Comparative Analysis of the Economic Growth of Malaysia and the Philippines 1

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A COMPARATIVE ANALYSIS OF THE

ECONOMIC GROWTH OF MALAYSIA AND

THE PHILIPPINES: IT’S IMPLICATIONS

FOR THE ROLE OF GOVERNMENT FROM

AN INSTITUTIONAL PERSPECTIVE

By: Dwight B. Perez

2

2010

ABSTRACT

This study was conducted based on the following research questions:

1. What was the economic growth of Malaysia as compared to the Philippines from 1991 to

2007?

2. What were some of the critical economic indicators that contributed to Gross Domestic

Product for both countries?

3. What were the economic policies of both countries during this period?

4..What are the implications of the economic growth for the role of government for both

countries?

The study found and concluded that:

1. The economic growth of Malaysia was much better than the Philippines from 1991 to

2007.

2. The eight critical economic indicators contributed to the economic growth of both

countries; and

3. The economic policies and the role of government were important in promoting

economic growth for both countries wherein Malaysian state emerged as stronger state tin

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promoting economic growth than the Philippine state which was weaker in developing

it‘s own economy.

In the over-all, the state as an economic institution is an important actor in economic

development. A strong state is one that can penetrate society for changes and reforms while a

weak state is a captive of its oligarchy and is influenced by certain particular classes or interests.

Thus, a strong state can effectively promote economic development. Malaysian had shown

that it is a strong state as shown by its high governance index as well as its impressive economic

progress while the Philippines historically was weak as the state were not able to succeed in

promoting a strong economic growth for the country.

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Contents CHAPTER ONE: INTRODUCTION ........................................................................................................... 7

CONTEXT OF THE PROBLEM ............................................................................................ 7

STATEMENT OF THE PROBLEM/RESEARCH QUESTIONS ....................................... 9

SIGNIFICANCE OF THE STUDY ......................................................................................... 9

ORGANIZATION OF THE STUDY .................................................................................... 10

CHAPTER TWO: REVIEW OF LITERATURE ....................................................................................... 11

LINEAR STAGES OF ECONOMIC GROWTH THEORY .............................................. 11

LONG-TERM ECONOMIC GROWTH .............................................................................. 12

STATE THEORIES OF DEVELOPMENT ......................................................................... 12

INSTITUTIONAL ECONOMICS AND NEW GROWTH THEORY .............................. 17

THE NATURE OF THE PHILIPPINE STATE AS AN ECONOMIC INSTITUTION .. 19

THE NATURE OF THE MALAYSIAN STATE AS AN ECONOMIC INSTITUTION 23

THEORETICAL FRAMEWORK AND HYPOTHESES .................................................. 24

CHAPTER THREE: METHODS OF DATA COLLECTION AND METHODOLOGY ......................... 26

RESEARCH OBJECTIVES .................................................................................................. 26

HISTORICAL METHOD ...................................................................................................... 27

MIXED RESEARCH METHODS ........................................................................................ 27

MULTIPLE REGRESSION ANALYSIS ............................................................................. 27

Table 1a Variables for Malaysia Regression Model ............................................................ 31

Table 1b Variables for Philippine Regression Model .......................................................... 33

LONG-TERM ECONOMIC GROWTH PROCESS .......................................................... 34

Figure 1 Long-Term Economic Model .................................................................................. 34

DATA GATHERING METHOD .......................................................................................... 35

VALIDITY OF DATA ............................................................................................................ 36

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ORIGINALITY AND LIMITATIONS ................................................................................. 36

RESEARCH ETHICS ............................................................................................................ 36

CHAPTER FOUR: RESULTS ................................................................................................................... 38

ECONOMIC TRENDS FROM 1990-1994 ........................................................................... 38

Table 2 Economic Trend Analysis for Philippines and Malaysia, 1990-1994................... 39

ECONOMIC TREND FROM 1995-1999 ............................................................................. 39

Table 2b Economic Trend Analysis for Philippines and Malaysia, 1995 - 1999 ............... 40


Table 3 Economic Trend Analysis for Philippines and Malaysia, 2000-2004 ................... 42


Table 4 Economic Trend Analysis for Philippines and Malaysia, 2005-2007 ................... 44

Figure 1b .................................................................................................................................. 45

Gross Domestic Product at Current Prices of Malaysia and the Philippines, 1980-2007 45

LONG-TERM ECONOMIC GROWTH .............................................................................. 46

Table 4b Malaysia Real GDP, Real Gross Capital Stock, and Employment, 1980 to 2007

................................................................................................................................................... 46

Table 4c Philippines Real GDP, Real Gross Capital Stock, and Employment, 1980 to

2007 ........................................................................................................................................... 47

Table 4d Malaysia and Philippines Real GDP, Real Capital Stock, and Employment,

1980 and 2007 .......................................................................................................................... 48

Table 4e Malaysia and Philippines Long-Term Economic Growth Averages from 1980 to

2007 (in percent) ...................................................................................................................... 49

Table 4f Malaysia and Philippines Long-Term Economic Growth Averages by Periods,

1980 to 2007 (in percent) ...................................................................................................... 50

Table 4g Malaysia and Philippines Real Output per Capita, and ...................................... 51

Capital/Labor Ratio, 1980 and 2007 ...................................................................................... 51

Figure 1c Malaysia and the Philippines GDP growth rate trend (annual %) from 1980-

2007 ........................................................................................................................................... 52

COMPETITIVENESS OF MALAYSIA AND THE PHILIPPINES ................................. 53

Table 5 Competitiveness Indicators for Malaysia and Philippines .................................... 53

Table 5b Cost of Doing Business Indicators ......................................................................... 55

Table 5c Doing Business Regulations Measures ................................................................... 56

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Table 5d Tax Incentives in Malaysia and the Philippines ................................................... 56

CONTRIBUTION OF CRITICAL ECONOMIC INDICATORS ..................................... 57

Table 5e Malaysia Critical Economic Indicators, 1977-2007 (in USD billion) .................. 59

Table 6 Philippines Selected Economic Indicators, 1977 to 2007 (in USD billion) ........... 60

Table 7 Malaysia GDP, Investment, Consumption, Government Expenditures, Balance

of Payments, 1991 to 2007 (in USD billion). .......................................................................... 62

Table 7b Philippines GDP, Investment, Consumption, Government Expenditures,

Balance of Payments, 1991 to 2007 (in USD billions) .......................................................... 63

Table 8 Malaysia Total Reserves, Total Debt Service (% of GNI), Manufacturing Value

Added As % of GDP, 1977 to 2007 ........................................................................................ 64

Table 8b Philippines Total Reserves, Total Debt Service (% of GNI), Manufacturing

Value Added as % of GDP, 1977 to 2007 .............................................................................. 65

Table 9 Malaysia Interest Rates, M1 and M2, Lending Interest Rate, Interest Rate

Spread 1977 to 2007 ............................................................................................................... 67

Table 10 Philippines Real Interest Rate, M1 and M2, Lending Interest Rate, and Interest

Rate Spread, 1977 to 2007 ...................................................................................................... 68

MULTIPLE REGRESSION ANALYSIS ............................................................................. 69

Table 11 Summary of Multiple Regression Results ............................................................. 70

CHAPTER FIVE: ECONOMIC AND FINANCIAL POLICIES .............................................................. 71

CHAPTER SIX: CONCLUSIONS ............................................................................................................. 80

INTRODUCTION ................................................................................................................... 80

REPHRASING THE RESEARCH QUESTIONS ............................................................... 83

THE HYPOTHESES AND TEST FOR HYPOTHESES .................................................... 83

CONCLUSION ...................................................................................................................... 111

RECOMMENDATIONS ...................................................................................................... 111

SUGGESTIONS FOR FURTHER STUDIES .................................................................... 113

REFERENCES ......................................................................................................................................... 116

APPENDICES .......................................................................................................................................... 124

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CHAPTER ONE: INTRODUCTION

CONTEXT OF THE PROBLEM

The Philippines presents a stark example of a state that has failed to effect the kind of socio-

economic change found among the newly industrializing countries of East Asia. However,

despite its weak degree of efficacy, the Philippine state plays an enormously important role in the

creation of wealth. Access to the state apparatus remains the major avenue to private

accumulation.

It is, indeed, paradoxical that a ―weak‖ state should be a central subject of analysis. Even as it

is often incapable of meeting even the most basic infrastructural needs of the economy, the

Philippine state is central to any comprehensive analysis of the country‘s political economy. In

other words, it is necessary to focus analysis on the nature of the Philippine state, and seek

frameworks that would be able to capture fully the dynamics of state-society interactions even in

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countries such as the Philippines where the state has failed to effect an impressive degree of

socio-economic transformation.

The weak state in the Philippines has failed to provide basic provisions such as employment,

and housing. The country‘s population majority are suffering from poverty and homelessness. It

is a cruel kind of underdevelopment that has not changed over the years.

The phenomena of underdevelopment or the existence of a chronic state of underdevelopment

is not only a question of economics or even of quantitative measurement of incomes,

employment, and inequality. Underdevelopment is real. It is real for the Philippines and over two

billion people in the world. It is what Andre Gunder Frank would call, ―the development of

underdevelopment (Frank 1967)‖. It is a state of dependency towards the help of others who

have the access to wealth and power. Underdevelopment is a state of misery and helplessness in

the Philippines and in all Third World countries. As Dennis Goulet (1971) succinctly put it:

―Underdevelopment is shocking: the squalor, disease, unnecessary deaths, and hopelessness of it

all! No man understands if underdevelopment remains for him a mere statistic reflecting low

income, poor housing, premature mortality or underemployment. The most emphatic observer

can speak objectively about underdevelopment only after undergoing, personally or vicariously,

the ―shock of underdevelopment.‖ This unique culture shock comes to one as he is initiated to

the emotions which prevail in the ―culture of destitution when a new self-understanding reveals

to them that in their life is neither human nor inevitable (Goulet,1971, p. 23).‖

Malaysia, on the other hand made good progress in economic development and foreign

investments soared in the country and became one of Asia‘s promising economies. It‘s

technological, economic as well as institutional backbone as a government became more stable

and organized and was recognized by many international agencies as excellent in governance.

Thus, in this study, Malaysia‘s take-off as an economy as it had overtaken the Philippines will

be evaluated as well as the Philippines failure as a country and government will be analyzed

comparably.

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STATEMENT OF THE PROBLEM/RESEARCH QUESTIONS


2007?




4 What were the implications of the economic growth for the role of government for both

countries?

SIGNIFICANCE OF THE STUDY

This study is significant because the institutional analysis of Malaysia and the Philippines

under the institutional economics theory is a new research that is important for academicians,

management consultants, economists and businessmen in the Southeast Asia region. It is

important to compare the performance of both countries and evaluate what went wrong and what

went right.

Moreover, it also contributes to the role of the states and institutions in economic

development that by using the state as a conceptual variable in pursuing specific kinds of

economic policies in the Philippines and Malaysia, this study would promote comparative

understanding of the capacity of the third world state in this area.

Furthermore, also, another significance of this study is that by examining state economic

policies and performance in Malaysia and the Philippines, the role of government as an

economic institution, the factors that caused underdevelopment in the Philippines will be

uncovered so that long-term policies can be formulated in order to promote sustainable and

balanced socio-economic development. On the one hand, Malaysia‘s formula for success in its

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take-off in economic development can also be evaluated in the light of helping the economic

development of other developing countries.

ORGANIZATION OF THE STUDY

The organization and structure of the study is based on the format of the American

Psychological Association (APA). This dissertation is organized and divided into six chapters.

Chapter one discusses the context of the problem, the statement of the problem, hypotheses,

objectives of the study, significance of the study, scope and limitations of the study,

methodology, definition of terms, and the organization of the study. Chapter two discusses the

review of literature of this study as well as the theoretical framework and hypotheses and chapter

three explains the nature of the research methodology and processes used in the study..

Chapter four presents the results and findings of the study, and finally, chapter five presents

the discussion of findings. Finally, chapter six presents the conclusions of the study.

The references and appendices can be found at the end of the text of the study.

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CHAPTER TWO: REVIEW OF LITERATURE

LINEAR STAGES OF ECONOMIC GROWTH THEORY

The linear stages of economic growth theory was originally conceived by Walt

Rostow (1962) and it viewed economic development as linear starting from the traditional stage

of society which have limited levels of production and productivity and whose economy is

basically agricultural. In the next stage, a society has to make preparations for preconditions for

the take-off.

The linear growth theory were later further developed by Harrod and Domar (Todaro 2000,

pp. 80-83) which later formulated the Harrod-Domar Growth Model which basically

reemphasized the importance of savings, and investment in the development of an economy.

This position of emphasizing technology, and investments in a nation‘s competitive advantage

have also been reiterated by Michael Porter (1990) of Harvard University.

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LONG-TERM ECONOMIC GROWTH

The long-term economic growth model as explained through the Cobb-Douglas production

function is that output (GDP) is a function of capital, labor, and technology. As such, the long-

term economic growth of a country would depend upon investments and savings in order to

support the capital stock of a country. In addition, labor or employment is also important in

contributing to output especially with the integration of technology which would result to

productivity (Todaro, 2000). The computations as well as the model for the long-term economic

growth as based on the Cobb-Douglas production function can be found in the appendices as

well as in Figure 1.

STATE THEORIES OF DEVELOPMENT

State theories in economic development will also be reviewed as governments also play a

vital role in the development of a country.

As Skocpol writes:

―A sudden upsurge of interest in ―the state‖ has occurred in comparative social science in the

past decade. Whether as an object of investigation or as something invoked to explain outcomes

of interest, the state as an actor or an institution has been highlighted in an extraordinary

outpouring of studies by scholars of diverse theoretical proclivities from all the major disciplines.

The range of topics explored has been very wide. Students of Latin America, Africa, and Asia

have examined the roles of states in instituting comprehensive political reforms, helping to shape

national economic development, and bargaining with multinational corporations (Skocpol 1985,

p. 457).‖

Thus, there is this renewal of interest about the role of the government in developing the

economy. ―State‖ is defined by Max Weber (Roth 1968) ―as compulsory associations claiming

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control over territories and the people within them. Administrative, legal, extractive, and

coercive organizations are the core of any state. These organizations are variably structured in

different countries, and they may be embedded in some sort of constitutional-representative

system of parliamentary decision making and electoral contests for key executive and legislative

posts (Roth, 1968).‖

Skocpol (1985) viewed states as organizations which has control over territories and people

and that they may formulate and implement objectives that might not be what the people wants

society and this is called as ―state autonomy‖. If there is no independence in the formulation

and implementation of objectives, the state is irrelevant as a player in socio-economic

development.

For Migdal (1988), it is clear that only a strong state can be effective in transforming

society, on the other hand, a weak state is ineffective, and in a sense, it has no relative autonomy

to effect much needed change in a given country. This can be exemplified with the existence of

power elites in a given society which would tend to predominate politics, and economic policies

particularly in many underdeveloped countries such as the Philippines. As Migdal stated:

―Capabilities include the capacities to penetrate society, regulate social relationships, extract

resources, and appropriate or use resources in determined ways. Strong states are those with high

capabilities to complete these tasks while weak states are on the low end of a spectrum of

capabilities (Migdal 1988, pp. 4-5)‖

In another school of thought, Evans‘ (1989) predatory to developmental states continuum is a

heuristic tool in determining the degree of the state to effect socio-economic development. As

Evans (1989) explains:

―Some states may extract such large amounts of otherwise investable surplus and provide so

little in the way of ―collective goods‖ in return that they indeed impede economic

transformation. It seems reasonable to call these states ―predatory‖. Zaire might be considered an

archetypal case of such a state…Other states, however, are also able to foster long-term

entrepreneurial perspectives among private elites by increasing incentives to engage in

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transformative investments, and lowering the risks involved in such investments. They may not

be immune to rent seeking or to using some of the social surplus for the balance, the

consequences of their actions promote rather than impede transformation. They are legitimately

transformation considered as ―developmental states‖ (Evans 1989, pp. 562-563).‖

The predatory state is basically one that exploits the country‘s resources for the good of a few

and not for the well being of the majority (Evans cited Zaire as classic example of such a state)

while the developmental states are those that utilized the surplus of society for the improvement

of its constituents. Evans theorized that embedded autonomy is the key to a state‘s

developmental effectiveness.

In contrast to capitalist development theories, Althusser (1984) think that states are a captive

of the oligarchy in capitalist countries since the economic base which is controlled by the

oligarchy dictates the policies of the state. As such, he viewed that there can be no relative

autonomy of the state in these countries.

As explained by Althusser, the state is composed of two basic components and these are: 1)

state power, and 2) the state apparatus. The state is a captive of the oligarchy in capitalist

countries even in developing countries like the Philippines.

However, from the Weberian perspective, the capacities of states to promote economic

development is possible and these include societal penetration for development as well as in the

regulation of social relationships. The state can also extract resources and appropriate them in

such a way that it could benefit society as a whole (Migdal 1988, pp. 4-5).

Richard Edward Deeg (1992) in his dissertation entitled, ―Banks and the State in Germany:

The Critical Role of Subnational Institutions in Economic Governance‖, argued that the capacity

of the German Banks to influence the decisions of non-financial firms and coordinate the

activities of industry is significantly more circumscribed than is widely assumed in the

comparative political economy literature. The weakening influence of the banks over industry is

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the result of several factors: the growing competition since the late 1960s between commercial,

cooperative and public savings banks; the growing financial independence of large non-financial

firms; the increasing importance of small and medium-sized firms as customers group for the

banks which has favored savings and cooperative banks as sources of industrial finance; and the

growth of state economic intervention, especially by the federal states. The institutional role of

the banking system in the German political economy is increasingly better characterized as one

of information mediation. In this role banks supply firms, especially small and medium-sized

firms, with an ever wider range of non-financial information and services. The banks and the

state must be understood as increasingly complimentary, not alternative institution for industrial

policymaking.

Deeg further argued that the state played a crucial role in promoting the competitiveness of

local and regional savings and cooperative banks partly in order to limit the economic power of

the large commercial banks. Strong competition among the three banking groups inhibits banks

influence over industry and foster the growth of their information mediation role. His study also

showed the changing role of the banks in the economy and the growing importance of

subnational institutions, including governments, in promoting the economic adaptation of small

and medium-sized firms.

Osman Babikir Ahmed (1990) in his dissertation, ―The Contribution of Islamic Banking to

Economic Development: The Case of the Sudan,‖ showed that the contribution of Islamic banks

in financing productive projects in development were minimal. The attitude of the Islamic banks

managements, state policies, and the structural rigidities characterizing the Sudanese economy

contributed to this dismal performance. His study also showed that the financial facilities

provided by the commercial banks, and the pattern of allocating these facilities provide evidence

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that smaller firms in the Sudan are at a disadvantage in terms of type, volume, and conditions of

financing. Thus, commercial banks contributed partly to the smaller business finance gap in the

Sudan. Banks have been highly security-conscious and profit-oriented.

Michael Todaro (1985) viewed that in developed countries the role of the state is important in

expanding economic activity through fiscal and monetary policies and this can be done through

increasing or decreasing the interest rates of money being lent to the private sector and this is so

because of highly efficient organizations that promote money and credit markets (Todaro 1985,

pp. 502-503).

However in less developed countries, markets and financial organizations are not that

organized and usually they are dependent upon other countries as well as they are fragmented.

Todaro states:

―Many LDC commercial banks are merely overseas branches of major private banking

institutions in developed countries. Their orientation therefore, like that of multinational

corporations, may be more toward external and less toward internal monetary situations. The

ability of third world governments to regulate the national supply of money is further constrained

by the openness of their economies and by the fact that the accumulation of foreign currency

earnings is a significant but highly variable source of their domestic financial resources (1985, p.

502).‖

These inefficient and fragmented financial structure disrupt economic development in third

world countries. The funds for loan are also rationed to selected ―bankable‖ individuals and as

such development is only limited. Todaro writes:

―Most important, the commercial banking system of the LDCs restricts its activities almost

exclusively to rationing scarce loanable funds to ―credit worthy‖ medium and large scale

enterprises in the modern manufacturing sector. Small farmers and indigenous manufacturing

and service sectors must normally seek finance elsewhere-usually through local money lenders

and loan sharks who charge exorbitant rates of interest (1985, p. 503).‖

As such in most less developed countries, these inefficient rationing of credit as well as the

existence of the ―underground‖ credit lenders that offers loans to ―non-bankable‖ borrowers with

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very high rates of interest undermine the economic development of small businesses in these

countries.

INSTITUTIONAL ECONOMICS AND NEW GROWTH THEORY

Institutions

The effect of institutions such as the state on economic performance according to Yoshihara

(2004):

― Institutions define the incentives and penalty for economic activities. For example, an

effectively enforced tax law determines how much one can retain his earning and how much he

has to pay to the government. If the rate is too high, it is discouraging for private initiative, in

particular risk-taking. If a tax law is enforced with a great deal of discretion, there may be

incentives for cultivating relations with politicians and bureaucrats. If such activity becomes

important for business, national productivity suffers (Yoshihara, 2004, p.6).‖

Thus, governments as an institution can make things easier for business men by enforcing

taxes that are affordable and reasonable and which promotes them to do business in the country

by giving reasonable rates. As such, productivity can be affected if policy on taxes and other

factors are not right.

In addition, Yoshihara (2004) further writes:

―Institutions determine the degree of economic freedom. How free is it to import goods

and services from abroad? How free is it to invest? Does a foreign investor enjoy the same

freedom, or if he does not, to what extent is his investment restricted? Is one discriminated on

the basis of ethnicity? If so, to what extent? Is it free to start business in any areas? Or if it

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is not, what areas are not free or to what extent is freedom restricted. Institutions answer these

questions (Yoshihara, 2004, p.6).‖

As such, the degree of economic freedom is also an important factor for businessmen since if

there are many restrictions then this can affect their productivity.

New Growth Theory

According to Cortright (2001), institutions are important in shaping development particularly

the increased in knowledge-based economies. As he explains:

―History, institutions and geography all shape the development of knowledge-based economies.

History matters because increasing returns generate positive feedbacks that tend to cause

economies to ―lock in‖ to particular technologies and locations. Development is in part chaotic

because small events at critical times can have persistent, long term impacts on patterns of

economic activity. Institutions matter because they shape the environment for the production

and employment of new knowledge. Societies that generate and tolerate new ideas, and that

continuously adapt to changing economic and technological circumstances are a precondition to

sustained economic growth. Geography matters because knowledge doesn‘t move frictionlessly

among economic actors. Important parts of knowledge are tacit, and embedded in the routines of

individuals and organizations in different places (Cortright, 2001, p. ii).‖

In addition, Cortright (2001) view the new growth theory as one that should emphasize new

knowledge and that the economy should grow because of increasing knowledge. He writes:

―New Growth Theory emphasizes that economic growth results from the increasing returns

associated with new knowledge. Knowledge has different properties than other economic goods

(being non-rival, and partly excludable). The ability to grow the economy by increasing

knowledge rather than labor or capital creates opportunities for nearly boundless growth

(Cortright, 2001, p. ii).‖

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Thus, the economic development of a country can be supported by increasing the quality of

human capital and promoting new knowledge is an important factor in it.

THE NATURE OF THE PHILIPPINE STATE AS AN ECONOMIC INSTITUTION

The Philippine state as an economic institution will be reviewed in this section as it is the

contention of this study that the problem with the Philippines as an institution is rooted to the

traditions of spoils and patronage that has turned the state bureaucracies into fiefdoms of

particularistic interest mediated by the oligarchy and dominant political families. Under the

Marcos government, the dispensation of these privileges became concentrated, in fact, in a

narrower circle of interests. In a very real sense, therefore the state was a captive of these vested

interest, unable to exercise any significant degree of autonomy for transformative, and economic

projects (Rivera 1994, p. 117).

As such, Rivera argued that the Philippine state was not autonomous from the pre-colonial

period up to the Marcos government since the power elites were influencing state policy-making

in favor of their vested interests.

According to Villacorta (1994), the root of the weakness of the Philippine state is its

incapacity to severe itself from the interests of the affluent class. The dominance of this ruling

class supported the view that the state is not autonomous in a capitalist system. Villacorta states:

―At the root of the weakness of the Philippine state is its inability to dissociate itself from the

interests of oligarchy. In the Philippines, the landed elite also dominate the industrial sector. This

oligopolistic control of the economy replicates itself in the political system. Most law-makers

have either come from or have been supported by the landed-capitalist elite. The bureaucracy is

likewise not insulated from these vested interests (Villacorta 1994, p. 67).‖

Villacorta (1994) also using the findings of the Ateneo Center for Social Policy regarding the

predominance of oligarchs in the Philippine House of Representatives mentioned 25

congressmen owned or partially owned rural banks; 27 were connected with commercial banks;

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with 17 having insurance businesses; and 28 had investments in holding, management and

investment companies, Villacorta continues:

The career and economic backgrounds of congressmen in the House of Representatives

prior to the May 1992 elections is illustrative of the domination of the economic elite. Of the 200

elected members, 137 were landowners and agricultural businessmen…the congressmen elected

in 1987: 38 congressmen were businessmen prior to their election; 25 were top officials of

corporations and big-business enterprises; 94 congressmen directly owned agricultural and

pasture lands; 36 were major league landlords, owning farmlands and pasturelands worth more

than P1 million; about 53 congressmen were owners or officers of real estate agencies; at least 42

were controlling owners of manufacturing enterprises and factories…25 owned or partially

owned rural banks; 27 were connected with commercial banks…(Villacorta 1994, p. 76).

As such, Villacorta concluded that because of the elitist background of most congressmen,

the House of Representatives had become the power base of elite agenda.

In addition Buendia (1993) also proposed that also added that colonialism as a major factor

in Philippine underdevelopment. He explains:

Philippine political development has been shaped by its colonial history and postcolonial elitist

political system. As the country is ushered into the 21st century. The problems of

underdevelopment remain. These problems are rooted on the unresolved question of nationhood,

skewed concept of public service, alienated political system, and ambivalent political culture.

These problems contributed significantly to the weakness of the country‘s political and economic

instiutions…(Buendia 1993, p.141).

Thus, Buendia (1993) viewed that the political and economic institutions in the Philippines

are both weak. This is further compounded by post-colonial influences in our state and economic

policies which disrupts the country‘s socio-economic development.

In his study of the Philippine state, Hutchcroft (1994) contends that powerful elites who

are autonomous and independent of the State resisted change. He explains:

…Political administration—whether in pre-martial law, martial law or in the Aquino years—is

often treated as a personal affair. The state apparatus is choked continually by an anarchy of

particularistic demands and particularistic action on behalf of those oligarchs and cronies who

are currently more favored by its top officials. One will obtain a highly coveted loan, another

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will enjoy a stake in a cartelized industry unfettered by effective state regulation…(Hutchcroft

1994, p. 66).

Hutchcroft (1991) argues that this elitist and patrimonial aspect of Philippine politics were

entrenched after the World War 11 period because: (1) personal contacts became even more

important for entrance in the central bureaucracy; (2) patrons, who historically relied on their

own local resources, found expanded opportunities in enriching themselves through the

bureaucracy. This did not diminish the power of local elites, but merely increased the role of

state resources within long standing patron-client relationships; and (3) as the oligarchy

diversified its economic holding beyond agriculture to include commerce, manufacturing and

finance, access to state machinery become more important than ever for the creation of wealth

(1991, pp. 414-450).

The Philippine state did not have a serious program for social housing over the years. Its

failure to generate adequate housing for the lower echelon of the Filipino masses persistently

over the years led the researcher to wonder why is it that there is no clear and and adequate

explanation to these phenomenon. This study would argue that this issue can best be explained

from the perspective of ―house financing‖ which is a crucial area in its development.

The spiraling cost of housing had been triggered by the staggering increase in land prices as

well as the cost of materials in constructing houses. Thus, at the heart of the problem of social

housing is the issue of financing and banking in this area because of the housing cost factors

mentioned.

The state institutionalized the Housing and Urban Development Coordinating Council

(HUDCC) as the premier policy-making body in finding solutions and program implementation

on social housing and the Government Financial Institutions (GFIs) that were identified as the

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principals in providing financial support were the following: Social Security System (SSS),

Government Service Insurance System (GSIS), the Home Development Mutual Fund (HDMF),

the National Home Mortgage Finance Corporation (NHMFC), and the Home Insurance Guaranty

Corporation (HIGC).

The private banking sector is expected to play a crucial role in contributing to the social

housing program of the government. The viability of banking on mass housing must indeed be

profitable if properly managed because of the economies of scale. However, the private banking

sector‘s dismal performance in helping the state‘s housing program in the past few years was

buffling.

The role of Government Financial Institutions (GFIs) in financing social housing, and in

relation to the private banks in the Philippines is an issue that must be examined and addressed in

the light of the worsening housing problems in the country. The amount which the state allocated

for the socialized housing program was insufficient to cover the real needs of housing for the

poor. The state, thus, resorted to a financial policy for housing which relied on the private sector

to enhance the construction of social housing.

Simbulan (1998) stated that the government only has a small budget for social housing and

left the rest of these housing needs for the private sector to solve. The problem with this policy is

that the funds of the private sector are more tied-up with investments in real estate, and other

highly profitable form of business interests.

In terms of the slums and squatter settlements in the Philippines, a World Bank (1996) report

states:

―Slums and squatter settlements around the world reflect the failures of housing and land

markets as much as poverty. In the Philippines, it is the underlying failure of the land market

which has made land so costly that urban housing has become not affordable to many. With such

a high proportion of urban dwellers surviving with uncertain land tenure, improved security of

23

settlement is critical to the reduction of poverty in urban areas. With secure tenure, the majority

of the poor can meet their own needs for shelter, constructing their own houses (World Bank

1996, p.27).‖

The World Bank reported the failure of social housing, and increasing problems of poverty in

the Philippines. The underlying factor that caused this according to them is the failure of the land

market.

THE NATURE OF THE MALAYSIAN STATE AS AN ECONOMIC INSTITUTION

In comparison with the Philippines, the Malaysian state has been able to move forward and it

became an instrument of economic development and reform that made the country very

progressive and which surpassed the Philippine state in its economic performance.

The Malaysian state had been able to score high among other countries in terms of good

governance and having imposed the rule of law. In addition its corruption index is impressive

and is respected by the World Bank as compared to the governance and corruption of the

Philippines which did register good ratings (The World Bank, 2009).

What are the factors that made Malaysia better than the Philippines? According to Yoshihara

(2004), Malaysia adopted new economic policies in the early 70s and restricted the economic

freedom of the Chinese who were the backbone of the economy then but the Malaysian was not

that strict to the Chinese. As Yoshihara (2004) explains:

―Consider Malaysia vs. the Philippines first. One favorable institutional factor for Malaysia

is that it did not adopt as restrictive policy as the Philippines. True, Malaysia adopted New

24

Economic Policy in the early 1970s and restricted the economic freedom of the Chinese who

had been the main pillar of the economy together with foreign capital. But Philippine

institutions had been generally more restrictive on economic freedom, at least until the early

1990s. First of all, the Chinese, most of whom were not Filipinos at the time of independence,

were discriminated more severely in the Philippines than in Malaysia. Chinese discrimination

eased in the mid 1970s under Marcos‘ marshal law, but before that, the effect of discrimination

was quite severe (the major discriminatory institution was the Retail Nationalization Law passed

in 1954). Besides, the Philippines restricted foreign investment and imports to greater extent

than Malaysia. Furthermore, the Philippine government created monopolies on commodity

trade and intervened in the economy through creating government corporations (especially,

banks), setting minimum wages at relatively high level, and controlling the prices of basic

commodities and services (Yoshihara, 2004, p. 11).

As such, during the Marcos regime, the Philippines restricted foreign investments and

imports much more than Malaysia. In addition, the Philippine state developed monopolies on

commodity trade and interrupted the economy by creating government corporations which

controlled the prices of basic commodities and services.

Furthermore, the Philippines and Malaysia had communist insurgency problems but

Malaysia was able to shut it down while in the Philippines it still continues and continued to

create havoc to the economy. Crimes in the Philippines had been higher in terms of kidnapping

of businessmen especially Chinese (Yoshihara, 2004).

THEORETICAL FRAMEWORK AND HYPOTHESES

This study is influenced by many of the concepts and ideas of the authorities that were

reviewed.. Since the central problem of this study concerns the economic development of the

Philippines and in comparison to Malaysia, the institutional economics theory of Douglass North

(1990) and the strong and weak states theory of Migdal (1985) will be utilized as a framework in

this study.

This framework is also supported by Douglas North‘s economic growth theory and as he states:

―Economic changes will change transformation and transaction costs, possibly leading

25

to institutional change, but changes in institutions will affect the efficiency of economic

transactions, and thus shape future economic growth. This duality is at times overlooked, simply

by not recognizing that they both can be happening concurrently (North, 1990).

Thus, the economic growth of Malaysia and the Philippines will be evaluated in terms of its

efficiency and as such it is recognized that the change in economic growth would lead also to

institutional change. On the other hand, the institutional change can also affect economic growth

and this is a duality that can happen for both countries in this study.

As such, economic institutions as termed as polities or governments shape economic

performance since they create policies to improve development and this had been applied and

focused in the United States and other developed countries (North, 1990). This new institutional

economics should be also applied to developing countries such as the Philippines and Malaysia

as a framework in analyzing the differences in their economic growth.

