Introspective
Business World, 16 July 2012

 

The development of the private sector is key to a country’s long-run economic growth and poverty reduction. Steady increases in investment and productivity underpin the evolution of the private sector. Investment and productivity growth critically hinge on the quality of the investment climate. Fostering a sound investment climate is a fundamental responsibility of the government for the country to achieve rapid, sustained and inclusive economic growth.

The investment climate can be defined as the institutional and policy environment that influences the actual and potential performance of business establishments.  Three broad sets of factors make up the overall investment environment: macro fundamentals, institutions and governance, and infrastructure.

Macro fundamentals include social and political stability, macroeconomic stability (e.g., sustainable fiscal and external balances, realistic exchange rate, low inflation and interest rates), and competitive markets. Institutions and governance refer to transparency and efficiency in regulation, taxation, and legal system; strong and well-functioning financial sector; labor market flexibility and skilled labor force. Infrastructure concerns the availability and quality of physical infrastructure such as transportation (roads, ports, and airports), telecommunications, power and water supply.

With globalization and more intense competition, a favorable business environment assumes even greater importance to draw in foreign direct investment (FDI) and new technology. Which in turn can complement local capital and technology to produce exports besides domestic goods. This is how the Philippines’ Asian neighbors have been able to achieve their economic dynamism.

A recent ADB report on the Philippines, “Taking the Right Road to Inclusive Growth”, argues that the economy has relied for too long on the ‘one leg’ of services that today account for nearly 60% of GDP, while industry’s share has plummeted from 39% to 32% in a matter of a decade. Yet the country brags over its being the world’s third largest business process outsourcing (BPO) center after India and Canada, thanks to its continuing double-digit growth.

But BPO absorbs only about 1.0% of the labor force, of which still many continue to be un-/under-employed. To be hired in BPO one must be a college graduate, which means the millions of poor and relatively uneducated don’t stand the glimmer of a chance. Hence, pursuing the BPO channel to help foster economic growth – more so the inclusive type – will likely be a lost cause. This issue is somewhat akin to overseas labor migration which requires skills and for which the remittances benefit significantly more the higher-income households (see my BW Introspective, 2 April 2012).

By contrast, our Asian neighbors put emphasis on promoting the ‘other leg’ of industry, shifting from the traditional primary sector to this productive and labor-intensive secondary sector. Industry attracted FDI, produced exports, created more jobs, and rapidly reduced poverty.

Our country is coming in late in the intensely-competitive FDI and development game. It needs to seriously redouble its efforts to improve the business environment. About a decade ago when I led the first ADB investment climate study in Asia, the Philippines was at or near the bottom of the investment climate ranking. Now comes the 2012 UN Conference on Trade and Development (UNCTAD) World Investment Report (WIR) which hardly gives us a sigh of relief.

The WIR has three main indices: (i) Inward FDI Attraction Index – the average of a country’s percentile rankings in FDI inflows and inflows as a share of GDP (183 countries  covered); (ii) Inward FDI Potential Index – a composite of market attractiveness, availability of low-cost labor and skills, enabling infrastructure, and presence of natural resources (179 countries); and (iii) FDI Contribution Index – encompassing valued added, employment, exports, tax revenue, wages and salaries, R&D expenditures, and capital expenditures (77 countries). Here we focus on the latest (2011) rankings among ASEAN countries (the smaller the number, the higher the ranking).

As to the Attraction Index, the best is Singapore, as expected, with a score of 3, followed by Vietnam (13), Malaysia (36), Thailand (48), Indonesia (72), and the Philippines (137) is at the bottom of ASEAN 10.

Concerning the Potential Index, the Philippines (51) does better than Cambodia, Laos, Myanmar, and Brunei Darussalam but not vis-à-vis the other five which are topped by Indonesia (9) owing to its abundant natural resources and large market with rising purchasing power. Regarding the “enabling infrastructure” component of this index, the Philippines (111) is also in the lower half with the new members of ASEAN. It’s in the “availability of low-cost labor and skills” where the Philippines (10) fares relatively well along with Thailand (4), Indonesia (2), and Malaysia (15). The ASEAN latecomers don’t have the data.

Turning to the Contribution Index, among the six ASEAN countries with the data, the Philippines (60) also ranks at the bottom, with Malaysia (7) highest followed by Singapore (13), Thailand (16), Cambodia (19), and Indonesia (45).

Logically, the effectiveness of the Attraction and Potential indices should be reflected in yearly investment inflows which are also available for 2010 from UNCTAD. There are no surprises. Excepting Singapore which is sui generis, Indonesia tops with $13.3b ($8.3b in 2005); Malaysia, $9.1b ($4.1b, 2005); Vietnam, $8.2b (2.0b, 2005), and Thailand, $5.8b ($8.1b, 2005). The Philippines tops the lower half with $1.7b which is down from $1.8b in 2005.

To revive and strengthen the industry ‘leg’ of the economy – a principal task of the private sector – the public sector must quickly improve the investment climate. The present government has done fairly well in enhancing the macroeconomic fundamentals and beginning to streamline the bureaucracy and regulatory system. Still, much more urgency and effort are called for to bring infrastructure up to par with that in the country’s Asian neighbors. Faster-tracking the public-private partnership (PPP) projects will be a concrete step.

Let’s make “virtuous impatience” prevail over our accustomed “vicious patience”!

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Prof. Ernesto M. Pernia is with the UP School of Economics, fellow of the Institute for Development and Econometric Analysis, and former lead economist of the ADB.