The Philippine Economy and the Need to Reinvent Ourselves

[Romy Encarnacion]

The Philippine Economy and the Need to Reinvent Ourselves
By Romeo O. Encarnacion

In 2009 I started a blog and the title reflected what I thought was what we needed to do if we are to ever lift the Philippines up as an economy: “Philippine economy: Reinventing ourselves.” I chose the blog to be anonymous because I wanted to encourage Filipinos to feel free to reject or accept my thoughts. And if they do buy them or just some of them, they could freely build on them because my goal was simply to offer a different perspective – being a Filipino looking in.

Change is never easy nor is human nature simply expected to change. But having done business globally since 1986, I have seen with my own eyes how people could be encouraged to make a firm commitment to change. I owe it to being a Filipino that my American employer tapped me for a regional (Asia-Pacific) and then a global role. In the same manner that the international community in 1966 chose Manila to be the headquarters of the Asian Development Bank, my bosses similarly respected the worldview of Juan de la Cruz – not surprising since we were next only to Japan as a progressive economy.

But what happened? “From 1960-2008 [or almost haft a century] our neighbors [grew their economies] and did 3.6%-6.0% against our 1.4%,” Manila Standard Today, 17th Nov 2011, quoting former NEDA chief, Cielito Habito. “There has been a tremendous uniformity in policy and strategy since 1962. In other words there has been tremendous consistency, tremendous continuity from 1962 to now. Now, at the end of that period, we are now worse off than we were. We are now less industrialized than we were in 1985, we’ve been selling textile equipment as scrap,” Dr. Sixto K. Rojas said. “So my advice is, Dondon (NEDA and Socioeconomic Planning Secretary Dr. Cayetano W. Paderanga Jr.), if the program looks familiar, discard it, it’s been tried, it failed. Look for the unfamiliar.” (Business Mirror, 28th Nov 2010)

Our economic struggle isn’t new, and given what the rest of the world has done over the last 50 years or so, my advocacy, starting with my blog, is meant to raise that point while sharing my worldview. And so I have worked with a couple of Filipino companies to share with them how they could expand their horizon beyond our shores. (Is our inward-looking bias consistent with our parochial instincts?) And Dean Ricardo A. Lim of the Asian Institute of Management encouraged me to turn my blog postings into a book. It is currently in the works with the working title, “Learning to Reinvent Ourselves.” While I am thankful to Dean Lim, I am also grateful to the 50 or so Philippine newspaper columnists that I have been religiously following for seven years, and have effectively engaged in my blog. Their writings have forced me to expand my thinking.

I’ve spent the nine years since retirement from an MNC as a business consultant in Eastern Europe, first at the instance of USAID/IESC. But after my month-long engagement, my Bulgarian friends asked me to stay on. As I wrote in my blog: “The writer extended his engagement sensing that they were sincere in their desire “to create their new world": they were (a) committed to be a ‘white business'; (b) seeking help to turn their ‘dream’ into a plan – that must be executed with discipline and hard work; and (c) recognized they could trip if not in fact stumble and wanted their attention called whenever they did – “because we may not even realize we are messing things up.”

I share that to point out how people who were under Soviet rule for decades and had little understanding of free enterprise and the market economy would be so predisposed to change. But that could be the difference with us Filipinos – we did not suffer under such rule? But we have suffered with our economy?

The model I have been sharing – a result of over 25 years of global business experience, on top of 20 years in the Philippines – is that the 21st century, being an integrated world, demands competition. It’s nothing earthshaking really but it is consistent with the fundamentals of economics: the scarcity of resources and the ever-changing want of man. And over the three years that I’ve been doing my blog, my sense is we Filipinos are yet to be unanimous on something as fundamental as that.

It is not surprising if many of us don’t buy globalization in the first place. Yet it is not unusual if we own an iPhone or an iPad if not even other Apple products? We love to travel. We are knowledgeable of developments across the globe. But we still want barriers to protect us from the outside world? We continue to invoke that we’re a small poor country that must be given a chance to learn the ropes. And that is where we appear different from the rest of the world. It was during the 10-year period when I was a regional manager in Asia Pacific that our neighbors embraced market economy like never before – including China, which was supposedly a socialist nation.

But as we continue to invoke the necessity to be a closed economy, oligarchy has remained the pillar of our industry. Our cacique orientation remains strong – i.e., that capital is the be all and end all. And so we admire, though grudgingly, Filipinos with access to capital. What we have missed is that in a globalized world, competitiveness demands more than capital – i.e., technology and innovation as well as talent, product and market development.

But the restrictive economic provisions of our Constitution have encouraged oligarchy to further flourish beyond their expertise; and so the same half-a-dozen are dominating across several industries especially basic infrastructure-related, which is just a shade removed from rent-seeking. But in the absence of technology and innovation, for example, despite their size, these major Philippine enterprises have not made us globally competitive. Says a friend, “Do you know that I have just changed Internet providers and I am still angry?” Adds another, “Beyond problem Internet providers, mobile service is characterized by dropped calls!”

