The Philippine economy - Are there bright prospects ahead?

There are signs that the Philippine economy is headed toward brighter directions. What are these and will that brighter future be attained?

“The signs.” First, despite the desolate overall world economic conditions at the moment, the same stormy clouds for the industrial and more developed economies are creating conditions that favor the Philippine economy.

Second, there are inherent domestic factors that, if fully attended to, could improve the current pace of economic development.

Finally, the degree of gains that might come our way depends on how the government makes use of the emerging opportunities as they come.

“The changing world economy and us.” The great economic recession that began in 2008 with the decline of the US economy has signaled major structural changes among the big players in the world economy. Such changes will affect us in favorable ways if – this is a big if -- we play our cards well.

Will the country’s leaders move passively, expecting that these happenings will work themselves to benefit us automatically? Or will they work hard to strengthen the weak links in the country’s investment attraction policies so that the future flows of foreign direct investments will find their way to us?

“The great currency realignment: US dollar depreciation.” American efforts to restore growth have led to the sharp depreciation of the US dollar. This phenomenon has been at work over the longer term even before 2008. Though the recovery has been slow, discernible outcomes are coming into view.

The American standard of living has fallen but it has also led to the growth of its economic competitiveness in relation to other major economies whose currencies have in turn appreciated. The euro and the Japanese yen have risen. So have those of most other economies: the British pound, the Swiss franc, the Australian and Canadian dollar. In Asia, its main impact is on the rise of the currency of China.

“Europe.” These currency changes have made many European industries in their homelands less competitive with respect to the United States and other economies more linked with the US economy. Their industries will have to find other locations to improve their cost advantages in their trade with the US.

Europe’s situation has been further complicated by the euro debt problem, a malady that has threatened international financial stability. The cure to the euro problem depends in part on how world aggregate demand expands and makes possible more growth. The economic recession has greatly weakened total demand, further weakening the economies already in crisis.

“China.” The low cost factory of the world was China for almost two decades. This is about to end. Continuous economic growth at break neck speed over that period has brought about the quick transformation of the Chinese economy.

Today, that internal growth in China has led to new economic problems: the large and almost inexhaustible supply of low cost labor has finally dwindled.

Such development has led toward the conquest of poverty in China. That transformation has changed China’s economic dynamics: a solid middle class has made income gains; household consumption has risen; and investment in infrastructure has prepared China toward further structural change.

On the international front, China’s growth has caused a rapid rise of demand for raw materials that has made possible a boom in the demand for the world’s natural resources. This new demand has displaced the reduced demand that was the outcome of the economic recession among the industrial countries.

The economic transformation of China has brought with it new problems. Labor costs have risen and domestic employment conditions have tightened. Rising labor costs have made industries dependent on labor use to seek new sources of expansion outside of China itself.

The foreign direct investments that had once flocked to China to set up low-cost production centers for consumption and industrial goods are now suffering from rising costs. Eventually, this will require China’s labor intensive industries to move up to more machine-intensive processes.

One outcome of this is that those foreign direct investments that had once located to China for its low-cost labor will now look for new production sites where labor is still abundant and available at relatively low cost.

“Japan.” Economic adjustment in Japan has been prolonged and complex. The rising yen has continued its spectacular appreciation since end of the mid-1980s. A feature of this adjustment is that industrial capital from Japan has found it necessary to move to lower cost production sites in Southeast Asia and elsewhere to maintain Japanese comparative advantage in trade.

The massive tsunami of 2011 and the nuclear disaster following it have further aggravated the adjustment problem afflicting the Japanese economy. Recovery from that tsunami also requires an unexpected major long term problem for the Japanese economy. Many industries were suddenly faced with a sudden need to find alternative production centers outside of Japan.

Other developments have further aggravated the pressures on Japanese foreign direct investment toward continued migration. Rising labor costs in China is one reason. The flood disaster that hit Bangkok is another. (To some extent, this same problem of Japanese investments is echoed for South Korean and Taiwanese investments located in China and Thailand.)

Thailand has become the major center for a large concentration of Japanese investments and most of these companies were hit badly by the Bangkok floods. With global warming and shifting weather problems, Bangkok’s flood prone landscape is not likely to be remedied in the near future. Some Japanese companies would need to adjust their risk exposure by shifting toward safer investment havens for their manufacturing plants.

“Potential foreign direct investment flows into the Philippines.” All these developments are favorable for the Philippines. Without doing much except to maintain its economic policies of the moment and keeping political and social peace, there are harvests to be reaped.

But the question is how the country could keep its competitive edge even better positioned in order to capture a large share of the foreign investment flows that are likely to come southward to Southeast Asia.

“Lost opportunity of the 1980s.” A similar benign period of great foreign investment flows happened during the 1980s. During that time, the four major rising economies were those of South Korea, Taiwan, Hong Kong and Singapore and they had expansion of their labor-intensive industries.

As the labor supply of these economies got exhausted, the foreign capital moved to the next round of countries in Southeast Asia. Although we had received some share of that, most of the new foreign investments flowed into Thailand, Malaysia and Indonesia.

This time, we cannot afford to miss a second chance!

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