Last week, the IMF and the World Bank held their annual meetings in Marrakesh, Morocco. The normally high-profile gathering took place in the shadow of two major conflicts, the political dysfunction in several Western democracies and the continued drawing of geopolitical lines by Washington and Beijing. China’s economy, for a long time one of the world’s key dynamos, is slowing down. As World Bank Group president Anjay Banga described in his speech at Marrakesh, we live “in a world with alarming challenges but at a time of intensifying polarization and extremes.” At the same time, the IMF released its World Economic Outlook, with the subtitle “Navigating Global Divergence.”
The mood around the IMF-WB meetings was an era away, both figuratively and literally, from another meeting held in Marrakesh three decades ago, in 1993. After eight years, negotiators submitted that year the final draft of the Marrakesh Agreement establishing the World Trade Organization (WTO). It would be signed four months later, in April 1994. Slightly more than year before, Chinese leader Deng Xiaoping boarded a train in Beijing to start a month-long tour of southern China in which he kicked off the country’s economic reforms. Arguably, these two events were the most consequential in shaping the global economy as it exists today.
But the changes were not economic alone. Also in 1993, at the National Center for Supercomputing Applications at the University of Illinois Urbana-Champaign, version 1.0 of Mosaic, the first modern Internet browser, was launched. The first commercial search engine, Architext (later to become Excite), became available. In August that year, IBM announced Simon, the first smart phone. Although these products did not survive the 1990s, they were the first commercial implementations of the core technologies that pervade our work and our lives today.
The world had its problems in the early 1990s, but there was a general sense of optimism that the geopolitical fragmentation writ large was receding, and that technology would supercharge the expansion of trade and the spread of capitalism and liberal democracy. Convergence, not divergence, seemed to be the global economy’s direction of travel.
In the Philippines, President Fidel Ramos, in his 1993 state of the nation speech, launched “Philippines 2000.” Few Filipinos understood what it meant, especially since the lights still flickered on and off. The Philippines connected to the world wide web the year after, in 1994. By 1996, at the Philippine independence centenary, there was genuine optimism that with the power crisis having been solved and significant economic liberalization having been achieved, maybe the country would have its best shot at real, felt economic growth, including joining the emergent global value chains (GVCs) in manufacturing.
We missed that boat, however.
Philippine export of goods and services as a percentage of GDP peaked at roughly 42% in 2003; in 2021 it was 26%. Thailand reached 71% in 2007, now down to 58%, but still higher than what we ever achieved. Vietnam was at 57% in 2002, and it is currently at 93%. In short, we failed to keep up with the countries that were once our peers. Philippine manufacturing’s value-added in GDP is among the lowest in the region, below even Indonesia.
The effect is not simply optical, i.e., the paucity of “Made in the Philippines” when compared to “Made in Thailand” or “Made in Vietnam.” Manufacturing is an escape route out of poverty for many of our farmers, low-wage agricultural and rural workers. Participation in GVCs not only generates jobs, but also leads to the creation of new industries and capabilities, and the growth of small- and medium-sized enterprises. It raises incomes and the consuming power in the countryside. Done properly, it eases the pressure on the large cities.
What we have instead seen are the social and economic effects of the sector’s stunted growth. Lacking opportunities in their home communities, members of lower income households continue to seek employment abroad or in the larger cities; the former is lucrative but splits families and drains our communities of their skills, while the latter not only creates the same problems but adds to the stresses of the big city, where underinvestment in infrastructure and housing stress Metro Manila’s residents and business every day. In the meantime, the low incomes in agriculture for those stuck there make reforming the sector difficult. The potential displacement of farmers, many of whom lack the education or skills to quickly transfer to other industries, is a real social concern; they need alternative opportunities lest we enlarge the number of dispossessed who then become targets for populists and demagogues.
WHERE DID WE GO WRONG?Having an “English-speaking” workforce, the mantra often used to highlight the Philippines’ manufacturing potential, is one advantage, but clearly an insufficient one as Thailand and Vietnam’s successes have shown. Our other immediate disadvantages have been widely discussed, including expensive energy costs, weak transport and logistics infrastructure, and the misalignment between our education system or skills training and the capabilities needed by foreign manufacturing investors.
