The Philippines and geographical karma

The calculus of economic development within countries is very complex and has been dissected exhaustively by Jared Diamond in his groundbreaking book, “Guns, Germs, and Steel.” His central theme of the pivotal role of geography in economic development is especially appropriate in assessing the Philippines, a country with over 7,000 islands. This condition has no doubt impeded the development of a centralized and efficient economic system and represents a critical piece of the Philippines’ development puzzle.

But this same geography which might be argued to be a curse, now presents an enormous opportunity in the form of the Tampakan mining project. The mine has the potential to become the fifth largest copper mine in the world. The confluence of a surging China hungry for copper and record-setting copper prices suggests that the mine’s development must proceed for the benefit of the country. Projected federal taxes are $4.5 billion or roughly 1 percent of GDP including thousands of new jobs. While environmental concerns should not be understated, significant proposed anti-pollution investments by the mining companies, coupled with the transparency microscope of regulatory bodies, provide sufficient insurance.

The African country of Zambia was faced with a similar investment decision 10 years ago—whether or not to allow development of its copper industry. The decision to ultimately develop the mining sector has created enormous tax windfalls which are being used to fund anti-poverty measures, in particular the development of its agriculture industry. The government, in retrospect, has publicly acknowledged that it made the correct decision. Additionally, tax revenues have exceeded initial forecasts. In 2010 the World Bank cited Zambia as the fastest economically reforming country.

There is no reason why the Philippines cannot duplicate the Zambia formula, but tax proceeds need to be spent wisely and funneled toward segments of the economy with large multiplier effects. One such segment is agriculture, the beauty of which is its accompanying simple math. According to the Philippine Rice Research Institute, rice lands are producing three tons of rice per hectare annually, substantially below the land’s potential of 12 tons. Funding to farmers for better fertilizers or low interest loans for better production machinery or irrigation equipment can be a quick and easy development policy to maximize yields. Higher yields generate more income and benefit local communities immediately. As Diamond notes, once a culture creates a surplus of food and self-sufficiency, the other trades begin flourishing. Additionally, the self-sufficiency eliminates more costly imports, which contribute to higher rice prices that disproportionately impact the poor who spend a significant percentage of disposable income on rice.

Another segment with large multiplier effects is infrastructure. Strategic development of key transportation networks can uncork bottlenecks and create access to new markets and ameliorate the economic inefficiencies of 7,000 islands. Delays and expenses related to land-vs.-water transport can be reduced. Lastly, mining funds can be allocated to improving the country’s educational system by funding an additional two years of elementary school, reducing class sizes and enforcing school attendance.

It is no secret that the Philippines has lagged behind its Southeast Asian neighbors in development despite the fact that the Filipino work ethic is unquestioned and the Filipino people’s professional success abroad is substantial. The mere fact that Filipinos work in nearly 70 countries abroad suggests a home country with a broken or flawed economic system and a people desperate to flee it. My nearly three-year stint living in Northern Mindanao and consequent interaction with both the poor and rich in my community have been a rewarding experience. However, several endemic qualities within the country’s system here continue to gnaw at me and have forced me to sympathize with people wishing to leave and work abroad. I do believe that government policy prescriptions exist which can meaningfully right this ship, assuming the participation of a committed government that is intent on not tolerating corruption. Given the current stage of development, “throwing money at the problem” can be effective if done strategically. The Tampakan mine project is an important first step in the brick by brick development process.

The Philippines’ geographical luck may be taking an important and monumental turn, and the role of luck should not be underestimated. As Ecclesiastes notes, “I returned, and saw under the sun, that the race is not to the swift, nor the battle to the strong, neither yet bread to the wise, nor yet riches to men of understanding, nor yet favor to men of skill; but time and chance happeneth to them all.” (Ecclesiastes 9:11)

The Philippines is harboring a coveted natural resource in today’s expanding global economy with the prospect of continuing copper prices at historically high levels led primarily by China’s ascendance. The proverbial “Filipino Time” is now.

Mark Zinski is an American residing in Northern Mindanao. He is the managing director of 21st Century Equity Research which specializes in small and micro cap equity research.