The framework of this study will also be adopted fromr Migdal (1988) and as for him it is

clear that only a strong state can be effective in transforming society, on the other hand, a weak

state is ineffective, and in a sense, it has no relative autonomy to effect much needed change in a

given country. This can be exemplified with the existence of power elites in a given society

which would tend to predominate politics, and economic policies particularly in many

underdeveloped countries such as the Philippines. As Migdal stated:

―Capabilities include the capacities to penetrate society, regulate social relationships, extract

resources, and appropriate or use resources in determined ways. Strong states are those with high

capabilities to complete these tasks while weak states are on the low end of a spectrum of

capabilities (Migdal 1988, pp. 4-5)‖

Hypotheses

1. The economic growth of Malaysia was superior and higher than the Philippines from 1991 to

2007.

26

2. The eight critical economic indicators namely government expenditures, gross capital

formation, goods exports, goods imports, gross domestic savings, gross fixed capital formation,

foreign investments, consumption were related to the economic growth (GDP) for both

countries.

3. The Malaysian government was more effective than the Philippines in shaping economic

development and these were due to better economic policies and implementation by the former

as compared to the latter.

CHAPTER THREE: METHODS OF DATA COLLECTION AND

METHODOLOGY

RESEARCH OBJECTIVES

This study was conducted based on the following research objectives:

1. To evaluate the historical and comparative economic growth of Malaysia and the

Philippines;

2. To evaluate the critical economic indicators that contributed or hampered the economic

growth of both countries;

3. To evaluate the economic policies of both countries and its impact to their economic

growth; and

4. To evaluate the role of government in the development of their economy in these two

countries..

27

HISTORICAL METHOD

The historical method was utilized in this study. This method was appropriate for this study

since the period being studied happened already in the past. Historical data were gathered during

these periods and were analyzed based on state policies and actual performance

Historical research in this study proceeded with the systematic collection and objective

evaluation of data related to past occurrences in order to test hypotheses concerning causes,

effects, or trends of those events that may help to explain present events and anticipate future

events.

MIXED RESEARCH METHODS

In as much as the study can be explained through the historical method, the researcher also

integrated other methods of research such as the quantitative, and descriptive research methods.

These methods have been integrated since some of the data and phenomena being studied are

also current in Malaysia and the Philippines.

The descriptive method was utilized to support the historical method. Some of the data in

this study were quite recent and as such this method was utilized to describe the situation.

Furthermore, the data were analyzed utilizing charts and tables through chart analysis and

trend determination

Quantitative data were measured based on numerical measurements and it test causal

hypotheses (Thomas, 2003). This was an excellent approach used in this research since numbers

are specific and phenomena can be measured.

MULTIPLE REGRESSION ANALYSIS

28

In some areas of the economic study, regression analysis was utilized to determine

relationships between certain economic factors that caused the increase or decrease in economic

development such as money supply, gross domestic product, and other economic factors.

Multiple Regression Analysis refers to a set of techniques for studying the straight-line

relationships among two or more variables. Multiple regression estimates the β's in the equation

The X’s are the independent variables (IV‘s). Y is the dependent variable. The subscript j

represents the observation (row) number.

Multiple regression analysis (Allen, 1982) studies the relationship between a dependent

(response) variable and p independent variables (predictors, regressors, IV’s). The sample

multiple regression equation is:

If p = 1, the model is called linear regression.

The intercept, 0b, is the point at which the regression plane intersects the Y axis. The ib

are the

slopes of the regression plane in the direction of ix. These coefficients are called the partial-

regression coefficients. Each partial regression coefficient represents the net effect the ith

variable has on the dependent variable, holding the remaining X’s in the equation constant.

A large part of a regression analysis consists of analyzing the sample residuals, je, defined as

j j je y y

Once the β's have been estimated, various indices are studied to determine the reliability of

these estimates. One of the most popular of these reliability indices is the correlation coefficient.

29

The correlation coefficient, or simply the correlation, is an index that ranges from -1 to 1. When

the value is near zero, there is no linear relationship. As the correlation gets closer to plus or

minus one, the relationship is stronger. A value of one (or negative one) indicates a perfect linear

relationship between two variables.

Assumptions made with multiple regression

A fundamental assumption in the multiple regression model is that the effect of each IV is

additive. Now, no one really believes that the true relationship is actually additive. Rather, one

believes that this model is a reasonable first-approximation to the true model. To add validity to

this approximation, you might consider this additive model to be a Taylor-series expansion of the

true model.

Another assumption is that the relationship of the DV with each IV is linear (straight-line).

Here again, no one really believes that the relationship is a straight-line. However, this is a

reasonable first approximation.

In order obtain better approximations, methods have been developed to allow regression

models to approximate curvilinear relationships as well as non-additivity. Although nonlinear

regression models can be used in these situations, they add a higher level of complexity to the

modeling process (Allen, 1982).

Multiple Regression Technical Details

This section presents the technical details of least squares regression analysis using a

mixture of summation and matrix notation. Because this module also calculates weighted

multiple regression, the formulas will include the weights (Allen, 1982).

Definition of the following vectors and matrices:

30

Least Squares

The essence of the least square method is to look for a vector b such that Xb is an

approximation of Y.

Using this notation, the least squares estimates are found using the equation.

1' '

b X WX X WY

where X’ is the transpose of matrix X.

Note that when the weights are not used, this reduces to

1' '

b X X X Y

The predicted values of the dependent variable are given by

Y Xb

31

The residuals are calculated using

e Y Y Y Xb

The least square method chooses b in such a way that the (weighted) sum of the

values e_1, ..., e_N is as small as possible.

In this study, the multiple regression model would be using Y GDP as the dependent variable

for Malaysia and the dependent variables are the following:

X1 Consumption

X2 Foreign Direct Investment (net inflow)

X3 Government Expenditures

X4 Exports

X5 Imports

X6 Investment

X7 Gross Domestic Savings

X8 Gross Fixed Capital Formation

Table 1a Variables for Malaysia Regression Model

Time

Y

GDP

X1

Cons

X2

FDI

net

X3

Govt

Exp

X4

Exports

X5

Imports

X6

Investment

X7

GDS

X8

GFCF

1977 14 9 0 2 6 5 3 4 3

1978 17 11 0 3 7 6 4 5 4

1979 22 14 1 3 11 8 6 8 5

1980 25 17 1 4 13 11 7 7 7

1981 25 18 1 4 12 12 8 6 9

1982 27 20 1 5 12 13 9 7 10

1983 31 21 1 5 14 13 10 9 11

32

1984 35 22 1 5 17 14 10 11 11

1985 32 22 1 5 15 12 8 9 9

1986 28 19 0 5 14 10 7 8 7

1987 32 20 0 5 18 12 7 11 7

1988 35 22 1 5 21 16 8 12 9

1989 39 25 2 5 25 20 11 13 11

1990 44 29 2 6 29 26 14 15 15

1991 49 32 4 7 34 33 19 17 18

1992 59 37 5 8 40 37 21 22 22

1993 67 41 5 8 46 43 26 26 26

1994 74 45 4 9 57 55 31 29 30

1995 89 54 4 11 72 72 39 35 39

1996 101 58 5 11 77 73 42 43 43

1997 100 56 5 11 78 74 43 44 43

1998 72 37 2 7 72 54 19 35 19

1999 79 42 4 9 84 61 18 38 17

2000 94 51 4 10 98 78 25 43 24

2001 93 54 1 11 88 70 23 39 23

2002 101 58 3 13 93 75 25 42 24

2003 110 63 2 14 105 79 25 47 25

2004 125 71 5 16 127 99 29 54 26

2005 138 79 4 17 142 109 28 59 28

2006 156 89 6 19 161 123 33 68 33

2007 187 108 8 23 176 139 41 79 40

Source: The World Bank

Also, for the Philippines multiple regression model, GNP is the Y dependent variable and the

following are the dependent variables:

X1 Consumption



X4 Exports

X5 Imports

33

X6 Investment



Table 1b Variables for Philippine Regression Model

Time

Y

GDP

X1

Consumption

X2

FDI Net

X3

Govt.

Exp

X4

Exports

X5

Imports

X6

Investments

X7

GDS

X8

GFCF

1977 20 14 0 2 3 4 6 5 5

1978 23 17 0 2 3 5 7 6 6

1979 28 20 0 3 5 6 8 7 7

1980 32 24 0 3 6 8 9 8 9

1981 36 26 0 3 6 8 10 9 10

1982 37 28 0 3 5 8 10 8 10

1983 33 24 0 3 5 7 10 8 10

1984 31 24 0 2 5 6 6 6 7

1985 31 25 0 2 5 5 4 5 5

1986 30 24 0 2 5 5 5 6 5

1987 33 26 0 3 6 7 6 6 5

1988 38 30 1 3 7 8 7 8 7

1989 43 34 1 4 8 10 9 8 9

1990 44 36 1 4 8 12 11 8 10

1991 45 38 1 5 9 12 9 8 9

1992 53 45 0 5 10 15 11 9 11

1993 54 47 1 5 11 18 13 8 13

1994 64 55 2 7 13 21 15 11 15

1995 74 63 1 8 17 26 17 11 16

1996 83 71 2 10 21 32 20 13 19

1997 82 71 1 11 25 36 20 12 20

1998 65 57 2 9 29 30 13 9 14

1999 76 65 1 10 34 40 14 14 15

2000 76 63 2 10 37 43 16 18 16

2001 71 59 0 9 31 38 14 11 13

2002 77 62 2 9 34 40 14 13 14

2003 80 64 0 9 35 41 13 9 13

2004 87 69 1 9 39 44 15 11 14

2005 99 78 2 10 40 48 14 10 14

2006 118 94 3 11 47 53 17 16 16

2007 144 114 3 14 50 58 22 23 21


34

Time Series Analysis

The study also utilized least squares method in analyzing and projecting the time series

analysis as to project the trend of internet users from 1986 to 2008 for Malaysia and the

Philippines. The least squares method is similar to regression analysis but this is only a simple

linear regression using one dependent variable and one independent variable.

Growth Rate Analysis

The study also used the growth rate analysis wherein the GDP annual growth rates of both

countries were computed and the graph would show the trend of the GDP for Malaysia and the

Philippines from 1980 to 2007.

LONG-TERM ECONOMIC GROWTH PROCESS

The long-term economic growth model was also used in the study using a time series of real

GDP, real capital stock, and employment for Malaysia and the Philippines from 1980 to 2007.

The model that was followed can be seen in the figure below:

Figure 1 Long-Term Economic Model

35

To understand this, let’s look at the sources of economic growth….where

does production come from?

LKAFY ,,Real GDP

“is a function of”

Productivity Capital

Stock

Labor

Real GDP = Constant Dollar (Inflation adjusted) value of all goods and

services produced in the United States

Capital Stock = Constant dollar value of private, non-residential fixed assets

Labor = Private Sector Employment

Productivity = Production unaccounted for by capital or labor

The computations for the model can be seen in the appendices.

DATA GATHERING METHOD

The data collection and gathering of this study were based on searches in the internet since it

is the only way to gather data worldwide. The data comes from the websites of the following

sources:

1. Asian Development Bank

2. The World Bank

3. United Nations Development Programme

4. International Monetary Fund

5. Malaysian Government Agencies

6. Philippine Government Agencies

36

VALIDITY OF DATA

The data are valid since these were taken from reliable sources in the internet. Most of the

data came from valid sources such as the The World Bank, Asian Development Bank, United

Nations Development Programme, International Monetary Fund, Malaysian Government

Agencies, and Philippine Government Agencies.

ORIGINALITY AND LIMITATIONS

The data are original. The limitations are that these sources came from the web and some of

these data came from secondary sources.

RESEARCH ETHICS

Ethics is important in economic research since students should be able to know and feel that

they are morally responsible in writing a research.

It is possible that students can violate ethics in research and as such, they should be

concerned with this as they plan their research as well during their contact with respondents.

In the universality stance of ethics, it is important that ethical precepts should not be violated

and that research respondents should not be treated as a means to an end. Thus, the researcher‘s

right to know should be balanced with the rights of the respondents such as their privacy, dignity

and self determination.

. Furthermore, in writing a research project, all the respondents will be briefed about the topic

and its restrictions and assurance will be guaranteed in terms of verbal and nonverbal

information provided according to Data protection Act of 1998. It is further important to be

ethical in management research in terms of reliability of data, its validity and generalizability as

37

it is important in ethics about the truthfulness of the study. Researchers are legally required to

protect their data

In the UK Data Protection Act of 1998, personal data must be:obtained for specific, explicit

and lawful purposes and should not be further processed if these are incompatible with those

purposes. The data must be adequate, relevant and not excessive in relation to the objectives.

The data must also be accurate and a general updated requirement is suspended in the case

of anonymized research data. This data must be secured in a form that allows identification of

data subjects for no longer than is necessary

There are four ethical principles that should be observed in research. Firstly, the researcher

must avoid harm to participants. Secondly, there must be informed consent from them. Thirdly,

the researcher must avoid invasion of their privacy. Fourthly, there must be the avoidance of

deception.

Participants must be informed about information that are needed for them to make a

decision about whether or not they wish to join in a study. This information should be what the

research is about and why it is being undertaken. They should also be informed of who is

funding the research. Information of what is exactly the participant‘s role in the study should be

clear in order to avoid misunderstanding.

Privacy issues in research ethics are linked to anonymity and confidentiality and this can be

problematic in qualitative research wherein rich contextual is provided by participants. The

respondents should be protected in terms of anonymity in their comments in the interviews since

their identities can easily be revealed if they are not protected by the researcher. This can be done

by not stating their names as well as possibly the organization where they came from especially

if there are only a few people in the organization or department where they came from.

38

CHAPTER FOUR: RESULTS

ECONOMIC TRENDS FROM 1990-1994

In terms of the current account balance, Malaysia had a negative (see Table2) figure with

USD- 0,918 billion and this deficit further decreased to USD -5,628 billion in 1994 while the

Philippines posted a deficit of USD -2,690 billion in 1990 and this also further increased to USD

-2,849 billion in 1994. Thus, both countries incurred deficits during this period and Malaysia had

higher deficits. The current account balance as a percent of GDP for Malaysia was -2.1% percent

in 1990 and increased further to -7.6% in 1994. The Philippines current balance as a percentage

of GDP was --6.1 % in 1990 and this also further improved to -4.4% in 1994.

In terms of gross domestic product per capita at current prices, Malaysia had USD 2,431,973

in 1990 and this increased to USD 3,703,376 in 1994. In comparison, the Philippines had only

USD718,114 in 1990 and this increased to USD 949,209. In this area, the Philippines had a much

lower figure as compared to Malaysia.

In the area of GDP (in constant prices) annual percent change, Malaysia had 9% percent in

1990 and this increased slightly to 9.2% in 1994 while Philippines had 3 percent in 1990 and this

increased to 4.4% in 1994. The GDP in current prices was USD 44.025 billion in 1990 and this

improved to USD 74.481 billion in 1994. Comparably, the Philippines had USD 44.164 billion in

1990 and this also improved to USD 64.085 billion in 1994 which was lower to the figure of

Malaysia.

As regard to inflation in annual percent change, Malaysia had a low 2.6% rate in 1990 and

this increased slightly to 3.9% in 1994 while the Philippines had a much higher rate at 13.2% in

1990 and it decreased to 9% in 1994.

39

Table 2 Economic Trend Analysis for Philippines and Malaysia, 1990-1994

Country Subject Description Units Scale 1990 1991 1992 1993 1994

Malaysia Current account balance

Billion

s

US

dollars - 0,918 -4,234 -2,207 -3,079 -5,628

Malaysia

Current account balance in percent of

GDP Ratio - 2,1 - 8,6 - 3,7 - 4,6 - 7,6

Malaysia

Gross domestic product per capita,

current prices Units

US

dollars

2,431,97

3

2,680,86

7

3,152,68

4

3,419,33

5

3,703,37

6

Malaysia

Gross domestic product, constant prices,

annual percent change

Percen

t 9,0 9,5 8,9 9,9 9,2

Malaysia Gross domestic product, current prices

Billion

s

US

dollars 44,025 49,134 59,151 66,895 74,481

Malaysia Inflation, annual percent change Percent 2,6 4,4 4,8 3,6 3,9

Philippine

s Current account balance

Billion

s

US

dollars -2,690 - 0,944 - 0,993 -3,003 -2,849

Philippines

Current account balance in percent of GDP Ratio - 6,1 - 2,1 - 1,9 - 5,5 - 4,4

Philippine

s

Gross domestic product per capita,

current prices Units

US

dollars 718,114 719,384 822,695 825,012 949,209

Philippines

Gross domestic product, constant prices, annual percent change

Percent 3,0 - 0,6 0,3 2,1 4,4

Philippine

s Gross domestic product, current prices

Billion

s

US

dollars 44,164 45,418 52,976 54,368 64,085

Philippines Inflation, annual percent change

Percent 13,2 18,4 8,9 7,6 9,0

Source: IMF

ECONOMIC TREND FROM 1995-1999

During the period 1995 to 1999, Malaysia‘s current account balance (see Table 2) which

started with a negative USD -8.644 billion 1995 improved much further with a surplus of USD

12,604 billion in 1999. Comparably, the Philippines started with a negative current account

balance of USD -1,965 billion in 1995 to a surplus of USD 7,219 billion in 1995 which was a

lower figure compared to Malaysia. In terms of current account balance as a percentage of GDP,

Malaysia had a -9.7% rate in 1995 and this increased to 15.9% in 1999. The Philippines had a -

2.6% rate in 1995 and this increased to a positive 9.5% in 1995. Again, Malaysia had a better and

higher current account balance rate than the Philippines during this period.

