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After two years of slow growth owing primarily to the repercussions of the 2008 global

financial and economic crisis the Philippine economy expanded by 7.5 per cent in the first
three quarters of 2010. The growth rate in 2010 is nearly equal to that of 2007 which is not
surprising since economic activity in both years was boosted by election spending. The new
administration has therefore benefited from favourable economic conditions. The challenge
is to sustain the momentum and make economic growth more inclusive and balanced.

In the short-term, the Philippines, like many other emerging market economies, has to deal
with the surge in foreign capital inflows. The peso appreciated by 5.6 per cent in the first 11
months of the year. Meanwhile, stock prices surged by 42 per cent in the same period.
Prudent management by the Bangko Sentral ng Pilipinas (the Philippine central bank) has
helped contain inflation to an average of 3.8 per cent in the first eleven months of 2010
despite the increase in capital inflows and strong economic recovery.

In the medium-term, the Philippine government has to achieve fiscal consolidation. The
national government deficit is expected to reach 3.9 percent of GDP in 2010 which is the
same as last year. Improved tax administration is the most effective and efficient way to
address the deficit. Another channel is streamlining or even abolishing the National Food
Authority (NFA) which is the biggest single source of misused funds. Both strategies require
a great deal of institutional strengthening and political will. The new President won handily
on an election campaign anchored on anti-corruption and he should use the strong mandate
to implement tough reform measures.

Greater fiscal space will allow the Government to address structural problems. These deal
mainly with a relatively high incidence of poverty and supply-side constraints which affect
the competitiveness of domestic firms. The most prominent example of a supply-side
constraint is poor infrastructure. This includes not only roads, bridges, ports, and
transportation, but also power and electricity. The Philippines has recently overtaken Japan
as the economy with the highest cost of electricity in Asia. Supply-side constraints are
reflected in the low investment-to-GDP ratio in the Philippines. In turn, lack of investment
limits the number of employment opportunities which then leads to the high incidence of

Recently the Government launched the Public-Private Partnership (PPP) program. Through
this contractual arrangement, the private sector can provide financial support and expertise
in implementing government projects more efficiently, while the government can focus on
its core responsibilities such as project prioritisation. However, supply side constraints
cannot fully explain the lethargic investment rate in the Philippines during the past 12 years.
There are countries with the same state of infrastructure and similar perceptions of
corruption that have much higher investment rates.

An interesting issue would be whether institutional factors can partly explain the low
investment rate. A World Bank study cited the dominance of corporate conglomerates in
strategic sectors such as agriculture, maritime and air transport, power, cement, and
banking. These corporate conglomerates do not have an incentive to invest and expand
their operations since their main source of profitability is a captured market. In turn the
resulting higher costs in these sectors discourage investment in sectors that have strong
backward and forward linkages with them, particularly in manufacturing.
The corporate conglomerates are symptoms of an oligarchy in the Philippines. Weak
institutions and an oligarchic private sector are actually two sides of the same coin. A
gridlock has evolved wherein stronger institutions are required to loosen the grip of the
oligarchs but at the same time the influence of oligarchs has to be reduced in order to
strengthen institutions.

Crafting appropriate development policies in the Philippines requires a political economy

framework supported by a variant of the new institutional economics. For example, some
experts emphasise the need to nurture and reinforce existing groups and constituents that
adhere strongly to democratic principles. This will strengthen these groups vis--vis the

Meanwhile, the Philippines can take advantage of the trend towards rebalancing economic
growth in East Asia. For example, the development of the Western region of China and the
likely increase in consumption expenditures in the whole country will provide export
opportunities. Rebalancing will also involve reallocation of financial flows. Instead of
accumulating foreign exchange reserves and purchasing US treasuries, resources in the
region will be used to support infrastructure projects to ensure greater connectivity in Asia.
Infrastructure projects in the Philippines can be financed through this mechanism.

Josef Yap is President of the Philippine Institute for Development Studies (PIDS) and is one
of the Philippines most prominent economists. Dr. Yap has acted as a member of the
Committee on Social and Human Sciences to the UNESCO National Commission of the
Philippines. The author gratefully acknowledges the excellent research assistance of Ms. Kris
A. Francisco, Research Analysts II at PIDS.

This is part of a special feature: 2010 in review and the year ahead.


Growing an impressive 7.2%, the Philippines was one of Asias best-performing

economies in 2013. As growth has given rise to increased business activity and
boosted consumer spending power, the question that arises is whether this new-
found domestic demand will be for goods and materials produced locally or
imported from abroad. This is an issue that will become even more important in
2015 as ASEAN Economic Community integration further opens the market to
imports from regional manufacturing powerhouses. At the same time, integration
offers new-found market access to a wide and emerging consumer base, and the
Philippines will need to ramp up its manufacturing competitiveness to ensure it
becomes a net exporter, rather than a pure importer, of value-added products
moving throughout the region. This chapter contains interviews with Edgar Injap
Sia II, Chairman and CEO, DoubleDragon Properties; and Winstron Co, President,
Emperador Distillers.

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