Investment questions

Introspective
Business World, 11 March 2013

Largely unnoticed in the back-and-forth over last year’s glowing growth figures was a curious statistic: investment actually fell as a proportion of GDP, 19.4 percent versus 21.6 percent in 2011. What gives?

To get the whole picture, one must see the pattern over a longer period. After a significant drop in 2009 (here, blame the global recession), the gross investment ratio recovered significantly in 2010 and 2011 before falling off again in 2012 (first row of the table). The earlier rebound partly vindicates the hypothesis of a good-governance dividend to investment. (Full disclosure: I wrote a paper on the topic in 2008.) But now the 2012 performance seems to invalidate that hypothesis. Or does it?

Source of basic data: National Statistical Coordination Board

Part of the problem is purely statistical. The official definition of investment contains two main categories: fixed capital formation and “change in inventories”. Measured accurately, the latter is a useful figure indicating the degree to which producers have over- or under-anticipated demand in the current period. As my colleague Jeff Ducanes pointed out in this column and a blog  some time ago, however, the system of national accounts was revised in 2011 so that the “change in inventories” category is now a residual and therefore essentially meaningless.

Keeping this in mind, gross investment can be recomputed excluding the problematic category (second row of the table). And what does one get? Instead of a fall in the investment ratio relative to 2011, one sees it remaining essentially flat or even increasing slightly. In this sense the good-governance dividend relative to 2007 or 2008 still exists—hypothesis saved. Indeed, the dividend is almost certainly larger, considering what the investment ratio could have been if past issues of legitimacy and corruption had persisted and worsened.

Still, while very reassuring, this is frankly not enough. The larger issue for employment and inclusive growth is whether the Philippines can bump up its investment ratio to something closer to Southeast Asian levels of 25-30 percent over the next five years or so. How much of a bigger boost can one expect from good governance?

In a sense, with the resolution of political stability and legitimacy issues—until 2016, anyway—we have only managed peel off the tough outer skin of the governance nut. But further gains can be made only if one tackles the more structural problems that have ingrained themselves into the economic system through the years.

Consider that the most active investment areas (public construction, communications, and real estate) have still not covered the cojones grandes of inclusive growth: manufacturing and agriculture. Business and popular opinion have already been sensitised to some important second-layer hindrances to investment, among the most prominent and obvious of which are the strong-currency problem and an overregulated formal labour market.

There is a third and even deeper layer, however, and this relates to the readiness of both the government and the people to objectively assess and accept large investments to begin with. In a previous column I already questioned whether the poor and distressed sectors of the economy in agriculture were sufficiently empowered and socially organised to absorb large-scale investments, especially from big business.

But the same question of readiness can also be asked of government. Recent events have revealed a pattern of contractual and regulatory lacunae that have delayed significant investment projects in many areas. Consider, for example, the long lags (and many are still pending) in government decisions regarding the NLEx-SLEx connector; or the mining clearances for the Rio Tuba and Tampakan projects (sometimes complicated by local government intervention); or a common standard for digital terrestrial TV; or the location of the country’s major international gateway (Clark or Manila); or the cross-ownership rules for airlines bidding to construct airports. All these have invariably landed—or will eventually land—on the president’s desk. Indeed, even the otherwise purely ministerial task of approving applicable incentives for a qualifying Thai agro-industrial conglomerate to serve the domestic market must wait on a presidential decision. (One wonders: is PNoy the only civil servant in the country?) The demand from business interests in some cases is not even for a favourable decision, but rather simply for any decision to be taken at all. On this aspect, doing business is not very fun in the Philippines.

Some blame this state of affairs on an excess of caution owing to the administration’s concern to keep to the straight-and-narrow. I disagree. The problem is not a hyper-developed ethical sense (more of which we actually need) but a technical deficit and a failure to anticipate what the country needs and wants. We are reaping the bitter fruits of a failure to build up the critical mass of a competent, and knowledgeable bureaucracy (das Beamtentun in German). Accustomed to a past of being pre-empted and marginalised by politicians and pushed around by big business, civil servants are either too timid or professionally ill-equipped to take assured and timely decisions on their own. For lack of budgets in the past, few detailed plans and prefeasibility studies were ever prepared; the pipeline of shovel-ready projects was always short to begin with; few templates for private-public partnerships were ever conceived; and the knowledge of and confidence in regulatory tools to prevent anti-competitive behaviour were deficient. The result: an ingrained fear of what is new, what is large, and what is ambitious. The appropriate response should have been a frantic catch-up and massive marshalling of ideas and human resources. What one more likely encounters, however, is a refuge in perfunctory performance and a freezing-up when confronted by the unfamiliar. Delay and deferral are the predictable result.

A critical period is upon us when the gap must be bridged between peaking investor interest and the government’s struggle with itself to define the rules of the game. Though of a different kind, this, too, is a governance problem, and solving it is key to the breaking the next barrier to investment.

A tired saying talks about leading a horse to water but not being able to make it drink. In our case, investment is more like leading a thirsty horse into town, only to find that the construction of the water-trough was still about to be bid out.