40

In terms of GDP per capita in current prices, Malaysia had USD 4,293,662 in 1995 but this

declined to USD 3,484,888 in 1999. In comparison, the Philippines had only USD 1,104,985 in

1995 but this declined slightly to USD 1,018,882 in 1999. In addition, the GDP in constant prices

annual percent change for Malaysia was 9.8% in 1995 but this declined to 6.1% in 1999. On the

one hand, the Philippines had 4.7% in 1995 but this decreased slightly to 3.4% in 1999. It can

still be observed that Malaysia had a better figure compared to the Philippines in this category

during this period.

As regard to the GDP in current prices, Malaysia posted USD 88.833 billion in 1995 but this

declined to USD 79.148 billion in 1999. In comparison, the Philippines had USD74.120 billion

in 1995 and this increased slightly to 76.157 billion in 1999 which was again lower compared to

the GDP of Malaysia during this period.

In terms of inflation in annual percent change, Malaysia had 3.5% in 1995 and this improved

further to only 2.8% in 1999. In contrast, the Philippines had a much higher inflation rate with

8.5% in 1995 which declined slightly to 6.7% in 1999.

Table 2b Economic Trend Analysis for Philippines and Malaysia, 1995 - 1999



Billion

s

US

dollars -8,644 -4,462 -5,935 9,529 12,604

Malaysia Current account balance in percent of GDP Ratio - 9,7 - 4,4 - 5,9 13,2 15,9

Malaysia Gross domestic product per capita, current prices Units

US dollars

4,293,662

4,764,126

4,623,427

3,254,125

3,484,888

Malaysia



Percen

t 9,8 10,0 7,3 - 7,4 6,1

Malaysia Gross domestic product, current prices Billions

US dollars 88,833 100,852 100,169 72,175 79,148

Malaysia Inflation, annual percent change

Percen

t 3,5 3,5 2,6 5,1 2,8

Philippines Current account balance

Billions

US dollars -1,965 -3,861 -4,330 1,510 7,219

Philippine

s Current account balance in percent of GDP Ratio - 2,6 - 4,6 - 5,2 2,3 9,5

Philippines

Gross domestic product per capita, current prices Units

US dollars

1,104,985

1,206,136

1,170,318 910,436

1,018,882

Philippine

s



Percen

t 4,7 5,8 5,2 - 0,6 3,4

Philippine Gross domestic product, current prices Billion US 74,120 82,848 82,344 65,172 76,157

41

s s dollars

Philippine

s Inflation, annual percent change

Percen

t 8,5 9,1 5,9 9,7 6,7

Source: IMF


The economic trend from 2000 to 2004 in terms of the (see Table 3) current account balance

was a great improvement for Malaysia after the Asian crisis which registered USD 8,487 billion

in 2000. This soared to USD 14,872 in 2004. This was because the policy reforms adopted by

the government were already in placed and these macro-economic fundamentals played a key

role in the continued increase in the economic growth of the country. Comparably, the

Philippines posted USD 6,258 billion in 2000 but this decreased to USD 2,312 billion in 2004.

The current account balance as a percentage of GDP improved further for Malaysia which

registered 9.4% in 2000 and which further improved to 12.6% in 2004. On the other hand, the

Philippines‘ performance in this area was poor which started well with 8.2% in 2000 but this

declined to only 2.7% in 2004. This decline can be attributed to the fiscal deficits of the

government and the poor political will of the government to improve its current account balance.

In terms of GDP per capita in current prices, Malaysia did well with USD 3,844,239 in 2000

and this improved further to USD 4,645,874 in 2004. However, the Philippines had a lower GDP

per capita with only USD 994,291 in 2000 and only improved slightly to USD 1,041,860 in

2004. In terms of GDP (in constant prices) annual percent change, Malaysia had a high rate at

8.9% in 2000 but declined slightly to 7.1% in 2004. In comparison, the Philippines had a lower

42

rate with 6% in 2000 and had the same rate of change of 6% in 2004 and this means it did not

improve in this area.

As regard to the GDP in current prices, Malaysia had a good performance with USD 93.790

billion in 2000 and this increased further to USD 124.749 billion in 2004. On the one hand, the

Philippines had a lower GDP of only USD 75.913 billion and increased to only USD 86.930

billion in 2004 which was again much lower to the GDP of Malaysia during this period.

The inflation rate of Malaysia was very low which was actually good for the economy with

1.6% in 2004 and which improved slightly to 1.4% in 2004. The low inflation rate in Malaysia

can be attributed to the lower cost-push factor for prices such as Malaysia had its own oil

reserves and sources. Moreover, the transactional cost as well as the transformational cost of

running the economy as caused by the efficiency of the Malaysia state also should contribute to

lower inflation rate in the country. On the other hand, Philippines had a higher 4.3% inflation

rate in 2004 and this increased to 6% in 2004. This higher inflation rate as well as higher lending

rates can be attributed to the increasing oil prices in the world market which resulted to the

spiralling increase in cost to goods and services. Furthermore, the transactional cost and

transformational cost of running the economy were higher since the Philippine state was not

efficient in running the country.




Billion

s

US

dollars 8,487 7,286 8,025 13,207 14,872

Malaysia Current account balance in percent of GDP Ratio 9,4 8,3 8,4 12,7 12,6

Malaysia Gross domestic product per capita, current prices Units

US dollars

3,844,239

3,664,730

3,884,220

4,159,321

4,645,874

Malaysia



Percen

t 8,9 0,3 4,4 5,4 7,1


US dollars 93,790 92,784 100,846 110,202 124,749

43


Percen

t 1,6 1,4 1,8 1,1 1,4

Philippine

s Current account balance

Billion

s

US

dollars 6,258 1,323 4,383 1,396 2,312

Philippine

s Current account balance in percent of GDP Ratio 8,2 1,9 5,7 1,8 2,7

Philippine

s

Gross domestic product per capita, current

prices Units

US

dollars 994,291 913,900 966,176 976,829

1,041,86

0

Philippine

s



Percen

t 6,0 1,8 4,4 4,5 6,0

Philippine

s Gross domestic product, current prices

Billion

s

US

dollars 75,913 71,216 76,814 79,634 86,930

Philippine


Percen

t 4,3 6,1 2,9 3,5 6,0

Source: IMF


As Malaysia‘s policy of liberalization and export led strategy worked very well during the

2001 to 2004 period, this same policy and strategy worked well also from 2005 to 2007. On the

one hand, the Philippines‘ policy was also focus on liberalization as well as on export led

strategy but its performance in terms of exports and in the GDP measure were much lower than

Malaysia.

During the period from 2005 to 2007, the current account balance (see Table 4) of Malaysia

further improved from USD 20,355 billion in 2005 to USD 22,784 billion in 2007. In contrast,

the Philippines‘ current account balance was much smaller and continued to decline further from

USD 2,938 billion in 2005 to USD 2,096 billion in 2007.

As Malaysia‘s current account balance as percentage of GDP improved to 15.6% as

compared to the previous period, it declined slightly to 14.7% in 2007. However, the Philippines

had a much smaller ratio with 3% in 2005 and which declined further to 1.6% in 2007.

Malaysia‘s GDP per capita in current prices continued to improved much further with USD

5,040,048 in 2005 to USD 5,756,397 in 2007. In comparison, the Philippines only had USD

44

1,159,207 in 2005 which increased to USD 1,455,301 in 2007. The GDP in constant prices

annual change for Malaysia was 5.3% in 2005 and improved slightly to 5.8%. In comparison, the

Philippines had a similar rate with 5.1% in 2005 which also increased slightly to 5.6% in 2007.

The GDP in current prices for Malaysia further increased to USD 137.954 billion in 2005

from the previous year. This further increased to USD 186.721 billion in 2007. In comparison,

the Philippines had a lower GDP of USD 98.824 in 2005 but this further increased to USD

144.043 billion. However, the 2007 figure is till lower compared to Malaysia‘s USD 186.721

billion.

The annual inflation rate for Malaysia was only 5.3% in 2005 and this increased slightly to

5.8% in 2007. In comparison, the Philippines had a higher inflation rate of 7.6% in 2005 and

declined slightly to 4.7% in 2007.

In the over-all, all these economic indicators proved that Malaysia did better economically in

comparison with the Philippines.


Country Subject Description Units Scale 2005 2006 2007


Billion

s

US

dollars 20,355 21,526 22,784

Malaysia Current account balance in percent of GDP Ratio 15,6 14,9 14,7

Malaysia Gross domestic product per capita, current prices Units US dollars

5,040,048

5,457,355

5,756,397

Malaysia Gross domestic product, constant prices, annual percent change

Percen

t 5,3 5,5 5,8


US dollars 137,954 156,408 186,721


Percen

t 3,0 3,1 2,7

Philippines Current account balance

Billions

US dollars 2,938 2,369 2,096

Philippine

s Current account balance in percent of GDP Ratio 3,0 2,1 1,6

Philippines Gross domestic product per capita, current prices Units

US dollars

1,159,207

1,297,867

1,455,301

Philippine

s Gross domestic product, constant prices, annual percent change

Percen

t 5,1 5,0 5,6

Philippine Gross domestic product, current prices Billion US 98,824 117,534 144,043

45

s s dollars

Philippine


Percen

t 7,6 7,4 4,7

Source: IMF

From 1980 to 1990, the Philippines had been higher in GDP than Malaysia until 1991 where

Malaysia had overtaken the Philippines until today (see Figure 1b)

Figure 1b

Gross Domestic Product at Current Prices of Malaysia and the Philippines, 1980-2007

Source: IMF

0

20000

40000

60000

80000

100000

120000

140000

160000

180000

1 3 5 7 9 11 13 15 17 19 21 23 25 27

Years

Malaysia

Philippines

46

LONG-TERM ECONOMIC GROWTH

The growth in the long term from 1980 to 2007 for Malaysia‘s (see Table 4b) real GDP was

tremendous as it increased from USD 26.4 billion in 1980 to USD 132 billion in 2007. In terms

of real gross capital stock, it grew from USD 6.6 billion in 1980 to USD 29.3 billion in 2007.

In addition, the labor force of Malaysia increased from 4,976,959 in 1980 to 11,474,574 in

2007. From the production point of view, capital stock and employment were major contributors

to the output (GDP) of the country.

Table 4b Malaysia Real GDP, Real Gross Capital Stock, and Employment, 1980 to 2007

Time GDP (constant 2000

US$)

Gross capital

formation (constant

2000 US$)

Labor force, total

1980 26,414,956,465 6,679,149,135 4,976,959

1981 28,248,670,150 7,827,342,525 5,112,875

1982 29,926,902,978 8,952,473,763 5,245,655

1983 31,797,409,675 9,635,992,448 5,380,412

1984 34,265,500,871 10,163,474,170 5,533,535

1985 33,880,956,782 8,158,061,836 5,729,949

1986 34,271,437,817 7,060,898,678 5,945,260

1987 36,118,204,026 6,877,384,304 6,157,329

1988 39,707,531,539 8,661,770,992 6,380,551

1989 43,304,430,757 10,651,934,988 6,695,517

1990 47,206,008,084 12,930,554,616 7,003,834

1991 51,712,041,005 16,744,791,467 7,231,448

1992 56,306,715,785 17,316,926,995 7,457,551

1993 61,878,235,380 21,260,876,316 7,675,969

1994 67,578,484,906 23,951,787,316 7,907,288

1995 74,220,829,683 30,126,221,878 8,157,353

1996 81,644,917,419 31,867,614,904 8,428,794

1997 87,623,564,853 35,448,146,252 8,703,883

1998 81,174,982,743 20,189,729,854 9,002,151

1999 86,157,186,506 19,409,980,022 9,283,538

2000 93,789,738,019 25,198,947,685 9,724,275

2001 94,275,264,341 22,850,526,603 10,001,253

47

2002 99,357,632,826 24,657,631,888 10,250,829

2003 105,108,948,687 24,285,000,305 10,493,105

2004 112,238,948,777 25,951,052,957 10,735,294

2005 118,223,685,694 25,312,105,581 10,982,445

2006 125,050,527,885 28,217,631,933 11,217,771

2007 132,987,633,248 29,330,789,842 11,474,574


On the other hand, the Philippines real GDP increased from (see Table 4c) USD 47.5 billion

in 1980 to USD 106.7 billion in 2007. The real gross capital stock as a contributor to real GDP

also increased from USD 10.8 billion in 1980 to USD 1.7 billion in 2007.

Table 4c Philippines Real GDP, Real Gross Capital Stock, and Employment, 1980 to 2007

Time GDP (constant

2000 US$)

Gross capital

formation

(constant 2000

US$)

Labor force,

total

1980 47,575,477,646 10,826,315,251 17,817,125

1981 49,204,114,308 11,132,948,042 18,390,193

1982 50,984,972,401 12,070,187,767 19,015,752

1983 51,940,745,090 12,842,684,624 19,661,427

1984 48,136,769,787 8,092,497,741 20,195,682

1985 44,619,604,313 5,514,752,422 20,729,699

1986 46,144,159,280 6,069,541,342 21,658,316

1987 48,133,726,918 7,264,884,951 22,576,249

1988 51,383,978,240 8,331,915,978 23,061,365

1989 54,572,513,953 10,035,804,894 23,436,092

1990 56,229,862,808 11,624,824,140 24,099,598

1991 55,904,666,027 9,614,840,150 24,771,833

1992 56,093,401,874 10,367,979,215 25,648,643

1993 57,280,510,565 11,184,299,960 26,186,155

1994 59,793,763,616 12,152,189,522 26,894,754

1995 62,591,329,783 12,577,926,500 28,086,519

1996 66,250,339,726 14,144,630,514 28,799,125

1997 69,685,659,849 15,798,915,090 29,527,555

1998 69,283,767,186 13,227,420,725 30,593,952

1999 71,636,918,558 12,965,283,968 31,271,608

2000 75,912,538,425 16,067,907,730 31,479,295

2001 77,245,314,676 14,896,156,430 33,064,728

48

2002 80,682,273,266 14,254,929,595 33,843,319

2003 84,659,692,054 14,680,464,929 34,635,029

2004 90,060,548,960 15,732,574,326 35,276,034

2005 94,520,229,499 14,348,253,037 35,530,965

2006 99,568,571,504 15,075,467,020 36,046,752

2007 106,616,846,806 16,939,254,912 36,843,186


The labor force of the Philippines grew from 17,817, 125 to 36,046,752 in 2007. In

comparison, the real GDP grew faster and higher than the Philippines. The real capital formation

which was much higher than the Philippines played a major part in the output of the country. As

regard to labor, the Philippines output were more on the growth of labor wherein Malaysia had

less (see Table 4d).

Table 4d Malaysia and Philippines Real GDP, Real Capital Stock, and Employment, 1980

and 2007

Country Year Real GDP

(in USD

millions

Real Capital

Stock (in

USD millions

Employment

(in

thousands)

Malaysia 1980 26,415 6,679 4,978

Malaysia 2007 132,988 29,331 11,475

Philippines 1980 47,575 10,826 17,817

Philippines 2007 106,617 16,939 36,843


The long-term economic average of Malaysia from 1980 to 2007 (see Table 4e) in terms of

output was 38.06% while the Philippines had only 21.08%. It can be observed that the long-term

growth were higher than the developed countries. It was observed that developed economies had

lower growth rates since they had already reached the maturity stage of economic growth while

developing countries such as the Philippines and Malaysia were still in the transition stage. The

real capital stock long-term economic average was 8.09% for Malaysia and it was higher than the

Philippines which was only 2.18%. As such, real capital stock played a major part in the output

49

(real GDP) of Malaysia while the Philippines had less. It was typical for developing countries

like the Philippines and Malaysia for having shortages in capital since their economies lacked

maturity in terms of financial markets as well as low savings which were needed for capital

formation.

Furthermore, the long-term economic average for labor or employment of Malaysia was only

2.32% while the Philippines had a higher average with 6.8%. It can be seen here that the higher

output of Malaysia was more of capital driven rather than labor driven while the Philippines

output was driven by labor growth. In addition, long-term productivity growth rate in Malaysia

was higher with 33.82% while the Philippines had only 15.81%.

