —and political instability and backsliding again set in. Estrada had been under house arrest since his removal in early 2001, but in late 2007 he was pardoned and set free by his successor, the current president, Gloria Macapagal-Arroyo.

The key to the recent success is that, since the deep economic and political crisis of 1985–86, the reformers have been able to enact and institutionalize enough major policy victories to satisfy the business community that they are a more or less permanent feature of the political economy architecture. Two in particular stand out: an independent and high quality central bank, BSP, ensuring that monetary and exchange rate policy continue to function effectively, and trade policy reform that has resulted in a much more open economy. For some of this period, fiscal policy has become more prudent, although it remains hostage to Congressional intrigues. These reforms capitalize on what has always been one of the country's greatest strengths, its educational advantage. Philippine professional and technical labour, well educated and English-speaking, has always been highly competitive.

The purpose of this article is to examine the country's recent economic performance, and to relate these outcomes to the policy environment. Unless one believes in good luck or exceptionally favourable international circumstances as the explanators —and neither appears plausible —in recent years, this improved economic performance must be the result of domestic factors that propel economic growth. We examine these factors, focusing on macroeconomic management followed by trade policy, microeconomic reform and governance. Section 2 reviews recent economic performance, including the macroeconomic record. Next in section 3 we investigate microeconomic reform and governance, traditionally the most difficult areas of policy reform. Section 4 presents recent social trends, while in section 5 we summarize our main arguments.

Growth and Macroeconomic Policy

Philippine economic growth in 2007 was 7.3 per cent, the highest for almost 30 years and not far off Asia's high-growth economies. Most major sectors performed well, with services, growing at 8.2 per cent, contributing 56 per cent of the increase. On the demand side, consumption as always was the major engine of growth, contributing 65 per cent of the total. But, encouragingly, investment grew strongly for the first time in a decade, at 9.5 per cent, compared to the anaemic average for 1997–2006 of just 0.8 per cent. Owing to slower global growth, and sharply higher energy and food prices, growth is likely to be more subdued in 2008, perhaps around 5.5 per cent. The economy slowed to around...