ADB: Basics of growth in the Philippines

Reading Time: 6 minutes

Neeraj Jain1The Asian Development Bank (ADB) plays a highly active role in developmental projects in the Philippines, supporting the rehabilitation of roads, technical assistance for human capital development, construction of socially-oriented infrastructure and more. The bank’s Philippine Country Director Neeraj Jain told Inside Investor how governance reforms have significantly improved the competitiveness and growth outlook of the Philippine economy, as well as how addressing barriers to stronger growth in the manufacturing sector and fuller exploitation of other growth drivers would make economic growth more inclusive and sustainable.

Q: What is your perception of Moody’s following the recent investment upgrades by S&P and Fitch?

A: Moody’s has already have given a positive outlook for the Philippines, and they seem to be already rigorously analysing data with an eye on a rating upgrade. The Philippines needs to continue managing its macroeconomy prudently and it has been doing this well despite a complicated global environment.

Q: The Philippines has been called “by far the best macroeconomic story in Asia” in 2012 by Bloomberg. How has Aquinomics played a part in achieving this accolade?

A: According to ADB analysis, governance has been a binding constraint to inclusive growth in the Philippines, therefore addressing governance constraints is critical.  President Aquino’s administration has implemented significant governance reforms. As an example, early benefits of reform have been seen in the public financial management area. For the past three years, national government budgets have been prepared, submitted and approved in time. This is critical from the standpoint of due diligence and congressional oversight in the budgetary processes. The process of preparing and executing budgets has become significantly more transparent and inclusive. The Department of Budget and Management has even been actively engaging civil society in budget preparation and execution. Public dissemination of information on the budget and utilisation of electronic systems for public procurement have improved transparency and efficiency. Rigorous efforts to improve tax administration have resulted in reducing risks of tax evasion and increasing tax collections.

Q: The Philippines needs to develop a manufacturing sector to complement its BPO industry in order to create jobs. What other sectors can achieve this?

A: The Philippine economy has to fire on all engines to create jobs as we have seen with other emerging countries in Asia, thus it needs a robust manufacturing sector to employ semi-skilled and skilled workers. The BPO and tourism sectors have also proven to be effective job creators. Tourism is a labour-intensive sector and the Philippines has the potential to further develop it. The agriculture sector provides jobs disproportionately to its contribution to the national output. This sector is also critical from the standpoint of poverty reduction.

On your specific question on the ADB’s role in these sectors, the ADB is assisting on a number of fronts, such as establishing a framework for accreditation and certification of tourism service providers. For example, when we say that a hotel is a four-star hotel, visitors should understand that hotel in the same way because it employs standardisation in an internationally comparable manner. We are helping the tourism industry with internationally understood rating levels, as well as working with the Department of Tourism to establish public-private partnerships for development of skills that are critical to the growth of the tourism industry.

Q: An ADB report on inclusive growth recommends that the Philippines needs a stronger manufacturing sector to support the modern service sector, listing the lack of infrastructure, weak governance, and unfavourable business climate perception as the sector’s largest impediments. Which of these presents the largest problem?

A: These three barriers to growth are interrelated and reinforce each other. A lack of good governance will affect the development of infrastructure and a lack of infrastructure will affect the business environment. However, a lack of good governance is the critical impediment. That is the reason why the Aquino administration focused its attention on improving governance. With the central focus on governance, the government is addressing other impediments including an unfavourable business climate and deficient infrastructure. Improvements in public financial management have allowed the government to increase public spending in human capital and infrastructure.

Over the past three years, public spending in education alone has increased by an equivalent of about 0.4 per cent of GDP. That is a significant effort. The public-private partnership programme of the government has gathered momentum and will help attract greater private investment in infrastructure. The government has addressed the business climate in a number of ways. Improved governance and a stable macroeconomy are major contributors to a positive business climate.

Clearly, all this is a work in progress. More needs to be done and is being done on all the fronts. Manufacturing is a long-term investment that requires capital-intensive equipment. Investors in the manufacturing sector essentially take a long-term stake in the country. They therefore need to have a high level of confidence, not only in the country’s ability to provide human capital and infrastructure needs, but also the judicial system and macroeconomic fundamentals.

