For years, the Philippines has been the economic laggard of southeast Asia. Blessed with a large English-speaking population of 100 million, abundant natural resources and the trappings of a functional democracy, it has nevertheless managed to fall further and further behind more successful neighbors.
Today, in purchasing power parity terms, the Philippines has an income per capita roughly a quarter that of Malaysia and half of Thailand. Outside its glitzy business district, the traffic-clogged capital of Manila is full of slums. Rural poverty and corruption are rife.
At long last, though, the tide is turning. Just as many of the world's best-performing countries of recent years – including Brazil, India and even China – are sagging, the Philippines is stirring into life. Last quarter, its economy again surprised on the upside, growing 7.1 per cent and notching up its 55th straight quarter of growth. It now seems to be growing at a steady 5-6 per cent, despite an adverse external environment, against a lowly 3 per cent in the 1990s. The finance ministry believes the potential growth rate can be lifted to 6-7 per cent and eventually to 7-8 per cent.
The fiscal position has altered beyond recognition. The Philippines has gone from being a country constantly on the verge of a balance of payments crisis to one with manageable external debt and a fiscal deficit of just 2 per cent of output. Such has been the improvement that rating agencies have nudged its sovereign debt to within a whisker of investment grade, a status it is likely to achieve in the next year or so.
As a result, money is pouring in. The stock market, one of the world's best-performing in 2011, is up 32.5 per cent in the year to date in peso terms. That makes it the world's fifth-best performing index. The peso itself has strengthened 7 per cent against the dollar. There is even talk of new investor interest in manufacturing. Japanese companies, looking for an alternative to China, have been nosing around. Philippine exports, not as important to the economy as for many Asian countries, have held up well in spite of falling demand for electronics, suggesting a degree of diversification.
Underlying the story, though, is strong consumption, which makes up early 70 per cent of gross domestic product. Remittances from overseas workers have nearly tripled to $20bn since 2004, defying expectations that they would wilt after the 2008 financial crisis. Notwithstanding the inflow of money, inflation has been kept below 3 per cent thanks to prudent fiscal and monetary policy. Adding to this year's growth impetus, the government – confident that the fiscal situation is under control – has begun to loosen its purse strings, spending more on much-needed infrastructure and social welfare. Spending on education has risen by a third and on health by two-thirds, it says.
"The Philippines, together with Indonesia, is one of two countries beating expectations in this region," says Changyong Rhee, chief economist of the Asian Development Bank. "Now, all of a sudden, foreign investors have high expectations of this country."
Much of the credit for the starkly improved performance goes to Benigno "Noynoy" Aquino, a fourth-generation politician whose election to the presidency in May 2010 has proved a watershed. Mr Aquino has put his administration's weight behind combating corruption, perhaps the country's biggest failing. He has led a battle against tax evasion, pursuing several high-profile cases even among the elite – of which he is a part – normally able to evade the law. Tax collection has risen by 2 per cent of GDP without new taxes. The treasury believes it can still squeeze out another 2-3 per cent.
In the political sphere, Mr Aquino's war on the corrosive politics-as-usual has resulted in the ousting of the chief justice of the Supreme Court. Gloria Macapagal Arroyo, the former president, whose administration is considered one of the most corrupt in years, has been brought to trial. Both moves have won Mr Aquino popular acclaim as has his strong stance on territorial disputes with China.
His clean image has kept his popularity rating well above 60 per cent, unheard of for a president, especially one already nearly halfway through his six-year term. "He's set a tone that the rule of law is to be respected," says Jaime Augusto Zobel de Ayala, head of the country's oldest (and one of its largest) conglomerates. "People trust him. He's very black and white about what he thinks is right."
Mr Aquino has stuck his neck out in other ways. His administration has reached a deal with Muslim rebels in the southern island of Mindanao, ending four decades of conflict. Agriculturally rich Mindanao could yet prove a big boon to the economy. The president has also taken on the Philippine Catholic Church – no light undertaking – by championing a law that would require government hospitals to provide free contraceptives.