But if we dig a little deeper, we will find that these to be proximate causes, but not the ultimate ones. What the Philippines has suffered from is weak government coordination, inconsistency in the formulation and implementation of policy at both the national and local government levels, and lack of capacity whether in terms of people or systems. Recognizing these institutional shortcomings requires that we go beyond the easy cop-out of blaming one administration, or hoping for a silver bullet, with the “if only we had a Lee Kuan Yew” mantra. The Singaporean leader was as rare as they come and hoping for a Philippine incarnation of him is not a strategy.
We also regularly blame Philippine “culture,” that seemingly impenetrable and unquantifiable weakness that holds us back every time. But as my friend and former colleague Ross Schaap once told me, “culture” is the repository of our ignorance. We sweep things that we do not, or are unwilling to, understand beneath it, and then shrug our shoulders.
But there is hope. There is always hope.
The worsening geopolitical situation today may be creating the best opportunity in a generation for Philippine leaders to correct what we failed to achieve earlier this millennium. Unlike in the 1990s, when low costs, productive capacity, the ability to scale and gain access to new markets gave countries such as China and Thailand clear economic advantages over the Philippines, the wrangling between Washington and Beijing, and the fear that it could eventually break out in open conflict over any of several issues, has resulted in material changes in the calculus of investment decisions.
Over-reliance on the concentration of supply chains in one geography is now considered a serious business risk — a problem highlighted even more by the COVID-19 pandemic. Firms that are sensitive to these risks have moved some of their production to third countries. ASEAN now accounts for 30% of US electrical and electronics imports, equal to that provided by China, compared to 43% from China and 20% from ASEAN in 2016. The US is actively encouraging technology manufacturers to shift some of their operations, whether to US soil or to a friendly country, in the process passing two monumental pieces of legislation in the Inflation Reduction Act (2022) and the CHIPS and Science Act (2022). Call it de-risking, de-coupling and just-in-case.
The Philippines has an opportunity to attract western manufacturers seeking to diversify their production bases for electronics, semiconductors and equipment components, and maybe even automobile and renewable energy parts and components.
What we must do, however, is convince foreign investors that: a.) the geopolitical risks of production are lower here, and, b.) it is economically feasible to manufacture here even if the country is not the lowest-cost producer. In their trips abroad, government officials often highlight the policies and available resources that they believe make the country attractive to investors.
But that is not enough. There must be better predictability and stability of policy across administrations. Investors who decide to move forward based on the investment promotion trips of the Philippine president or in their meetings with our diplomats and senior officials abroad should not find uncoordinated, recalcitrant, or obdurate bureaucracies whether in the central or local governments when they arrive here and start kicking the tires. We should have clear and reasonably implemented standards of governance for the environment and labor if we are to effectively entice western manufacturers. Our education and training systems should be nimble enough to build up a capable workforce.
These prescriptions are incomplete, and they are not new, but they are often the main complaint from investors, so we must tackle them now. There is a lot of blame to pass around for our failings: vested interests, malicious or negligent government officials, even bad luck. There is also the valid question of whether globalization, trade, and growth have failed to benefit a disproportionate number of our people, and which has therefore discredited these ideas in their eyes. Moving forward institutionally to address these problems will require political leadership, pressure from the people, some sense of shared goals and responsibility between government, businesses and their communities. Local businesses will have to see that a much bigger pie works out best for them, eventually.
We will never be able to offer the same efficiencies as China; it will take us years to even achieve what Thailand has been offering FDI investors for decades, or what Vietnam has been putting forward for the Koreans and Japanese the past 10 years. But we must seize the opportunities that have been created by the geopolitical jostling of China and the United States and the reconfiguration of global value chains. Otherwise, we risk missing the boat. Again.
Bob Herrera-Lim is a managing director at Teneo, a New-York based consulting firm that advises companies and investors globally. He covers all of Southeast Asia for the firm’s clients. He is also a fellow of the Foundation for Economic Freedom.