The Philippines has a highly educated workforce, which is why the BPO industry is growing so fast. Technical and vocational skills, however, need to be more focused on. The Technical Education and Skills Development Authority, or TESDA, is a top-notch agency working on this, which the private sector needs to work more closely with.

In the near term, it is possible for the Philippines to identify some low hanging fruits in the manufacturing sector. There is also a much greater interest from foreign investors and this needs to be fully utilised. One way would be to find specific products where the Philippines has comparative advantages and the production could be scaled up by resolving some localised bottlenecks. According to the ADB’s recent research [Taking the Right Road to Inclusive Growth], the Philippines could achieve high spill-over effects by manufacturing televisions, fabrics, telegraphic apparatuses, calculating machines, refined sugar, porcelain, sewing machines and stationary. These are examples. It would be important to coordinate closely with the private sector in identifying and resolving bottlenecks for catalysing investment in the manufacturing sector.

Q: The Philippines has the highest income inequality level in ASEAN with a Gini coefficient of 44, and children of wealthier parents are seven times more likely to attend college than their poorer peers. What is being done to address this vicious cycle of poverty?

A: Inequality in the Philippines is indeed high among comparable regional emerging economies. That is why the government has been taking steps to make economic growth more inclusive. For example, access to education for the poor is a very pervasive issue in Asia. Poorer children are treated as economic assets by their parents and this leads to high dropouts rates and low rates of enrollment.

The Philippines has designed and implemented a unique conditional cash transfer program called the 4Ps. This program creates economic incentives for the parents to send their children to school. It provides the parents money if they let their children go to school thus compensating them for the opportunity cost of children going to school. This programme has already demonstrated impressive results. Enrollment rates have climbed.

Additionally, the government is making stellar efforts to build classrooms. It even brought in the private sector through an innovative public private partnership for building classrooms. Moreover, budget spending on education has gone up by double-digit levels each year for the past three years.  Between 2009 and 2012, public spending on education has increased by about 0.4 per cent of GDP, or about $1 billion, quite a substantial amount.

Q: What growth nodes, such as the Clark Freeport Zone (CFZ) and Subic Bay Freeport Zone (SBPZ), are most competitive in the Philippines for investors?

A: I would say, in general, a lot of economic activity is shifting to secondary cities, such as Cebu and Davao. Additional BPO investments are coming into Cebu and Davao, and these cities are addressing infrastructure bottlenecks aggressively. BPO is thriving because the only difference in locations is the availability of skills, accommodation and infrastructure. Both Cebu and Davao have fantastic universities to supply the required human capital. The Philippine Economic Zone Authority, or PEZA, has done a fantastic job under the leadership of Ms Lilia De Lima, Director General.

Q: The ADB offers safeguard guarantees to foreign investors in ASEAN infrastructure projects. Can you give an example of the most recent project the ADB administered in the Philippines?

A: Local political and judicial systems are the largest safeguards for foreign investors. The Philippines is a democracy that works by the rule of law. Prudent policies by the government have helped establish a solid and predictable macroeconomic environment. These are important safeguards for foreign investors. In the infrastructure sector, the government is establishing a rules-based and fully transparent PPP regime. The ADB has been helping the government in these efforts also through preparation of specific PPP transactions.

These efforts have helped the government roll out a solid pipeline of PPP projects. If the bidding is transparent, that is the best safeguard. There has been no litigation for any of the contracted PPP projects awarded since the new programme began in 2010, which is significant progress for the Philippines. The ADB offers a guarantee programme for infrastructure investors. The ADB works with the PPP Center to help establish a solid pipeline of PPP projects. The approach is to work on a properly prepared pipeline of projects and follow competitive and transparent bidding practices. Eighty per cent of our technical assistance grant has been allocated for preparation of a proper pipeline of PPP projects.

