A Change of Guard

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Friday, 7 October 2011

Global Competitiveness [The Philippines behind all ASEAN peers, with the exception of Cambodia]

October 7, 2011,

MANILA, Philippines — The recent improvement in global competitiveness of the Philippines in the World Economic Forum (WEF) ranking leaves little room for complacency. We are still behind all of our ASEAN peers, with the exception of Cambodia.

It is a long way to go to be in the top 20 or even in the top 50. Given the headstart the Philippines had as an industrialized and democratic society after the Second World War, we should adopt the attitude of National Competitiveness Council co-chairman Guillermo M. Luz who greeted the good news with the following cautiously optimistic words: “We are extremely happy with the results thus far. When we set out to improve our rankings, we realized that we had to be systematic and persistent in our efforts in order to record consistent gains over time.

The teamwork between government and the private sector and the coordination among different government agencies is beginning to show results... Although our ‘institutions’ ranking improved marginally, this remains a key challenge for us.

This category looks into the strengths of our public institutions in their management of public funds, counter-corruption, legal framework, and favoritism and transparency in government decisions. Many of these indicators have begun to move in the right direction in terms of slightly improved rankings but room for improvement and gains remain. Our performance remains in the bottom 20% of global ranking.”

There are a variety of ways to continuously improve our global competitiveness. One approach is to build on our strengths to make even more quantum leaps in improving our standing. Another is to focus on our weaknesses and to move heaven and earth to overcome them.

A middle way is to spread our efforts on both building on our strengths and overcoming our handicaps. My opinion is to give the stress to building on our strengths while gradually eliminating our weaknesses, which always take a longer time to achieve.

The Global Competitiveness Index measures over 110 key indicators spread across 12 major categories or “pillars.” The Philippines recorded improvements in ranking in 9 of the 12 pillars, with significant jumps in the categories of “macroeconomic environment” (from 68 to 54), “technological readiness” (from 95 to 83), and “institutions” (from 125 to 117).

Our weaknesses were obvious in the categories where rankings declined: “infrastructure” (from 104 to 105); “health and primary education” (from 90 to 92); and “labor market efficiency” (from 111 to 113).

Special mention has to be given to our 14-position leap in “macroeconomic management” which got a big boost from the very positive gains in credit rating, government debt, interest rate spreads, and management of inflation. Also key drivers for our improvement in ranking were market efficiency for goods, particularly in the intensity of local competition; extent and effect of taxation; prevalence of foreign ownership; the local supplier quantity; Internet users; and Internet bandwidth.

I personally cannot understand why we were cited positively for “marked improvement in FDI and technology transfer” since my own perception is that we are way behind our ASEAN peers (possibly even Cambodia) in our openness to foreign direct investments because of the numerous obstacles found in our very Constitution and other laws and administrative practices that militate against FDIs.

Removing these obstacles will take some time because, among others, constitutional amendments will be necessary.

We must have a long-term strategy to address our deficiencies in infrastructure, the quality of health and primary education, and the efficiency of our labor market. We all know that these problems take time to resolve.

Take, for example, the labor market. Part of the problem there is that our existing Labor Code is full of archaic provisions that date back 20 or more years ago. The challenge of coming out with a new Labor Code is daunting.

Even if a new Code is passed in the next two to three years, implementation will take even much longer. It would be difficult for us to have significant improvements in this area even during the term of the current Administration.

The same can be said for the other categories in which we rank poorly. As another example, it would take more than five years before we can bring down the very high price of electricity that is a real deterrent to manufacturing activities.

In contrast, under “macroeconomic environment,” we are already No. 54. It is not overly ambitious to target breaking into the top 50 circle or even top 20 circle under the present Administration since we have an outstanding team of fiscal and monetary policy makers who are among the best in East Asia.

If we obtain investment grade in credit rating soon, continue to decrease our government debt as a ratio of GDP, bring down inflation to the 2 to 3% level, etc., our much improved ranking in macroeconomic management can compensate partly for the slow progress we may be making in improving, for example, the quality of our primary education.

We can also work more aggressively on increasing the intensity of local competition by being more effective in preventing oligopolistic or monopolistic practices (even in the absence of a competition law which may take time); improve the extent and effect of taxation by finetuning our tax laws and revenue collection measures; and promote more investments from both domestic and foreign investors in our IT infrastructure so that we can move to the magic 50 circles in both Internet users and Internet bandwidth.

By working on our strengths, thus focusing on the “low-hanging fruits,” we provide the appropriate macroeconomic environment and investment climate that will attract the larger funds needed to tackle the more intractable challenges as the quality of roads, quality of ports, the quality of railroads and airport infrastructure, and the quality of electricity supply.

All these need massive domestic and foreign investments that would be easier to attract if we rank among the top 20 in those areas where we already have our strengths compared to our ASEAN peers. Even at the corporate level, building on strengths is a more effective strategy to achieve objectives than eliminating weaknesses.

In fact, there are even circumstances under which management is resigned to the fact that some weaknesses may be difficult to remove, at least for the medium term, and the only intelligent strategy is “to make them irrelevant.” For comments, my new email address is bernardo.villegas@uap.asia.

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