(Part 2)
The second reason why I chose 2050 for this futuristic look at the Philippine economy is my focus on South Korea as the best model among East Asian economies for the Philippines to emulate, despite some important differences in factor endowments and culture. South Korea was finally declared as an advanced economy by the United Nations Conference on Trade and Development (UNCTAD) only last July 2021, about 25 to 30 years after it attained upper-middle income status in the late 1980s or early 1990s. The Philippine economy will attain upper-middle income status some time in the next three years, delayed by the pandemic. The year 2050 will be about 25 to 30 years after we shall have attained upper-middle income status, which in today’s prices is reached by emerging markets when they are able to surpass a per capita income of $4,000.
By following the example of South Korea, we will be able to avoid the so-called middle-income trap into which practically all the Latin American countries like Mexico, Argentina, Brazil and Chile were trapped in the last century. If we don’t watch out, we may be forever at the stage of an upper-middle income economy and never reach the stage of an economy, which in today’s prices would require at least $20,000 per capita income. The Middle-Income Trap refers to countries stagnating and not growing to advanced country levels. Many middle-income countries are caught in this trap—unable to compete with low income, low wage economies (such as today, Myanmar, Laos and Cambodia) in manufacturing exports and unable to compete with advanced economies in high skill innovations. Such countries cannot make a timely transition from resources-driven growth, with low-cost labor and capital, to productivity driven growth. As reported by Jesus Felipe in an article entitled “Tracking the Middle-Income Trap: What Is It, Who Is In It and Why?,” out of 124 countries with available date in 2010, there were 52 middle-income countries, of which 35 were caught in the middle-income trap.
How did South Korea escape the middle income trap. From my analysis of their development process in the last fifty years or so, South Koreans escaped the middle-income trap for the following reasons:
-They focused on rural infrastructures and improvement of agricultural productivity very early on in their efforts to attain sustainable and inclusive growth. Especially notable was their Saemaul Undung movement which mobilized both human and capital resources to improve the economic conditions of their rural villages. Following this initial emphasis on farm-to-market roads and other rural infrastructures, they embarked on a very aggressive Build, Build, Build program that resulted in the construction of some of the highest-quality infrastructures in the East Asia region.
-They capitalized on the demographic dividend they enjoyed after the Korean war by investing in labor-intensive, export-oriented industries which were later replaced by more capital-intensive, high-technology industries like steel, automotive, ship building, chemicals, construction, etc. in a subsequent stage of industrialization.
-They invested heavily in high-quality education and research. South Korea today has some of the top universities and research facilities in the Indo-Pacific region.
-They built on the Confucian culture to foster a highly motivated people with a strong work ethic as well as a high propensity to save. Their high rates of domestic savings enabled them to increase their rate of investment without depending too heavily on foreign direct investment.
-Though not free from corruption, their successive authoritarian leaders practiced a crony capitalism based, not on personal and family relations, but on the meritocracy based on actual proven entrepreneurial talents as found among the founders of such chaebols as Samsung, Hyundai, Lucky Gold Star and other conglomerates that received certain subsidies and favors. This is in contrast with the crony capitalism common even now in the Philippines which is based on pure personal relationship or friendship that often has nothing to do with demonstrated business acumen.
The case of South Korea also answers the skepticism of those who do not believe in long-term economic projections. They say that numerous unforeseen events and seismic shocks can affect both domestic and global scenarios facing any given economy. South Korea reached advanced economy status despite many earthshaking events between 1960 and 2021. Among them were oil shocks of the early 1970s, the September 11, 2001 terrorist attack against the U.S., the Arab spring, numerous regional wars In the Middle East, East Asian financial crisis in which South Korea was one of the worst victims, and the Great Recession in 2008 to 2012. The domestic political scene was seriously perturbed by the assassination of Park Chung Hee in 1979, the sentencing of Chun Doo-hwan to life imprisonment for his role in the Gwangju Massacre; the jailing of Roh Tae-woo on the same count as Chun; the sentencing of Lee Myung-back for 15 years for embezzling $22 billion; and the sentencing of Park Geun-hye for 25 years for various charges of corruption. Despite these economic and political shocks and setbacks, South Korea attained average GDP growth of 7.1 percent over a fifty-year period. What mattered most were sound market-oriented institutions, quality infrastructures, an educated population, a minimum of good governance practices, and long-run political stability (which was absent in many Latin American countries).
In the last ten or so years before the pandemic, there were clear signs that the Philippine economy was veering towards the South Korean model in a good number of sectors. Just before the pandemic, the Oxford Economics group came out with a list in November 2019 identifying 10 countries as the leading emerging markets that will dominate the global economy in economic growth in the next decade. The ranking is as follows: 1.) India; 2.) the Philippines; 3.) Indonesia; 4.) China; 5.) Malaysia; 6.) Turkey; 7.) Thailand; 8.) Chile; 9.) Poland; and 10.) South Africa. The rankings took into account factors beyond mere GDP figures and also considered funding availability and workforce growth, in which the Philippines ranked very high because of its young (median age is 24), growing and English-speaking population. This demographic dividend (which has long disappeared in South Korea and the other East Asian “tigers”, gives rise to the strongest engines of growth of the Philippine economy now and in the intermediate future: more than 10 million Overseas Filipinos (OFWs) earning yearly more than $30 billion and some 1.4 million highly educated workers in the BPO-IT sector turning out some $25 billion annually. These two very reliable sources of foreign exchange earnings and jobs will only grow stronger after the pandemic as the depopulating part of the developed world will rely heavily on Filipino workers to keep many of their industries and services operating. Even China, because of its rapidly aging population, will increasingly turn to the Philippines for the much needed supply of nurses, health workers, teachers and IT professionals.
The large population consisting of 110 million growing annually at 1 percent will swell to a peak of some 150 million in the next thirty years, constituting a solid foundation for the growth of demand for all types of industrial products and services. Domestic consumption, rather than export, will be the main engine of growth of the economy as it is already the case in China and South Korea. Private consumption in 2050 will account for 70 percent of GDP. Another UK think tank, the Centre for Economics and Business Research (CEBR) gave a very positive assessment of the Philippine economy as late as December 2020, when COVID-19 was already raging all over the world. In a world economic forecast for 193 countries all the way to 2035, the CEBR projected the Philippine economy to improve by 10 positions in GDP ranking according to the World Economic League Table. Ranked 32 in 2020, the Philippines was forecast to improve by 10 positions to Rank 22. It assumed an annual rate of growth of GDP of 6.7 percent between 2026 and 2032. Given the greater importance being assigned to rural and agricultural development by state officials as well as the private sector; the intensification of the Build, Build , Build program expected in the new Administration that will be in place in June 2022; the greater focus on quality education; the strong recovery of tourism and travel expected by 2023; and the removal of legal and constitutional restrictions against Foreign Direct Investments, I am confident that that there is a very high probability that by 2050 the Philippines can follow South Korea to attain advanced economy status by 2050. Let us now picture what that advanced economy would look like in 2050. (To be continued.)