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Where did the Philippines go wrong? What did Vietnam do right?

Last month, the International Monetary Fund announced that Vietnam will surpass the Philippines in terms of per capita income by the end of this year. This comes on the back of Vietnam’s decisive anti-virus response which significantly insulated it from the pandemic’s economic blowback. Vietnam’s economy is poised to grow by 3% in 2020 while the Philippine economy will likely contract by a massive 9%.

This was bound to happen. Since Vietnam adopted its Doi Moi policies in 1986 (Doi Moi consist of economic reforms designed to transform Vietnam into a market-driven, socialist state), the socialist republic has increased per capita income from $200 to $3,500. From being one of Asia’s poorest nations, the average Vietnamese is now wealthier than the average Filipino.

How did this happen? The fates of both nations were a result of two distinct paths to development. Vietnam adopted a policy of rapid industrialization while the Philippines relied on its population to drive growth. Vietnam’s socialist government succeeded in instituting the necessary reforms to make its environment conducive to manufacturing while the democratic government of the Philippines was only marginally successful.

The decline of Asia’s star economy of the 1960s began under Marcos’ leadership. Contrary to the misnomer that the best days of the country were under Marcos, statistics show that the economy began to decelerate and lose much of its competitiveness under the despot’s watch. During the Marcos kleptocracy, privately owned businesses that were profitable and competitive were “nationalized” and meted out to cronies to usurp. Among them were companies involved in steel manufacturing, cement manufacturing, auto and auto parts manufacturing, light electronics and construction, among others. These companies eventually closed under crony mismanagement. Our competitiveness in these industries were lost in the process.

Marcos putrefied our institutions by instilling a culture of corruption which remains pervasive up to today. The dictator broke the country’s finances by amassing billions in debt for graft-ridden projects that failed to contribute to national productivity. Marcos relegated two generations of Filipinos to poverty.

By the time the despot was ousted in 1986, the country was an economic wreck. Public utilities were owned by the state and operated with wanton inefficiency. Government institutions were as corrupt as they were inefficient. Private businesses lost their competitiveness and struggled to stay afloat. All these were exacerbated by massive capital flight and a foreign debt load we could not pay.

When President Cory Aquino took over, her first priority was to re-establish our democratic institutions — which she did. But unfortunately, neither Cory, nor any other President after her, including President Duterte, made a commitment to industrialize the nation as Vietnam did.

As mentioned earlier, our leaders relied on our population to fuel growth. GMA relied on OFW remittances to keep the economy afloat. PNoy’s accelerated the development of the IT-BPO industry which later became a new source of foreign exchange. President Duterte depended on household consumption to drive the economy.

Although the Philippine economy grew by an average of 5.3% from 2000 to 2019, its foundations remain “shallow.” I say “shallow” because our manufacturing base remains dangerously thin, our level of exports are substantially lower than our ever-increasing imports, agricultural output is at subsistence level and our service industry is generally comprised by low-value services (eg. call centers). Ours is a consumption-lead economy, not one driven by production.

In contrast, Vietnam embraced industrialization with gusto. During the early days of Doi Moi (1986 to 1990), the Vietnamese sought to attain food security. To achieve this, the socialist government decentralized farming and introduced incentives for production expansion. The monopoly of the state over international trade was broken and private enterprises were allowed to import and export. Farmlands were distributed to individual farmers and excess crops, beyond the mandated quota, could be maintained by the farmers. Regions were encouraged to plant according to their comparative advantage. Price controls were removed. These reforms were the foundation of Vietnam’s agricultural revolution and the reason why it is a net exporter of agricultural products today.

In 1987, the Vietnamese government introduced its first Foreign Investment Law to attract foreign capital and develop its industrial sector. The law permitted complete foreign ownership of domestic physical assets and opened all but a handful of industries to foreign investors. In 1990, the Law on Private Enterprises which provided a legal basis for private firms was enacted. In the same year, the Vietnamese government began the process of privatizing state-owned enterprises.

With its new wealth, tax revenues were diverted to underdeveloped areas through investments in infrastructure and social welfare. As a result, poverty rates declined significantly in the countryside.

From the year 2000 to the present, Vietnam sought to become the region’s center for export manufacturing. Its competence increased not only in agricultural products but also in apparel and footwear as well as electronics and high technology products. As of 2019, Vietnamese exports topped $300 billion, four times more than that of the Philippines. Vietnam bagged $112 billion worth of foreign direct investments from 2010 to 2019 while the Philippines attracted only $57 billion.

How did Vietnam become the favorite destination for multinational companies? It is a combination of many reasons. The first is that it pursued as many free trade agreements as it possibly could. This lowered the tariffs imposed on both imports and exports. Vietnam, today, has free trade agreements with ASEAN, the US, WTO members, China, India, Japan, Korea and members of the Trans Pacific Partnership (ex US).

Next, the Vietnamese government made large investments in primary education and healthcare. Infrastructure spending was gradually increased to 8% of GDP. Lately, it has been investing heavily to modernize its digital backbone.

Finally, it made conditions conducive for manufacturing. This included lowering power cost (it is 43% cheaper than the Philippines), a stable policy regime, the development of upstream and downstream supply chains and better trading infrastructure like seaports and export processing zones. In addition, the Foreign Investment Law of 1997 was revised several times such that Vietnam now offers one of the most attractive fiscal incentives in the region. It also helps that Vietnam is geographically closer to China and East Asia.

Vietnam’s economy will continue to soar and the Philippines will be hard-pressed to catch up unless it embraces industrialization. Not to do so will cause us to be left further behind in the development race.

Since Marcos’ ouster, we have failed to fully industrialize the nation. Let’s hope that the next administration has the vision and political will to do so.

 

Andrew J. Masigan is an economist

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