Page last updated at 08:50 CST6CDT, Wednesday, 16 October 2019 PH
Global economic growth will shift to the Asian region as the developed countries, especially those in the West, suffer a serious slowdown. As we reported in a recent column, the Financial Times carried an article on July 20, 2017 by Martin Wolf, entitled “How the developed world lost its edge.” His views even preceded the calamitous impact on world trade by the trade war that President Trump of the US is now waging against China and of the uncertainties of a no-deal BREXIT. The following comments of Mr. Wolf, one of the most astute observers of world economic development today, take even greater significance during the second half of 2019: “The most important transformation of recent decades has been the decline of the weight of the high-income countries in global economic activity. The ‘great divergence’ of the 19th and early 20th centuries, when today’s high-income economies leapt ahead of the rest of the world in terms of wealth and power, has gone into remarkable rapid reverse. Where once there was divergence, we now see a ‘real convergence’. Yet it is also a limited convergence. The change is all about the rest of Asia and, most importantly of China.” And may I add India and the ASEAN Economic Community (AEC).
Using a word that President Duterte popularized at the beginning of his Presidency when he ostentatiously announced that he wanted the Philippines to move away from the U.S. and closer to China, how should we “rebalance” our economic relations during this era of the “Asian Century.” More specifically, how do we move closer in economic relations towards China, India and the AEC? Let us begin with China. Using the Purchasing Power Parity (PPP) measure of GDP, China is already Number One in absolute GDP, although very much behind the U.S. and other developed countries in GDP per capita. Nonetheless, China is estimated to have more than 500 million middle-income consumers who would constitute the largest consumer market in the world today. It is crystal clear that the Philippines is failing miserably in tapping this consumer market at our very backyard. We have a trade deficit of about $5 billion as we import a total of $12 billion from China and export $7 billion, mostly electronic components. The greatest opportunity for the Philippines is to export high-value agribusiness products, following our successes in pineapples and bananas. We are way behind Thailand, Vietnam and Malaysia in their exports to China of food and feed products.
Until and unless we are able to put our agricultural house in order, we may have to depend more on services exports such as tourism and manpower (especially caregivers, nurses and teachers). China is increasingly open to these specialized types of services exports because of the serious demographic crisis that the country is already facing. If we are able to increase our pool of Mandarin-speaking Filipinos, we may even explore the possibility of BPO-IT exports to China because of the rising wages in some of the industrialized cities of China, especially along the coast line. In the online gaming business, we are already earning significant amounts of foreign exchange in addition to the increased demand for condominium units and other real estate products from the estimated 200,000 Chinese workers in what we call POGO. Incidentally, these Chinese workers do not take away jobs from Filipinos because there are very few Filipinos who can do their work that has to be in the Mandarin language.
What about investments from China? In this regard, we have to be more realistic in our expectations. After the euphoria resulting from the first visit of President Duterte to China which supposedly bagged investment and credit line pledges amounting to US $24 billion, there is the harsh reality that the Chinese are good in promising but very slow in delivering. Chinese investments in the Philippines remain paltry, very much behind those from the Netherlands, Singapore, and the U.S. As one of the members of the Duterte Cabinet remarked, “Only a sliver of the US $24 billion has materialized.” In fact, most of the infrastructure projects that have started in the first half of the term of President Duterte are being funded by the Japanese, e.g. the train from Clark to Manila, the subway system in Manila and the Cordoba bridge in Cebu. I would give more credibility to the pledges made in the recent trip of President Duterte to Japan (25 billion yen for Mindanao and US$5.5 billion in private business investments) than the Chinese promise of $24 billion.
Those who worry about being overly indebted to the Chinese should make a reality check. The Chinese have very little to lend to countries like the Philippines. Their entire financial system is caught in what was called by long-time China watcher George Magnus a debt trap. In a book entitled “Red Flags: Why Xi’s China is in Jeopardy,” Mr. Magnus reports that China is mired in enormous debt. China has seen a rapid tripling in total domestic debt to about 300 per cent of GDP—notably for debt of state-owned enterprises, local governments and more recently for citizens. This debt trap may explain why we should not expect a more rapid implementation of projects that are supposed to be funded by Chinese investments. Projects like the Mindanao Railway (part of the Belt and Road Initiative) are more political than commercial. Already loaded with many non-performing loans, it is understandable that Chinese banks may be hesitant to commit funding to the Belt and Road Initiative because they are already saddled with many questionable infrastructure loans in their books. This debt trap may also explain why there are many negative feedbacks from the experiences of African nations, Sri Lanka and Malaysia about infrastructure projects funded by the Chinese in their respective countries. (To be continued)