II. IMPROVED INVESTMENT CLIMATE

II. IMPROVED INVESTMENT CLIMATE

1. 
   In the 1980s, Philippine policymakers embarked on a number of major reforms to liberalize trade, deregulate domestic markets and privatize public enterprises. These market liberalizing reforms were designed to generate faster output and productivity growth by promoting greater competition. More competition encourages existing firms to either become more efficient or be replaced by more productive firms. Furthermore, in the absence of economies of scale or externalities, greater competition leads to lower prices and improved product quality, benefitting consumers and other firms that use the products in question as inputs. Some evidence also suggests that greater competition raises the propensity to innovate and encourages faster technology diffusion.
   

2. 
   While the Philippine economy is much more open today than it was three decades ago, the competitive momentum generated by these reforms has not been sustained. Following the introduction of reforms in the mid-1980s, both the trade ratios (exports + imports as a share of GDP) and the foreign investment ratio increased rapidly in the Philippines, comparable to the performance observed elsewhere in the region (Figure 1). Arguably, this helped prepare the ground for the subsequent economic take-off, with growth accelerating to 5 percent per annum during 2000-08, after plodding along at an average rate of 2.3 percent in the 1980s and 1990s. Even so, many observers had expected a greater economic pay-off, comparable to the 8 percent growth exhibited by the East Asian & Pacific region as a whole during this same period. Meanwhile, the initial competitive momentum provided by these reforms seems to have waned by the late 1990s as both the trade and foreign investment ratios declined again, contrary to the performance in the other East Asian comparator countries. Also, the industry structure continues to exhibit very high concentration ratios and price cost ratios in many sectors in the Philippines, which suggests the presence of monopoly rents.
   

3. 
   These developments raise a series of questions about the remaining barriers to competition and growth in the Philippines.¹ It is argued below that the Philippines has advanced significantly in removing barriers to trade, but that a significant number of ‘behind-the-border’ constraints remain that inhibit the entry of new businesses in different markets. Aldaba (2008) notes that the manufacturing sector in general has become more contestable due to the low level of tariff rates and removal of some constraints on foreign investment, but that competition remains constrained by the presence of structural and behavioral barriers, together with the absence of a dynamic core of medium-sized firms that could credibly challenge the large incumbent firms. The failure of these medium-sized firms to thrive conspires against a decline in industry concentration ratios, and tends to limit domestic competition and market contestability.
   

1. 
   The Philippines Today: Progress and Challenges
   

4. 
   The Philippines has a fairly open international trade policy environment. The country has been moving toward more liberal trade and investment regimes through unilateral liberalization since 1985, and policy actions in the context of regional and multilateral commitments. In spite of partial reversals in 2003 and the absence of new initiatives since then, the latest Tariff Trade Restrictiveness Index (Tariff-TRI) values indicate that the Philippines remains a fairly open economy (Table 1). With a Tariff-TRI value for overall trade of 3.9 percent, the Philippines compares well to the averages for the East Asian & Pacific region (4.9 percent) or for the lower-middle-income countries (8.4 percent). The Philippines also faces relatively open markets for its exports. The Market Access Tariff Trade Restrictiveness Index (MA-TTRI) gives the Philippines a value of 2.5 percent, which is below the regional average of 3.8.²
   

5. 
   The Philippines also compares favorably with other countries in terms of trade logistics. The World Bank’s Logistics Performance Index (LPI) measures the efficiency in carrying out an array of essential activities for trade, including transport, warehousing, cargo consolidation, border-clearance, distribution and payments systems. The Philippine LPI score of 3.14 in 2010 represents an improvement over the score achieved in 2007 and is comparable to the scores achieved by neighboring Thailand and Malaysia. It is also significantly higher than the average for the East Asian & Pacific region as a whole (Table 2). The Philippines’ relatively high rank in terms of the TTRI and the LPI indexes suggests that the barriers to trade do not appear to be important impediments to greater competition.
   

6. 
   The Philippines has been less successful in eliminating so-called “behind-the-border” constraints that inhibit the entry of new firms and that weaken the investment climate. The most recent Doing Business³ report, which measures the cost and quality of business regulations, ranks the Philippines 144^th out of the 183 economies measured on the overall ease of doing business, and 21^st amongst 24 economies in the East Asia & Pacific region. This places the Philippines in the lowest quartile of the economies sampled, and significantly behind its other competitors in the region: Thailand (which ranks 12th), Malaysia (23rd), and Indonesia (122nd). Furthermore, Table 3 shows that the Philippines’s ranking has been progressively deteriorating since 2004, contrary to the evolution in the other countries.
   

7. 
   The Philippines exhibits significant barriers to market entry and exit of firms. The sub-categories that make up the overall Ease of Doing Business indicators reveal that the Philippines falls into the last quintile of the economies surveyed in terms of the ease of starting a business as well as in the ease of closing a business (Table 4). Another category where the Philippines ranks very poorly in comparison with its regional comparator economies is in the protection of investors. Meanwhile, as found earlier, trading across borders does not appear to be a major constraint, even though the Philippines ranks less well than several regional comparators.
   

8. 
   Cumbersome regulations and procedures deter the entry of firms and business expansions. The number of procedures (15) required to start a business in the Philippines is substantially higher than in other countries in the region, resulting in higher cost and investments in time. Furthermore, the weak bankruptcy resolution regime makes it particularly difficult for inefficient or unprofitable firms to exit the market. The recovery rate from a failed business in the Philippines averages a very low 4 cents to the dollar, compared to more than 30 cents in Malaysia or Thailand, causing potential entrants to think twice before committing to take advantage of seeming market opportunities.
   

9. 
   
   Directory: curated
   curated -> Concept stage
   curated -> Concept stage
   curated -> Republic of Côte d'Ivoire Urbanization Review
   curated -> Report No: aus11011 Central America
   curated -> Report No. 94474-pk fiscal Disaster Risk Assessment Options for Consideration
   curated -> Environmental and Social Management Framework for the Costa Rica Telecommunications Sector Modernization Project
   curated -> Environment Impact Assessment For Jiangxi Shangrao Sanqingshan Airport Beijing Guohuantiandi Environmental Technology Development Center. Ltd. Oct. 2012 Content
   curated -> Growth through Innovation An Industrial Strategy for Shanghai By Shahid Yusuf Kaoru Nabeshima April 22nd, 2009
   curated -> Report No: 70178. People's Republic of China
   
   
   
   Download 2.19 Mb.
   
   Share with your friends: