‘Philippine global competitiveness ranking’ – (Part IV) Investment climate

The Philippines scored well this year in the Global Competitiveness Index (GCI) as measured by the World Economic Forum. From number 85 among 142 countries, the country surged past 10 other countries to number 75. Even though this improved ranking is welcome, the country has a long way to go to close the gap with other East Asian countries in terms of competitiveness.

The Global Competitiveness Index is a high profile index that is followed closely along with the World Bank’s Doing Business surveys.

“Big difference for performance.” I quote below the entire paragraph devoted to the Philippines in the 2011 Global Competitiveness Report. Each sentence of the paragraph is highlighted below for ease of reading through bullets:

“Up 10 places to 75th, the Philippines posts one of the largest improvements in this year’s rankings. The vast majority of individual indicators composing the GCI improve, sometimes markedly.”

“Yet the challenges are many, especially in the areas at the foundation of any competitive economy…..”

“The quality of the country’s public institutions continues to be assessed as poor: the Philippines ranks beyond the 100 mark on each of the 16 related indicators. Issues of corruption and physical security appear particularly acute (127th and 117th, respectively).”

“The state of its infrastructure is improving, but not nearly fast enough to meet the needs of the business sector. (my emphasis) The country ranks a mediocre 113th for the overall state of its infrastructure, with particularly low marks for the quality of its seaport (123rd) and airport infrastructure (115th).”

“Finally, despite an enrollment rate of around 90 percent, primary education is characterized by low-quality standards (110th).”

“Against such weaknesses, the macroeconomic situation of the Philippines is more positive: the country is up 14 places to 54th in the macroeconomic environment pillar, thanks to slightly lower public deficit and debt, an improved country credit rating, and inflation that remains under control.”

“Still a long way to go.” East Asian neighbors are ranked among the forefront of countries in the competitive rankings. In 2011, the rankings for the big ASEAN neighbors are: Malaysia (21), Thailand (39), Indonesia (46), and Vietnam (65). The more economically advanced neighbors – Taiwan (13) and South Korea (24) – even have higher competitive rankings. Singapore (2) and Hong Kong (11) are among the most competitive economies in the world. China, the rising economic giant, is ranked high (26).

Thus, the Philippines (75) has a long way to go. Years ago, the ASEAN economies and the Philippines were mainly within the same competitive footing. Then, our ASEAN partners improved their competitive rankings while ours suffered some decline.

“The problem of perception.” The competitiveness index or ranking is essentially a perception about the country’s costs of undertaking commerce and production. It is based on a single measure that combines many economic indicators concerning the functioning of the economy as seen from the answers to the survey of business executives in each of the countries ranked.

These indicators are grouped by topics – governance, market competition (both domestic and foreign), labor market policies, infrastructure level, financial market efficiency, education and skill of human resources, technological capacity, and so on. Macroeconomic factors such as fiscal and balance of payments health, inflation, and credit policy are rated also as indicators.

A single score – the competitiveness score – is derived for each country which is an average of these indicators. All the scores per country are then compared and so we get the competitiveness rankings by country.

Therefore, the competitiveness ranking is an aspect of the way business decision makers view the country’s investment climate. In a private enterprise economy, perceptions become a basis for judging the business environment. In this sense, the competitiveness ranking could be a supporting tool for those who make investment decisions concerning where, how and what amounts to invest.

Is it a wonder then that the Philippine performance in attracting foreign direct investment flows has resulted in much less foreign direct investments compared to what the country has hoped to have?

“Macroeconomic soundness plus major structural reforms needed.” In 2011, it appears that the improvement of the macroeconomic fundamentals has made the difference for the rise country ranking.

This is all important: the fiscal deficit and the balance of payments were in good position during the year which the credit rating agencies validated with their own upgrade of the country’s sovereign debt rating and those of Philippine banks.

All this notwithstanding, more fundamental changes are needed. There are structural issues that must be addressed sector and other microeconomic areas –public and private investments especially in infrastructure, regulatory reforms, agricultural and industrial deepening, educational reforms, budget reallocations, and so on.

“Making sure that improved perceptions continue.” It is therefore important that the momentum of improving competitiveness does not get squandered by a failure to move along these structural fronts. A checklist of to-do’s must be pursued, sustained, and maintained as follows:

Remove the restrictive economic provisions in the constitution (that have been the subject of much discussion in this column). This promises to be a major changer of economic directions. It will move the country many notches forward along the main areas of concern upon which the competitiveness index depends.

Pass the reproductive health bill to deal more directly with improved family health, population issues, and so on.

Reform the labor market to create greater flexibility in employing and redeploying of labor within the firm.

Raise the investment level – focused on infrastructure programs in the public sector investment.

Raise the level of participation of all foreign and domestic businesses so that the country can take advantage of the open competition in trade and markets.

Continue the governance reforms – “walang wangwang” and matuwid na daan, especially with convictions of those charged of corruption. –Gerardo P. Sicat (The Philippine Star)

My email is: gpsicat@gmail.com. Visit this site for more information, feedback and commentary: http://econ.upd.edu.ph/gpsicat/