Overview & Context
A little over half a century ago, the Philippines appeared ideally positioned to develop rapidly as the world recovered from the devastation of World War II. The country had high levels of education and English literacy thanks to Uncle Sam's colonial influence, decent savings rates, and an export-oriented agricultural sector that generated more than sufficient foreign exchange. The industrial sector was growing rapidly and the country had one of the highest per capita incomes in Southeast Asia. There was much to look forward to on the economic and business front.
So what happened? Well... a lot of things (see An Oversimplified History Lesson and Globalization, Part 1 for a quick overview). The 1950's saw the spread of the power of the traditional oligarchs from their original economic base on the haciendas into all sectors of the Philippines economy (see Cronies and Booty Capitalism for historical background and discussion). The 1960's and 1970's up to 1986 were dominated by martial law and the veritable looting of the Philippine economy by Ferdinand Marcos and his buddies. Throughout these long and trying decades, the Philippines followed a path of dependent development that failed to build domestic capital or pave the way for healthy and balanced development.
The Aquino years were basically a transition period, and the former housewife did her best to deal with the complex and challenging economic mess she had inherited. Through no fault of her own, she for the most part failed miserably. Major progress finally began to be made under the strategic leadership of General Fidel V. Ramos, who basically threw the doors open to foreign investment in an effort to (finally) integrate the Philippines into the global economy. Foreign investment, only $44 million in 1992, his first year in office, grew rapidly and peaked at $2.01 billion in 1997.
Ramos' basic policies of liberalization, privatization, and deregulation were the driving forces of economic development during the 1990s prior to the Asian crisis. Among the key structural reforms:
The net effect of these and related policies was to insulate the Philippine economy from the worst ravages of the crash. Indeed, commentators in the international and regional business press were quite impressed by how resilient the Philippines turned out to be in the wake of the general devastation. Certainly the country weathered the economic storm in much better shape than Thailand, Indonesia, and other ASEAN nations. Although far from rosy, prospects were not all that bad as the smoke cleared in 1998 and 1999. Indeed, many knowledgeable pundits expected the Philippines to recover much more rapidly than its peers and even to (belatedly) join the ranks of the Asian tigers.
Erap, although a world-class crook and with virtually no real qualifications to be President, somehow managed to continue most of Ramos' economic policies and to install a reasonably strong team of economic and business advisors and cabinet ministers. Government policy under the Estrada administration focused on stimulating manufacturing, particularly with the creation of export processing zones (EPZ's) with major concessionary tax rates and tariffs. The former US bases at Clark and Subic Bay emerged as important EPZs, while the Philippine Economic Zone Authority took an active role in attracting foreign investment.
However, the massive corruption and looting of the economy, combined with the political turmoil culminating in People Power II, threw a major monkey wrench into the gears of the Philippines economy.
When President Arroyo (GMA for short) came in she faced major problems: a devastated economy, a frightening and accelerating polarization between rich and poor exacerbated by out-of-control population growth, a persistent Muslim rebellion down south, and rampant kidnappings in Manila (to name only a few). GMA's background as a trained economist stood her in good stead, and she immediately committed to an economic program aimed at encouraging domestic demand. One of the highlights of her first year was the privatization of the electric power industry (GMA signed the Electric Power Industry Reform Act in June). This paves the way for restructuring the industry and privatization of the heavily indebted National Power Corporation (Napocor). According to GMA, this privatization will free the government of P38 b. in annual subsidies, which would finance 15,000 classrooms, 76,000 low-cost houses, or 6,300 kilometres of roads.
However, the challenges of 2001 have been difficult indeed. The global recession and the events of 9-11 created an economic environment that can only be described as highly problematic. Given the constraints and magnitude of the problems, the first year of the Arroyo administration would appear to represent a qualified success. The Philippines weathered the year in better shape than most of its neighbors, and there is some evidence that investors are beginning to return (see Prospects). If the peace and order situation can be effectively addressed and tourism revigorated, the Philippines may eventually move closer to tiger rank. But it is a long way from here to there.
In its latest World Economic Outlook, the IMF revised its growth projection for the Philippines downwards from 3.5% to 3.2% for 2002 due to the global recession. But Dante Canlas, Economic Planning Secretary, paints a much rosier picture, forecasting 2002 GDP growth of 4.5%. However, he is quick to admit that this estimate is contingent on the fast recovery of the country's main trading partner (the US).
2002 looks to be yet another transition year for the Philippines. Given the continued global slump, projecting a truly vigorous recovery would be pie in the sky thinking. More realistically, the economy will be hunkered down in a defensive posture, with an emphasis on encouraging domestic demand and attracting high-impact foreign investment. Everyone is hoping that the global economy recovers with a bang and that the Philippines can somehow avoid its historical tendency of muddling along through recessions and then finding a way not to take off during boom times.
