Asia’s Rising Stars: Where does the PH stand?

These are interesting—and challenging— times for the global economy. While many of the world’s advanced countries continue to suffer the aftershocks of the global financial crisis, the Asian Development Bank’s most recent forecasts for developing Asia remain cautiously optimistic.

There is no better time for the Philippines to take a hard look at how it can capture the opportunities afforded by the region’s resilience. Improving competitiveness with its neighbors—and the world—is the key to unlocking these opportunities. And it requires the government to tackle several major challenges.

The first of these is diversification. After achieving record growth of 7.6 percent in 2010, GDP growth in the Philippines may have dropped below 4 percent in 2011 due in large part to a double-digit decline in exports the latter half of the year. This is a sharp contrast to export growth in neighboring economies, even in the face of the global slowdown. The reason behind it is that the Philippines’ export products are too highly concentrated in electronics, particularly semi-conductors.

The Philippines has not made the significant structural economic transformation that other Southeast Asian economies have achieved. As a consequence, unemployment remains high, and poverty remains a serious problem. Four in every 10 working adults are either self-employed at menial jobs or unpaid family workers, and many underemployed remain extremely vulnerable to shocks that could easily cast them back into poverty.

There have been successes, of course. Employment in the business process outsourcing industry grew by a staggering 34.5 percent between 2004 and 2009 and its revenues by 37 percent annually. The industry is moving up the value chain from voice-based services such as call centers to knowledge-based businesses like software development, financial services, accounting and medical services. While this industry is an important source of employment for the skilled labor force, for the millions of Filipinos with lesser skills and fewer prospects, the country needs stronger service and manufacturing industries that allow the economy to “walk on two legs.”

The second challenge is the expansion of markets. With about two-thirds of its trade conducted within East Asia, the Philippines may be somewhat sheltered from global economic shocks originating outside the region. The country could, however, substantially expand its markets into other newly emerging economies. For example, trade with emerging economies outside of East Asia represented about one-quarter of Malaysia’s total trade last year. For the Philippines, it was less than 5 percent.

Third, inadequate infrastructure has impeded sustained growth. Greater investment in infrastructure is critical to creating employment and to providing better access to health and education services for people living in poverty. This is a key element in what we call “inclusive growth”—growth that allows more people to enter the circle of opportunity; to contribute to and benefit from the country’s growth.

Fourth, investment in social services themselves, including education, health and social protection, is likewise critical. Over the past decade Malaysia, Thailand and Vietnam’s investments in education, as a percentage of national GDP, have been more than twice that of the Philippines.  Insufficient and unequal access to opportunities, and resulting skills deficiencies, reduce the inclusiveness of growth and drag down the investment climate.

The final challenge—one that underlies all others—relates to governance and the political economy. This issue is inexorably linked with the Philippines’ low competitiveness rating and inability to translate growth into poverty reduction.

On broad-based international indices, perceptions of the country’s quality of governance have been deteriorating. However, there are indications that the current government’s commitment to good governance is beginning to positively impact on investor confidence and trust in the public sector. The reform orientation is reflected in the timely passing of the 2011 and 2012 budgets, and greater emphasis on the quality of spending. Continued and strong commitment to sustained improvements in governance will be required if prosperity for all Filipinos is to be achieved.

The Philippines Development Plan for 2011-2016 contains specific, workable commitments for governance, economic growth and social development. If effectively implemented, the plan could go a long way to helping this country achieve its growth potential.

As a key partner in the Philippines’ development, the Asian Development Bank is firmly committed to supporting innovative solutions to complex development challenges—from the social assistance and development programs improving the wellbeing of the country’s children, to greener transportation alternatives. Our support helps the country address constraints to growth and poverty reduction, including the weak investment climate, low social spending and weak governance.

The challenges facing the country are daunting, but with careful planning and strong political will, the Philippines has the potential to turn challenges into advantages that create opportunities for all of its people.

Stephen P. Groff is vice president (Operations 2) of the Asian Development Bank.