From the Andaman to the South China Sea: The Development of the Philippines from a Sri Lankan Perspective

April 8, 2019        Reading Time: 5 minutes

Reading Time: 5 min read

Image Credit: h3k27/depositphotos

Aaron Francis Chan*

Sri Lanka and the archipelagic countries of Southeast Asia are separated geographically by the Andaman Sea, and culturally, by divergent colonial legacies. However, these island nations have pursued similar development goals over the last half-century in the face of similar challenges, such as separatist insurgencies, political instability, and entrenched inequality.

Although each country must shape its own response to these problems, President Maithripala Sirisena’s recent inclination to ‘Look East’ and forge stronger bonds with Southeast Asia could yield new insights into the steps other nations have taken to address these issues. As Central Bank Governor, Dr. Indrajit Coomaraswamy points out, Association of Southeast Asian Nations (ASEAN) “fits in with Sri Lanka’s key priorities of export strategy, foreign direct investment (FDI) strategy, and non-aligned international strategy.”¹ The Sirisena government’s conclusion of a Free Trade Agreement (FTA) with Singapore, despite its current suspension, represents a promising first step in this direction.

President Sirisena’s recent state visit to the Philippines concluded on 19 January 2019 with the signing of various agreements on defence cooperation, agriculture, education, and tourism.² With luck, these warm words will translate into more concrete gains for companies and individuals from both countries. After all, the Philippines has experienced nearly a decade of strong economic growth, averaging about 6% every year from 2010 to 2018 and breaking beyond the cycle of boom and bust that had trapped the economy in the 1980s.³

I aim to highlight three specific points about the Philippine experience that might apply to Sri Lanka’s own development path – on external balance, industrial development, and macroeconomic stability.

Remittances

First, we look at the stabilising role of workers’ remittances in the balance of payments. Both Sri Lanka and the Philippines have been buffeted with balance of payments crises in the past, triggered by sudden shocks or jittery investors. In the Philippine case, hard currency remittances from both low and relatively high-income Filipino workers and households overseas have acted as a stabilising force amid internal and external shocks. The Philippines government recorded inward flows of USD 28 billion at the end of 2017, constituting up to 10% of national output.⁴

These remittances ebb and flow with global events – for example, a recession in Saudi Arabia could see some workers laid off and sent home. However, the geographic and occupational distribution of Filipino households is a source of strength, as any slowdown is unlikely to cut too deeply into the wider flow of dollars.

Once home, the dollars are kept with commercial banks, propping up the Philippine peso against the US dollar, paying for food, housing, medicine, and entertainment. More importantly, they have paid for better education and created a pool of skilled recruits for the business process outsourcing (BPO) industry—the other major foreign exchange generator in the economy that is powering a new source of growth and helping stave off the worst effects of future adjustments in the balance of payments.

Sri Lanka’s current balance of payments crisis is rooted in other problems, some structural and others political. However, Sri Lanka also relies on strong remittance flows of up to 7% of GDP to cover persistent current account deficits. In time, maybe Colombo will also find a way to channel this stable flow of hard currency into new industries and opportunities.

Business Process Outsourcing (BPO)

Second, we zero in on the role of the BPO sector as a key driver of growth. Overseas remittances may provide a stable flow of foreign exchange and enable consumption, but remittances alone aren’t enough to create a new middle class and jumpstart further development.

The BPO sector employs around a million Filipinos in secure, high-skilled, and relatively high-income jobs in a variety of functions, from customer service and legal transcription to data analytics and programming. These jobs act as a multiplier, catalysing the growth of restaurants, the purchase of new cars, and the creation of a whole slew of supporting services.

The success of the industry is testament to years of effort and a constellation of disparate factors – including investment incentives, strong English language skills, and time zone advantages. The Special Economic Zone Act of 1995, for instance, set up the Philippine Economic Zone Authority (PEZA) as a one-stop shop for administrative and regulatory concerns, offered income tax holidays, zero-duty imports of capital equipment, and other tax breaks and investment incentives.

