ForeignPolicy.com

President Aquino's anti-corruption program is just what the Philippines economy needs.

By GREG RUSHFORD
June 19, 2012

Once considered the most promising economy in Asia after Japan, the Philippines has fallen far behind Southeast Asia's nimble, export-led economies. But things are finally looking up. Tired of being scorned as "the sick man of Asia," President Benigno Aquino III asserts: The Philippines is now "open for real business."

Judging by some very visible changes, Aquino, who has been in office for two years, isn't engaging in wishful thinking. Manila's luxury hotels are crawling with Asian, American, and European investors in search of opportunity. And the city's skyline, a symbol of its past as a home to slow-moving domestic oligarchs, is now dotted with cranes. Foreign direct investment is on track to triple this year, while GDP growth is expected to rise from 3.7 percent last year to a respectable 5 percent in 2012. Karen Ward, a London-based analyst for HSBC bank, speculates that the Philippines, now the world's 43rd largest economy, could be the 16th largest by 2050.

Such optimism is hardly a consensus view. For one thing, the Philippines has yet to deliver an economic performance worthy of an Asian tiger. The IMF forecasts that, while up considerably, Philippine GDP growth will still lag behind that of the other Asian tiger wannabes -- Indonesia and Vietnam -- in 2012. And while foreign investment is rising rapidly, it's from a dismally modest base: Indonesia is expecting to attract some $27 billion this year, compared to roughly $3 billion for the Philippines.

Indeed, the standard indictment of the economy still seems daunting. For one thing, the Philippines is startlingly dependent on alms from abroad. Roughly 11 million Philippine citizens (12 percent of the population) work in a great diaspora, running from Hong Kong to New York and Kuwait, sending home about $20 billion annually to support their families. Nearly one-fifth of all Pinoys, as Filipinos call themselves, still live in deep poverty, which is defined by the World Bank as a purchasing power of less than $1.25 a day. Meanwhile, the WTO reports that "key sectors" of the Philippine economy remain "effectively controlled" by uncompetitive domestic elites.

So why am I optimistic? President Aquino -- nicknamed P-Noy -- is apparently that rare Philippines leader who is both incorruptible and competent. And his administration seems determined to change the environment of crony capitalism where who you know in government, and how much you're willing to pay for privileges, has always mattered more than what you make or how well you make it. John Forbes, a former U.S. diplomat and business consultant, whose Philippine experience goes back more than 40 years, says Aquino's anti-corruption moves are "unprecedented."

Now, the very idea that one leader or one government administration can reverse a long history of institutional sleaze makes economists and political scientists uneasy. Successful economic reform is a complex, organic process that requires support at every level of society. And the recent past is littered with economic reform plans that succumbed to cronyism -- think Yeltsin's Russia or Suharto's Indonesia or Mubarak's Egypt. But change is afoot in the Philippines, and Aquino may just be able to nudge the economy into a virtuous circle in which reform sparks economic growth, and growth, in turn, gives outsiders the clout to contest the power of the country's crony capitalists.

Aquino's immediate predecessor, Gloria Arroyo, earned her PhD in economics. By contrast, the laid-back P-Noy would never claim to be an economic savant (though he did manage to earn a B.A. in the dismal science, and one of his professors was Ms. Arroyo). President Aquino, by the way, is prosecuting Ms. Arroyo, alleging that she raked in millions of dollars in bribes. However the criminal charges are eventually resolved -- or perhaps not, considering the notoriously glacial pace of justice in Manila courts -- this much is clear: On Ms. Arroyo's watch, rampant corruption held the Philippine economy back, while in P-Noy's few years in office, honesty is producing tangible results in terms of growth.

