Rodrigo Duterte’s efforts to cozy up to China these last few years isn’t paying the economic dividends the Philippines hoped.
It all seemed so simple in June 2016, when Duterte grabbed the keys to the presidential palace from Benigno Aquino. His predecessor drew Manila close to Barack Obama’s America. In his six years in office, Aquino pushed back at China’s territorial expansionism in the South China Sea. He even took China to international court (and won).
Duterte went the other way, engaging with Xi Jinping’s China. In September 2016, he insulted Obama with a slur in Tagalog after the U.S. leader had criticized the extrajudicial killings that characterized Duterte’s war on drugs. China, Duterte figured, was a better fit: deep pockets to help build Filipino infrastructure and a policy of non-interference with Duterte’s domestic activities.
Now that bet is going awry. Obama’s successor, Donald Trump, launched an intensifying trade war, putting China’s economy on the ropes. It raises big questions about Duterte putting all his eggs in the proverbial Chinese basket.
Two problems are coming to head. One is how a rapidly decelerating Chinese growth leaves less growth to go around in Asia. China is still growing, but exports are grinding to a halt just as manufacturing activity is cratering. In May, the closely watched Caixin/Markit Manufacturing Purchasing Managers’ Index signaled slowing output, falling factory prices and the weakest business confidence since at least April 2012.
China’s reading is now at 50.2, on the verge of falling below 50. That shrinkage is already showing up in proxy economies from Malaysia to South Korea to Taiwan, all of which are below the 50-mark denoting contraction. Vietnam is heading that way and, odds are, Duterte’s economy, too.
The second is Duterte’s lack of job creation after three years at the helm. In 2016, Duterte was elected to turn Aquino’s reform success to 11. When Aquino took office in 2010, Transparency International put the Philippines behind Nigeria in its annual corruption perceptions index. By 2016, Aquino improved that 134th ranking to 95th.
Aquino’s efforts to curb graft, boost tax collection and increase public accountability won Manila its first-ever investment-grade ratings. His government was the first in more than a decade to prioritize growing better over growing faster. Aquino’s policies sought to ensure that the fruits of 5% or 6% growth are more widely shared.
Under Duterte, the reformist momentum has slowed, and China helps explain why. Rather than get under the economy’s hood, Duterte subcontracted economic management to Beijing. He bet that a tidal wave of Chinese investment into his “Build, Build, Build” infrastructure push would create jobs and higher incomes. Hardly.
Better roads, ports, bridges and power grids are plenty important. Poor hardware explains why the Philippines often has one Asia’s highest inflation rates. Chaotic distribution systems and poor storage and refrigeration raise the cost of living. But Duterte isn’t tending enough to the economic software.
To compete in this rapidly advancing region, Manila most improve education and training. It must slash red tape and smash the myriad levels of rent-seeking middlemen undermining new business formation and job creation. Manila must internationalize investment rules and taxation.
The government must attack its brain-drain problem. An undersupply of good-paying jobs forces more than 10% of the nation’s 105 million people to seek opportunities abroad and send cash back home. This feeds an addiction to remittances, one that reduces the urgency on Manila to raise its game.
Duterte didn’t create a system where people are the nation’s main export. It’s been a growth industry for decades. But Aquino, to his credit, looked for ways to woo back the Filipino diaspora. Duterte is going the other way, even creating an Overseas Filipino Bank to facilitate the process of exporting more talent needed at home. In his travels around the globe, Duterte does Trump-like rallies with overseas laborers, treating them like a key voting block he needs to grow.
The Philippines needs its best and brightest to stay home. As Indonesia generates an impressive stable of tech unicorns and Singapore’s Grab divides and conquers, Duterte’s economy is largely looking on from the sidelines. The divergence is an economic indicator all its own–and a wakeup call for Manila to raise its competitive game.
To date, Duterte has focused more on old-economy growth drivers, not the information-age disruption needed to compete in the “Made in China 2025” era. Unfortunately, China’s largess lets Asian governments off the hook.
Admittedly, the process of domestic retooling is as tedious as it is fraught, but upwards of 40% of Filipinos live on less than $ 2 a day.
This sobering statistic underlines the unfinished nature of Aquino’s reform drive—and the tragedy of Duterte pivoting elsewhere. Again, Duterte didn’t invent the “Cult of GDP” that warps Manila’s incentives. But China’s cash infusions are enabling Manila’s penchant for thinking that when gross domestic product is zooming along, its job is done.
That disposition collides with a Trump trade war slamming China. Philippine growth slowed to a four-year low in the first quarter. That 5.6% growth from a year earlier makes for a grim bookend. Granted, few foresaw Trump’s November 2016 election win–or the epic trade battle to come–when Aquino was leaving the palace. At least from a growth standpoint, Duterte is squandering the Aquino boom.
The real worry is the “middle-income trap” that could easily ensnare Southeast Asia’s fifth-biggest economy. At roughly $ 3,100, nominal per capita income in the Philippines is a long way from the $ 10,000 mark at which many developing nations stall out. Still, little is happening under the hood to raise incomes broadly and sustainably. That is courting a future GDP crisis as a young population goes underemployed.
In Tokyo just over a week ago, Duterte expressed deep concern about the U.S.-China trade war. “There must be a resolution soon,” Duterte said. Yet there also must be a resolution to his government’s GDP blinders.
It’s great that, depending on the news source, Manila expects to woo between $ 12 billion and $ 24 billion of mainland investments. Not so great if Dutertenomics doesn’t augment this largess will big reforms at home. Upgrades are needed to make productive use of foreign capital and level playing fields for the Philippines masses to enjoy today’s 5%-plus growth.
At the halfway mark of his presidency, Duterte might want to look less to Beijing and more under the hood of a Philippine economy losing thrust.