Recently, the BRICS nations met in South Africa. Due to severe debt crises in the advanced nations, the growth prospects in these economies are no longer immune to the turmoil in the West.
Among the emerging economies, the Philippines is best-placed for an upgrade. It is favorably positioned to sustain growth in an exceptionally grim international landscape. It could even become a BRIC nation – with continued reforms.
In the sweet spot
During the past decade, I have used much time exploring and consulting on the transformation of the major advanced and large emerging economies worldwide. What most nations find particularly intriguing are the growth lessons of the BRICs.
When Goldman Sachs identified the emerging group of potential successors to the BRICs a few years ago, the Philippines also made it into the list, in the footprints of two other major Southeast Asian nations. However, Indonesia and Vietnam have attracted much more FDI, so far.
In the aftermath of the Ramos era, the role of the Philippines as a BRIC successor was based mainly on its economic potential rather than a sustained growth record. In 2002, the Philippines gross domestic product still amounted to $81 billion, in current prices. Today, it has tripled to $241 billion.
In the aftermath of the global crisis, the Philippines is one of the few nations in which forecasts are revised up by financial analysts. In January, it reported 6.8 percent year-to-year growth, which made it the growth leader in Southeast Asia.
Almost half of the recent growth can be attributed to private consumption, which has been coupled by investment, especially in construction. Due to the impending mid-term elections in May, government spending will accelerate through the spring.
The acceleration of domestic demand since the first quarter of 2012 reflects the country's solid macroeconomic fundamentals, stronger government finances, and confidence in the Aquino government's commitment to reform.
Along with current account surpluses and foreign exchange reserves, the growth record has given rise to a more diversified export basket, while shielding the economy from very challenging international headwinds.
Complacency is not an option
The beauty of the BRIC projections is that they allow policy architects to reflect on (very) long time perspectives. The trap of the same projections is that, when they create a sense of inevitability, they can lull even the most promising growth stories into complacency.
In the Philippines, delivering the growth promise is predicated on accelerated structural progress.
According to various competitiveness indicators, the country has made dramatic strides in improving competitiveness, though often from a very low base. The perception is that corruption and red tape are finally addressed decisively. With the strong macroeconomic performance, the financial sector has become supportive of business activity.
Despite these positive trends, weaknesses remain to be addressed, including the poor infrastructure, various market inefficiencies and labor market rigidities.
As the Aquino administration knows only too well, the economy needs to shift from consumption towards investment, both public and private. Sectorally, this requires rising productivity in agriculture, less dependence on low-wage and low-skill services and more on labor-intensive manufacturing and high value services.
In BRIC economies, such changes have typically preceded periods of sustained growth. However, in order to raise the incentives for job creation and entrepreneurship, they require difficult policy reforms in agriculture, manufacturing, business and labor regulations, and social protection.
In turn, these reforms make possible greater public investment in health, education, and infrastructure.
BRIC future requires more inclusive growth
In the absence of adverse developments, the Philippines is at the verge of receiving an investment-grade rating, by the major rating agencies.
Nonetheless, significant challenges of poverty remain. Growth is not yet inclusive.
Except for Brazil, inequities have typically increased in all emerging economies during their high-growth phases, while job-creation has been strong and unemployment low. In the Philippines, the story is different.
Even in 2011-2012, unemployment rate stayed at 7%, while underemployment rate rose to 22.7% since the number of full-time jobs declined by half a million in the same period.
In the next half a decade, GDP growth rate in the Philippines could climb close to that of China. But in order to be sustained, this growth must become more inclusive.
In the Philippines, the BRIC future has potential for a large consumer economy, with some 150-170 million people by 2050. That objective is predicated on huge expansion of consumption – but it is only viable through more inclusive growth.
Due to the historical legacies of the Philippine political and economic institutions, there remain strong vested interests in the current status quo. That, in turn, makes vital reforms challenging to implement.
The Aquino administration has proven able and willing to make difficult decisions. In all BRIC nations, sustained growth has been neither inevitable nor automatic. It does not just happen. It must be made to happen. And sometimes that requires painful decisions in the short-term because they make possible sustained growth in the long-term.
An abbreviated version was published by The Philippine Daily Inquirer on April 1, 2013
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