Being No. 1

Michael Alan Hamlin

Posted on March 26, 2008

The Philippines needs to do the obvious…

The Philippine brand took another unfortunate hit earlier this month when the Hong Kong-based Political and Economic Risk Consultancy (PERC) announced that the Philippines is the most corrupt of 13 Asian countries in the view of 1,400 expatriate businesspersons surveyed across the region. The survey did not include some supposedly even more notoriously corrupt countries in Asia, such as Myanmar and Bangladesh, according to news reports, which might have pushed the Philippines out of the top slot.

This is not the kind of number one status any country – or any government – wants. Just look to other corrupt countries to see the political impact. Malaysia is a fine example. In national elections this month, Malaysia’s ruling coalition suffered its worst setback in history, losing its two thirds majority and control of four more state governments, placing five of 13 state governments under the opposition.

According to PERC, “A promise to fight corruption was the main campaign theme that won (Prime Minister Abdullah Ahmad Badawi) a big increase in voter support in the last national elections (in 2004).” Instead of reducing corruption, however, corruption was perceived by respondents to the PERC survey to have worsened, with Malaysia scoring 6.37, somewhat worse than its previous 6.25.

In Malaysia’s case, there appears to be a direct correlation – a direct cost – for failure to address corruption. Allegations of corruption also led to protests against the government of former Thai Prime Minister Shinawatra Thaksin in 2005, and provided the pretext for his overthrow in a bloodless coup. And as we all know so well, middle-class outrage over perceived corruption set the stage for People Power Dos in the Philippines.

Fortunately, the Philippine middle-class appears to have learned the lesson of People Power Dos – two wrongs don’t make a right, just a bigger wrong. But that doesn’t mean that the Philippines isn’t paying a price for branding itself the most corrupt country in Asia, at least according to some observers. In an Associated Press interview, Michael Clancy, who heads the Philippine Business Leaders Forum with a membership of 240 senior executives in 40 multinational corporations, said recently widespread corruption in the Philippines is a bigger deterrent to investment than perceived security risks.

Clancy said that while corruption is not causing investors to close shop, it does discourage expansion and disrupts the entry of new investors. “What they’re saying to me is everywhere you turn, somebody has got their hands out for money,” Clancy told the Associated Press. “You need 100 permits and every one of those 100 signatures wants something under the table.”

As a result, the Philippines, Clancy suggested, is losing potential investors who do not want to put all their eggs in the popular China basket to Malaysia and Thailand. “Western companies looking at Asia are not going to tie themselves totally to China,” he reportedly said. “They will have a backup, but at the moment, that backup plan is not the Philippines,” he concluded.

But wait a minute. Isn’t Thailand only marginally less corrupt than the Philippines according to the PERC survey? The Philippines was rated nine, and Thailand, eight. China, incidentally, was rated about the same as Thailand, at 7.98 tied with Indonesia. Yet each of these countries receives billions more in foreign direct investment (FDI) than the Philippines every year. China’s size, influence, and economic reforms explains why it so popular with investors, but why should Thailand get so much more attention?

Well, FDI into Thailand did fall in 2007 to $7.5 billion from $10.3 in 2006, due to a combination of factors, including the coup, missteps by the military-appointed government including calls for increased protectionism, and the prospect of further political instability as a result of Thaksin’s enduring popularity and his likelihood of returning to the country following elections. His allies won the election in December and Thaksin returned to Thailand this month.

The answer may be that Thailand does better because it manages its overall image pretty well. While it may be corrupt and politically shaky, Thailand spends hundreds of millions of dollars promoting tourism, manufacturing, and culture. Thailand may be corrupt, but, perceptually, it has so much more going for it. The Philippines, which spends almost nothing promoting itself, had the lowest FDI in Southeast Asia, at $2.7 billion last year, slightly lower than in 2006, in part because there is just one dominant message being communicated. And it’s not good.

Incidentally, Indonesia posted $10.2 billion in investment, and Malaysia garnered $13.7 billion in 2007. Vietnam recorded a whopping $19 billion, putting the rest of the region, and especially the Philippines, to shame. Yet the Transparency International 2007 Corruption Perceptions Index shows Vietnam almost as corrupt as the Philippines. Indonesia is viewed as more corrupt than the Philippines in that survey.

These hard facts seem to suggest, on balance, that corruption doesn’t have much to do with FDI, despite Clancy’s argument. There does seem to be a political cost, however, but that won’t matter much to a leader who is constitutionally prohibited from running for another term. One thing is certain: the Philippines lags in FDI in dramatic fashion, and needs to do the obvious to fix the problem.

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