Is the Philippines Ready For More

Competition and Integration?

Rogier van den BrinkLead Economist and Program Leader

World Bank Group, Philippines

Swift Business Forum Philippines 2016

Peninsula Manila

April 7, 2016

3

Macroeconomic fundamentals

-60

-40

-20

0

20

40

60

80

100

120

-6

-4

-2

0

2

4

6

8

10

12

Per capita growth Current accountbalance (in percent of

GDP)

Inflation rate Interest payments (inpercent of GDP)

International reserves(USD billion, RHS)

US

D b

illio

n

Perc

ent

Selected macroeconomic indicators

1990-99 2000-09 2010-15

Sources: PSA, BSP, World Bank staff computations

Fiscal space created since 2010: education (more than doubled), health (more than tripled), social

protection (more than quadrupled)

3

37.9 38.6 49.9 57.7 98.9 56.9

132.7

235.2 271.7 309.0 329.4

389.5

327.0

547.3

101.0

133.0 104.5

169.3

214.9 328.2

425.8

0

200

400

600

800

1,000

1,200

2010 2011 2012 2013 2014 2015 2016

PH

P b

illio

n

Health, education, and social welfare budgets, 2010-2016

Health Education Social welfare

Source: DBM

Fiscal space created since 2010:

infrastructure (almost six fold)

4

134.0

228.5 269.9

328.2

411.6

562.4

766.5

0

100

200

300

400

500

600

700

800

900

2010 2011 2012 2013 2014 2015 2016

PH

P b

illio

n

Infrastructure budget, 2010-2016

Infrastructure

Source: DBM

Achieving inclusive growth is within reach,

now more than in any previous period

• Recent trends show an improvement in the country’s growth-poverty

elasticity – which means growth is becoming more inclusive.

• If the Philippines sustains high growth and accelerates structural

reforms, the country can eradicate poverty within one generation.

5

In a nutshell…

Weak job creation in agriculture and

manufacturing

Both agriculture and manufacturing can typically provide

tens of millions of jobs to the poor

Policies which limit both domestic and foreign competition

• Restrictions on practice of professions for foreigners

• The long foreign investment negative list

• Substantial tariff barriers in several key industries, mostly in

agriculture (also significant non-tariff barriers)

• Cases: rice, SMEs, shipping, telecoms, taxes/customs

Philippines China Indonesia Japan Malaysia SingaporeSouth

KoreaThailand Vietnam

Sector Group

Mining, oil & gas 40 100 98 100 70 100 100 49 50 78 92

Agriculture & forestry 40 100 72 100 85 100 100 49 100 83 96

Light manufacturing 75 75 69 100 100 100 100 87 75 87 97

Telecom 40 49 57 83 40 100 49 49 50 65 88

Electricity 66 85 95 100 30 100 85 49 71 76 88

Banking 60 63 99 100 49 100 100 49 65 76 91

Insurance 100 50 80 100 49 100 100 49 100 81 91

Transport 40 69 49 40 100 47 80 49 69 66 79

Media 0 0 5 60 65 27 40 28 0 36 68

Construction, tourism

& retail 100 100 85 100 90 100 100 66 100 93 98

Health care & waste

management 100 85 83 50 65 100 100 49 76 84 96

Source: Investing Across Borders (IAB) database of the World Bank

Foreign ownership restrictions (percentage of foreign ownership)

IAB

regional

average

IAB

global

average

Integration and Competition:the case of rice

Rice prices in the region

10

In Jan 2016, 1kg of

rice cost PHP 35 in

Philippine markets.

In contrast, the Thai

and Vietnamese are

paying the

equivalent of PHP 15.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

US

D/K

G

Philippines Thailand Vietnam

Source: FAO

Rice and the poor:The poor spend over 20% of expenditures on rice

11

Other

expenditure

Other food

expenditure

Rice expenditure

Expenditure breakdown of

the poor, Philippines

(2012)

If the price of rice fell to

the world price…

Other

expenditure

Other food

expenditure

Savings

Source: World Bank staff calculations using Family and Income Expenditure Survey (FIES) 2012

Rice expenditure

While Filipino children continue to suffer

malnutrition

Rice Policy in the Philippines 12

33.6

0

10

20

30

40

50

60

70

Prevalence of stunting among children, 2011P

erc

en

t

Source: World Bank 2011 for countries who report stunting data

High rice prices are pushing up wages and

reducing competitiveness

13

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8 Ratio of minimum wage to value-added per worker

Sources: Doing Business Database (2012), WB staff estimates using National Wages and Productivity Commission (NWPC) dataNotes: The first 5 countries either have no minimum wage or have minimum wages close to zero.