Table 4e Malaysia and Philippines Long-Term Economic Growth Averages from 1980 to

2007 (in percent)

Malaysia Philippines

Output 38.06 21.08

Capital 8.09 2.18

Labor 2.32 6.8

Productivity 33.82 15.81


The Malaysian long-term economic growth average for output from (see Table 4f) the 1980

to 1989 period was 16.89% while the Philippines had only 6.99%. Malaysia‘s long-term

economic average for output further increased to 42.90% during the 1989 to 1999 period while

the Philippines had a lower growth rate with 17.06%. Finally, Malaysia‘s output increased

further to 52.03% during the 1999 to 2007 period while the Philippines had a lesser long-term

average for output of 38.87% during the same period.

50

In general, long-term output gradually declines as economies matures but since these two

countries were still in the developing and transition stage, output were still increasing during the

periods mentioned.

Malaysia‘s long-term economic average for real capital stock was only 3.97% during the

1980 to 1989 period while the Philippines had a negative growth rate with -0.79% during the

same period. Furthermore, Malaysia‘s real capital stock long-term average grew to 8.76% during

the 1989 to 1999 period while the Philippines had a lower figure with 2.9% during the same

period. However, the Philippines recovered from the negative growth rate during the previous

period mentioned. Finally, during the 1999 to 2007 period the real capital stock long-term

average of Malaysia grew to 11.02% while the Philippines only had 4.42% during the same

period.

In terms of Malaysia‘s labor long-term average growth during the 1980 to 1989 period, it

posted only 1.72% while the Philippines had higher with 5.62% during the same period.

Table 4f Malaysia and Philippines Long-Term Economic Growth Averages by Periods,

1980 to 2007 (in percent)

Malaysia Philippines

1980 to

1989

1989 to

1999

1999 to

2007

1980 to

1989

1989 to

1999

1999 to

2007

Output 16.89 42.90 52.03 6.99 17.06 38.87

Capital 3.97 8.76 11.02 -0.79 2.93 4.42

Labor 1.72 2.60 2.43 5.62 7.84 6.19

Productivity 14.42 38.25 46.74 2.98 10.85 33.27


During the 1989 to 1999 period, Malaysia‘s labor long-term average grew to 2.60% while the

Philippines long-term labor average grew to 7.84% which was again higher than Malaysia.

However, the long-term average for labor for the Philippines declined to 6.19% during the 1999

51

to 2007 period while Malaysia‘s labor long-term average also declined slightly to 2.43% during

the same period.

Malaysia‘s long-term average productivity was 14.42% during the 1980 to 1989 period while

the Philippines only had a meager 2.98%. This further increased to 38.25% for Malaysia while

the Philippines‘ long-term average productivity also increased to 10.85%. Finally, the long-term

productivity average of Malaysia further grew to 46.74% during the 1999 to 2007 period while

the Philippines had a lower long-term average productivity rate although it increased to 33.27%.

A better measure of economic performance was real output (real GDP) per capita and the real

capital stock per capita or the capital/labor ratio (see Table 4g). Malaysia‘s real output per capita

grew from USD 5,306 in 1980 to USD 11,589 in 2007 while the Philippines real output per

capita increased from only USD 2,670 in 1980 to USD 2,894 in 2007 which were much lower

compared to Malaysia.

Table 4g Malaysia and Philippines Real Output per Capita, and

Capital/Labor Ratio, 1980 and 2007

Country Year Real Output

per Capita

Capital/Labor

Ratio

Malaysia 1980 5,306 I,342

Malaysia 2007 11,589 2,556

Philippines 1980 2,670 608

Philippines 2007 2,894 460


Furthermore, the capital/labor ratio of Malaysia increased from USD 1,342 in 1980 to USD

2,556 in 2007 while the Philippines had a capital/labor ratio of only USD 608 in 1980 and this

further decreased to USD 460 in 2007. Developing countries typically have low capital/labor

ratio and the Philippines was no exception but it‘s capital/labor ratio was really low in 2007

because as was mentioned already, it‘s low domestic savings generation cannot cope with the

capital needs of the growing economy.

52

The annual growth rates of the Malaysia were generally much higher from 1980 to 2007

and it showed the superiority of it‘s economic performance due to better resources, policies, as

well as it‘s determination to succeed (see Figure 1c).

Figure 1c Malaysia and the Philippines GDP growth rate trend (annual %) from 1980-

2007

Source: World Bank

As such, it can be concluded that the long-term economic averages of Malaysia in terms of

real output, real capital stock, and productivity were much higher than the Philippines and these

were major factors that made Malaysia more economically superior than the Philippines. On the

other hand, the long-term labor growth rate of the Philippines was much better compared with

-8

-6

-4

-2

0

2

4

6

8

10

12

19

80

19

81

19

82

19

83

19

84

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07Pe

rce

nta

ge (

% )

Year

Malaysia GDPgrowth (annual%)Philippines GDPgrowth (annual%)

53

Malaysia but this was not enough to produce an output that can compete with the long-term

economic growth of Malaysia.

COMPETITIVENESS OF MALAYSIA AND THE PHILIPPINES

The competitiveness indices of Malaysia were much better than the Philippines (see Table

5).The ranking of the Malaysia and The Philippines (out of a total of 102 countries in 2004 and

125 countries in 2006) in terms of three sets of competitiveness indicators: growth

competitiveness, macro environment, and public institutions indices. The growth

competitiveness index covers measures of competitiveness such as institutions, infrastructure,

macro economy, health and primary education, higher education and training, market efficiency,

technological readiness, business sophistication, and innovation. The macro environment index

was based on macroeconomic stability, country credit risk, and wastage in government

expenditures while the public institutions index is based on measures of the enforcement of

contracts and law and degree of competition.

Table 5 Competitiveness Indicators for Malaysia and Philippines

Country Growth

Competitiveness

Index

Macro

Environment

Index

Public

Institution

Index

2004 2006 2004 2006 2004 2006 Malaysia 29 26 27 31 43 18 Philippines 66 71 60 62 85 88 Source: World Economic Forum, Global Competitiveness Report, 2003-2004 and 2006-2007.

A recent study by the Asian Development Bank-World Bank (2009) confirmed these

findings. The ADB study (see Table 5b) indicated that macro instability in the Philippines

remains a major concern for investors because of the country‘s serious fiscal problems.

Moreover, the poor quality of key infrastructure services, a fragile and underdeveloped financial

54

system, and a perception that contracting and regulatory uncertainty adds to the costs of doing

business which also makes investors hesitant. The surveyed firms identified corruption and

macroeconomic instability as the two biggest impediments to a good investment climate in the

Philippines. Electricity supply, security and regulatory uncertainty also figured prominently.

A recent study by the Asian Development Bank-World Bank (2009) confirmed these

findings. The ADB study indicated that macro instability in the Philippines remains a major

concern for investors because of the country‘s serious fiscal problems. Moreover, the poor

quality of key infrastructure services, a fragile and underdeveloped financial system, and a

perception that contracting and regulatory uncertainty adds to the costs of doing business which

also makes investors hesitant. The surveyed firms identified corruption and macroeconomic

instability as the two biggest impediments to a good investment climate in the Philippines.

Electricity supply, security and regulatory uncertainty also figured prominently.

A comparison of the business costs indicators for Malaysia and the Philippines and the

World Bank‘s doing business indicators showed the same concerns on costs of doing business as

well as complexity and uncertainty in contract enforcement. It also revealed that the Philippines

in 2006 data made substantial improvements in the indicators such as time to start a business,

cost to register business, procedures to enforce contracts, and employments laws index which all

showed reductions. Malaysia was still ahead of Philippine performance in term of effectiveness

and efficiency of its business institutional framework except for number of procedures to enforce

a contract and cost to register a business wherein the Philippines had an edge over Malaysia.

55

Table 5b Cost of Doing Business Indicators

Country Number of

start-up

procedures

Time to

start a

business

(days)

Cost to

register

Business

(% of per

capita GNI)

Procedures

to enforce a

contract

Time to

enforce a

contract

(days)

Employment

laws index:

range 0 (less

rigid) to 100

(very rigid)

Year A B A B A B A B A B A B

Malaysia 8 9 31 30 27 19.7 22 31 270 450 25 10 Philippines 11 11 59 48 24 18.7 28 25 164 600 60 39 Note: A: 2003-2004 and B: 2006-2007.

Source: World Bank, World Development Indicators, 2004 and 2006.

The ADB-World Bank (2009) survey on (see Table 5c) business costs in the Philippines

showed differences in perceptions between foreign and domestic firms. In general, the findings

revealed that macro instability and corruption are the most important constraints to business,

followed by electricity and tax rates. Foreign firms, however, regarded customs regulations,

telecommunications, transportation, labor regulations, crime and labor skills as the most

important constraints.

Furthermore, in another study by the World Bank Group, economies were ranked (see Table

14) on their ease of doing business, from 1 – 183, with first place being the best. A high ranking

on the ease of doing business index means the regulatory environment was conducive to the

operation of business. This index averages the country's percentile rankings on 10 topics which

were made up of a variety of indicators, giving equal weight to each topic.

Protection to investors was much better in Malaysia than in the Philippines. In the overall,

Malaysia business regulations, policies in conducting business and attracting investors were

much more favorable.

56

Table 5c Doing Business Regulations Measures Ranked by Region: East Asia and Pacific

Economy Ease of

Doing

Busine

ss

Rank

Startin

g a

Busine

ss

Dealing

with

Constructi

on Permits

Employi

ng

Workers

Registeri

ng

Property

Gettin

g

Credit

Protecti

ng

Investor

s

Payin

g

Taxes

Tradin

g

Across

Border

s

Enforcin

g

Contrac

ts

Closing

a

Busine

ss

Malaysia 4 10 19 14 13 1 3 7 5 8 7

Philippin

es

21 23 20 20 15 16 18 23 11 17 19

World Ranking

Malaysia 23 88 109 61 86 1 4 24 35 59 57

Philippin

es

144 162 111 115 102 127 132 135 68 118 153

Source: The World Bank Group (2009) IFC

In terms of other tax incentives (see Table 15), Malaysia and the Philippines, offered almost

similar incentives such as tax holidays, reduced corporate income tax rates, investment

allowances and credits, import duty and VAT exemptions; although there were some differences

on the terms and conditions under which the incentives can be availed of.

Table 5d Tax Incentives in Malaysia and the Philippines

Tax Incentive Malaysia Philippines

Tax holidays 5 years on 70-100% of statutory income &

10

years for companies of national strategic

interest

3-8 years

Reduced

corporate

income tax rates

3% for offshore companies in Labuan &

10% for foreign fund management

companies

For zone enterprises, exemption

from national & local taxes &

instead a special 5% tax rate on

gross income

Import duty &

VAT

exemptions

Exemptions & reduced import duty &

VAT rates on inputs in certain sectors

especially exporters

Tax & duty free importation of

capital equipment & raw

materials for zone enterprises; tax

credit on raw materials &

supplies for BOI registered firms

Investment

allowances &

credits

Investment allowance of 60-100% of

qualifying capital expenditure

Tax credits for purchases of

domestic breeding stocks &

genetic material as well as

57

for incremental revenue

Accelerated

depreciation

Accelerated depreciation of computer

technology &

Environmental protection investments

Immediate expensing of major

Infrastructure investments by

export enterprises in less

developed areas Source: Chalk (2001) and Price Waterhouse Coopers (2001) as cited in Fletcher (2002).

Thus, in the overall, the competitiveness of Malaysia through the indicators above

contributed more to the economy and business of the country as compared to the Philippines.

CONTRIBUTION OF CRITICAL ECONOMIC INDICATORS

Consumption in Malaysia increased from USD 14 billion in 1977 to USD 187 billion in

2007 (see Table 5e) and this contributed to the growth of GDP in the country. On the other

hand, consumption in the Philippines grew from USD 14 billion in 1977 to USD 114 billion in

2007 which was lesser than Malaysia‘s growth in this category. The foreign direct investments

(net inflow) in Malaysia increased from USD 1 billion in 1979 to USD 8 billion in 2007 while

for the Philippines it had foreign direct investments (net inflow) of USD 1 billion in 1988 and

this increased to USD 3 billion in 2007. It can be observed here that Malaysia had foreign direct

investments as early as 1979 while the Philippines had foreign investments only in 1988.

Moreover, the foreign direct investments in Malaysia were much bigger as compared to the

Philippines and this was an advantage for the economic development of Malaysia.

The general government final expenditure of Malaysia increased from USD 2 billion in 1977

to USD 23 billion in 2007 and this had definitely contributed to the growth of GDP as it was the

role of government to help in the development of the economy (see Table 5). In comparison, the

Philippines (see Table 6) had a government expenditure of USD 2 billion in 1977 and this

increased to USD 14 billion in 2007. If we compare the government expenditures for both

58

countries, it can be observed that Malaysia had a much bigger figure as compared to the

Philippines.

Another critical economic indicator for economic growth is gross capital formation

(investment) and Malaysia posted USD 3 billion in 1977 and this improved to USD 41 billion in

2007. In contrast, the Philippines had a higher investment with USD 6 billion in 1977 and this

improved to USD 22 billion in 2007 which was lower compared to Malaysia. It can be observed

here that the GDP of Malaysia was lower compared to the Philippines from 1977 to 1989 and

was equal in 1990. In 1991, the GDP of Malaysia started to be higher than the Philippines and

became much higher until 2007. Malaysia‘s GDP was only USD 14 billion in 1977 while the

Philippines had a higher GDP with USD 20 billion for the same year. However, the GDP of

Malaysia increased to USD 49 billion in 1991 while the Philippines had a lower GDP with USD

45 billion. The GDP of Malaysia further increased to USD 187 billion in 2007 while the

Philippines had a much lower economic growth with a GDP of USD 144 billion for the same

year.

Again, it can be observed here that the gross capital formation of Malaysia was almost

double than that of the Philippines. This is where the investment policy of Malaysia had been

implemented well in the country with its 20 year long term development plan which had paid off.

The Philippines had a shorter development horizon through medium term development plans and

earlier planning was not that centralized as compared to the planning agency of Malaysia. The

implementation of getting investments was also reflected in the gross domestic savings of the

country. A crucial economic indicator for any country is domestic savings and Malaysia had only

USD 4 billion in 1997 but this ballooned to USD 79 billion in 2007. On the other hand, the

Philippines had a higher domestic savings in 1977 with USD 5 billion in 1977 and this increased

59

to only USD 23 billion in 2007 as compared to Malaysia with USD 79 billion for the same year.

The Medium Term Development Plan for the Philippines (see appendix) calls for increased in

domestic savings but because of the low savings rate and the absence of a mature financial

market in the country, domestic savings did not take off as compared with Malaysia.

Table 5e Malaysia Critical Economic Indicators, 1977-2007 (in USD billion)

Time GDP Cons FDI

net

Govt

Exp

Exports Imports investment GDS GFCF

1977 14 9 0 2 6 5 3 4 3

1978 17 11 0 3 7 6 4 5 4

1979 22 14 1 3 11 8 6 8 5

1980 25 17 1 4 13 11 7 7 7

1981 25 18 1 4 12 12 8 6 9

1982 27 20 1 5 12 13 9 7 10

1983 31 21 1 5 14 13 10 9 11

1984 35 22 1 5 17 14 10 11 11

1985 32 22 1 5 15 12 8 9 9

1986 28 19 0 5 14 10 7 8 7

1987 32 20 0 5 18 12 7 11 7

1988 35 22 1 5 21 16 8 12 9

1989 39 25 2 5 25 20 11 13 11

1990 44 29 2 6 29 26 14 15 15

1991 49 32 4 7 34 33 19 17 18

1992 59 37 5 8 40 37 21 22 22

1993 67 41 5 8 46 43 26 26 26

1994 74 45 4 9 57 55 31 29 30

1995 89 54 4 11 72 72 39 35 39

1996 101 58 5 11 77 73 42 43 43

1997 100 56 5 11 78 74 43 44 43

1998 72 37 2 7 72 54 19 35 19

1999 79 42 4 9 84 61 18 38 17

2000 94 51 4 10 98 78 25 43 24

2001 93 54 1 11 88 70 23 39 23

2002 101 58 3 13 93 75 25 42 24

2003 110 63 2 14 105 79 25 47 25

2004 125 71 5 16 127 99 29 54 26

2005 138 79 4 17 142 109 28 59 28

2006 156 89 6 19 161 123 33 68 33

2007 187 108 8 23 176 139 41 79 40


60

Another critical economic indicator was exports and Malaysia posted USD 6 billion in 1977

and this improved very much in 2007 with USD 176 billion which was almost the GDP figure of

USD 187 billion. However, the Philippines had only goods exports of USD 3 billion in 1977 and

this increased to only USD 50 billion in 2007. As such, it can be evaluated here that in this

category alone, the Philippines economic performance was quite inferior compared to Malaysia.

Table 6 Philippines Selected Economic Indicators, 1977 to 2007 (in USD billion)

Time GDP Consumption FDI Net Govt.