The Philippines is a country of tremendous contrasts and extremes of conspicuous consumption that Thorstein Veblen would relate to on the one hand and devastating poverty and hunger on the other, a situation described in sometimes excruciating detail in my various Pearl of the Orient Seas columns. The economy is basically agricultural, with rice, corn, and kamote (sweet potatoes) the staple food crops. Key cash crops include coconuts, fruits and vegetables, sugar, tobacco, and abaca (the famous "Manila hemp" used for rope making). In aggregate, about two-thirds of Filipinos continue to depend on the agricultural sector.
The Philippine archipelago is rich in natural resources, as reflected in the fact that foreign exchange earnings have traditionally been derived largely from export of primary commodities. The export of fruits and vegetables, especially pineapple products and bananas, plays a key economic role every year. Among the minerals that the Philippines produces are copper, gold, nickel, chromium, iron, and manganese. Mining will continue to be important in the future, particularly copper, nickel, chromite, and iron. It is estimated that 90% of the country's mineral resources are unsurveyed and undeveloped. However, operating costs are high by international standards and many gold mines and other operations aren't economically viable at this time.
The country still has substantial timber land, primarily hardwoods of the dipterocarp family. Philippine mahogany and narra wood are widely considered among the finest in the world. Exporting logs was banned in 1976, fueling the growth of sawmills, plywood and veneer factories, and other value-added manufacturing ventures with wood as raw material. Overall, however, the country's forests are now largely depleted by inadequate reforestation, shifting cultivation patterns, and illegal cutting. Production of timber is currently suspended.
The manufacturing sector continues to increase its share of GDP relative to the traditional agricultural and mining sectors. Before the Ramos' years, manufacturing tended to be concentrated in processed foods (sugar, coconut oil, canned fruits), textiles, clothing, oil, wood products, transportation equipment, and the like. These sectors continue to be key, but manufacturing activity is shifting towards electronics components and related goods for export.
A major transition is now underway, involving various sectors that capitalize on the many strengths of the Philippines' first-rate labor force. The country has millions of eager, well-educated, and English speaking workers. There are now an estimated 250,000 engineers and technicians, with the nations' colleges pumping out 30-40,000 new engineering and technical grads each year. They are joined by thousands and thousands of "commerce" and marketing graduates on what is rapidly becoming a glutted labor market (see Globalization, Part I for more commentary).
Which means that the Philippines' comparative advantage - the low wage rates earned by those graduates - is not likely to go away. According to the Semiconductor and Electronics Industries of the Philippines, salaries for production mangers range from $1000-1500 per month and for production supervisors $450-700. Well-qualified customer service representatives (CSRs) in the many call centers around Manila earn about $200-300 a month; the current estimate is that it costs about 1/6 per seat what it does in the states. And stateside companies who have outsourced here are reportedly thrilled by the quality of the customer service compared to what was being delivered at their previous call centers in the Southern United States (see Globalization Revisited for further commentary).
According to Hong Kong's Political and Economic Risk Consultancy (PERC), the Philippines is the only Southeast Asian nation besides Singapore with a labor force with the potential to move beyond a manufacturing focus to a higher value-added level. PERC ranks the Philippines as 4th in Asia on quality of labor force (trailing only Japan, Taiwan, and Singapore).
One challenge for the country is its low domestic savings rate. According to a recent study presented by economist Y.H. Kim at the Asian Development Bank, gross domestic savings as a percentage of GDP declined from 19% in 1994 to 17% in 2000. That puts the Philippines in the "low savings" rate category along with Bangladesh, Myanmar, and Uzbekistan. In contrast, Thailand, Malaysia, and Singapore all have savings rates over 30%.
Religion and Ethnicity
The Philippines is very much a multicultural hybrid (83% Catholic; 9% Protestant; 5% Muslim; 3% Buddhist/"Other"), and not a particularly easy place to figure out. Some try to explain the country by referring to an odd mixture of "Malay, Madrid, and Madison Avenue", while others cite humorous anecdotes about a nunnery, a whorehouse, and Hollywood. Whatever.
The Philippines, of course, is the only predominantly Christian country in the region. However, most of the world's major religions are represented somewhere in the archipelago. The Catholic church has tremendous political clout, which the Cardinals and Bishops never hesitate to mobilize, whether against family planning programs or to further its idiosyncratic political agenda. Remember that Cardinal Jaime Sin played a key role in rallying the people to support Aquino during the crucial days of People Power. (The Church also has played a less productive role in terms of its consistent opposition to effective family planning, which is a problem given the country's unacceptable population growth rate of 2.7% per annum. President Arroyo, herself a devout Catholic, has had a hard time making the strong commitments that are needed to bring the Filipino population bomb under control).