"PHL" stands for "Philippines." "NCR" stands for "National Capital Region."

41.5

0

20

40

60

Malaysia China Thailand Indonesia Vietnam Philippines

Share of food expenditure to total household consumption (%)

Source: US Department of Agriculture, Economic Research Service

Source: Doing Business Database (2012), WB staff estimates using National Wages and Productivity Commission (NWPC) data

Policy recommendations

Rice Policy in the Philippines 14

• Rice trade: more competition and integration would have

many benefits…

• Remove the state’s import monopoly (quantitative import

restrictions) and replace with tariffs

• Progressively reduce the tariffs over time

• Increase agricultural productivity of farmers (a “classic”

agricultural agenda):

• Invest in research and development;

• Revamp agricultural extension;

• Build rural infrastructure: roads, irrigation and electrification

• Secure farmers’ property rights

• Improve farmers’ health and education

Integration and competition:making it easier to start a business

Starting and maintaining a small business…

still not easy

16

• The number of procedures required to start a corporate

business in the Philippines, at 16, barely improved and is

substantially higher compared to neighboring countries.

• As a result, this costs the country more than PHP 100 billion

annually in opportunities foregone…

• See “Philippine Economic Update Oct. 2015”:

http://www.worldbank.org/en/country/philippines/publication/philippi

ne-economic-update-october-2015

Philippines 2005 2010 2016

Starting a business rank 102 out of 145 162 out of 183 165 out of 189

Number of procedures 17 18 16

Number of days 49 42 29

Cost (as a percent of per capita

income)

24.1 21.6 16.1

Cost (in current pesos) 14,587 18,918 22,000

Progress in starting a business indicator

Strong coalition is needed:

for reforms across agencies and spheres of government

Topics Potential Reforms

Starting a

Business

Philippines rank:165 of 183

Average EAP: 103

• Further propagation and effective implementation of one-stop-shops, such as the

newly Go Negosyo Centers

• Use of information technology to allow automation of business name registration,

payment, information access, etc.

• Introduce risk-based approaches to business registration

• Eliminate the minimum capital requirement to establish a limited liability company

Getting CreditPhilippines rank:109 of 183

Average EAP: 80

• Create a central repository of credit information

• Establish a sustainable credit information ecosystem

Construction

Permit

Philippines rank:99 of 183

Average EAP: 78

• Simplification of the procedures and documentation required for securing

construction permits.

• Use of information technology to allow automation of the process, such as filing and

obtaining application forms, payment, information access, and other requirements for

construction permitting.

• Reforming the legal framework for construction permits, support for the

implementation of the law

• Implementation of a risk-based approach

Enforcing ContractsPhilippines rank:140 of 183

Average EAP: 104

• Map processes at the courts to identify sources of delay

• Investigate expanding the scope of the existing commercial courts

• Introduce case management in the courts

Integration and Competition:shipping

International shipping: not easy

0

20

40

60

80

100

120

140

160

Component: International shipping(2014 Liner Shipping Connectivity Index [LSCI])

20

Cabotage liberalization—partial

• In July 21, 2015, the President signed the Foreign Ships Co-

Loading Act (RA 10668) into law.

• Move in the right direction: foreign ships can now load and unload

imports and exports along domestic routes

• It will help reduce costs for importers and exporters and it will also

aid in decongesting ports within the country

• The Act specified that the Implementing Rules and Regulations

should have been promulgated by Sep 22, 2015.

• Still waiting…

• And reforms need to continue…domestic shipping is still

protected… and “not ready for competition”…

• While ports, export processing zones and transport infrastructure

need to be much better planned and coordinated

Ready for competition:A quarter of the world’s seafarers is Filipino and exports of

skilled marine engineers increasing…

21

11,307

11,695

12,701 11,855

21,976

290,000

300,000

310,000

320,000

330,000

340,000

350,000

360,000

370,000

380,000

2009 2010 2011 2012 2013

OFW

dep

loym

ent

Seabased OFW deployment

Others Engineer officer

Source: POEA

Sources: POEA and Amante (2003)

Filipino’s build and export ships…

22

0

0.5

1

1.5

2

2.5

3

3.5

0

500

1000

1500

2000

2500

3000

2006 2007 2008 2009 2010 2011 2012 2013 2014

Share

(%

)

Gro

ss T

onnage

Year

Philippines' Shipbuilding Statistics

Gross Tonnage

Market Share (%)

Source: IHS (Former Lloyd’s Register) “World Fleet Statistics”. “World Shipbuilding Statistics”.

The Shipbuilders’ Association of Japan “Shipbuilding Statistics” March, 2013.

The Shipbuilders’ Association of Japan “Shipbuilding Statistics” March, 2015.