Successive administrations seized on these advantages, nurturing the sector until the Philippines finally overtook India in terms of call centre employees and revenue in 2010. Today, the World Bank estimates that metropolitan Manila has more people employed in the BPO sector than any other city in the world and the industry is expected to keep growing by 5.6% between 2016 and 2022.⁵

Policy Consistency

Finally, we see the value of macroeconomic policy consistency in the face of political turmoil. In the Philippines, balance of payments pressure has often been accompanied by political infighting, leading to policy uncertainty and spooking nervous investors. The 1980s and 1990s saw the toppling of the Marcos dictatorship and the birthing pains of the new democratic government, with coups and counter-coups pushing both locals and foreigners to exit, taking their capital with them. In 2001, against the backdrop of a perfectly healthy outlook in the rest of Southeast Asia, corruption allegations against President Joseph Estrada led to massive demonstrations, coup rumours, and more capital flight.

Philippine politics has not become markedly more stable or agreeable since 2001. However, the Bangko Sentral ng Pilipinas (BSP), the Philippine Central Bank, has maintained its independence and the unspoken support of the Philippine business sector has helped drive the creation and entrenchment of a new consensus around the sound management of monetary and fiscal policy. The BSP announced its intention to apply a straightforward inflation-targeting regime in January 2002. Since then, three successive governors have steered the Central Bank through a succession of political crises, including the surprise resignation of the trade and finance ministers in July 2005 and a slew of military mutinies.

This consistency has extended to fiscal issues as well, with the Philippine Department of Finance rationalising its liabilities through a series of well-timed debt buybacks and swaps across three successive – and fractious – administrations. External debt to GDP was 23.3% as of the end of 2017, down from a crippling 61.6% in 1999.⁶ Even the Duterte Administration is keeping an eye on the public finances, passing new fuel excise taxes while promoting its aggressive ‘Build, Build, Build’ infrastructure construction programme.

Over the last year, the Sri Lankan government has carried out significant macroeconomic reforms, with the Inland Revenue Act and the Active Liability Management Act expected to raise greater public revenue and rationalise public debt. Unfortunately, policymakers cannot always escape the vagaries of the weather or the effects of political crises – but these recent steps bode well for more consistent macroeconomic steering in the future.

Conclusion

Ultimately, it is to be hoped that Sri Lanka will not just continue to ‘Look East’ but also ‘Go East.’ LKI’s Research Fellow, Adam Collins, observes that “the trading relationship [with ASEAN] is under-exploited … and there is also room for greater investment flows to integrate Sri Lanka into Southeast Asian global value chains.”⁷ Although the Philippines’ economic history offers plenty of cautionary tales along with these success stories, it will be up to individual Sri Lankans and Filipinos to ensure that the future is more good than bad and that economic opportunity bridges our current geographic and cultural distance.

Notes

¹De Silva, C. (2018). Sri Lanka can seize ASEAN as next big opportunity. [Online] Daily FT. Available at: http://www.ft.lk/special-report/Sri-Lanka-can-seize-ASEAN-as-next-big-opportunity/22-657449 [Accessed 20 Jan 2019].

²CNN. (2019). Five agreements signed during Sri Lankan President’s first state visit to PH. [Online]. Available at: http://cnnphilippines.com/news/2019/01/16/agreements-philippines-sri-lanka-duterte-maithripala-sirisena.html [Accessed 25 Jan 2019].

³The World Bank. (2019). GDP growth (annual %). [Online]. Available at: https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?locations=PH [Accessed 20 Jan 2019].

⁴The World Bank. (2018). Philippines Economic Update April 2018 draft – Public Documents. [Online] Available at: worldbank.org/en/…/Philippines-Economic-Update-April-15-2018-final.pdf [Accessed 20 Jan 2019].

⁵Ibid.

⁶CEIC Data. (2019). Philippines External Debt: % of GDP. [Online] Available at http://www.bsp.gov.ph/statistics/spei_new/tab6_exr.htm [Accessed 22 Jan 2019].

⁷Daily FT. (2018). Sri Lanka can seize ASEAN as next big opportunity. [Online] Available at: http://www.ft.lk/special-report/Sri-Lanka-can-seize-ASEAN-as-next-big-opportunity/22-657449 [Accessed 22 Jan 2019].

*Aaron Francis Chan was previously Assistant Vice President covering Filipino clients at ING Bank N.V., as well as Head of Inward Investment and Economic Advisor for the British Embassy in Manila. He holds an MSc in International Political Economy from the London School of Economics. The opinions expressed in this article are the author’s own and not the institutional views of LKI, nor do they necessarily reflect the position of any other institution or individual with which the author is affiliated.