Good morning everyone. I am very excited to present you our Growth and Productivity in the Philippines report. As the title says, it’s about winning the future of the Filipino people.
Growth and productivity seems to be technical to many, so we tried to interview some people to see what they think about growth and productivity and how people could benefit from it. So, I’d like to show you a video.
IT IS POSSIBLE, THE FILIPINO CAN!
The report takes a long term perspective on the Philippines’ growth performance with a special focus on productivity. Productivity was analyzed at aggregate, sectoral and firm levels. Then the report identifies constraints to economic growth and productivity, assesses the prospects for achieving the Philippines’ vision for a prosperous middle-class society as stated in the Ambisyon 2040, and discusses what needs to be done to make it happen.
This report has three important messages:
- To achieve the national Ambisyon, the Philippines needs to triple GDP per capita in two decades. The Philippines has done it before but there are challenges.
- High growth is not enough. More could be done to make it more inclusive.
- Most important reform to pursue is to level the playing field to promote competition. Real competition benefits everyone, especially the poor.
Now, let me elaborate:
To make the Ambisyon more concrete, there are two goals the country needs to achieve. First, a growth target, tripling income per capita. Second goal is a country free of poverty.
To achieve the national Ambisyon, the Philippines needs to triple GDP per capita in two decades. The Philippines has done it before but there are challenges.
Currently income per capita is around 3000. In 2000, income per capita was around half of that, which means income per capita doubled in 17 years by growing 5.3% every year in average. To achieve the ambition, by 2040, income per capita needs to reach over 9000 which is more than three times the current level. The Philippines needs to sustain an average of 6.5 percent until 2040.
Remember that the Philippines went through a long period of political and macroeconomic instability and only started to recover in the 1990s. But the economy not only recovered but thrived in the 2000s and became one of the top growth performers in the region.
So how did the Philippines do it?
By implementing difficult reforms that started in late 1980s. Reforms that improved trade openness, opened and deepened the financial sector, and developed infrastructure. These reforms were accompanied by prudent fiscal and macroeconomic policies, and we must also acknowledge the favorable external environment.
Looking back, we can see that the Philippines CAN implement reforms to accelerate and sustain high growth.
First, the Philippines needs to accelerate physical investment, roads, bridges, airports are examples of physical investment. We need to develop the country’s infrastructure. The Philippines has been investing little in physical capital compared to regional peers over the last two decades, so there’s an opportunity to accelerate growth by investing in infrastructure.
Second, the Philippines needs to sustain high productivity growth. By productivity I mean how the economy efficiently uses its resources to produce goods and services. Productivity contribution to growth has been increasing rapidly since 2000, thanks to the reforms that were implemented in the 80s and 90s paying off across the economy. Going forward, it will be crucial to sustain this high productivity growth to reach the income target of the Ambisyon. But remember, this is growth rate, it means the country needs to continuously improve the efficiency of how to do things.
Having a fair playfield in the market is important to encourage firms to enter the market, to expand and to innovate. A fair playing field means competition is strong, and that it is easy for firms to enter and exit the market. Sadly, competition in the Philippines is not as strong compared to other countries as many sectors are dominated by only a few firms. A clear example is the current telecom industry which has only two players that don’t really compete with each other. While other countries in the region has increased number of operators in the market over the years, Philippines mobile market instead passed from being oligopolistic to being duopolistic. There was an episode of a third player in 2003 (Sun cellular that brought competitive plans) but was bought out by PLDT in 2011. Interestingly between 2003 and 2011, number of subscription lines grew 23% between those years, while between 2011 and 2015 it was only 5.8%.
Part of the reason for the duopolistic nature has to do with FDI restrictions which insulate Philippine telecoms from foreign competition and restrict investment in infrastructure.
As a result, the mobile and internet coverage is lower in the Philippines and they are more expensive than regional peers. For instance, the mobile phone service cost twice in the philippines than Indonesia and three times the average of EAP.
Another example is the transport sector which is the most dominant mode for transport goods within the country. While the sector is characterized by having many small firms, there are a number of restrictions that prevent entry for more firms. For instance, trucks need a license to operate in the market which requires dealing with 8 government agencies. And remember, a lot of goods we consume in Metro Manila, probably ½ of the cost is on transport, so by bringing more competition in the sector, prices of the goods could be reduced.
