The waning efficacy of daang matuwid

Business leaders in the Philippines have expressed dismay at the way things are going.

To the outside world, the Philippines represents a remarkable good news story. In the latest Global Competitiveness Report for 2015-16 released by the World Economic Forum, a group consisting of global leaders, the Philippines climbed 5 notches up the ranking landing in 47th place out of 140 economies. In 2014-15, the Philippines was considered the most improved economy by the WEF.

When he sat down to interview President Aquino at the close of the Forbes Global Leaders Conference last year, Steve Forbes remarked, “I think people who hadn’t been here for a while are very surprised at the dynamism of the economy and we were discussing beforehand that when we get back, our party, to the United States, some of us are going to get a constitutional amendment so that President Aquino, when he leaves office next year, can come to the US and give us some of the 6-percent growth rate.”

These international leaders see the macro-picture of the Philippines: a country that has had stable government, relatively faster growth, and seemingly conscientious leadership over the last five years. From a distance, the country looks like a nation on the rise. Certainly on paper, the fundamentals seem to indicate that.

The view is very different, however, for those “on the ground” in the Philippines, who have to contend with the day-to-day challenges of life and doing business in the country. The following statements were issued in the last quarter of 2015 and early this year by some of the more prominent business leaders who represent foreign investors with a stake in the country:

It is simply unfathomable that the common principle of sanctity of contract can be completely disregarded here. How can the country attract foreign investors if even a signed contract offers no assurance that the other party, in this case the government, will respect it.

– ECCP vice president Henry Schumacher in reference to the case of JKG-Power Plates, the  winning bidder for the Motor Vehicle License Plate Standardization Program (MVLPSP) of the Land Transportation Office (LTO).

It’s a litany of failure after failure, of total incompetence in managing a system—all because the government wanted to “save” a few cents…The government…has proven itself massively inept at running something like a rail line.

– Peter Wallace  of the Wallace Business Forum in reference to the Metro Rail Transit system.

Metro Manila is at risk of becoming uninhabitable as annual new car growth increases to 500,000 by 2020. While roads are being improved throughout the country, the National Capital Region urgently needs more limited access roads, especially skyways, and rail.

– John Forbes, senior advisor of the American Chamber of Commerce of the Philippines.

The frustration expressed by these local business leaders appears to be echoed by international watchdogs. Transparency International in its latest global report found that the Philippines had slid in the annual Corruption Perceptions Index (CPI) as it ranked 95th among 168 countries. With a score of 35 out of 100, the country’s current rank is 10 notches below its ranking last year.

This finding supports the World Bank’s latest Worldwide Governance Indicators for 2014 which saw the Philippines’ score in curbing corruption go down for the first time since 2010. This happened despite other indicators of governance improving for the country, in areas such as in government effectiveness and political stability.

In the World Bank Group’s Doing Business 2016 report released in October last year, the country’s ranking dropped six notches to 103rd from the previous year’s 97th spot across 189 economies. It was reported that the Philippines ranked 95th from the original report published last year but was revised to 97th to reflect a change in methodology.

Stalled reform?

All this seems to indicate that the reform agenda of President Aquino and the Liberal Party, dubbed Daang Matuwid (or the Straight Path) stalled in 2014 and began to falter in 2015.

Perhaps the administration has become a victim of its own success. After experiencing economic growth averaging 5.9% over the last five years (a rate unprecedented in the last 40 years), the sheer volume of business activity is now suffering from congestion, as public infrastructure has not been able to keep up with the growth.

On the other hand, a number of wounds in the business climate have been inflicted by the government, itself. By that I am referring to the contracts which the government either rescinded or reneged on. This has led to system disruption for public services, which in turn has cost the public time and money. If issuing licenses and running trains on time is the benchmark for government capability, then this government has failed miserably.

There are two things that big business seeks before investing in a place: stability and predictability. The administration has delivered on the former, but failed considerably with the latter. By not honoring contracts and arrangements entered into (Wallace cites 9 major cases in a five part series), the government has increased the risk of doing business in the country and undermined property rights.

In addition, the president and his chosen heir Mar Roxas have indicated their opposition to a number of reforms that different sectors of the business community have been seeking, namely:

  • lowering the company tax rate
  • raising the tax free personal income tax threshold and adjusting tax brackets for inflation
  • lifting constitutional restrictions on foreign ownership in telecommunications, media, mining, and energy
  • reviving responsible mining
  • creating a new department to handle information and communication.

Refusing to entertain these measures will put a cap on future growth, many policy and business experts claim, and reduce the capacity of the economy to rapidly transform and generate employment growth.

On top of all this is the faltering campaign against corruption. After the string of cases against prominent public officials that has landed a handful of them in prison, no meaningful progress has been made in reducing corruption, as evidenced by the surveys of Transparency International and the World Bank.

Compared to the anti-corruption campaign launched by Pres. Xi Jinping of the People’s Republic of China in 2012 after assuming office, which has put hundreds of fellow communist party-mates, military and state owned company officials in jail, Daang Matuwid’s efforts appear miniscule.

It is not surprising then for local businessmen to be up in arms. As the election campaign that will determine who succeeds President Aquino in June heats up, expect the noise to get even louder. Perhaps these warnings are a way of telling the government not to take the business community for granted, as it seeks a mandate for another six years.