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A Look into the Economy of the Philippines

July 27, 2015
Editor(s): Edward Zhang
Writer(s): Sean Brown

An individual, such as myself, born in Australia to an Australian father and a Filipino mother, is not too much of an oddity in our multicultural land down under, and I take great pride in both sides of my ancestry. There has been many a time I have ventured to the Philippines to visit family, and even as a young boy I was shocked at the incredible differences the country had from my home. It constantly bustled with life wherever one looked; fitting, for country that has a population of around 100 million, and it seemed that the country was in healthy economic shape, with people lining the shopping centers and happily spending their cash.

Until you look towards the squalid conditions not far from the centers – often walking distance away – filled with poverty-stricken families surviving with the little that they have. This huge disparity in income is very symptomatic of a developing nation, but it also shows there are a lot of obstacles to overcome before the Philippines can reach the zenith of its economic strength.

The Philippines, situated in an area of Southeast Asia nestled near Malaysia, Indonesia and Thailand, has been looked upon by many economists as destined for greatness, that is, part of the next wave of developing nations to accelerate with growth in a similar manner to places such as South Korea, Japan, India and China. Known to some as a ‘Tiger Cub’ economy, lumping it with Malaysia, Thailand and Indonesia, as well as part of the ‘Next Eleven’ (featuring countries such as Bangladesh, Indonesia and Turkey), many economists predict it to follow the same trend as Japan and Korea in the near future. In the past few years its economic growth has been rather steady.

Other than the obviously prominent dip within 2008 and 2009 due to the GFC, the Philippines has been experiencing strong growth ranging from 5-8%, with its 6.1% growth in 2014 second to that of China in the Asia-Pacific region and a predicted yearly GDP growth rate of 6.7% for 2015 by the IMF. The economy has also been experiencing incredible consumer confidence as a result of their strong growth, ranking third in the world behind India and Indonesia and this is reflected in the increased discretionary spending that Filipinos have been undertaking on lifestyle and luxury items. You can find many Filipinos shopping at the SM or Robinsons mega-malls across the country – indeed, shopping has become a very popular hobby for most Filipinos, something that most definitely would not have been as common a few years ago when people had very little and were centered in provincial areas.

The growth in the Philippines and the creation of this shopaholic middle-class stems from a few changes within the country and, importantly, how it interacts in the globalized economy. One important thing to note about the Filipino workforce is how incredibly proficient they are in speaking the English language. From an early age Filipinos are taught to speak English proficiently, and hence the current generation of young workers is an excellent fit for the booming business process outsourcing industry. Although in prior years the stereotype of the Indian call center was well established, more recently the Philippines has making gains on India as a prime place for business process outsourcing (BPO), with capital city Manila ranking second just behind BPO giant Bangalore. This has occurred for a few reasons. In India, BPO jobs are seen as incredibly temporary, and not necessarily a secure job, while in the Philippines they are seen as quite the contrary – with some people leaving what are thought as traditionally more secure jobs for the higher-paying jobs of BPOs. Furthermore, business have seemed to prefer the very American-sounding voices of the Filipinos, especially since the Indian accent has become so entrenched in negativity by some clients. This growth in BPOs has excellent flow-on effects to the rest of the economy, with a higher demand for commercial floor space increasing demand for further building development, as well as general increases in consumption.

Another important source of income for the Philippines is overseas Filipino workers remittances. Since President Marcos’ 1974 decree to increase overseas work in order to spur the then incredibly poor country, Filipinos have proceeded to spread out to work in a variety of countries. 2.3 million Filipinos have been working in foreign countries, with most going to Saudi Arabia, followed by the United Arab Emirates, Singapore, Kuwait, Qatar, Hong Kong and a few towards countries such as the United States, Great Britain and Australia. The jobs Filipinos have taken on include nurses, laborers, construction and trades workers, engineers, administrative workers, and teachers. Via remittances, wages sent back to the overseas worker’s home country, often to their families, the Philippines has experienced growth in income and therefore GDP growth, or so one would expect. Remittances made up around a tenth of GDP in 2014, totaling to around $24.3 billion, and have grown by 5.5% in May.

Remittances are a strong contributor to the country’s economy indeed, but is also somewhat of a double-edged sword, with many Filipinos overly reliant on their relative’s remittances, spending most, if not all, of the sent back money on general consumption. It provides for basic needs, preventing absolute poverty, but it does not creating savings and therefore investment, meaning that remittances cannot be absolutely relied upon for economic growth. It also creates a moral hazard, where individuals are less incentivized to work due to a relative assuredly sending them money, further potentially lowering growth. Without some important reforms the contribution of remittances may be not as impressive as what they initially appear. There’s also been some worry about remittances losing traction in the Philippines in recent years, with many growth figures being the lowest in five years and fewer and fewer Filipinos finding employment in more lucrative countries such as the United States. It’s been placed on the back of the growing BPO market and a growing need for Filipino workers in the Middle East and Asia to make up for this loss, as well as overseas investment from places such as Japan and Taiwan, who have been encouraged to set up operations in the Philippines over the slowing China.

There have been a few other problems limiting growth and success within the Philippines. Corruption has been a problem that has dogged the country for many years, and only recently has it been somewhat alleviated. Corruption generally leads to large leakages of public funds away from projects to assist the general populace, debilitating growth, but recent President Benigno Aquino III has been aiming to remedy the problem in recent years with some amount of success. Nonetheless, Transparency International still gives the Philippines a relatively poor ranking and score when it comes to its corruption metrics. Other huge problems in the Philippines is its susceptibility to natural disasters, as exhibited by the relatively recent Typhoon Haiyan, and the growing terror threat by terrorist organization Abu Sayyaf in the southern islands of Mindanao.

Despite all these problems, the Philippines is looking like its destiny as one of the new tigers of Asia will be fulfilled, so long as no incredible hiccups get in its way. Its accelerating BPO sector and its positive flow-on effects, increasing promises of overseas investment, declining corruption, as well as hopefully bolstered remittances assisted by reform to encourage savings, will likely lead to future economic prosperity for the country. Hopefully sometime in my life the shantytowns near the malls will be no more, and the poverty in the country will be minimized. With how ingrained it is, however, no matter how far the economy excels, those thoughts may be overly optimistic.

The CAINZ Digest is published by CAINZ, a student society affiliated with the Faculty of Business at the University of Melbourne. Opinions published are not necessarily those of the publishers, printers or editors. CAINZ, our Partners and the University of Melbourne do not accept any responsibility for the accuracy of information contained in the publication.

Meet our authors:

Edward Zhang
Editor
Sean Brown
Writer

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