Even our professionals benefit from this restrictive environment but at the expense of all of us – as we set very low expectations, and thus explains why we’re not truly geared to be globally competitive, For example, as Senator Angara has noted, our lawyers have been shielded from competition; and so how could we sharpen our legal profession – and elevate its contributions to society – if we are isolated as such?

Vietnam has done a better job in engaging with the global community and thus in attracting foreign investments, and not surprisingly, they are developing at a much faster pace. Likewise, we sorely need technology – but we don’t have to reinvent the wheel, so to speak. While innovation is equated to discontinuity or pure value-creation, it could also be value-addition or building on the state-of-the-art. For instance, Apple does not invent every element of its products – e.g., they used Toshiba’s coin-sized hard drive for the iPod and Corning’s tiger glass, being scratch-proof, for their touch screen technology – which they similarly acquired, and not developed in-house.

And thus beyond capital or investment, competitiveness demands innovation especially in product development. Over the last nine years, I have worked with my Eastern European friends precisely on innovation and product development. So much so that from one single business – household and personal care products – they have moved into hygiene and disposable tissue, snack food and dairy food. (And in 2011, the European Business Awards recognized them as one of Europe’s 110-best, after vetting 15,000 enterprises.) None is high-technology, which simply means that innovation in product development is universal and not confined or unique to hi-tech products.

Thus I have shared with a Filipino consultancy and a BPO enterprise how even in the service business, the concept of “product architecture” could provide the mental model to pursue product development. The key is to understand the thought process inherent in “value-addition” if not “value-creation,” of which Steve Jobs was a master. Simply put, the product architecture must move up from offering “basic” benefits to “self-actualized” benefits. It is consistent with the ever-changing wants of man, captured succinctly by Maslow’s principle on the hierarchy of human needs. For instance, to be self-actualized could mean the product would respond to a person’s lifestyle – and which is why the iPad has become indispensable. From the moment we wake up and until we retire at night we unconsciously want the iPad next to us. Not surprisingly, Mark Zuckerberg wants Facebook to be the “first thing we go to in the morning and the last thing we go to at night.”

And beyond investment, technology, innovation and product development, competitiveness demands talent and market development. In short, to create a culture of innovation, an enterprise or a nation needs the right kind of education – i.e., inquisitive and expansive. And in the case of businesses, to educate the consumer or the market about the benefits of their products – not only with regard to an individual’s lifestyle, but also to their impact in making efficiency and productivity a way of life, thus elevating Philippine global competitiveness.

And so competitiveness is embracing investment, technology and innovation as well as talent, product and market development.

There are two developments that are indeed welcome news: (a) President Aquino’s personal leadership in the fight against corruption; its being endemic has made Filipinos indifferent thus making our moral fabric suspect; and (b) “Arangkada Philippines 2010”: A Business Perspective from the JFC (Joint Foreign Chambers). “(It) contains measures on how to realize the projected $75-billion foreign direct investments and 10 million jobs in the next 10 years from seven priority industries.” They will generate incremental GDP of over $100 billion, and do highlight the fundamental building blocks of an economy: power generation and basic infrastructure as well as the priority industries where the Philippines could be competitive. At the end of the day, our per capita income of $3,500 is barely a tenth that of developed economies.

The bottom line: to grow several times fold and be a developed nation requires a major structural fix. And relying on consumption principally generated by OFW (overseas Filipino workers) remittances (of as much as $20 billion annually) has not gotten us – and will not get us –  to where we ought to be. Instead we can call upon the human spirit and begin to look forward and dream and see ourselves as a developed nation! We have to overcome simply being in survival mode, which is reflected even in our driving convention and thus in our chaotic, dreadful and nightmarish Metro Manila traffic! Rizal must have lost faith in his generation that he called on the youth to be the future of the nation. Have we likewise lost faith in this generation? The reality is it would take more than a generation to fix our economy, but we owe it to the future to invest and erect its building blocks – and take the pain that comes with it.

For example, we must get our act together instead of championing the status quo in power generation. We have to cease taking inaction as the best option. That was the same argument we had when we said that to industrialize was too costly – because we wanted to go it alone instead of attracting foreign investments. And thus 50 years hence we remain underdeveloped. Will that happen again with power generation? If it does, would we finally recognize the curse of parochialism and shortsightedness?

Juan de la Cruz can’t just be averse to change, unwittingly nurturing oligarchy in the midst of poverty? We have to learn to be egalitarian instead of perpetuating hierarchy? It would be unfortunate if we underestimate the impact of our preference for hierarchy and the high value we put to it – because it is a very plausible explanation for why we tolerate inefficiency and substandard conditions for many but not for ourselves?

ABOUT THE AUTHOR:
Romeo O. Encarnacion is a business consultant who has focused on Eastern Europe over the last nine years. His client in Bulgaria, a consumer-products maker, was chosen by the European Business Awards in 2011 as among Europe’s best from the 15,000 companies vetted for the selection. He started his career in 1968 as a human resources trainee in the Philippines. He then joined a Fortune 500 company in 1981, working with its Manila subsidiary for seven years. He later moved up to its Asian regional headquarters and finally assumed a global responsibility for the company. Since his Eastern European engagement, he has likewise done consulting work with some domestic enterprises in the Philippines. In 2009 he started a blog, “Philippine Economy: Reinventing Ourselves,” owing to his desire to share his worldview with his fellow Filipinos. He considers himself very hands on and professes a strong bias for simplicity and successful execution. He lives in Stamford, Connecticut with his wife Belinda.

