An East Asian Renaissance Philippines Manila June 4, 2007

06/04/2007An East Asian Renaissance2 Philippines: Trade Reduction in tariffs since the late 1980s from more than 23 to less than 5 percent Plugging into regional trade networks, and moving up the value chain: –Share of intraregional exports up from 42 to about 50 percent of total since 1990 –Share of machinery in exports up from 20 to 66 percent –Share of parts and components trade is more than 56 percent, up from 18 in –Philippine exporters compete with countries with per capita incomes of $12,000 PPP-adjusted dollars, almost three times its own (adjusted) income Some displacement by China in third markets, but Philippines is increasing exports to China –More displacement than Thailand and Indonesia but less than Malaysia –Share of China in exports has gone up from 1 to 5 percent since 1990

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06/04/2007An East Asian Renaissance10 Philippines: Finance Bank assets, equity markets, and bond markets have not grown as rapidly as for neighbors since 1997 –Bank assets rose from 56 to 63% of GDP (Emerg. EAP: ) –Equity market capitalization rose from 31 to 40% (37-71%) –Bonds outstanding rose from 22 to 37% (Emerg. EAP: 18-40%) Moderate regional integration in finance –Philippine equity markets have become more integrated with countries in the region since 1998 –About 40 percent of FDI flows into the Philippines are intra- regional since 2000 But access to finance does not seem to be a major problem for firms in the Philippines –Less than 15 percent of firms cite this as a problem

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06/04/2007An East Asian Renaissance15 Philippines: Innovation Main source of new technology is new machinery –FDI and purchase of foreign technology (large royalty payment) Weak overall R&D effort at about 0.1 percent of GDP –Has fallen from 0.2 percent in 1992 –Malaysia is five times more, China ten times more Share of business in R&D is about 60 percent of total –Share of government is about percent –Philippines does not rely much on universities, and industry-university linkages are weak Poor innovation climate in general –Credit market depth low –Researchers per million residents (50) lowest in emerging East Asia; –Quality of research institutions low Philippines has invested in quantity of higher education; it should pay more attention to R&D in firms and universities –Else it may be difficult to maintain strong trade performance

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06/04/2007An East Asian Renaissance24 Philippines: Urbanization High urban share in population, rising rapidly –At 61 percent, close to Malaysia’s ratio at 65 percent, though its income is less than one third that of Malaysia –Urban population will grow at 2.8 percent per year, rising from 52 million to 88 million by 2030, or by about 1.5 million every year Cities in the Philippines are showing strains –Manila’s livability is about what can be expected of countries at its per capita, but –Slums comprise a larger share of the Philippines’ urban population than the East Asian average Sustainable city development requires a tailored approach –Urban development is of three institutional types: comprehensive (China), mixed metropolitan (Vietnam), and fragmented (Philippines) –For the Philippines, the solution lies in greater private sector and community involvement

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06/04/2007An East Asian Renaissance30 Philippines: Cohesion Modest progress in reducing poverty levels since 1990 –At $1/day, noticeable decrease: from about 20 percent to 10 percent today (12 to 9 million poor people) –At $2/day, small increase (34 to 35 million), though ratio fell from 52 to 42 percent Increase in consumption inequality since 1990 –Philippines now has highest income inequality among East Asia’s middle income countries Progress in human development indicators, but wide spatial differences persist –Income: Rural-urban gaps high; widened between –Human development: Large rural-urban and other spatial gaps

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06/04/2007An East Asian Renaissance35 Philippines: Corruption Corruption levels are high –About what to expect from a country with Philippines’ per capita income, or somewhat lower (Malaysia better than expected) –Decentralization can exacerbate corruption in the short term Government effectiveness are better than what would be predicted from its control of corruption index –For public service delivery –For regulation of private sector But corruption is seen as a constraint to enterprises –More than one out of three firms in the Philippines see it as a severe constraint to doing business

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06/04/2007An East Asian Renaissance41 Philippines Is integrating strongly into regional production networks –Intra-industry trade Must strengthen innovation to maintain this integration –Research effort and institutions Lags in all aspects of domestic integration –Urbanization –Inequality –Corruption

Extra Tables and Graphs

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