No Free Lunch
Divergent paths

By Cielito Habito
Philippine Daily Inquirer
First Posted 23:24:00 05/09/2011

Filed Under: Economy and Business and Finance, Investments, Foreign affairs & international relations

Some years back, I wrote about how the economies of Thailand and the Philippines had been virtual identical twins in 1970, but have since dramatically parted ways. The numbers tell the story quite clearly. In 1970, both countries had the same populations of 36 million each, growing at the same rate of 3.1 percent per year. Average income, derived by dividing gross domestic product (GDP) by population, was $250 in both. Interestingly, just 10 years before (in 1960), our average income was actually double that of Thailand; it took them only 10 years to close the gap.

The structures of our respective economies were also very similar in 1970. Services made up 45.2 percent of the Thai economy, and 46.7 percent of ours. Agriculture accounted for 32 percent of Thai output while it made up 26 percent of ours, and industry made up 23 percent in Thailand against the Philippines’ 27 percent. We were even slightly more industrialized and less agricultural than Thailand 40 years ago. Total domestic investment made up one-fifth (20 percent) of GDP in both countries in 1965. But we were somewhat bigger savers than the Thais: total domestic savings made up 20.3 percent of our aggregate income, whereas Thailand’s saving ratio was 18.5 percent.

How times have changed. Fast-forward to the present, and the contrast is now so dramatic, it’s downright depressing. In 2009, the Philippine population was 92.2 million, against Thailand’s 66.9 million. Our population now exceeds that of Thailand by more than the entire population of Mindanao. Filipinos are growing in number by about 2 percent per year, while the Thais are growing at less than half that pace, at 0.6 percent per year. Industrialization surged in Thailand, with industry’s output share nearly doubling to 43.3 percent; in the Philippines, it only inched up to 30.2 percent. Where we failed in industrialization, we made up for in services, whose share of the economy grew to a dominant 55 percent. The Thais nearly doubled their saving rate to 32 percent, while ours fell to 16 percent. And average income (GDP per capita) in Thailand is now more than twice ours ($4,062 against our $1,796). Estranged twins indeed.

Three things contributed to this dramatic switch from our relative positions 50 years ago. First, the Thai economy grew much faster than ours did through those five decades. Second, the Thais managed to slow down their population growth to less than 1 percent since the 1970s, while ours remained in excess of 2 percent per year. Third, our currency fell in value at a rate more than 10 times the Thai baht did since 1970. The baht had depreciated 52.5 percent (from 20 to 30.5 baht to the dollar) within the period, while the peso had declined by 560 percent (from 6.44 to 42.5 pesos to the dollar).

Recently, I was asked to draw a similar comparison between the Philippines and Indonesia, a closer neighbor to us in more ways than one. With Thailand already well beyond our own league, one hopes that a comparison with a closer kin may prove more comforting for us—or at least less discomforting?

Alas, that is not so. It turns out that our switch with Indonesia has happened in a much shorter time span, or just within the last 10 years. In 2000, Indonesia was still the poorest (that is, it had the lowest average income) among the original five member states of the Association of Southeast Asian Nations (Asean 5), with a GDP per capita of $802 against our $1,049, or only 0.76 of ours (Singapore, Malaysia and Thailand were of course already well ahead). By 2009, it was the reverse: our GDP per capita (at $1,746) was 0.75 of Indonesia’s ($2,335), and we had become the poorest country among the Asean 5. It is worth noting that we had actually pulled away from Indonesia in the 1990s. In 1990, Indonesia’s average income was already 0.88 of ours, which means that we had widened our lead over them through that decade. But that widened gap was squandered in the last decade, leading us to switch places instead.

In 1990, Indonesians outnumbered us three to one, with a population of 179 million to our 61 million. But because we have been multiplying faster than our southern neighbors, the gap has since narrowed to 2.5 to 1, with their 231 million against our 93 million. Meanwhile, Indonesia had industrialized its economy, with industry’s share of output growing from 39 percent to 48 percent in the 20-year period since 1990. In contrast, industry share in total Philippine GDP had dropped from 35 to 30 percent in that same period. Again, it was services that took up the gap that industry could not fill.

There’s more: in 1990, Indonesians invested 31 percent of their total income, whereas Filipinos invested only 24 percent. By 2009, Indonesians were still investing 31 percent of income, but Filipinos’ investments had even dropped to 15 percent. Similarly, Indonesians saved 32 percent of their income in 1990 and in 2009; in the Philippines, the saving ratio had dropped from 19 to 16 percent.

I could go on with more such statistics, all showing how pitiful our performance had been relative to our closest neighbors, especially in the last 10 years. There is so much wrong to undo, so much catching up to accomplish. Against such a background, the pressure is great for the new government to show spectacular results, which so far seem elusive. But like in Manny Pacquiao’s lackluster bout over the weekend, what is important is that we are ahead of the game, and making good progress in picking our economy up nonetheless. Happily, the recent numbers show that to be the case.