Exp

Exports Imports Investments GDS GFCF

1977 20 14 0 2 3 4 6 5 5

1978 23 17 0 2 3 5 7 6 6

1979 28 20 0 3 5 6 8 7 7

1980 32 24 0 3 6 8 9 8 9

1981 36 26 0 3 6 8 10 9 10

1982 37 28 0 3 5 8 10 8 10

1983 33 24 0 3 5 7 10 8 10

1984 31 24 0 2 5 6 6 6 7

1985 31 25 0 2 5 5 4 5 5

1986 30 24 0 2 5 5 5 6 5

1987 33 26 0 3 6 7 6 6 5

1988 38 30 1 3 7 8 7 8 7

1989 43 34 1 4 8 10 9 8 9

1990 44 36 1 4 8 12 11 8 10

1991 45 38 1 5 9 12 9 8 9

1992 53 45 0 5 10 15 11 9 11

1993 54 47 1 5 11 18 13 8 13

1994 64 55 2 7 13 21 15 11 15

1995 74 63 1 8 17 26 17 11 16

1996 83 71 2 10 21 32 20 13 19

1997 82 71 1 11 25 36 20 12 20

1998 65 57 2 9 29 30 13 9 14

1999 76 65 1 10 34 40 14 14 15

2000 76 63 2 10 37 43 16 18 16

2001 71 59 0 9 31 38 14 11 13

2002 77 62 2 9 34 40 14 13 14

2003 80 64 0 9 35 41 13 9 13

2004 87 69 1 9 39 44 15 11 14

61

2005 99 78 2 10 40 48 14 10 14

2006 118 94 3 11 47 53 17 16 16

2007 144 114 3 14 50 58 22 23 21


The export development policy of Malaysia was better and implemented well as it also

pursued the development of high-technology exports that were in demand in other countries

while the Philippines lagged behind in terms of high-technology exports and was inferior in

terms of implementing its export development plan.

In addition, gross fixed capital formation which was important in manufacturing and

industrialization was again favorable for Malaysia which posted USD 3 billion in 1977 but this

jumped to USD 40 billion in 2007. Although the Philippines gross fixed capital formation was

higher in 1977 with USD 5 billion, this increased to only USD 21 billion in 2007. Again, in

comparison, this indicator which was vital for industrialization was much lower as compared to

Malaysia.

Analysis of the Components of GDP and Balance of Payments

The balance of payments of Malaysia was always on a surplus which increased from USD 1

billion in 1991 to USD 37 billion in 2007. On the contrary, the Philippines balance of payments

were always negative which increased from negative –USD 3 billion in 1991 to negative -USD 8

billion in 2007. As such, this was one factor that hampered the growth of GDP in the Philippines

and which was favorable for Malaysia. The investments portion of Malaysia contributed to the

growth of GDP as it increased from USD 19 billion in 1991 to USD 41 billion in 2007. On the

other hand, the Philippines investment portion contributed to GDP with USD 38 billion in 1991

which resulted to a GDP of USD 45 billion during the same year. It‘s net exports (BOP),

however, was a negative factor and it decreased the GDP with negative USD 3 billion for the

same year. The GDP of the Philippines grew to USD 144 billion in 2007 and the biggest

62

contributor was again consumption with USD 114 billion while investment also contributed with

only USD 22 billion. Government expenditures also helped in GDP growth with USD 14 billion

in 2007 while net exports (BOP) was a disaster sinking the GDP growth with negative USD 8

billion in 2007. On the other hand, Malaysia‘s consumption was the biggest contributor with

USD 32 billion to its GDP of USD 49 billion. Also for the same period, government

expenditures contributed USD 7 billion. The contribution of net exports (BOP) to the GDP was

USD 1 billion for the same period. This had increased over the years and in 2007, its GDP

valued at USD billion was supported by investment which contributed USD 41 billion while

consumption was again the biggest contributor with USD 108 billion. Net exports (BOP) also

contributed USD 37 billion to the GDP.

Table 7 Malaysia GDP, Investment, Consumption, Government Expenditures, Balance of

Payments, 1991 to 2007 (in USD billion).

Time GDP investment Cons Govt

Exp

Exports Imports BOP

1991 49 19 32 7 34 33 1

1992 59 21 37 8 40 37 3

1993 67 26 41 8 46 43 3

1994 74 31 45 9 57 55 2

1995 89 39 54 11 72 72 0

1996 101 42 58 11 77 73 4

1997 100 43 56 11 78 74 4

1998 72 19 37 7 72 54 18

1999 79 18 42 9 84 61 23

2000 94 25 51 10 98 78 20

2001 93 23 54 11 88 70 18

2002 101 25 58 13 93 75 18

2003 110 25 63 14 105 79 26

2004 125 29 71 16 127 99 28

2005 138 28 79 17 142 109 33

2006 156 33 89 19 161 123 38

2007 187 41 108 23 176 139 37


63

Table 7b Philippines GDP, Investment, Consumption, Government Expenditures, Balance

of Payments, 1991 to 2007 (in USD billions)

Time GDP Investments Consumption Govt.

Exp

Exports Imports BOP

1991 45 9 38 5 9 12 -3

1992 53 11 45 5 10 15 -5

1993 54 13 47 5 11 18 -7

1994 64 15 55 7 13 21 -8

1995 74 17 63 8 17 26 -9

1996 83 20 71 10 21 32 -11

1997 82 20 71 11 25 36 -11

1998 65 13 57 9 29 30 -1

1999 76 14 65 10 34 40 -6

2000 76 16 63 10 37 43 -6

2001 71 14 59 9 31 38 -7

2002 77 14 62 9 34 40 -6

2003 80 13 64 9 35 41 -6

2004 87 15 69 9 39 44 -5

2005 99 14 78 10 40 48 -8

2006 118 17 94 11 47 53 -6

2007 144 22 114 14 50 58 -8


Initial Endowment, Reserves, Debt, and Manufacturing

In terms of initial endowment, Malaysia had large oil reserves and energy where they export

them to other countries while the Philippines only had a small oil reserve which was being

developed during the period from 1977 to 2007. As such, this initial endowment gave a critical

edge to Malaysia‘s economic development. The property rights in Malaysia was a success and it

64

was crucial to its development while in the Philippines, land reform was a failure and this

hampered the country‘s economic growth.

Moreover, the total reserves of Malaysia was over USD 3 billion in 1977 and it grew to USD

102 billion in 2007 and this showed the economic strength of Malaysia as this was an indicator

of its economic surplus. On the other hand, the total reserves of the Philippines was only USD

1.6 billion in 1977 and this grew to only USD 34 billion in 2007. As such, the strength of

Malaysia‘s reserves was three times higher than the Philippines.

In addition, the debt service as a % of GNI of Malaysia posted 6% in 1977 and this still

remained at 6% in 2007 while the Philippines had 3% in 1977 and increased to 6% in 2007. As

such, there was not that much disparity for both countries in this category.

In terms of industrialization as a % of GDP, Malaysia posted 19% in 1977 and it grew to

28% in 2007. On the other hand, the Philippines had 25% in 1977 which was higher than

Malaysia initially but it fell to only 22% in 2007. As such, while Malaysia was increasing its

industrialization, the Philippines was declining.

Table 8 Malaysia Total Reserves, Total Debt Service (% of GNI), Manufacturing Value

Added As % of GDP, 1977 to 2007 Time Total reserves (includes gold,

current US$)

Total debt service (% of GNI) Manuf valued as % of GDP

1977 3,070,865,766 6 19 1978 3,670,452,656 7 20 3,300,991,801 1979 5,005,509,030 4 20 4,369,624,213 1980 5,754,998,625 4 22 5,374,619,146 1981 5,024,214,147 5 21 5,327,141,591 1982 4,832,355,575 6 19 5,199,735,754 1983 4,672,614,680 7 19 5,925,836,267 1984 4,441,615,462 8 19 6,674,883,342 1985 5,677,019,647 18 19 6,137,393,596 1986 6,942,089,619 13 19 5,458,522,341 1987 8,572,963,559 15 20 6,373,234,215 1988 7,490,587,819 18 22 7,697,036,909 1989 8,733,333,838 12 24 9,246,898,921

65

1990 10,658,832,532 10 24 10,664,719,314 1991 11,716,563,664 6 26 12,553,725,881 1992 18,023,987,500 8 26 15,274,397,891 1993 28,182,868,709 8 26 17,343,149,068 1994 26,338,866,593 9 27 19,842,244,208 1995 24,698,753,699 7 26 23,432,358,193 1996 27,891,911,688 9 28 28,079,812,580 1997 21,470,189,843 7 28 28,428,124,086 1998 26,235,703,349 9 29 20,774,007,824 1999 30,930,645,528 6 31 24,485,526,135 2000 28,650,938,059 7 31 28,946,842,468 2001 29,845,803,324 7 29 27,219,474,026 2002 33,761,681,180 8 29 29,493,684,581 2003 44,309,888,341 9 30 32,982,105,677 2004 66,393,548,615 8 30 37,896,579,423 2005 70,458,191,541 7 30 40,837,813,462 2006 82,876,090,372 5 30 46,279,101,467 2007 101,994,769,392 6 28 52,223,602,140


Table 8b Philippines Total Reserves, Total Debt Service (% of GNI), Manufacturing Value

Added as % of GDP, 1977 to 2007

Time Total Reserves Total debt service (% of GNI)

Manufacturing, value added (% of GDP)

1977 1,653,546,073 3 25

1978 2,104,978,493 6 26

1979 3,121,121,301 6 25

1980 3,977,980,295 7 26

1981 2,725,396,313 8 26

1982 1,740,333,175 10 25

1983 857,185,285 9 24

1984 844,406,816 9 25

1985 1,098,200,654 9 25

1986 2,611,227,401 10 25

1987 2,312,132,594 10 25

1988 2,168,908,351 9 26

1989 2,398,208,886 8 25

1990 2,036,231,563 8 25

1991 4,436,166,921 7 25

1992 5,335,691,000 8 24

66

1993 5,933,972,406 9 24

1994 7,146,366,699 7 23

1995 7,780,875,204 7 23

1996 11,775,611,252 6 23

1997 8,744,996,306 5 22

1998 10,837,476,487 7 22

1999 15,068,980,979 8 22

2000 15,074,070,373 9 22

2001 15,682,884,986 12 23

2002 16,321,044,786 12 23

2003 17,083,609,581 12 23

2004 16,234,406,188 12 23

2005 18,474,495,834 9 23

2006 22,963,019,934 11 23

2007 33,740,202,851 6 22


Money and Interest Rates

In terms of money (M1/M2) as % of GDP, Malaysia had 63% in 1977 and this grew to

116% in 2007 while the Philippines had only 22% in 1977 and it grew to only 53% in 2007. As

such, compared to Malaysia, the velocity and circulation of money were much lower and this

was crucial for its economic growth from 1997 to 2007.

As regard to real interest rates, Malaysia had 5% in 1987 and this decreased to only 1% in

2007 while the Philippines had 3% in 1977 and this increased to 6% in 2007. In terms of lending

rates, Malaysia had 10% in 1987 and increased to 12% during the Asian crisis but this decreased

to 6% in 2007. On the other hand, the lending rates in the Philippines increased from 12% in

1977 to 17% during the Asian crisis and gradually declined to 9% in 2007. Thus, the lending

rates were lower in Malaysia than in the Philippines. Lower interest rates means easy money

policy and this explains the huge circulation of money in Malaysia while in the Philippines, it

had in most of the years tight money policy which discouraged entrepreneurs to borrow money

and this affected it‘s economic growth.

67

Table 9 Malaysia Interest Rates, M1 and M2, Lending Interest Rate, Interest Rate Spread

1977 to 2007

Time Real

Inter

M1

and

M2 as

% of

GDP

Lend

Int R

Int R

spread

1977 .. 63 .. ..

1978 .. 66 .. ..

1979 .. 66 .. ..

1980 .. 71 .. ..

1981 .. 81 .. ..

1982 .. 87 .. ..

1983 .. 91 .. ..

1984 .. 93 .. ..

1985 .. 108 .. ..

1986 .. 130 .. ..

1987 5 126 10 7

1988 5 116 9 6

1989 4 118 9 4

1990 5 89 9 3

1991 6 62 9 2

1992 8 81 10 2

1993 6 101 10 3

1994 5 105 9 4

1995 5 107 9 3

1996 6 111 10 3

1997 7 117 11 3

1998 3 125 12 4

1999 9 125 9 4

2000 -1 117 8 4

2001 9 130 7 4

2002 3 127 7 3

2003 3 123 6 3

2004 0 120 6 3

2005 1 118 6 3

2006 3 117 6 3

68

2007 1 116 6 3


Furthermore, the interest rate spread in Malaysia was 7% in 1987 and this declined to 3% in

2007 while the interest rate spread in the Philippines was 5% in 1987 and remained at 5% in

2007.

Table 10 Philippines Real Interest Rate, M1 and M2, Lending Interest Rate, and Interest

Rate Spread, 1977 to 2007

Time Real

Int R

M1/M2

as %

of

GDP

Lend

Int R

Int R Spread

1977 3 21 12 4

1978 2 23 12 4

1979 -1 23 14 5

1980 0 22 14 2

1981 3 23 15 2

1982 9 24 18 4

1983 4 28 19 6

1984 -16 26 28 7

1985 9 27 29 10

1986 14 27 18 6

1987 5 26 13 5

1988 6 26 16 5

1989 9 29 19 5

1990 10 31 24 5

1991 6 32 23 4

1992 11 34 19 5

1993 7 38 15 5

1994 5 42 15 5

1995 7 47 15 6

1996 7 51 15 5

1997 9 56 16 6

1998 6 59 17 5

1999 3 60 12 4

2000 4 59 11 3

2001 6 58 12 4

2002 4 57 9 5

69

2003 5 56 9 4

2004 4 53 10 4

2005 3 51 10 5

2006 4 52 10 4

2007 6 53 9 5


MULTIPLE REGRESSION ANALYSIS

The multiple regression analysis of the critical economic indicators above for Malaysia and

the Philippines for the period 1991 to 2007 yielded (see Table 11) an adjusted R2 of 0.999882

for Malaysia which means that there was a very high positive relationship with GDP between the

eight critical economic indicators which were consumption (X1), foreign direct investment (net

inflow) (X2), government expenditures (X3), exports (X4), imports (X5), investments (X6),

gross domestic savings (X7), and gross fixed capital formation (X8).

The regression coefficient for consumption (X1) was 1.04 while for foreign direct investment

(X2) was -0.21. The regression coefficient for government expenditures (X3) was 0.08 while for

exports (X4) was -0.13. The regression coefficient for imports was 0.09 and for investments (X6)

is -0.03. Finally, the regression coefficient for gross domestic savings (X7) was 1.12 and for

gross fixed capital formation (X8) was –0.07. The regression coefficient was the expected

change per unit for every unit changed in the dependent variable Y all other things being equal.

On the other hand, the Philippines had an adjusted R square of 0.996163 which also means

that there was a strong relationship between the growth of GDP and the eight critical economic

indicators which were consumption (X1), foreign direct investment (net inflow) (X2),

70

government expenditures (X3), exports (X4), imports (X5), investments (X6), gross domestic

savings (X7), and gross fixed capital formation (X8).

The regression coefficients for X1 was 1.28 and for X2 was -0.57. In addition,(see details of

multiple regression output in the appendix) the regression coefficients for X3 was -2.41 while

for X4 was 0.60. In addition, X5 registered a regression coefficient of -0.25 and X6 resulted to

1.44. Finally, the regression coefficient for X7 was 0.27 and for X8 it was -1.0.

Table 11 Summary of Multiple Regression Results

Country Adj. R

Square

X1

Coef

X2

Coef

X3

Coef

X4

Coef

X5

Coef

X6

Coef

X7

Coef

X8

Coef

Malaysia .999882 1.04 -0.21 0.08 -0.13 0.09 -0.03 1.12 -0.07

Philippines .996163 1.28 -0.57 -2.41 0.60 -0.25 1.44 0.27 -1.09

In the over-all the eight critical economic indicators were vital for the economic

development of both countries as supported by the multiple regression analysis.

71

CHAPTER FIVE: ECONOMIC AND FINANCIAL POLICIES

What were the factors that made Malaysia better than the Philippines? According to

Yoshihara (2004), Malaysia adopted new economic policies in the early 70s and restricted the

economic freedom of the Chinese who were the backbone of the economy then but the

Malaysian was not that strict to the Chinese. During the Marcos regime, the Philippines restricted

foreign investments and imports much more than Malaysia. In addition, the Philippine state

developed monopolies on commodity trade and interrupted the economy by creating government

corporations which controlled the prices of basic commodities and services.





Thus, Malaysia was really a stronger state than the Philippines in the sense that it had

destroyed its bad habits and created new programs that made its government more effective and

with lesser graft and corruption as compared to the Philippines.

