bob looney teaches economics at the Naval Postgraduate School in California.
Published November 22, 2019
Southeast Asia has been a laboratory for democracy and development since the onset of globalization in the 1990s — and by some criteria the experiments have been successful. But, infected by the viruses of tribalism and right-wing populism, much of the region is now retreating from democratic norms and good governance. Arguably the most dismaying case in point: the 2016 election of Rodrigo Duterte as president of the Philippines.
Retreat to Populism
When Duterte won, the Philippines was experiencing strong economic growth — though growth dimmed by rising income inequality. Duterte, a self-proclaimed socialist with a populist bent, won in part by promising to narrow the income divide and to tackle infrastructure frustrations ranging from inefficient public transit to doddering post-cyclone (i.e., hurricane) reconstruction.
But equally prominent in Duterte’s campaign message was a pledge to get very tough on crime — and, for those tuned to his dog whistle, to bring cosmopolitan elites to heel. Using the skills he acquired as the mayor who brought safe streets (and, admittedly, prosperity) to Davao City (pop. 1.6 million) by setting loose death squads on drug addicts and other undesirables, Duterte set out to make good on this promise. As president, he has only honed his image as human rights violator; his war on drugs has yielded an official body count of 4,000 and an unofficial count by human rights groups closer to 23,000.
Compared to his slaughter-first-talk-later approach to crime, Duterte’s economic policies have received relatively little attention outside the Philippines. At the center of these policies is the Build! Build! Build! Infrastructure Plan (BBB), which Duterte promises will cure what ails. The goal is to catch up to the Philippines’ middle-income neighbors by 2022 and to become a high-income economy within a generation.
But the planners seem to have gotten it precisely wrong. Agriculture and manufacturing, the two sectors that would ordinarily benefit most from beefed up infrastructure and that must prosper if the economy is to grow in a sustained fashion, are not the focus of BBB. Productivity in the agriculture sector grew at just 0.8 percent in 2018, miles below the government’s target of 4 percent. Meanwhile the growth rate in manufacturing, which is still concentrated in low value-added sectors that must compete for foreign markets with established players in the rest of Asia, has dropped from 7.1 percent in 2016 to 4.9 percent in 2018.
True to his word, jobs and welfare for the poor rate highly among Duterte’s priorities. However, for the most part, Duterte appears content simply to expand the patronage-oriented welfare programs of his predecessors, Gloria Macapagal Arroyo (2001-10) and Benigno Aquino (2010-16), largely ignoring the lessons of successful anti-poverty initiatives in Latin America and Asia.
Nor does Duterte seem to have broad reforms in mind. Other than strutting his independence by shifting trade and investment away from the United States and toward China, Duterte seems content with the status quo — which in this case means relying on mainstream free-market policies somewhat undermined by corruption and rent seeking.
Not a bad way to go, perhaps, when one considers the sorts of alternatives widely entertained by populist governments. But not surprisingly, given the mix of ill-targeted spending programs and unease with a Mussolini-wannabe at the tiller, the Philippine economy has been slowing since the election. Growth in GDP, which ran a fairly healthy 6.9 percent in 2016, is now at 5.5 percent. The rate of growth in remittances from Filipinos working abroad, which accounts for a remarkable tenth of national income, dropped from 5.0 percent in 2016 to 3.1 percent in the first 10 months of 2018 (the latest period for which numbers are available).
The country’s rank on the World Bank’s Ease of Doing Business Index has eroded from a none-too-splendid 99th in 2015 to 124th by the end of 2018 — behind the likes of Egypt and the Cote D’Ivoire.
Imports of supplies to feed Duterte’s infrastructure ambitions combined with brisk welfare spending have boosted inflation from 1.2 percent in 2016 to 5.2 percent in 2018. And the current account deficit has gone through the roof (up to 8.5 percent of GDP in 2018), suggesting that business-as-usual is not sustainable unless economic growth soon kicks into high gear.
While Duterte’s government contends that economic growth driven by infrastructure expansion will outpace debt, this may be wishful thinking in light of the present slow-down in global trade and China’s weakening commitment to foreign investment. Add to this the IMF’s warning that deficit-financed infrastructure expansion will likely increase the Philippines’ borrowing costs down the road.
The Philippines has a long history of ambitious reform brought up short by incompetent, corrupt government. But Duterte doesn’t even seem to have ambitions to try. Quite the contrary: key governance indicators are moving in the wrong direction.
Heritage House’s index of economic freedom for the Philippines fell by 0.9 percent in 2017 and an additional 1.8 percent in 2018. The sub-index for government integrity (i.e., control of corruption) fell by 11.1 percent in 2017 and a further 10.2 percent in 2018. The country’s rank on the World Bank’s Ease of Doing Business Index has eroded from a none-too-splendid 99th in 2015 to 124th by the end of 2018 — behind the likes of Egypt and the Cote D’Ivoire.
As Western investors grow increasingly wary in the face of Duterte’s human rights abuses and inflammatory rhetoric, the Philippines must rely on China and, to a lesser extent, Japan for capital. Yet, with its own economic problems front and center and second thoughts about global overreach mounting in Beijing, China has been slow to transform its pledges of assistance into the significant investment needed for the Philippines to pull off BBB.
By no coincidence, as of April 2019, only two of 75 planned flagship infrastructure projects had been completed. Nine others are under construction, with the remaining 64 being studied, re-evaluated or in limbo for lack of funding. Indeed, much of the private Chinese investment in the Philippines in recent years has flowed into online gaming platforms targeted at Chinese gamblers — platforms that compete with casino gambling in Macao that Beijing is eager to protect.
Complicating matters, Chinese flag waving in the disputed South China Sea is throwing a monkey wrench into Philippine-Chinese relations. Further pressure from China in this regard may lead to a backlash from Philippine voters who largely distrust Beijing. Given that the economic benefits of close ties with China have yet to be realized, Duterte may eventually be forced to cut bait without much hope of replacing the lost resources with Western investment.
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While it is still early to judge whether Duterte’s infrastructure crusade will generate the promised sustained growth, there is every reason to be skeptical. Apart from other problems, the infrastructure-led strategy requires a lot of foreign borrowing and direct investment — hence the huge current account deficit. And given Duterte’s poisonous image abroad, if the money doesn’t come from China it probably won’t come at all.
Probably the best thing one can say about the Philippines’ current woes is that they will make other countries more reluctant to replicate Duterte’s brand of bloodthirsty populism.