 

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Reading Time: 6 minutes

The Asian Development Bank (ADB) plays a highly active role in developmental projects in the Philippines, supporting the rehabilitation of roads, technical assistance for human capital development, construction of socially-oriented infrastructure and more. The bank’s Philippine Country Director Neeraj Jain told Inside Investor how governance reforms have significantly improved the competitiveness and growth outlook of the Philippine economy, as well as how addressing barriers to stronger growth in the manufacturing sector and fuller exploitation of other growth drivers would make economic growth more inclusive and sustainable.

Reading Time: 6 minutes

Neeraj Jain1The Asian Development Bank (ADB) plays a highly active role in developmental projects in the Philippines, supporting the rehabilitation of roads, technical assistance for human capital development, construction of socially-oriented infrastructure and more. The bank’s Philippine Country Director Neeraj Jain told Inside Investor how governance reforms have significantly improved the competitiveness and growth outlook of the Philippine economy, as well as how addressing barriers to stronger growth in the manufacturing sector and fuller exploitation of other growth drivers would make economic growth more inclusive and sustainable.

Q: What is your perception of Moody’s following the recent investment upgrades by S&P and Fitch?

A: Moody’s has already have given a positive outlook for the Philippines, and they seem to be already rigorously analysing data with an eye on a rating upgrade. The Philippines needs to continue managing its macroeconomy prudently and it has been doing this well despite a complicated global environment.

Q: The Philippines has been called “by far the best macroeconomic story in Asia” in 2012 by Bloomberg. How has Aquinomics played a part in achieving this accolade?

A: According to ADB analysis, governance has been a binding constraint to inclusive growth in the Philippines, therefore addressing governance constraints is critical.  President Aquino’s administration has implemented significant governance reforms. As an example, early benefits of reform have been seen in the public financial management area. For the past three years, national government budgets have been prepared, submitted and approved in time. This is critical from the standpoint of due diligence and congressional oversight in the budgetary processes. The process of preparing and executing budgets has become significantly more transparent and inclusive. The Department of Budget and Management has even been actively engaging civil society in budget preparation and execution. Public dissemination of information on the budget and utilisation of electronic systems for public procurement have improved transparency and efficiency. Rigorous efforts to improve tax administration have resulted in reducing risks of tax evasion and increasing tax collections.

Q: The Philippines needs to develop a manufacturing sector to complement its BPO industry in order to create jobs. What other sectors can achieve this?

A: The Philippine economy has to fire on all engines to create jobs as we have seen with other emerging countries in Asia, thus it needs a robust manufacturing sector to employ semi-skilled and skilled workers. The BPO and tourism sectors have also proven to be effective job creators. Tourism is a labour-intensive sector and the Philippines has the potential to further develop it. The agriculture sector provides jobs disproportionately to its contribution to the national output. This sector is also critical from the standpoint of poverty reduction.

On your specific question on the ADB’s role in these sectors, the ADB is assisting on a number of fronts, such as establishing a framework for accreditation and certification of tourism service providers. For example, when we say that a hotel is a four-star hotel, visitors should understand that hotel in the same way because it employs standardisation in an internationally comparable manner. We are helping the tourism industry with internationally understood rating levels, as well as working with the Department of Tourism to establish public-private partnerships for development of skills that are critical to the growth of the tourism industry.

Q: An ADB report on inclusive growth recommends that the Philippines needs a stronger manufacturing sector to support the modern service sector, listing the lack of infrastructure, weak governance, and unfavourable business climate perception as the sector’s largest impediments. Which of these presents the largest problem?

A: These three barriers to growth are interrelated and reinforce each other. A lack of good governance will affect the development of infrastructure and a lack of infrastructure will affect the business environment. However, a lack of good governance is the critical impediment. That is the reason why the Aquino administration focused its attention on improving governance. With the central focus on governance, the government is addressing other impediments including an unfavourable business climate and deficient infrastructure. Improvements in public financial management have allowed the government to increase public spending in human capital and infrastructure.

Over the past three years, public spending in education alone has increased by an equivalent of about 0.4 per cent of GDP. That is a significant effort. The public-private partnership programme of the government has gathered momentum and will help attract greater private investment in infrastructure. The government has addressed the business climate in a number of ways. Improved governance and a stable macroeconomy are major contributors to a positive business climate.