The Malaysian strategy concentrated on liberalization, privatization, and globalization and

these were successfully done from the 1970s to the 1990s. As such, investments in the country

increased and became one of the highest in Southeast Asia. And this was a major factor in the

change in the structure of the economy which shifted from agriculture to manufacturing.

Liberalization was adopted throughout the country this greatly enhanced the economic strength

and competitiveness of the nation. Most of the investments were focused into electronics and

exports whereas a big part went into capital-intensive infrastructure and the real estate sector.

72

The state made various changes which cut the deficits of the government, and was able to

restore fiscal balance. Reforms were made to open up the economy in terms of traded as well as

in terms of the payment system and as such supported the development of the export base of the

country. The high growth during the 1980s persisted and this resulted to high improvements in

living standards. The economy diversified and this was supported with the restructuring of the

banking sector during the decade of the 1980s.

The strong economic development of the country persisted during the 1990s before the crisis.

However, some signs of stress already existed as exports declined and a big current account

deficit occurred due to the appreciation of the ringgit exchange rate. However, the investment-

based plan was effective in increasing production and income although the quality of the

investments decreased. As such, crucial financial weaknesses in the banking sector as well as in

the corporate world made it vulnerable for the crisis in Asia that was forthcoming. The crisis

pressured the currencies the countries in Asia and triggered a currency crisis followed also by a

banking crisis.. Nevertheless, the country‘s external debt which was quite low helped in

preventing a crisis in external debt.

The fragile economy of Malaysia weakened and this increased during early 1997 and up to

the middle of the same year. The country experienced a market confidence crisis and this was

also the experience of the other countries in the region including the Philippines. Major portfolio

investments flowed out of the country and equities and real estate values hugely declined. The

Malaysian currency was under tremendous pressure and traders made speculative actions in

anticipating a large devaluation of the ringgit. As a result, the offshore ringgit interest rates s

increased in relation to domestic rates. This resulted to the increased in the outflow of ringgit

73

funds and this had affected the liquidity of banks as well hampered their financial strucures. The

corporate world also experienced major financial problems because of the decreased in real

estate value and the equities utilized as collateral for banks.

The state initially responded to the crisis by increasing interest rates and squeezed fiscal

policy in order to restore market confidence to the financial system. However, these policies did

not work well and as such in early 1998, fiscal policy was modified to an expansion posture. At

any rate, this policy was not enough to restore external imbalances.

Thus, the Malaysian state implemented a policy package in September 1998 and this was

designed to protect monetary policy from the volatility of the external economy. The policy

integrated an exchange rate based on the U.S. dollar and selected exchange and financial

measures. Furthermore, a fiscal stimulus package increased investment spending and these

measures resulted to the gradual decline in interest rates. The Malaysian state also made major

reforms in the banking and corporate sectors and this consolidated and upgraded financial

regulations based on international standards.

Some weaknesses in the Malaysian economy during the 2000 to 2004 period occurred such

as major dependence on electronic exports made the economy vulnerable to the global slowdown

in the areas of computers and information technology. The depreciations of the yen and other

currencies in the regions affected the ringgit and resulted to it‘s large appreciation during March

and April of 2001. This resulted to capital outflows and reserves losses in the short-term. This

problems which simultaneously happened in the context of a global slowdown hitting the

economy affected the confidence in the market. At any rate, this external volatility of Malaysia

was well controlled because of the large current account surplus of the country as well as it‘s low

74

short-term external debt. Moreover, the country‘ strong reserves position also helped in

maintaining economic balance. The financial sector at this time also had improved banks‘

capacity in risks management.

There is the continuing process of industrialization in Malaysia and it is going up the value

chain in manufacturing with higher technology utilizing skills, and with new and materials which

are advanced (see Appendix 7).The breakthroughs in R and D worldwide in terms of materials,

products, and processes have developed investors in manufacturing along this line. The academe

and the industry joined in hand in developing high technology in manufacturing and this was

reflected in the high technology exports of Malaysia. This exports were also responsible for the

its high GDP growth rate from 2001 to 2007.

The government offers tax incentives for those who were in Pioneer Status for high

technology products and services and so far the government had invested RM 8.1294 billion for

the advancement of this projects during 2001 and 2004.

Hutchcroft (1994) in his study of the Philippine state in the banking industry concluded that

the state was weak in terms of its poor performance and efficacy in the financial system.

However, he discovered that the state as represented by the Central Bank was a captive of

powerful elites who were autonomous and powerful. It was a also a source for cheap loans vital

to their further accumulation of wealth. He further contend that the Philippine state is continually

bombarded with demands of favored elites with particularistic demands such as favored loans or

licenses in the banking industry.

According to him, the Philippine Financial System is defective and it does not work for the

greater benefits of those who need it in society. Hutccroft explains further: ―If the system

75

genuinely worked for the greater good, perhaps weak state regulation and rampant favoritism

could be overlooked. But it does not: there are four major areas in which the Philippine financial

system performs poorly and hampers larger developmental objectives. First, it discourages the

efficient allocation of credit. There are three major types of commercial banks: patronage-

infested government banks (most importantly, the Philippine National Bank, but formerly two

small banks as well), a large number of private banks, most of which are family-dominated, and

four highly profitable branches of foreign banks, all of which have been in operation since at

least the late 1940s (1994, p. 66).

According to Hutchcroft (1994), the other major areas in which the Philippine financial

system are weak and which hampers growth are the following:

1. First priority in loan allocation by government banks generally goes to those with

greatest proximity to the political machinery. Within private domestic banks, first priority

on loans commonly goes to related enterprises of the extended family owning the bank.

The basic building blocks of the Philippine business community are extended family

conglomerates, and the surest means for such groups to secure a credit is through

ownership (or partial ownership) of a commercial bank. If an entrepreneur lacks access

through either of these channels, credit is very hard to obtain no matter how well it might

be put to use (1984, p. 66).

2. The banking system has a weak record of mobilizing savings, a key element in most any

successful program of economic development. In part because real savings deposit rates

have generally been negative over the past two decades, the Philippines has by far the

worst record of promoting financial intermediation M3/GNP have been very weak: .20 in

76

1970, peaking at .31 in 1983, and falling to .23 in 1988. This has led to considerable

reliance on foreign savings, which may have been allocated even more inefficiently than

domestic savings (1994, p. 66).

3. The banking system has created a high degree of financial instability, the root cause of

which is regulators‘ inability to curb the milking of loan portfolios by bank owners,

directors, and officers for related family enterprises. Banks have occupied a central role

in profit-making strategies of the large family-based conglomerates that control much of

the Philippine economy. In the 1980s and particularly in the early 1960s, oligarchs

acquired banks to serve the credit needs of their family business empires; by 1965, nearly

every major family had gotten in on the act. Among bank owners, loyalty is rarely to

banking per se, but rather to the family conglomerate that the bank is meant to serve. In

some cases, banks have been literally milked to death (1994, pp. 66-67).

4. Finally, the banking system provides enormous profits to those banks that are primarily in

the business of banking for the sake of banking profits. Bankers enjoy oligopolistic power

that is unchallenged by the Central Bank, and the head staffers at the Bankers Association

of the Philippines actually admitted that prices for banking services are set by the actions

of a cartel. The large interest rate spreads guarantee high levels of profitability for those

banks whose loan portfolios are less fragrantly milked by their directors, officers, and

stockholders. As a result, the four foreign banks find profits from their Philippines

branches to be among the highest in their international branch network (1994, p. 67).

Rivera (1994) in his study also recognized the existence of a cartel in the banking system

where a few banks control the financial system and wherein there was a web of complex between

the industrial and banking sector. He writes:

77

― Not only do the landed families dominate the manufacturing sector; they also

control the leading private commercial banks in the country. Of the top 10 local

private banks in 1986, six, including the largest private banks in 1986, including

the oldest and largest, the Bank of the Philippine Islands, were controlled by

landed capitalist families (1994, p.50).

Rivera also mentioned in his study that the affluent class as represented by local

manufacturers availed of low-interest, long-term loans offered by government financial

institutions (GFIs) and these have proven to be an indispensable source of capital for them. He

writes:

―Both the landed and non-landed segments of the manufacturing class, including

Chinese-Filipino capitalists have availed themselves of this important resource. In

particular, a number of textile, cement, fertilizer, and pulp and paper companies

received substantial loans from GFIs like the Development Bank of the

Philippines (DBP), the Philippine National Bank (PNB), the National Investment

and Development Corporation (NIDC), and the Government Service Insurance

System (GSIS) (1994, pp, 57-58).

Rivera further explains the abuse of the use of GFIs both by the state and by the aristocracy:

―While there exists a long tradition of borrowing from GFIs, it was grossly abused

during the Marcos regime through cronyism and the state practice of guaranteeing

loans incurred by private corporations, particularly of the cronies, many of whom

later defaulted on their payments (Rivera 1994, p. 58). For instance, by 1992, the

Philippine National Bank (PNB) had loaned over 60 percent of its equity to a

single corporation, the crony-controlled Construction and Development

Corporation of the Philippines (CDCP), and was later forced to convert its loans

into company equity upon default by CDCP on its outstanding debts (1994,

p.58).‖

In the case of a major housing financial institution which is the Government Service

Insurance System (GSIS), it was also the source of funds for pet projects of Marcos and his

cronies. Manapat (1991) writes:

― The majority of investments and loans of the GSIS in 1971 were policy, salary,

and housing loans to GSIS members.These loans represented 82% of GSIS

investments. These loans to members, however, had dramatically declined by

78

1980. Housing loans for members, for example, were phased out. But during the

same period, loans and investments of the GSIS in Marcos-connected companies

and Imelda-inspired projects rose to USD843 million or 65% of the USD 1.3

billion the GSIS earned as income by the end of 1980. The CDCP conglomerate

of Cuenca was a constant recipient of GSIS money, from the start of the

construction boom until the time that this conglomerate collapsed (Manapat 1991,

p. 372).

Again, GSIS money, not available for housing for almost two thirds of the population of the

Philippines, were used to fatten the coffers of the Marcos cronies. Government Financial

Institutions (GFIs) were the favorite sources of low-interest and long term loans by a particular

class or group which had access to the state machinery.

On the other hand, the financial system in the Philippines provides enormous profits to those

financial institutions and banks that were primarily in the business of banking for the sake of

banking profits.

According to a World Bank study (World Bank, 1988: iii 73), pre-tax profit margins in the

Philippines were roughly 300 percent higher than the average of such margins in eight other. The

World Bank‘s analysis concentrates on the distinction that must be made between the profit

structures of the stronger and weaker banks in the Philippine banking system: the more efficient

banks priced their products and services with reference to the cost structure of the smaller banks,

a practice which effectively enabled them to capture higher profits. In early 1991, savings

deposit rates were at 11 percent per annum, while prime lending rates surpassed 23 percent

interest per annum. Analysis of interest rates from 1987 to 1998 would show the same pattern of

high spreads as was in 1991. These large spreads guarantee high levels of profitability for

financial institutions and banks. The interest spread to savings ratio was 196 percent in 1987 and

290 percent in 1988. In 1989, the interest spread to savings ratio was 215 percent and dropped

79

gradually to 90 percent in 1997. Nevertheless, the spreads were still too high in the banking

system.

This financial policy which concerns the interest rate spreads in the Philippines which were

very high and which continued even today affected the growth of savings which were needed for

sustainable investments in the Philippines. Since the savings were low due to these interest

spreads that resulted lower investment levels, the GDP growth of the country was lower as

compared to Malaysia which had tremendous increased in investments.

Moreover, the Philippines during the past had utilized import-substitution strategy but it had

some adverse affects which was based on high-tariff, quantitative restriction, and overvalued

exchange rate. However, during the period 1993-1998, policy changes meant to increasing the

competitiveness and efficiency of the industrial sector were started. The liberalization of foreign

investments were done and implemented, and as such, the foreign exchange market was also

deregulated. The Airline, banking, telecommunications, and oil industries were liberalized.

Public enterprises were encouraged to be privatized and the tariff rates were rationalized.

As a result, the macroeconomic environment significantly improved during this period. The

infrastructure problem was also solved through build, operate and transfer (BOT) schemes.

However, the problems of overvalued exchange rate, low savings rate and poor productivity have

remained. The goal of the country is to move the economy towards investments, trade and

exports. Moreover, the Medium-Term Philippine Development Plan (MTPDP) has stressed the

need to achieve global competitiveness in selected industries (see Appendices).

Competition policy in the Philippines consists of policy reforms aimed at promoting

competitive environment as well as measures formulated to prevent a decrease in competition.

80

These were exemplified as mentioned policy reforms aimed at promoting competition in the

banking industry as well as policies to encourage more players in the shipping, airline, and oil

industries. Examples of measures designed to prevent a reduction in competition are policies to

discourage mega-mergers in deregulated industries and policies against unfair business practices

in liberalized industries.

As such, the long-term economic policies of Malaysia were better than the Philippines

medium-term economic policies and these policies were also implemented well by the former as

compared to the latter.

CHAPTER SIX: CONCLUSIONS

INTRODUCTION

This study is important since the institutional analysis of Malaysia and the Philippines is a

new research that is crucial for academicians, management consultants, economists and

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businessmen in the Southeast Asia region. It is important to compare the performance of both

countries and evaluate what went wrong and what went right.

Moreover, this study also contributes to the role of the states and institutions in economic

development that by using the state as a conceptual variable in pursuing specific kinds of

economic policies in the Philippines and Malaysia, this study would promote comparative

understanding of the capacity of the third world state in Southeast Asia.

This study utilized the institutional economics theory as well as state theory as the

conceptual framework of the study. Furthermore trend analysis of critical economic indicators

were conducted for both Malaysia and the Philippines. As such, a multiple regression analysis

was conducted in these critical economic indicators utilizing GDP as the dependent variable and

the eight critical economic indicators as independent variables as follows:

X1 Consumption



X4 Exports

X5 Imports

X6 Investment



Multiple Regression Analysis refers to a set of techniques for studying the straight-line

relationships among two or more variables. Multiple regression estimates the β's in the equation

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The X’s are the independent variables (IV‘s). Y is the dependent variable. The subscript j

represents the observation (row) number.

Also, the historical method was utilized in this study. This method was appropriate for this

study since the period being studied happened already in the past. Historical data were gathered

during these periods and were analyzed based on state policies and actual performance.

Historical research in this study proceeded with the systematic collection and objective

evaluation of data related to past occurrences in order to test hypotheses concerning causes,

effects, or trends of those events that may help to explain present events and anticipate future

events. The descriptive method was utilized to support the historical method. Some of the data in

this study were quite recent and as such this method was utilized to describe the situation.

The originality of the data came from the World Bank, International Monetary Fund, Asian

Development Bank. The limitations of the study are that these sources came from the internet

and only a few of these data came from secondary sources.

This study was conducted based on the following research objectives:

1. To evaluate the historical and comparative economic growth of Malaysia and the

Philippines;

2. To evaluate the critical economic indicators that contributed or hampered the economic

growth of both countries;

3. To evaluate the economic policies of both countries and its impact to their economic

growth; and

4. To evaluate the role of government in the development of the economy in these two

countries.

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REPHRASING THE RESEARCH QUESTIONS

The research questions of this study are the following:


2007?




4. What were the implications of the economic growth for the role of government for both

countries?

THE HYPOTHESES AND TEST FOR HYPOTHESES

The hypotheses of this study which are supposed to answer the research questions and

temporarily guide the study are the following:


2007.

84



foreign investments, consumption were related to the economic growth (GDP) for both countries




Testing of Hypotheses

Hypothesis 1 - The economic growth of Malaysia was superior and higher than the

Philippines from 1991 to 2007

The current account balance, Malaysia had a negative figure with USD- 0,918 billion but

this improved tremendously to USD 22,784 billion in 2007 while the Philippines posted a deficit

of USD -2,690 billion in 1990 and this also improved to USD 2,096 billion in 2007. The current

account balance as a percent of GDP for Malaysia was -2.1% percent in 1990 and improved

further to 14.7% in 2007. The Philippines current balance as a percentage of GDP was --6.1 % in

1990 and this also further improved to only 1.6% in 2007.

The gross domestic product per capita at current prices of Malaysia was USD 2,431,973 in

1990 and this increased to USD 5,756,397 in 2007. In comparison, the Philippines had only

USD718,114 in 1990 and this increased to USD 1,455,301 in 2007. In this area, the Philippines

had a much lower figure as compared to Malaysia.


1990 and this increased to 5.8% in 2007 while the Philippines had 3 percent in 1990 and this

increased to 5.6% in 2007. The GDP in current prices of Malaysia was USD 44.025 billion in

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1990 and this improved to USD 186.721 billion in 2007. Comparably, the Philippines had USD

44.164 billion in 1990 and this also improved to USD 144.043 billion in 2007 which was lower

than the figure of Malaysia.


this increased to 5.8% in 2007 while the Philippines had a much higher rate at 13.2% in 1990 and

it decreased to 4.7% in 2007

. In the over-all, all these economic indicators proved that Malaysia did better economically in

comparison with the Philippines.