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Economists say this could help reduce the birth rate from 3.1 to 2.1 births born per women, enabling the country to make more of its demographic dividend. As Cesar Purisima, the finance secretary, points out, the Philippines, with an average age of 22 – the lowest in Asia – is about to hit its "demographic sweetspot". By 2015, half the population will be of working age, a phase when many Asian tigers took off.
"The president wants to transform the entire country," says Mr Purisima. "All his moves are to show that good governance is a must and that this is something he is going to demand of all sections of government."
Mr Ayala says he has rarely felt more confident about the country. His group's Globe Telecom is investing $800m over two years in overhauling its mobile network, while the property arm is building swanky new shopping malls in second-tier cities such as Cagayan de Oro, Davao and Olongapo. His Bank of the Philippine Islands is also expanding to capture business from what he expects to be a swelling middle class.
Overall, the Ayala Group, which has tripled capital expenditure since 2010, is investing more than $2bn at home this year, helping to counter criticism that big businesses send most of their money abroad. "We are a proxy for many other things that are happening. The country is refreshing itself," he says. "It's been a long time coming."
Several new sectors have been added to the economy. In recent years, the outsourcing industry has grown to such an extent that the Philippines now outpunches India in call-centre revenue. The back-office business already contributes nearly $11bn and 600,000 jobs.
There are hopes it will be a $25bn industry by 2016, One manager of an outsourcing centre in Makati, Manila's flashy business district, says his main problem is staff retention and escalating rents. There are also greater ambitions for tourism after an agreement allowing foreign airlines to fly direct to resorts. Mining could open up if laws are passed clarifying land rights and environmental codes.
Mr Ayala also defends the country's old mainstay, the overseas workers whose existence is often seen as proof of structural weakness. Some 8m Filipinos work abroad. "Why is it that when the finance industry or the manufacturing industry goes global it's seen as a positive?" he asks. "But when it comes to people it is seen as a negative?" Philippine workers are no longer just maids or construction workers, he says. They have now taken skilled jobs in shipping, healthcare and telecoms.
Yet the inability to create jobs at home does reflect a fundamental economic weakness, say many economists. Despite the improvement in governance and in growth rates, academics and charity workers say there is scant evidence that the benefits are reaching the vast majority of the poor. Some 40 per cent of Filipinos still live on less than $2 a day.
"Today we talk of high economic growth, but if I go to the countryside, this growth is not felt by the people," says Juan Ponce Enrile, a one-time protg of Ferdinand Marcos who later turned against the dictator. "Wealth remains among a very thin layer of elite."
F. Sionil Jos, an author who has chronicled the Philippines' struggle with both Spanish and US colonialism, says the ruling elite lacks the sense of national mission that galvanised the economic take-off in South Korea and Japan. "You can see where the interests of the elites lie – in their malls, condominiums, golf courses and beach resorts – not in factories, not in agribusiness," he says.
Mr Enrile blames skewed power relations for the failure to create jobs at home. He wants constitutional amendments making it easier for foreign investors to take on the country's vested interests and increase competition. Currently foreigners cannot own land and are restricted, in most industries, to 40 per cent ownership. "These limitations have hampered the growth and advancement of this country to the detriment of the common people," he says.
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The Aquino administration has shown more interest in making the current system more honest and efficient than in radical reform.
Once Mr Aquino leaves office in 2016, the fear is that everything may slide back. Without structural and institutional changes, the danger is that the usual clique of politicians will again manipulate the system. "Even if he had a vision and all the dedication in the world, he only has six years," says Mr Sionil Jos of Mr Aquino. "And you cannot make a nation in six years."
Mr Aquino's supporters argue that the president can change the Philippines' fortune by example. "Maybe the next guy will think, 'Hey, if you do the right thing, good things will happen,'" says one close associate. Mr Purisima concedes that "building a nation is more difficult than building a house".
But he argues that Mr Aquino can nevertheless institute irreversible change. Having seen what one leader can achieve, voters will demand nothing less of the next president, he says. "His six years are crucial to building the foundations and the institutions that will give his successor no choice but to continue."