Clearly, all this is a work in progress. More needs to be done and is being done on all the fronts. Manufacturing is a long-term investment that requires capital-intensive equipment. Investors in the manufacturing sector essentially take a long-term stake in the country. They therefore need to have a high level of confidence, not only in the country’s ability to provide human capital and infrastructure needs, but also the judicial system and macroeconomic fundamentals.

The Philippines has a highly educated workforce, which is why the BPO industry is growing so fast. Technical and vocational skills, however, need to be more focused on. The Technical Education and Skills Development Authority, or TESDA, is a top-notch agency working on this, which the private sector needs to work more closely with.

In the near term, it is possible for the Philippines to identify some low hanging fruits in the manufacturing sector. There is also a much greater interest from foreign investors and this needs to be fully utilised. One way would be to find specific products where the Philippines has comparative advantages and the production could be scaled up by resolving some localised bottlenecks. According to the ADB’s recent research [Taking the Right Road to Inclusive Growth], the Philippines could achieve high spill-over effects by manufacturing televisions, fabrics, telegraphic apparatuses, calculating machines, refined sugar, porcelain, sewing machines and stationary. These are examples. It would be important to coordinate closely with the private sector in identifying and resolving bottlenecks for catalysing investment in the manufacturing sector.

Q: The Philippines has the highest income inequality level in ASEAN with a Gini coefficient of 44, and children of wealthier parents are seven times more likely to attend college than their poorer peers. What is being done to address this vicious cycle of poverty?

A: Inequality in the Philippines is indeed high among comparable regional emerging economies. That is why the government has been taking steps to make economic growth more inclusive. For example, access to education for the poor is a very pervasive issue in Asia. Poorer children are treated as economic assets by their parents and this leads to high dropouts rates and low rates of enrollment.

The Philippines has designed and implemented a unique conditional cash transfer program called the 4Ps. This program creates economic incentives for the parents to send their children to school. It provides the parents money if they let their children go to school thus compensating them for the opportunity cost of children going to school. This programme has already demonstrated impressive results. Enrollment rates have climbed.

Additionally, the government is making stellar efforts to build classrooms. It even brought in the private sector through an innovative public private partnership for building classrooms. Moreover, budget spending on education has gone up by double-digit levels each year for the past three years.  Between 2009 and 2012, public spending on education has increased by about 0.4 per cent of GDP, or about $1 billion, quite a substantial amount.

Q: What growth nodes, such as the Clark Freeport Zone (CFZ) and Subic Bay Freeport Zone (SBPZ), are most competitive in the Philippines for investors?

A: I would say, in general, a lot of economic activity is shifting to secondary cities, such as Cebu and Davao. Additional BPO investments are coming into Cebu and Davao, and these cities are addressing infrastructure bottlenecks aggressively. BPO is thriving because the only difference in locations is the availability of skills, accommodation and infrastructure. Both Cebu and Davao have fantastic universities to supply the required human capital. The Philippine Economic Zone Authority, or PEZA, has done a fantastic job under the leadership of Ms Lilia De Lima, Director General.

Q: The ADB offers safeguard guarantees to foreign investors in ASEAN infrastructure projects. Can you give an example of the most recent project the ADB administered in the Philippines?

A: Local political and judicial systems are the largest safeguards for foreign investors. The Philippines is a democracy that works by the rule of law. Prudent policies by the government have helped establish a solid and predictable macroeconomic environment. These are important safeguards for foreign investors. In the infrastructure sector, the government is establishing a rules-based and fully transparent PPP regime. The ADB has been helping the government in these efforts also through preparation of specific PPP transactions.

These efforts have helped the government roll out a solid pipeline of PPP projects. If the bidding is transparent, that is the best safeguard. There has been no litigation for any of the contracted PPP projects awarded since the new programme began in 2010, which is significant progress for the Philippines. The ADB offers a guarantee programme for infrastructure investors. The ADB works with the PPP Center to help establish a solid pipeline of PPP projects. The approach is to work on a properly prepared pipeline of projects and follow competitive and transparent bidding practices. Eighty per cent of our technical assistance grant has been allocated for preparation of a proper pipeline of PPP projects.

 

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