Sustaining and accelerating the Philippines’ growth

M. A. P. Insights — Suraj Moraje and Kristine Romano | Posted on May 09, 2016 08:56:00 PM

The Philippines has had impressive growth in recent years. Focusing on five crucial themes could help sustain and even accelerate this success.

The Philippines is enjoying impressive growth — since 2010, the economy has grown a percentage point higher than the ASEAN average. In the same period, ratings agencies have raised the country’s sovereign debt to investment grade.

With a rich set of endowments, the Philippines is well-positioned to sustain and even accelerate its growth. Doing so will require the country to substantially increase its focus on improving labor productivity. A recent study by McKinsey found that the Philippines’ labor productivity must rise at least 58% faster than today to sustain its current rate of growth. To achieve this, the Philippines should consider acting on five important themes.

First, the Philippines should double down on sectors that it naturally “owns.” Unlike the pattern seen in most countries in a similar stage of development, manufacturing employment as a share of total employment in the Philippines fell from 9.7% in 2004 to 8.4% in 2015. The absence of a strong and growing manufacturing base in the country impedes capital investments that boost productivity.

For example, there is big potential for consumer goods manufacturers, especially in food and beverage, where the local market provides significant scale. Agribusiness, for example, has enjoyed double-digit export growth in the last decade. Yet, for many crops, yields in the Philippines are often a third of those seen among its best-performing ASEAN peers. Boosting crop productivity could yield tremendous gains for food manufacturers, as could additional investments in irrigation, mechanization, and cold chain.

Consumer goods companies could also take advantage of the large and growing urban population in the country. The number of consuming-class urban households — those earning $7,500 or more a year — is forecast to more than double from 11 million in 2013 to 23 million by 2030. To illustrate what this could mean for consumer goods manufacturers: by 2030, Manila residents are expected to be the number one purchasers of detergent and number two buyers of baby diapers among ASEAN cities.

Another opportunity could be mineral-based products and basic metals. Investment in the sector has lagged despite being ranked 12th globally in terms of mineral potential by the Fraser Institute in 2012. Capturing this opportunity will require the country to develop clear investment and sustainability guidelines, while creating the conditions for downstream industries and clamping down on illegal operations.

A second theme could be to consider how to build on the tremendous success of the business-process outsourcing (BPO) industry.

In 2014, BPO in the Philippines was sized almost $19 billion compared with about $3 billion in 2006. Globally, the Philippines is second only to India in the number of large BPO centers. The sector has been built on the back of an educated, English-speaking, and service-oriented labor pool, an advantage that we could use to expand into related service sectors. For example, the Philippines has a higher concentration of health care workers than many other developing countries, presenting an opportunity for outsourcing health services and promoting health care tourism. Further, about a fifth of the world’s seafarers are Filipino, suggesting the potential to create a center for ship management services.

Third, strengthening the Philippines’ export orientation could offer productivity growth opportunities. At present, the country is one of the least externally-oriented economies in Southeast Asia.

In 2014, external trade represented only 29% of Philippine economic output, compared with about 70% in Thailand and Malaysia.

While several Filipino companies have been aggressively expanding overseas through mergers and acquisitions in recent years, the Philippines could profit further from following the example of countries where the public and private sectors have partnered to buttress export growth.

The Malaysia External Trade Development Corporation, for example, launched a program in 2014 to support mid-tier companies’ export strategies, aiming to bolster exports by an additional RM 6 billion by 2020. In 2015, 101 mid-tier companies in the program saw their exports collectively increase by 30%. As more Filipino companies go global, many small and mid-sized firms could benefit from programs that support their export strategies.

Fourth, accelerating infrastructure development could encourage sustained growth, especially as the country continues to urbanize.

To illustrate the fast growth of Philippine cities, by 2030 Manila is expected to have an economy the size of Malaysia’s today; the number of city dwellers in the Philippines is forecast to rise from about 33 million in 2013 to 47 million by 2030. However, our analyses indicate that sustaining such growth would require annual infrastructure investment of about $23 billion a year. Such sums are staggering, but to get the greatest benefit from available funds the country could focus on the most critical aspects of infrastructure, such as sustainable urban development, roads and highways, a national broadband network, and flood control.

Finally, raising labor productivity will require investing in skills development, especially among the half-million young people that join the work force every year. Surveys have shown that businesses in the Philippines have difficulty filling professional and administrative positions, with financial and sales skills particularly wanting. One approach that has worked well in other countries is to upgrade the profile and efficacy of vocational schools through industry partnerships.

The 21st century has seen unprecedented growth in the Philippines. Sustaining and accelerating this dynamism will require us to take a harder look at productivity-enhancing measures. Addressing the five themes that we identified will go a long way to ensuring that the Philippines stays on its rapid growth trajectory.

The article reflects the personal opinions of the authors and does not reflect the official stand of the Management Association of the Philippines or the M.A.P.

Suraj Moraje and Kristine Romano are the Managing Partner and Associate Principal of McKinsey & Company, respectively.

Source: www.bworldonline.com