Trade opens up a country to foreign competition, but Philippines is not trading enough. This is despite having low tariff rates. The main reasons are higher logistic costs (for example transportation cost within Philippines is very high, storage is also expensive, all in all logistic cost is double in the Philippines than Thailand and substantially higher than Vietnam) and stricter non-tariff measures than regional peers.
Those firms that do export, although that is less than 10% of all firms in the country, they are substantially more productive.
Foreign investment not only provides finance for the country but also brings knowledge. When a foreign company invests in a local firm, it injects money and brings the know-how, which helps the firm to become more productive (or efficient).
While Foreign Direct Investment (FDI) has been increasing steadily in recent years, it remains low compared to regional peers. For instance, average FDI in the Philippines is less than half of Malaysia and less than a third of Vietnam between 2011-16
Moreover, direct investment to sectors (agriculture, manufacturing and services) is even smaller, less than a third of total FDI. This means knowledge spillover from abroad has been limited.
When we look at the firms that do receive foreign capital, which is less than 10% of all firms, they are an average more productive. And the higher the share of foreign capital in the firms, the more productive they are. This is a clear indication that FDI brings knowledge, boosting productivity growth in firms.
Labor is a crucial part of production input in a country. For the firms to expand, innovate and to become productive, it is important that firms find the right workers quickly and efficiently. In addition, it is important that firms invest in workers by giving them proper training, and that workers want to learn. These conditions are crucial for productivity growth.
The labor market in the Philippines is rigid due to cumbersome regulations. According to the World Economic Forum indicator for ease of hiring and firing, the Philippines has higher costs than all regional peers. For example, it is not easy to hire someone. There are numerous requirements for the workers to get clearances before starting to work for a company, and sometimes it could take weeks or months for the potential worker to get those clearances, not to mention the expenses they have to incur. Similarly, when a company wants to dismiss a worker because his volume of business has declined, it has to go through a lengthy administrative process. As a result of labor market rigidities, informality is high in the Philippines reaching to 70 percent of non-agriculture employment. High informality is not good for productivity growth because it’s hard for firms to want to give workers training when they are just temporary workers.
Our second message? High growth is not enough. More could be done to make growth more inclusive.
Let’s look back how the Philippines has performed before. Poverty declined between 2000 and 2015 but the pace was slower than other countries in the region. For example, Vietnam lifted almost 60% of its population out of poverty between 2002-14 compared to less than 10% in the Philippines between 2000-15. This means… the country needs to do more to accelerate poverty reduction if we want to achieve the national vision.
Why progress on poverty was slow despite rapid growth? Let me show you a picture.
What do you see? Where do you think this is? It looks like Singapore to me. Where is that one? That’s Manila. But wait…. This photo is not Singapore, but also Manila, and not far away from where the right photo is. There seems to be two worlds in one place.
This dichotomy is reflected in this figure. The first line shows how much output the average worker produces, and the second line is the average real wage. You can think of real wage as purchasing power. How much can you buy with your salary.
Output per worker increased more than 50% over this period. But real wage grew zero, which means the workers have not benefitted from the productivity growth.
Based on evidence, the report argues that weak market competition is one of the key reasons real wage did not grow.
Let’s move to our last key message which is about proposed reform areas. The reform areas that we emphasize aims to create an equal playfield for all.
First, to improve domestic competition, we propose to:
- Increase competition in selected sectors that have large effect to the rest of the economy such as telecommunications, electricity, and transport sectors, so we can lower the costs of these services.
- Improve ease of doing business so firms can function efficiently, spend less time in complying with paperwork. New firms can enter into the market easily.
To improve foreign competition and get more foreign investment, in addition to the previous two recommendations. We also recommend:
- Reduce restrictions on foreign investors (e.g., allow foreign competition in sectors and reduce equity limits), which specifically tackle barriers to foreign investors
- Lower non-tariff barriers since it has been found as one contributing factor to lower trade
To make labor market less rigid, we propose to:
- Reduce costs and simplify procedures for hiring and firing workers which is part of ease doing business.
- Make regular employment contracts more flexible so more long term hiring would be encouraged, and firms and workers are encouraged to improve and become more productive.
Let me close with our top messages:
FIRST, To achieve Ambisyon Natin 2040, the Philippines needs to triple GDP per capita in two decades. The Philippines has done it before but there are challenges.
SECOND, High growth rate is not enough. More could be done to make growth more inclusive.
And THIRD, Most important reform to pursue is to level the playing field to promote competition. Real competition benefits everyone, especially the poor.
