How do we raise investment?

ALONG with officials from the World Bank and the International Finance Corp., I spoke in a panel discussion on stable economy and improved investment climate organized by the WB Manila office last week. The discussion was meant to guide WB on how to advise the new administration that is expected to take over next year on the most critical and strategic interventions needed to address the persistent challenges facing the Philippine economy.

I thought it useful to share with readers some key ideas that emerged from that forum, both from the speakers and from the participants, who were mostly composed of mayors and governors from around the country.

Persistent challenges

The challenge we face, as discussed at the outset by WB Philippines country director Bert Hofman, sums up in (1) traditional weakness of our economic growth especially when compared to that of our neighbors, (2) failure of our economic growth to translate into significant poverty reduction and (3) the unusually low level of investment in our economy in recent years. It was acknowledged that overall growth had reportedly improved in recent years, and the country has in fact been spared from recession amid the global downturn. However, our recent experience of rising poverty in spite of record growth brings home the point that growth simply is not enough; the quality of that growth is just as important. A puzzle seemingly unique to the Philippines is why recent growth has not only failed to reduce poverty in the country, but actually even led to worsening poverty. A crucial element in this puzzle is the very low level of investment in the country, whether domestic or foreign, and whether private or public. It was pointed out that total investments account for only about 15 percent of Philippine GDP, whereas it accounts for upwards of 25 percent for most of our neighbors.

Boosting investments

The answers to the seeming puzzle are not really difficult to come by; participants in the forum had a wealth of ideas and experiences to share, both to explain and to address our challenges. Much of the discussion focused on the role of small and medium enterprises (SME), especially those based in the countryside, in boosting our lagging investment. I pointed out that in discussions on low levels of investment in our country, there is a tendency to think too much in terms of large enterprises. But we often forget that investments by SMEs could be an equally important, if not the more important contributor to boosting Philippine investments, especially at this time.

Investments by large numbers of SMEs would actually add up and provide the numbers we need to fill in the glaring investment gap relative to our neighbors. This is not to say that we should think less about attracting foreign investments, wherein we are also being badly left behind by our neighbors. Still, some members of the audience argued that preoccupation with attracting foreign investors could detract us from promoting more domestic investments, especially by rural SMEs whose benefits would be more broad-based. Indeed, it takes much less capital to create one job in an SME than in a large enterprise. If we want more investments to translate into more jobs, it is investments in the former that would be more job-creating—and ultimately more poverty-reducing.

SME hurdles

So why aren’t there still enough SMEs to provide those needed investments and jobs in the countryside? This is a question particularly relevant to the governors and mayors who made up the forum’s audience, as they are uniquely and strategically placed to either attract or deter SME investments in their respective areas.

Financing was pointed out to be the most binding constraint to SME development, and surveys among SMEs have consistently affirmed this. But here, the problem is not so much the cost of financing (translation: interest rates), but the accessibility of formal credit from the banks. The fact that countless small businesses get by with extremely high-cost financing from informal (“five-six”) lenders tells us that cost has not been an impediment. If countless small rural enterprises have been getting by with “5-6” financing, think of what they could do with loans at much lower, but nonetheless market interest rates. What we need is not more subsidized credit schemes, which are ultimately unsustainable, but simply more banks who are willing to devote larger portions of their loanable funds to SMEs, and with less rigorous documentary requirements. Thailand, for one, discovered years ago that funds flowed more freely to SMEs after they removed interest rate caps on SME lending by banks. Sometimes, well-meaning policies end up achieving exactly the opposite of what they intend.

The other key impediment cited was the local governments themselves. The procedures one has to go through to set up a small business is often cumbersome, time-consuming and expensive enough to discourage getting into business at all. Mayors would do well to review the various hoops and ladders that they make business applicants go through, and avoid driving away the very investors they should be attracting to create jobs, and ultimately reduce poverty in their respective localities. –Cielito Habito, Philippine Daily Inquirer

Comments welcome at chabito@ateneo.edu