President Aquino is not alone

I would like to quote an article in the May 9 edition of The Economist (“Indonesia’s Economy: Spicing Up Growth”), with the Philippine status in parentheses.

“In late April Indonesia’s president, Joko Widodo, better known as Jokowi, wooed foreign moneymen at a big international conference. Investing in Indonesia will bring ‘incredible profits,’ he promised. ‘And if you have any problems, call me.’”

(President Aquino has said he wants foreign investment, but his lack of support for a change in the Constitution to attract such investment doesn’t reflect that. Why he didn’t support a measure that would bring the Philippines into world attention, and much investment interest, I’ve never understood.)

“Jokowi says he wants Indonesia to return to 7% annual growth—a rate unseen since the Asian financial crisis of the late 1990s, but not unusual before it. In fact, the economy is slowing. In the first quarter of this year it grew by 4.7% year on year, down from 5% in the previous quarter. On a quarterly basis, it has been shrinking for six months now.”

(President Aquino also wants the economy to grow by 7-8 percent annually. However, the Philippine economy slid to slower-than-expected GDP growth of 5.2 percent in the first quarter of 2015, down from 5.6 percent in the first quarter of 2014. The decline was primarily due to the government’s failure to live up to its promise of catching up on spending, especially on infrastructure. The government’s lofty 7-8 percent GDP growth goal for this year now can’t be achieved.)

“The problem is commodities… The country is the world’s leading exporter of palm oil and tin, the second-biggest rubber exporter and the fourth-largest coal producer. The Grasberg mine in Papua, Indonesia’s biggest and easternmost province, is the world’s biggest gold mine and its third-largest copper mine. When China’s hunger for commodities was growing and prices were high, Indonesia boomed. But since 2011 its growth rate has declined, reflecting China’s weakening appetite for raw materials and the dramatic fall in prices this has precipitated.”

(In the Philippines, mining has been put on hold through an ill-conceived executive order that barred the government from granting new mining permits until a new law on mining taxes is passed. The government has not been able to fully utilize the country’s vast mineral resources. The Philippines is the fifth most mineralized country in the world, with untapped minerals (gold, copper, nickel, chromite, manganese, silver and iron) worth around $840 billion, which is 10 times the Philippines’ annual GDP. Despite this, the sector’s contribution to GDP is a disappointing 0.7 percent, while its share of total exports and employment are equally meager at 6.5 percent and 0.6 percent, respectively.)

“By 1990 manufacturing’s share of GDP exceeded that of agriculture for the first time, thanks to a winning combination of low wages, decent infrastructure, a stable investment climate and abundant natural resources.

“Indonesia today should be even more attractive as a manufacturing hub. It is the fourth-most-populous country in the world, with a huge, fast-urbanising domestic market and a rising consumer class. Workers are cheap: the average manufacturing job pays a base salary of $253 per month, compared with $369 in Thailand and $403 in China. Demography is in its favour: its median age, 29.2, is well below those of Thailand (36.2) and China (36.7).

“But Indonesia’s bureaucracy is impenetrable and its infrastructure, much neglected since Suharto’s day, woeful. Companies spend 50% more on logistics than those in Thailand and twice as much as those in Malaysia. No wonder that foreign investment has stagnated in recent years. Manufacturing’s share of GDP, meanwhile, fell from 29% in 2001 to 24% in 2013.

“Jokowi has taken some steps to reverse this slide. He launched a one-stop shop for investment approvals … and has boosted the budget for infrastructure by 53%—the biggest year-on-year increase in Indonesia’s history… some of the money is for much-needed power plants.”

(The manufacturing sector deserves greater focus given its ability to generate employment opportunities in the countryside, thus making economic growth more inclusive. In the Philippines, manufacturing’s share of GDP declined from 25-26 percent in the 1980s and 1990s to 23 percent from 2000 to 2014. The sector has been experiencing modest resurgence lately, with its share of national output improving to 24 percent in the first quarter of the year. The Philippines should be an attractive investment hub for manufacturing with its relatively low wages ($240 a month in Metro Manila) and a median age of 23.4, but it’s not attracting the much-needed investments. Indonesia’s “stagnant” attraction has brought in $106 billion in the past five years versus a disappointing $16.2 billion in the Philippines.

(To attract more manufacturing investments, the government also needs to reduce the cost of doing business, particularly at the local level.

(The government also needs to intensify the construction of key infrastructure projects. The Philippines spends only around 2-2.5 percent of its GDP on infrastructure annually—only half of what other major Asian economies spend. It is estimated to be 10-20 years behind its Asean peers Singapore and Malaysia in terms of infrastructure. Try comparing the three countries’ airports and railway systems. The government has been working on improving Philippine infrastructure but has been saddled by an overly cautious bureaucracy.)

Doesn’t all that sound eerily like the Philippines? The difference: Jokowi is beginning his term, and President Aquino is ending his. But Mr. Aquino still has 12 months left; he can get some critical things done. And business has suggested 15 action points that he can actually do. Next week we’ll look at those 15.