Wake-up call on RP competitiveness

The much-awaited Global Competitiveness Report 2007 released on Oct. 31 by the World Economic Forum ranks the Philippines at 71st place out of 131 economies surveyed based on 100 indicators grouped under 12 pillars. While we rose four places in the rankings from a year ago, the details of the report are more humbling than reassuring, even alarming. Telling observations on national performance bring down to earth the hopes of many that we have already risen to the ranks of the tigers, after recording seven-percent growth or better in several quarters this year.

On the plus side, the report says that the Philippines “derives competitive advantage from its market size, where it ranks 24th in domestic market size and 25th in foreign market size.” Its rise by four places in the rankings (eight in a constant sample) was driven largely by gains in macroeconomic stability, with a measured decrease in the inflation rate and interest rate spread, and lower government deficit and debt.

But our overall competitiveness is dragged down by our position in four key pillars: labor market efficiency, institutions, infrastructure and health and primary education. On labor markets, the country ranks 100th, with a severe brain drain problem, little flexibility for firms in wage determination, and excessively high firing costs, reducing the incentive for hiring. On the quality of public and private institutions, the country received a low ranking at 95th, with high business costs of terrorism, low public trust of politicians, excessive red tape, and concerns related to the diversion of public funds and the wastefulness of government spending as the main factors. On the quality of infrastructure, the country is considered uncompetitive, as it receives poor marks for its transportation and communication infrastructure. Finally, the country’s competitiveness was marred by low ratings for the health of the workforce (95th), due to poor performance on health indicators.

The GCR rankings are calculated from both publicly available data and the Executive Opinion Survey conducted by the World Economic Forum together with its network of Partner Institutes (leading research institutes and business organizations) around the world. This year, over 11,000 business leaders were polled in a record 131 countries.

One part of the report is the Global Competitiveness Index (GCI), which provides a comprehensive picture of the competitiveness landscape in countries around the world at all stages of development.

A second part provides a more detailed examination of the microeconomic aspects of competitiveness, presented in the Business Competitiveness Index (BCI) which was developed and overseen by Harvard Professor and competitiveness guru Michael Porter.

Countries that do well on the GCI also tend to do well on the BCI but there are some important differences. Says Porter: “Many countries have achieved progress by opening up to the world economy, stabilizing macroeconomic policies and removing internal barriers to competition. Our findings reveal the need to build underlying microeconomic competitiveness to translate these gains into sustained prosperity. If improvements in the business environment and company sophistication fail to – and they often require significant shifts in company and country – materialize, nations expose themselves to declining competitiveness and are vulnerable to economic and social risks.”

Evidently, it’s in the nexus between macroeconomic and microeconomic aspects where the Philippines falters. All the hard work to improve the economy which has resulted in the decrease of the inflation rate and interest rate spread and lower government deficit and debt cannot be translated into competitiveness because of poor microeconomic management. Strong macroeconomic fundamentals provide the environment for economic growth but do not in themselves create wealth. In fact they are wasted if at the microeconomic or firm level – the one that generates jobs and income – we are not competitive. At this level, competitiveness depends on labor productivity, physical (roads and bridges) and administrative infrastructure (regulations) and presence of support clusters all of which contribute to the cost and ease of doing business.

Quite revealing is the survey section where executives were asked to select from 14 factors and rank the five they consider the most problematic for doing business in their respective countries. In the case of the Philippines, the respondents cited the following as the most problematic:

1. Corruption – 22.3

2. Inadequate supply of infrastructure – 17.8

3. Policy instability – 15.2

4. Inefficient government bureaucracy – 14.8

5. Government instability/coups – 9.6

It’s not as if we haven’t heard all this before. But what the GCR provides, with its thorough analysis, there is now the weight of authority and unassailability. Our policy makers and executives would be foolish not to wake up from their Rip Van Winkle slumber.

Our dubious situation is quite telling in the manufacturing and agriculture/primary industries sector. For a country with an 88-million population, we are lopsidedly dependent on services – either here in the business process outsourcing or as migrant workers overseas – to drive our economy. Our economy is now dependent on consumer spending and worker remittances as its main engine. The share of manufacturing and agriculture in the economy and more particularly in the number of people employed in these sectors continue to decline. Even countries where services now account for the biggest share of their economy – like the United States – still have formidable manufacturing and agriculture production capacities. Here in the Philippines, except for electronics manufacturing which really does not have deep backward linkages because it involves primarily assembly of imported components, the productivity and therefore the competitiveness of traditional manufacturing has gone down. This is not sustainable because despite some real or specific competitive advantages (in BPO and migrant workers) we will sooner or later lose our standing in world competitiveness if we do not improve our overall performance.

We can’t stem the erosion of Philippine competitiveness in the world unless both our public and private sectors squarely address the issues. But with Congress consumed with bringing down the Administration and the latter preoccupied with survival, who will provide the leadership to address the issues? I worry when the business sector complains that they have clearly identified the bills that would help improve the country’s competitiveness and create an environment friendly to investments but that these have not been acted on due to the inability of congress to even muster a quorum.

It’s time the government takes seriously the work of the National Competitiveness Council which it created. For goodness sakes, we are the tailender now among the ASEAN Five plus Vietnam in terms of competitiveness. Not so long ago we were the top dog in the neighborhood. This alone should keep someone up all night. Is there anybody out there — in the halls of Congress or the Cabinet Room in Malacañang — who thinks this is a more serious problem than what they have been bickering about  endlessly?