[Eduardo (Jay) Olaguer]

Adding value is SO important, yet Filipino culture revolves around picking low hanging fruit. You see this in our barung-barong style education, which produces so many accountants and business majors, but very few technologists, scientists and engineers who know enough beyond the basics to innovate. Those at the top of the social pyramid prefer "safe" disciplines like law and finance, in which little value is added. Even our best private universities only reinforce the dominance of the risk averse and rent seeking class. Members of this class are little different from their 19th century counterparts who lived off the agricultural labor of others, and who sought only "decorative" knowledge that would distinguish them from the common person, the sort of knowledge vented by bullshit artists at cocktail parties and other social venues of the high and mighty. Until we confront this ugly fact of Filipino culture, we cannot progress beyond our sad and seemingly permanent state of economic disrepair.

[Romy Encarnacion]

I was tempted to respond straightway to a reaction to my posting. But on second thought, I opted to wait to see if there was a need to reinforce the points I was making.

In any case, after three years of doing my blogs, I have gotten the sense that people in general recognize that we need to do something about the economy. But the issue of the economy is pretty broad and thus people can’t intuitively identify a starting point, or if, in fact, any effort would even make a dent. For example, people talk about education reforms, but there is very little discussion about our inquisitiveness as a people. And so I wonder if initiatives like using Tagalog as the medium of instructions or moving to K-to-12 would in fact raise our inquisitiveness. Is our environment more about conformity?

One measure of competitiveness, for example, is the number of patents issued to a country or its people versus those from other countries. And given that we have been awarded the fewest patents in the region, I wonder if our value system ranks conformity above that of inquisitiveness? And if we are not intuitively inquisitive, where will the urge to do something about the economy come from, especially it being a complex subject at that?

And even with competitiveness, the Chairman and CEO of Ayala Corporation recently came out with an essay and it stressed how encompassing the challenge is; that is, we all have a role to play. We seldom hear people identify and discuss a starting point.

And which is why in my blog I have talked about lateral thinking and the concept of dynamic. At lot of times, cause and effect is not linear but lateral and so it is really the interplay of a number of things that generate good or bad outcomes in an economy.

For example, everyone is talking about the need for our economy to grow at 7% because if we grow at a lower 4%, for example, it would take over 100 years for us to attain developed nation status. But at 7% we could do it in one generation, according to international agencies. But talking about GDP growth rates for an underdeveloped country like the Philippines is more a like a hit-and-miss proposition. And the reason is an underdeveloped country, by definition, is yet to erect the building blocks of the economy. In other words, without a tangible muscular engine, how could the economy run at a consistent pace?

And in our case, it starts with power generation (at adequate levels and competitive rates) and then our underdeveloped (basic) infrastructure, like roads and bridges and airports and seaports. And on top of that, we need strategic industries that will generate truly incremental products and services that would substantially raise our economic output. Until we have these building blocks in place, talking of a 4% or 7% GDP growth rate is simply a hit-and-miss proposition.

At the end of the day, while free enterprise is supposed to be driven by the private sector, in an underdeveloped economy like ours, the experience of our neighbors is that government played a big role in fast-tracking these building blocks. We haven’t had the conviction to pull these building blocks together; instead, we have made the increase in the remittances of our OFWs and, more recently, the increase in the contributions of the BPO industry as the core of our economy.

And thus I have been talking about the JFC’s Arangkada program because it precisely addresses the gaping holes in the structure of our economy. Unfortunately, we have yet to demonstrate passion or conviction in truly fast-tracking Arangkada.

[Eduardo (Jay) Olaguer]

Perhaps one reason why the government lacks the energy and initiative to invest in basic infrastructure or implement radical reforms in education that go beyond mere symbolic issues is that government is oriented towards patronage rather than results. Because of this, it is severely bloated with mediocre employees without the knowledge or capacity for innovation. The large number of government staff keeps salaries low and therefore invites corruption, in addition to increasing the burden of useless "processes" to justify their presence.

A possible solution to this problem is to keep a core of high performing government employees and radically increase their pay in exchange for a high level of productivity and zero tolerance for corruption. Everyone else can be farmed off to various temporary government corporations that will have to sink or swim after a few years of subsidy. Moreover, NGOs should be encouraged to keep a watchful eye on government agencies, to the point of maintaining a presence in the government offices themselves, so that citizens can immediately complain about slackers.

I wholly encourage opening up the education sector to foreign investment and ownership so as to rapidly bring Filipino education to international standards. Those who complain that the costs of a university education are already out of reach should be reminded that having cheap diploma mills is ultimately more expensive for the country as a whole, because it generates a lot of unemployable people with substandard skills.