Thailand & the Philippines: A dismaying study in contrasts

Michael Alan Hamlin

Posted on February 9, 2012

In 1985, per capita gross domestic product (GDP) for Thailand and the Philippines was just under US$1,000. Growth in Thailand was set to take off, and it did, primarily fueled by foreign direct investment (FDI) in manufacturing. Growth in the Philippines, in contrast, was set to stagnate, with the economy limping along thanks to heavy reliance on the export of people, who send home billions of dollars annually.

In 2010 Thailand’s per capita GDP was approaching US$3,000 while the Philippines was threatening to pull per capita GDP back up to about US$1,100, matching record per capita GDP in the early 1980s when the population was less than half as big (In constant 2000 $s; for nominal GDP per capita, please see “Feedback from readers below”.). Since 1985, both countries have experienced successive political crises, repeated natural calamities, and the impact of two global financial crises. Aside from population growth the only difference is this: Thailand has attracted billions of dollars more in job- and revenue-generating FDI nevertheless.

During the 2000s, Thailand took in more than US$71 billion in FDI according to the Asian Development Bank (ADB) while the Philippines absorbed US$18 billion, or just a quarter of the investment dollars that went to Thailand. As a result, manufacturing—which requires high levels of development FDI—in the Philippines contributes about half as much to the economy as it does in Thailand.

From 1980—when FDI into Thailand first jumped dramatically—to 2009, labor productivity in manufacturing grew better than 90%. In that same period, in the Philippines manufacturing productivity contracted 3.8%. Although services accounts for almost 70% of Philippine GDP compared to less than 45% for Thailand, labor productivity in services grew just 25% from 1980 to 2009 while labor productivity grew almost 80% in Thailand during that same period. Thailand was pulling away competitively from the Philippines.

Growth in exports for both countries contracted at the onset of the 2009 global financial crisis but recovered in months. However, in January last year growth in Philippine exports began to fall precipitously, while growth in exports from Thailand remained steady. In mid-2011 exports from Thailand were up year-on-year over 20%, while exports from the Philippines were flat. By September, growth in Philippine exports was negative.

Part of the reason is the Philippines’ dependence on semiconductors and electronics, which account for close to 70% of exports, and its failure to diversify export markets. Thailand exports a much broader array of manufactured products to more markets. The Philippines has continued to enjoy robust growth in IT-BPO, which grew approximately 20% last year, but ADB economist Norio Usui suggests the Philippines needs two economic legs to stand on to grow significantly.

The contrasts presented by Dr. Usui at the recent Philippine Automotive Manufacturing Summit show that Thailand has succeeded since the mid-1980s in becoming both globally competitive and resilient. Its resiliency is largely the result of Thailand’s success in diversifying its economy. Over 90% of the Thai economy is accounted for in roughly equal amounts by manufacturing and services, with agriculture making up the difference.

While this diversity ensures that Thailand is not overly reliant on one sector, the more significant impact is its capability to generate economic value from two economic legs, unlike the Philippines. The reasons for the Philippines’ inability to match industry-bound FDI are myriad, ranging from the cost of energy to inadequate investment incentives and a highly regulated business environment that exploited investors instead of nurturing them.

The economic and employment cost of that failure is about to hit hard. According to officials of the Philippine Automotive Competitiveness Council, Inc. (PACCI), the Philippines is at a crossroads. At stake are some 410,000 direct and indirect jobs, according to University of Asia & the Pacific senior fellow Thomas Aquino. Many of those jobs are vocational, and don’t require the educational credentials that work in the IT-BPO sector does.

Direct employees contribute about P325 million in income taxes annually. The industry pays about P2 billion in duties and business taxes every year. In 2010, vehicle and parts manufacturers exported US$3.2 billion in vehicles and parts, despite a decline in locally manufactured vehicles as a percentage of new vehicles registered that year. Dr. Aquino told reporters last week that locally manufactured vehicles fell to 44% of new vehicles in 2010, down from 55% in 2006 and 96% in 2000.

PACCI members—which represent 90% of the vehicle and parts manufacturers in the Philippines—believe that the Philippine auto industry can compete globally under the right conditions, and that recent supply chain interruptions demonstrate the importance to the global industry of an alternative manufacturing hub within Southeast Asia. Department of Trade and Industry secretary Gregory L. Domingo agrees.

Last month Mr. Domingo said his department will “recraft” the Motor Vehicle Development Program, signaling that two decades of neglect of the industry is coming to an end. Thailand’s example shows that’s a good thing. And that the alternative is a senseless one.

Feedback from readers

Dear Mr. Hamlin,

I admire and agree with your analysis and insights on why Thailand is now ahead than the Philippines economically.  However,  your figure for GDP per capita needs to be adjusted.

For PH,  with reference to our NSCB,  the total GDP iof PH in 2010 was US$206.5 Billion.  With a population of 94 Million,  the GDP per capita, nominal was US$2,196.  The same figure was also used by World Bank and other financial institutions.

Source:  http://www.nscb.gov.ph/sna/default.asp

While for Thailand,   their GDP per capita nominal for 2010 was US$4,990.

Thank you for your kind words about the country as I have read your other stories/articles.

More power to you.

Respectfully yours,

Ronnie  Rabino

Ronnie, thanks for the heads up, and for reading the column. I should have said that the figures I cited were in constant 2000 $s for real GDP per capita. I will correct that oversight when I post the column to asianpundit.com tomorrow, and add the numbers you site as well, for reference. Thanks again for reading, and let me know if you notice anything else. Cheers, Mike.

Hi Michael

Good article in Manila Bulletin today re. Thailand v Philippines.  I run a software development BPO company here in Manila with a focus on Australian clients.

The comparisons between the development of the two countries comes down to the vision (or lack of) of the Governments in each country.  While I don’t like to criticise sitting Governments,  as an outsider looking in,  more (apparent) effort and resources are dedicated to impeaching political rivals than are to policy on economic development, job creation, education, health etc.  While it is important to break the culture of corruption,  should it be the only policy?

Imagine what would happen to the BPO and service  sectors in the Philippines if tommorrow the Thais suddenly had English as a first language?

Regards

Andrew McCarroll

Andrew, thanks for reading the column, and offering your perspective. I appreciate your kind appraisal.

I certainly agree that getting priorities straight is key to development. I should add that there are some things coming up for this industry and others that demonstrate renewed government commitment to growth and development. Unfortunately, I’m not at liberty to say much more. But as far as the IT-BPO industry is concerned, I believe that a number of encouraging announcements are coming up soon.

It is ironic that in a country with hundreds of dialects and at least 120 distinct languages that Filipino, the first language of about a third of all Filipinos, is considered a national language. But where would we be without irony? We know where we’ll be if we don’t get better at speaking English. Cheers, Mike.

(Note: The paragraph above has been edited and varies from the original email response I sent to Andrew. In the original response, I overestimated (to put it mildly) the number of dialects spoken in the Philippines. I also added the information on distinct languages and the proportion of the population that speaks Filipino as a first language.)

(Michael Alan Hamlin is the managing director of TeamAsia and a Manila-based author. His latest book is High Visibility: Transforming Your Personal and Professional Brand. Write him at mahamlin@teamasia.com and follow him on TwitterFacebook and LinkedIn. Copyright © 2011 Michael Alan Hamlin. All Rights Reserved.)

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