Combining overseas –

domestic routes

23

• Philippine flagged vessels are not allowed to run combined routes

without special permits

• Creation of a single registry to facilitate overseas-domestic routes

• Philippine shipping companies could partner with international companies

and enter regional and international markets

Integration and Competition:telecoms

Philippines: Strongly contested reforms in the

1990s… but now… booming services sector,

with 5 million jobs

25

0

50

100

150

200

250

PHP

bill

ion

Telecommunications revenues

Sources: Securities and Exchange Commission (SEC)

0

2

4

6

8

10

12

14

16

USD

bill

ion

BPO sector total revenues

Source: Business Processing Association of the Philippines (BPAP)

0

5

10

15

20

25

Mill

ions

Air transport, passengers carried

Source: WDINote: Data include passengers of both domestic and international flights.

0

20

40

60

80

100

Mill

ions

Mobile phone subscriptions

Source: WDI

ndicators

Integration and Competition:leveling the playing field in

taxation and customs

27

The Philippines high corporate income tax

… but many tax incentives

0

5

10

15

20

25

30

35

Malaysia Vietnam Thailand Indonesia Singapore Philippines

Tax

rate

(p

erce

nt)

Corporate income tax rate

Sources: USAID, KPMG, PWC, and Botman, Klemm and Baqir

0

1

2

3

4

5

6

7

8

9

Malaysia Vietnam Thailand Indonesia Singapore Philippines

Pe

rce

nt

of

GD

P

Corporate income tax revenue

Sources: USAID, KPMG, PWC, and Botman, Klemm and Baqir

Source: IMF

Real-Time Sin-Tax Monitoring

Collecting Tax Stamp Using Crowdsourcing

Customs Declarations

30

35

40

45

50

55

60

65

70

75

80

85

90

Pri

ce/K

G

Customs Declared Weighted Ave. Unit Price of Plastic Resins, Jan 2013 - Sept 2014

3901

3902

3903

Commodity Highlight: Valuations of plastic resins

improved by up to 60% Year-On-Year in 3Q 2014

Reform Period

Pre-Reform Period Reform Period Reform Period HS Code 4Digit Description 2013 Q1 2013 Q2 2013 Q3 2014 Q1 2014 Q2 2014 Q3 Q1 YoY Q2 YoY Q3 YoY

3901 Polymers of Ethylene 47.87 46.06 41.62 61.71 71.90 72.49 29% 56% 74%

3902 Polymers of Propylene 46.35 41.09 36.88 63.20 72.03 74.20 36% 75% 101%

3903 Polymers of Styrene 56.88 41.07 50.01 66.20 79.10 78.63 16% 93% 57%

15.00

17.00

19.00

21.00

23.00

25.00

27.00

29.00

31.00

2013 Q1 2013 Q2 2013 Q3 2013 Q4 2014 Q1 2014 Q2 2014 Q3

Pri

ce/K

G

Customs Declared Weighted Ave. Unit Prices of Iron and Steel, 2013 Q1 - 2014 Q3

7209

7211

7213

Commodity Highlight: Valuations of iron and steel

improved by up to 47% Year-On-Year in 3Q 2014

Pre-Reform Period Reform Period Reform Period HS Code 4Digit Description 2013 Q1 2013 Q2 2013 Q3 2014 Q1 2014 Q2 2014 Q3 Q1 YoY Q2 YoY Q3 YoY

7209Cold-rolled iron or non-

alloy steel 26.65 28.02 27.17 29.49 28.82 28.02 11% 3% 3%

7211Rolled iron or non-alloy

steel, not plated 18.02 21.30 21.70 22.74 27.88 26.55 26% 31% 22%

7213

Iron/steel bars and rods, hot-rolled, in irregularly

wound coils18.73 21.53 19.18 25.01 25.89 28.15

34% 20% 47%

Reform Period

Inclusive Growth:the “what” is well-known….

But “how”?

Need coalitions to seize the window of

opportunity on July 1, 2016

• A change of administration provides a unique window of opportunity:

the first 100 days, the first six months, the first year…

• However, increased competition in a particular sector often faces

strong opposition from vested interests

• This can sap the energy out of the reform process…

• The challenge lies in fostering a broad coalition of stakeholders, led

by committed leaders, which supports a reform package for inclusive

growth…

• Because they anticipate that integration and competition is a key pillar

of inclusive growth and will make everybody better off in the long run,

even if some will face losses in the short run

• These coalitions can form at many levels—sectorally, regionally, and

locally—and around many themes

33

We can work it out

Rogier van den BrinkLead Economist and Program Leader

World Bank Group, Philippines

Thank you