The Muslims in the South of the country represent an important, rebellious, and increasingly violent minority group. The ongoing conflict between Christians and Muslims, and the ubiquitous demands for secession, can be traced back to the Spanish colonial era. The three major Muslim groups - the Maguindanao, Maranao, and Tausug - live for the most part in traditional village social settings and are led by their Sultans. Most belong to the Sunni sect, although the practice of Islam is considerably adulterated by folk and animistic beliefs that predate the colonial era. The Muslims tend to be oriented towards international Islamic influences rather than to straightforward nationalistic appeals (hence, the terrorism of the MNLF). The Abu Sayyaf, although a Muslim splinter group and allegedly linked to Bin Laden, are basically kidnap-for-ransom bandits (see Kidnapping Filipino Style).
Ethnic Chinese play a key role in the Philippine economy, as they do throughout Southeast Asia. The term "Chinoy" is used in the papers to refer to individuals with a degree of Chinese parentage who either speak a Chinese dialect or adhere to Chinese customs. Constituting an estimated 4% of the country's population, the ethnic Chinese have a disproportionate impact on the economy and polity. Indeed, you will find stores and restaurants around the country owned by Sins, Ongs, and Tans, and most of the leading "taipans" featured in Manila newspapers are of Chinese extraction.
The hill tribes and other indigenous cultural groups exist on the margins of Filipino society, long since displaced and mostly forgotten about. Their traditional lifestyles are now seriously eroded by missionaries and the ongoing forces of globalization. These folks, officially classified as "National Cultural Minorities," account for approximately 3.5 million people. There are also some 300,000 surviving Negritos, living mostly in the mountains of Luzon. They are related to similar peoples in Indonesia, the Malay Peninsula, and Papua New Guinea. Not to put too fine a point on it, they are terribly exploited, culturally marginalized, and are being forced ever further into deforested upland areas. The prospects for their long-term survival as a homogeneous cultural group are grim.
There are more than a hundred ethnological groups in the Philippines and over 70 languages are spoken. Eight are considered major languages, with the two most widely spoken being Tagalog and Cebuano. All the indigenous languages are linguistically associated with the Melayo-Polynesian family of languages, which explains why many Tagalog phrases sound so familiar to speakers of Bahasa and other regional languages. Tagalog itself contains bits and pieces of Sanskrit, Chinese, Arabic, and Spanish, reflecting the diverse influences that have shaped Philippine history and culture.
Perhaps the most important legacy left over from the colonial days is the uniform acceptance and widespread use of English throughout the country. By 1930, English was solidly entrenched as the language of business and government, and it remains so to this day. Most TV and radio stations broadcast in both English and Tagalog, and teenage conversations are carried out in a fascinating pastiche known as either Taglish or Tinglish, take your pick. English language skills are assumed for professional workers and generally widespread in the general population, although this is less so than it used to be.
The bottom line for the international businessperson is that you don't need to learn a word of Tagalog to do business here. However, it can be a great help to learn a few basic words if for no other reason than to establish credibility and sense of cultural empathy. A few simple Tagalog phrases can be found in Da Nuts and Bolts Guide to Manila.
The weather is of course tropical, so you can get by for most purposes with a nice dress shirt (even short sleeve) and tie. However, it's better to come equipped with a good "our man in Manila" tropical suit (or equivalent lightweight business attire for the businesswoman). Alternatively, you might adapt the local formal dress of barong tagalog for high level meetings. As long as you wear such attire confidently and with a proper respect, it is more of an asset than a liability. (As a consultant building my business here the last couple of years, I have tended to wear fancy barong tagalogs for presentations and formal dinners, a short sleeve polo barong for most business meetings alternating with the occasional standard dress shirt and tie). Some more tips on business practices in the Philippines are provided in Da Nuts and Bolts Guide to Manila and Filipino Business Norms and Etiquette.
I wrote this piece as a relatively informed and inquisitive observer of the Philippines economy and business world, and as an entrepreneurial management consultant striving to build a successful business in Manila. Sources included publicly available reports and articles, various web pages which you can link to in the Sources to Pearl of the Orient Seas, the daily papers and regional business press, and my own take on coffee shop tsismis (being determined to blend in and acculturate effectively, I participate enthusiastically - it's kind of fun!). I am not a professional economist, and make no pretensions to authoritative pronouncements; thus, feel free to take any or all of the above with the proverbial grain of salt. Please send any insightful comments, critiques, corrections, or threats to me at firstname.lastname@example.org.
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