Philippine investigative reporter Roel Landingin (and FT Manila correspondent) recently dug into contracts issued by the Department of Public Works, which has a well-earned reputation for bid-rigging, collusion, and non-transparency. In a classic man-bites-dog story, Landingin found that P-Noy's people working in the belly of the crony-capitalist beast have actually been awarding contracts honestly. Aquino calls his anti-corruption campaign "daang matuwid," Tagalog for "straight path." And that path has cut costs for roads and flood-control projects by about one-third. By contrast, civil-works contracts during Ms. Arroyo's tenure were marked by "systemic corruption and bid rigging," dominated by a shadowy institutionalized cartel that "may enjoy support at the highest levels" of the Philippine government, a leaked 2009 internal World Bank report noted.

Actually, P-Noy has been walking his anti-corruption walk since the day he took office (June 30, 2010).  In spite of its tropical climate and low-cost labor, the Philippines has long been a major importer of rice. How is this possible? First, rice production is very inefficient in the Philippines, thanks in large part to underinvestment in infrastructure. Adding to its woes, the Philippines tolerates a domestic shipping cartel that charges more to deliver rice from southern Mindanao to Manila than wholesalers in Manila pay for transit from California.

On occasion, this has created domestic shortages. But Philippine leaders have never seemed to mind, since shortages create opportunities for the National Food Authority to award import licenses to cronies. It's a simple scam, really. The more tax dollars those cronies spend on rice imports, the more opportunities for commissions, kickbacks and such. In the last years of the Arroyo presidency, the government cheerfully paid as much as $125 per ton over the world market price for rice. Indeed, the Arroyo administration bought so much rice so quickly, and for such high prices, that it contributed to temporary global shortages in 2008 -- and to food riots from Cameroon to Haiti.

But thanks largely to investment in irrigation improvements, domestic crop yields are rising. The Philippines may, in fact, soon cease to import rice.
Anyone who doubts the Philippines' potential to become the next Asian tiger might visit the former U.S. military bases at Clark Field and Subic Bay, about 50 miles northwest of Manila, which were left empty when the Americans departed in 1991. Now, they are far from empty; the Clark-Subic corridor is booming as an industrial park; Yokohama built a huge tire-manufacturing plant; Texas Instruments has a $1.5 billion electronics operation; Samsung is making semiconductors; Hanjin has created one of the world's largest shipyards at Subic. What's more, a booming beach resort/theme park is drawing tourists by the hundreds of thousands. "This is what an Asian tiger economy looks like," says Dennis Wright, a former U.S. Navy officer who is developing a $3 billion industrial park for a group of Kuwaiti investors.
The former U.S. air base at Clark is now poised to become the Philippines' next major international airport. Clark, which only had about 50,000 passengers in 2004, had more than 750,000 last year, and is projecting to have one million in 2012.
While the Clark-Subic boom began when Ms. Arroyo was president, she nearly derailed it after feeling the heat from Philippine airline oligarchs who did not welcome the foreign competition. Mr. Aquino, by contrast, has not let domestic protectionist politics trump the economic progress.

Still, there are lingering doubts as to how far P-Noy's anti-corruption/anti-cronyism campaign can take the country. For one thing, Philippine growth remains burdened by regulations on foreigners, who aren't allowed to own land and are restricted to 40 percent minority shares in key sectors like agriculture, mining, telecommunications, and transportation. And here, Aquino may not be much help. He has admitted to a domestic audience that he still has "a nationalistic trait" that favors "majority control in Filipino hands because, at the end of the day, if something happens, there is a Filipino who will care for this country."

Come again? The Philippines' dismal long-term economic performance is traceable to its domestic elite, the dynasties that have dominated since the country was a Spanish colony (and do just fine, thank you, when they face no foreign competition). The more recent decades of Philippine decline were fueled by Filipino-first policies dating to the 1950s -- and the recent renaissance has depended heavily on foreign capital.

It's fair to say, then, that the game has yet to be won or lost. Aquino has four years left in office to demonstrate that he can deliver on essential economic reforms. Equally to the point, new economic actors (foreign and domestic) who gain from these reforms must prove themselves willing to contest the power of the old guard -- and thereby make it difficult for a less-well-intended successor to P-Noy to reverse course.