President Rodrigo Duterte's Economic Policy “Report Card”

Sustained growth prospects and remaining challenges in the Philippines

Joji Ide

Bank of Japan

(Former Economist, Asia and Pacific Department

International Monetary Fund)

Joji IdeBank of Japan(Former Economist, Asia and Pacific DepartmentInternational Monetary Fund)

About the Author

Date of Issue: 28/September/2018While the Philippines is the only Southeast Asian country continuing to experience growth, media reports in Japan focus only on negative aspects such as President Duterte’s hardline methods, overlooking the positive changes occurring in the economy. This article examines the changes which the Duterte administration has wrought in the Philippine economy from the perspective of sustainability, as well as the prospects ahead.The Philippine economy has been growing strongly since the late 2000s due to (1) more funds being sent home by Philippine nationals working overseas and (2) the growth of the business process outsourcing (BPO) industry, whereby companies outsource labor-intensive services. The economic growth rate has remained over six percent for the last several years, while the country’s economic scale has quadrupled since the year 2000.Per capita GDP has also continued to rise, reaching around US$3,000 in 2018 (Figure 1), and cars and other consumer durables are beginning to experience rapid uptake. In addition to realizing high growth, the country is expected to continue to enjoy the “demographic bonus” of a steady increase in its working-age population through until around 2050. These factors have led many Japanese firms to see strong market potential in the Philippines.However, as I note in my book The Philippines: A Young but Swiftly-Growing Major Power (Chuko Shinsho, 2017), the sharp contrast between the Philippines’ domestic demand- and service-driven economic growth and the typical East Asian growth model, which has always been powered by exports and manufacturing, has created some doubt as to its sustainability.Back when I was a desk economist for the Philippines at the International Monetary Fund (IMF), I too was not always convinced of that sustainability, but since Rodrigo Duterte came to power in 2016, his administration has been steadily laying the foundations for sustained growth.Focusing on this issue of sustainability, here I would like to overview the positive changes taking place in the Philippines under the Duterte administration and also touch on the remaining challenges.Sustainability in this case refers to the efforts of the Duterte administration to overcome long-standing issues in the Philippine economy and boost economic sustainability. Economic policy is beginning to produce clear results in the form of comprehensive tax reforms and progress with infrastructure investment. In terms of social order, setting aside the rights and wrongs of the administration’s authoritarian methods, many Filipinos are beginning to feel an improvement in public order. I examine each of these issues below.(1) Tax reformThe Duterte administration is pursuing comprehensive tax reform for the first time in around 20 years so as to secure the funds for infrastructure development, etc., and increase taxation efficiency and equitability.The first round of reforms was instituted in January 2018, featuring personal income tax cuts and a hike in commodity taxes. The IMF and other institutions have welcomed these reforms, and the Philippine government plans to direct the expected additional tax revenue into infrastructure development. In the second round, the government is currently planning to reduce the corporate tax rate to the same level as its neighbors to boost the Philippines’ competitiveness in terms of attracting companies to set up local operations.(2) Infrastructure investmentAlongside tax reform, the Duterte administration has thrown its weight behind infrastructure development in the form of the “Build, Build, Build” (BBB) Program, which will pour a massive 8.4 trillion pesos into infrastructure projects over the six years between 2017 and 2022. This is almost five times as much as infrastructure spending in the previous six years, indicative of President Duterte’s strong commitment in this area.With the government also aware of the need for swift progress with its investment, another feature is the shift away from the standard public-private partnership format to a combination of public investment and loans through official development assistance (ODA). While this does not necessarily mean that issues with delayed actioning of work programs has been resolved, noteworthy progress includes the beginning of expansion work on the Clark International Airport and the firming-up of the Metro Manila subway plan.(3) Improvement of public orderThe Philippines has had long-standing problems with Islamic forces on the southern Philippine island of Mindanao, and a clash between Islamist extremists and government forces in May 2017 resulted in the imposition of martial law. Since then, however, peace negotiations have been making steady progress and President Duterte actually put his signature to the Bangsa Moro Basic Law in July 2018. This piece of legislation provides for the establishment of an autonomous Islamic region, and if all goes well, the first local government will be in place there in 2022.The Duterte administration’s war on drugs too has won public support—if not necessarily for the methods employed, at least for the administration’s engagement with an issue which previous administrations have chosen to ignore. The latest public opinion surveys in fact reveal that many people approve of the government’s actions as improving public order.Inadequate tax revenue, the lack of infrastructure, and poor public order are in fact all interrelated, and have long been identified as bottlenecks in terms of growing the Philippine economy. More specifically, for many years, the lack of tax revenue has prevented the government from moving forward with public investment, causing infrastructure development to drag, while poor public order has made foreign companies hesitant to engage in large-scale investment in the Philippines.The various initiatives being pursued by the Duterte administration are aimed at removing these bottlenecks, and represent an excellent first step toward the Philippine economy achieving sustained growth.Tax reform, infrastructure investment, and the improvement of public order are all of course still in process, and the administration will have to demonstrate an even greater capacity to act in the second half of President Duterte’s term. There are also other important issues which will need to be addressed in order for the Philippines to escape the middle-income trap and sustain strong growth over the long term. I would like to close by identifying those outstanding issues.In economics, it is considered quite a challenge for a developing country to break out of the middle-income phase to become a high-income country.During the transition from a low-income to a middle-income country, excess rural population flows into urban areas to provide a cheap labor force. Cheap labor boosts national competitiveness, powering economic growth. However, that supply of cheap labor sooner or later tops out, and once past that turning point, a country’s economic growth capacity too often weakens. Escaping the middle-income trap requires unremitting efforts to boost the productivity of the economy as a whole.The Duterte administration’s tax reform, infrastructure investment, and improvement of public order could be regarded as laying the groundwork essential in addressing increased productivity, and boosting the productivity of the economy as a whole will indeed be the major challenge ahead. Taking, for example, the important BPO industry, the Philippines absolutely must reduce its dependence on labor-intensive call centers and aim for high added value.Manufacturing too has been a chronic underperformer in the Philippines, and designing a roadmap for the development of the manufacturing industry will be essential. With no supporting industry, it will naturally be no easy task to develop an automobile industry, for example, but if the Philippines were to pursue electric cars, which have far fewer parts than oil-powered cars and require limited optimizing technology, it could well be on to a winner.Given the above, I hope to see Duterte spend more time debating and executing productivity-enhancing industrial policy in the second half of his term.Joji Ide, Bank of Japan (Former Economist, Asia and Pacific Department, International Monetary Fund)Born in Tokyo in 1978. Graduated from The University of Tokyo School of Law in 2001 and entered the Bank of Japan. Completed a Master of Arts in Law and Diplomacy at the Fletcher School at Tufts University in 2006. Worked as a desk economist for the Philippines in the IMF’s Asia and Pacific Department before taking up his current position at the Bank of Japan. Publications include On the Frontlines of the IMF and World Bank (co-authored; Nihon Hyoronsha, 2014) and The Philippines: A Young but Swiftly-Growing Major Power (Chuko Shinsho, 2017).The English version on this page was translated and proofread by IIST.