Philippine geopolitics and economy

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KATEMANGOSTAR/ NATANAELGINTING/FREEPIK

Jhe Philippines may be islands in the Pacific, but they are not isolated from geopolitics. Geopolitical events have affected the Philippine economy and helped shape our history.

Cuba’s fall to Castro in 1957, for example, prompted the United States to increase its sugar quota for the Philippines and strengthened domestic rent seeking. More signiIfincluding the oil shocks of 1973 and 1979ffected the nature, duration and fate of former President Marcos’ martial law in the Philippines. How? ‘Or’ What?

The Yom Kippur war, where Israel engaged in a short war against a coalition of Arab states, prompted the Organization of Arab Petroleum Exporting Countries, led by Saudi Arabia, to declare an oil embargo against those who supported Israel. Oil prices jumped 300% from $3 a barrel to $12 a barrel. The world has known its Iffirst oil shock.

However, the dramatic increase in oil prices, which continued after the war, caused the oil-exporting countries to overflow with dollars, which were then deposited by the oil-exporting countries in the monetary central banks, mainly in New York. These monetary central banks then recycled the petrodollars into loans to developing countries, especially oil-importing countries, such as the Philippines, which were suffering from trade deficits.

These loans impacted the Philippines in two ways: first, they allowed the Marcos regime to keep the protectionist, inward-looking, statist economy essentially intact. The push for structural reform reversed and allowed crony capitalism. Second, it allowed the martial law economy to thrive in at least its early years. It was the era of “debt-led growth”.

However, because the protected and inward-facing structure was essentially unchanged, these loans were used for unproductive and inefficient purposes, corruption or no corruption. Consequently, when the second oil shock occurred in 1979 with the fall of the Shah of Iran, the economy sank into crisis, which culminated in the assassination of Ninoy Aquino in 1983 and the People Power Revolution. afterwards.

Today, because of the ongoing war in Ukraine, the world is experiencing another oil shock, and incidentally, a food shock, because Ukraine and Russia are major exporters of wheat and fertilizers. It is too early to tell its long term impact on the Philippine economy as we do not yet know the duration and end state of this war.

What I do know is that geopolitics will affect the Philippine economy. Economic planning must therefore take geopolitics into account.

However, geopolitics will increasingly favor the Philippines. Even the war in Ukraine has a bright side for the Philippines.

First, de-globalization is accelerating and the Philippines could be a winner. Before the war in Ukraine, the United States had tried to dissociate itself from China, the former seeing the latter as a strategic rival.

The de-globalization trend will only accelerate due to Ukraine’s war with the West cutting or reducing its ties with Russia and China, which is increasingly seen by the West as an ally of Russia.

Therefore, the West will try to strengthen its investment and trade ties with countries other than Russia and China.

The Philippines is in a better position than most because it is a frontline state in the United States’ fight against China. It shares democratic values ​​with the United States and Europe. It has a young and large English-speaking population.

Therefore, the adoption of the amendment to the Civil Service Law is timely. The opening of telecommunications, maritime transport, airlines, airports, tolls, railways, metros and TNVs (Transport Network Vehicles) to 100% foreign investment will lead to a boom in foreign investment by companies encouraged by their respective governments. Foreign governments will likely shower the Philippines with concessional loans, grants, or official development assistance to provide the infrastructure needed for increased trade and supply chain resilience. (A western version of “Belt and Road”.)

Second, another geopolitical event favoring the Philippines is the rise of mining as an industry of the present and future.

Mining is already a strategic industry and will become more so in the future. Two factors are driving up the global demand for metals and minerals: the first is the transition to EVs (electric vehicles) from internal combustion engines. The heart of electric vehicles are batteries, which require nickel, lithium, manganese and cobalt to operate. The other factor is the acceleration of digitization caused by the pandemic. The demand for electronic goods has increased during the pandemic and will continue even with the end of the pandemic, as businesses and consumers have seen the benefits of digitalization. All of these electronic products require minerals like copper and nickel.

The problem for the West is that some of these key minerals belong to Russia, China, Congo and other authoritarian regimes. (Russia is a major exporter of nickel and nickel-based products.) Therefore, it will seek to increase supply from friendlier countries like the Philippines.

The Philippines is the fifth most mineralized country in the world. It contains a lot of nickel, copper, gold, silver and even cobalt. Global companies will therefore come knocking at our door. If we let them in, standards of governance and sustainability in the mining sector will improve. (That’s what Tesla is doing in New Caledonia where it has contracted most of the nickel production.) The government just needs to give the mining industry some policy stability.

Finally, the Philippines has a young and large population in a region experiencing rapid population decline. China is heading towards negative population growth. South Korea is the fastest aging country in the world. Japan’s labor shortage is getting worse because there aren’t enough young people. Even Thailand is aging fast. Its average age is 40 and its working-age population will drop from 71% of the population to just 56% by 2060.

Therefore, if the Philippines plays its cards right, it could be a production base for companies looking to relocate their factories outside of China and Russia. If our labor laws are changed and modernized, the country might even have an advantage over Vietnam. Vietnam is, after all, like China, communist and authoritarian.

Although these geopolitical factors represent the tailwinds for the Philippines’ economic growth, the country could still optimize the opportunities offered by geopolitics.

First, it can improve its institutions and its respect for the rule of law. There is no reason why we cannot improve our institutions. We did it with the Central Bank.

We must also restore our international reputation for respect for human rights without compromising the campaign for internal security, peace and order.

Second, we should remove the foreign ownership restrictions in the Constitution and policy of the Philippines first in our government procurement and other laws.

We could attract many media companies fleeing Hong Kong and even Internet companies to set up shop here because we have freedom of the press. Unfortunately, 100% Filipino ownership of mass media has driven out foreign media and internet companies.

Due to the war in Ukraine, Western governments are also increasing their military and security spending. However, since they cannot manufacture all of their components in their own country, they have to rely on low-cost countries for these. We can build our own state-owned defense industries to export these military components and goods. However, a big hurdle is a “Filipinos first” provision in the government procurement law, which gives preference to even more expensive and lower quality “Filipino” products.

Third, we could negotiate bilateral free trade agreements and generalized system of preferences or GSP plus privileges with the EU, US and Canada, as well as ratify RCEP (Regional Comprehensive Economic Partnership) and join the CPTPP (Global and progressive agreement for cross-border transport). -PaciFic Partnership). Opening these foreign markets to local production will boost exports and encourage investors to set up shop here to sell in these markets.

If the next administration makes these reforms, the scale of foreign investment may become a FWell.

Economic management is not limited to monetary policy and fiscal management. It also means recognizing the threats and opportunities offered by geopolitics and taking advantage of our position. It’s about getting the big picture right and formulating a strategy around it.

Calixto V. Chikiamco is a board member of IDEA (Institute for Development and Econometric Analysis).

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