The long-term economic average of Malaysia from 1980 to 2007 in terms of output was

38.06% while the Philippines had only 21.08%. It can be observed that the long-term growth

were higher than the developed countries. It was observed that developed economies had lower

growth rates since they had already reached the maturity stage of economic growth while

developing countries such as the Philippines and Malaysia were still in the transition stage. The

real capital stock long-term economic average was 8.09% for Malaysia and it was higher than the

Philippines which was only 2.18%. As such, real capital stock played a major part in the output

(real GDP) of Malaysia while the Philippines had less. It was typical for developing countries

like the Philippines and Malaysia for having shortages in capital since their economies lacked

maturity in terms of financial markets as well as low savings which were needed for capital

formation.

Furthermore, the long-term economic average for labor or employment of Malaysia was only

2.32% while the Philippines had a higher average with 6.8%. It can be seen here that the higher

output of Malaysia was more of capital driven rather than labor driven while the Philippines

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output was driven by labor growth. In addition, long-term productivity growth rate in Malaysia

was higher with 33.82% while the Philippines had only 15.81%.

The Malaysian long-term economic growth average for output from the 1980 to 1989 period

was 16.89% while the Philippines had only 6.99%. Malaysia‘s long-term economic average for

output further increased to 42.90% during the 1989 to 1999 period while the Philippines had a

lower growth rate with 17.06%. Finally, Malaysia‘s output increased further to 52.03% during

the 1999 to 2007 period while the Philippines had a lesser long-term average for output of

38.87% during the same period.

In general, long-term output gradually declines as economies matures but since these two

countries were still in the developing and transition stage, output were still increasing during the

periods mentioned.

Malaysia‘s long-term economic average for real capital stock was only 3.97% during the

1980 to 1989 period while the Philippines had a negative growth rate with -0.79% during the

same period. Furthermore, Malaysia‘s real capital stock long-term average grew to 8.76% during

the 1989 to 1999 period while the Philippines had a lower figure with 2.9% during the same

period. However, the Philippines recovered from the negative growth rate during the previous

period mentioned. Finally, during the 1999 to 2007 period the real capital stock long-term

average of Malaysia grew to 11.02% while the Philippines only had 4.42% during the same

period.

In terms of Malaysia‘s labor long-term average growth during the 1980 to 1989 period, it

posted only 1.72% while the Philippines had higher with 5.62% during the same period.

During the 1989 to 1999 period, Malaysia‘s labor long-term average grew to 2.60% while the

Philippines long-term labor average grew to 7.84% which was again higher than Malaysia.

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However, the long-term average for labor for the Philippines declined to 6.19% during the 1999

to 2007 period while Malaysia‘s labor long-term average also declined slightly to 2.43% during

the same period.

Malaysia‘s long-term average productivity was 14.42% during the 1980 to 1989 period while

the Philippines only had a meager 2.98%. This further increased to 38.25% for Malaysia while

the Philippines‘ long-term average productivity also increased to 10.85%. Finally, the long-term

productivity average of Malaysia further grew to 46.74% during the 1999 to 2007 period while

the Philippines had a lower long-term average productivity rate although it increased to 33.27%.

A better measure of economic performance was real output (real GDP) per capita and the real

capital stock per capita or the capital/labor ratio. Malaysia‘s real output per capita grew from

USD 5,306 in 1980 to USD 11,589 in 2007 while the Philippines real output per capita increased

from only USD 2,670 in 1980 to USD 2,894 in 2007 which were much lower compared to

Malaysia.

Furthermore, the capital/labor ratio of Malaysia increased from USD 1,342 in 1980 to USD

2,556 in 2007 while the Philippines had a capital/labor ratio of only USD 608 in 1980 and this

further decreased to USD 460 in 2007. Developing countries typically have low capital/labor

ratio and the Philippines was no exception but it‘s capital/labor ratio was really low in 2007

because as was mentioned already, it‘s low domestic savings generation cannot cope with the

capital needs of the growing economy.

As such, it can be concluded that the long-term economic averages of Malaysia in terms of

real output, real capital stock, and productivity were much higher than the Philippines and these

were major factors that made Malaysia more economically superior than the Philippines. On the

other hand, the long-term labor growth rate of the Philippines was much better compared with

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Malaysia but this was not enough to produce an output that can compete with the long-term

economic growth of Malaysia.

Furthermore, the results also showed that the competitiveness of Malaysia were much better

than the Philippines in terms of three sets of competitiveness indicators: growth competitiveness,

macro environment, and public institutions indices. The growth competitiveness index covered

measures of competitiveness such as institutions, infrastructure, macro economy, health and

primary education, higher education and training, market efficiency, technological readiness,

business sophistication, and innovation. The macro environment index was based on

macroeconomic stability, country credit risk, and wastage in government expenditures while the

public institutions index was based on measures of the enforcement of contracts and law and

degree of competition. In addition the cost of doing business and measures of business

regulations.were better in Malaysia as compared to the Philippines.

Thus, hypothesis 1 is accepted.

Hypothesis 2.- The eight critical economic indicators namely government expenditures,

gross capital formation, goods exports, goods imports, gross domestic savings, gross fixed

capital formation, foreign investments, consumption were related to the economic growth

(GDP) for both countries.

Consumption in Malaysia increased from USD 14 billion in 1977 to USD 187 billion in 2007

and this contributed to the growth of GDP in the country. On the other hand, consumption in the

Philippines grew from USD 14 billion in 1977 to USD 114 billion in 2007 which was lesser than

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Malaysia‘s growth in this category. The foreign direct investments (net inflow) in Malaysia

increased from USD 1 billion in 1979 to USD 8 billion in 2007 while for the Philippines it had

foreign direct investments (net inflow) of USD 1 billion in 1988 and this increased to USD 3

billion in 2007. It can be observed here that Malaysia had foreign direct investments as early as

1979 while the Philippines had foreign investments only in 1988. Moreover, the foreign direct

investments in Malaysia were much bigger as compared to the Philippines and this was an

advantage for the economic development of Malaysia.

The general government final expenditure of Malaysia increased from USD 2 billion in 1977

to USD 23 billion in 2007 and this had definitely contributed to the growth of GDP as it was the

role of government to help in the development of the economy. In comparison, the Philippines

had a government expenditure of USD 2 billion in 1977 and this increased to USD 14 billion in

2007. If we compare the government expenditures for both countries, it can be observed that

Malaysia had a much bigger figure as compared to the Philippines.

Another critical economic indicator for economic growth is gross capital formation

(investment) and Malaysia posted USD 3 billion in 1977 and this improved to USD 41 billion in

2007. In contrast, the Philippines had a higher investment with USD 6 billion in 1977 and this

improved to USD 22 billion in 2007 which was lower compared to Malaysia. It can be observed

here that the GDP of Malaysia was lower compared to the Philippines from 1977 to 1989 and

was equal in 1990. In 1991, the GDP of Malaysia started to be higher than the Philippines and

became much higher until 2007. Malaysia‘s GDP was only USD 14 billion in 1977 while the

Philippines had a higher GDP with USD 20 billion for the same year. However, the GDP of

Malaysia increased to USD 49 billion in 1991 while the Philippines had a lower GDP with USD

45 billion. The GDP of Malaysia further increased to USD 187 billion in 2007 while the

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Philippines had a much lower economic growth with a GDP of USD 144 billion for the same

year.

Again, it can be observed here that the gross capital formation of Malaysia was almost

double than that of the Philippines. This is where the investment policy of Malaysia had been

implemented well in the country with its 20 year long term development plan which had paid off.

The Philippines had a shorter development horizon through medium term development plans and

earlier planning was not that centralized as compared to the planning agency of Malaysia. The

implementation of getting investments was also reflected in the gross domestic savings of the

country. A crucial economic indicator for any country is domestic savings and Malaysia had only

USD 4 billion 1997 but this ballooned to USD 79 billion in 2007. On the other hand, the

Philippines had a higher domestic savings in 1977 with USD 5 billion in 1977 and this increased

to only USD 23 billion in 2007 as compared to Malaysia with USD 79 billion for the same year.

The Medium Term Development Plan for the Philippines (see appendix) calls for increased in

domestic savings but because of the low savings rate and the absence of a mature financial

market in the country, domestic savings did not take off as compared with Malaysia.

Another critical economic indicator was exports and Malaysia posted USD 6 billion in 1977

and this improved very much in 2007 with USD 176 billion which was almost the GDP figure of

USD 187 billion. However, the Philippines had only goods exports of USD 3 billion in 1977 and

this increased to only USD 50 billion in 2007. As such, it can be evaluated here that in this

category alone, the Philippines economic performance was quite inferior compared to Malaysia.

The export development policy of Malaysia was better and implemented well as it also

pursued the development of high-technology exports that were in demand in other countries

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while the Philippines lagged behind in terms of high-technology exports and was inferior in

terms of implementing its export development plan.

In addition, gross fixed capital formation which was important in manufacturing and

industrialization was again favorable for Malaysia which posted USD 3 billion in 1977 but this

jumped to USD 40 billion in 2007. Although the Philippines gross fixed capital formation was

higher in 1977 with USD 5 billion, this increased to only USD 21 billion in 2007. Again, in

comparison, this indicator which was vital for industrialization was much lower as compared to

Malaysia.

The balance of payments of Malaysia was always on a surplus which increased from USD 1

billion in 1991 to USD 37 billion in 2007. On the contrary, the Philippines balance of payments

were always negative which increased from negative –USD 3 billion in 1991 to negative -USD 8

billion in 2007. As such, this was one factor that hampered the growth of GDP in the Philippines

and which was favorable for Malaysia. The investments portion of Malaysia contributed to the

growth of GDP as it increased from USD 19 billion in 1991 to USD 41 billion in 2007. On the

other hand, the Philippines investment portion contributed to GDP with USD 38 billion in 1991

which resulted to a GDP of USD 45 billion during the same year. It‘s net exports (BOP),

however, was a negative factor and it decreased the GDP with negative USD 3 billion for the

same year. The GDP of the Philippines grew to USD 144 billion in 2007 and the biggest

contributor was again consumption with USD 114 billion while investment also contributed with

only USD 22 billion. Government expenditures also helped in GDP growth with USD 14 billion

in 2007 while net exports (BOP) was a disaster sinking the GDP growth with negative USD 8

billion in 2007. On the other hand, Malaysia‘s consumption was the biggest contributor with

USD 32 billion to its GDP of USD 49 billion. Also for the same period, government

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expenditures contributed USD 7 billion. The contribution of net exports (BOP) to the GDP was

USD 1 billion for the same period. This had increased over the years and in 2007, its GDP

valued at USD billion was supported by investment which contributed USD 41 billion while

consumption was again the biggest contributor with USD 108 billion. Net exports (BOP) also

contributed USD 37 billion to the GDP.

In terms of initial endowment, Malaysia had large oil reserves and energy where they export

them to other countries while the Philippines only had a small oil reserve which was being

developed during the period from 1977 to 2007. As such, this initial endowment gave a critical

edge to Malaysia‘s economic development. The property rights in Malaysia was a success and it

was crucial to its development while in the Philippines, land reform was a failure and this

hampered the country‘s economic growth.

Moreover, the total reserves of Malaysia was over USD 3 billion in 1977 and it grew to USD

102 billion in 2007 and this showed the economic strength of Malaysia as this was an indicator

of its economic surplus. On the other hand, the total reserves of the Philippines was only USD

1.6 billion in 1977 and this grew to only USD 34 billion in 2007. As such, the strength of

Malaysia‘s reserves was three times higher than the Philippines.

In addition, the debt service as a % of GNI of Malaysia posted 6% in 1977 and this still

remained at 6% in 2007 while the Philippines had 3% in 1977 and increased to 6% in 2007. As

such, there was not that much disparity for both countries in this category.

In terms of industrialization as a % of GDP, Malaysia posted 19% in 1977 and it grew to

28% in 2007. On the other hand, the Philippines had 25% in 1977 which was higher than

Malaysia initially but it fell to only 22% in 2007. As such, while Malaysia was increasing its

industrialization, the Philippines was declining.

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In terms of money (M1/M2) as % of GDP, Malaysia had 63% in 1977 and this grew to

116% in 2007 while the Philippines had only 22% in 1977 and it grew to only 53% in 2007. As

such, compared to Malaysia, the velocity and circulation of money were much lower and this

was crucial for its economic growth from 1997 to 2007.

As regard to real interest rates, Malaysia had 5% in 1987 and this decreased to only 1% in

2007 while the Philippines had 3% in 1977 and this increased to 6% in 2007. In terms of lending

rates, Malaysia had 10% in 1987 and increased to 12% during the Asian crisis but this decreased

to 6% in 2007. On the other hand, the lending rates in the Philippines increased from 12% in

1977 to 17% during the Asian crisis and gradually declined to 9% in 2007. Thus, the lending

rates were lower in Malaysia than in the Philippines. Lower interest rates means easy money

policy and this explains the huge circulation of money in Malaysia while in the Philippines, it

had in most of the years tight money policy which discouraged entrepreneurs to borrow money

and this affected it‘s economic growth.

Furthermore, the interest rate spread in Malaysia was 7% in 1987 and this declined to 3% in

2007 while the interest rate spread in the Philippines was 5% in 1987 and remained at 5% in

2007. Finally, the multiple regression analysis indicated a strong relationship between the

dependent variable y which is the GDP and the independent variables which were consumption

(X1), foreign direct investment (net inflow) (X2), government expenditures (X3), exports (X4),

imports (X5), investments (X6), gross domestic savings (X7), and gross fixed capital formation

(X8) with an adjusted r square of 0.999882 for Malaysia and 0.996153 for the Philippines


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Hypothesis 3 - The Malaysian government was more effective than the Philippines in

shaping economic development and these were due to better economic policies and

implementation by the former as compared to the latter.

According to Yoshihara (2004), Malaysia adopted new economic policies in the early 70s

and restricted the economic freedom of the Chinese who were the backbone of the economy then

but the Malaysian was not that strict to the Chinese. During the Marcos regime, the Philippines

restricted foreign investments and imports much more than Malaysia. In addition, the Philippine

state developed monopolies on commodity trade and interrupted the economy by creating

government corporations which controlled the prices of basic commodities and services.





Thus, Malaysia was really a stronger state than the Philippines in the sense that it had

destroyed its bad habits and created new programs that made its government more effective and

with lesser graft and corruption as compared to the Philippines.

The Malaysian government has implemented a number of medium- to long-term

development plans and this was initiated with the 20-year New Economic Policy—a

development plan that strived for greater economic well-being for the ethnic Malays, or

bumiputras. This was later supported by the National Development Policy in the early 1990s.

The most recent development plan is the Third Outline Perspective Plan which is somewhat the

general thrust of Malaysia's development strategy for the period 2001–10.

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The development plans of Malaysia which focused on liberalization, privatization, and

globalization were implemented effectively and from the 1970s to the mid-1990s. As a result, the

country's investment ratio was among the highest in the region, resulting in a dramatic shift in

the structure of the economy from agriculture and mining to manufacturing. Liberalization

measures were made throughout the country and this really helped improved competitiveness

and productivity. Majority of the investments went into electronics and other export-oriented

industries, while a large portion also went into non-tradable sectors including capital-intensive

infrastructure and the real estate sector.

Malaysia's robust economic improvement continued during the 1990s prior to the crisis.

However, there were also symptoms of stress as exports decreased and a large current account

deficit developed in the context of a gradual appreciation of the effective exchange rate. At any

rate, the investment-led growth strategy was successful in raising output and income, investment

quality had declined. This later resulted to major balance sheet weaknesses in the banking and

corporate sectors which exposed the economy to the problems of the Asian crisis. The crisis in

Asia pressured the currencies of many Asian countries and resulted to a currency crisis as well as

banking crisis. However, Malaysia‘s external debt which were at a low level spared it from an

external debt crisis

The starting response of the state to the crisis was to increase interest rates and tighten fiscal

policy in an attempt to anchor market confidence in the financial system. However, during early

1998, fiscal policy was changed to a more expansionary position. This policy was not sufficient

to correct external imbalances and bring about the needed economic adjustment. Imbalances in

the domestic economy quickly emerged as growth rates slowed and then turned sharply negative

96

in early 1998. The confidence in the market declined because of regional uncertainties. As such,

by the summer of 1998, the stock market had fallen to its lowest level in recent history.

The Malaysian authority launched a policy package in September 1998 and was meant to

insulate monetary policy from external volatility. The policy included an exchange rate pegged

to the U.S. dollar and selected exchange and capital controls. This was also supported by a fiscal

stimulus package that increased capital spending. These controls resulted to the gradual

decreased in interest rates. The Malaysian state also made some crucial reforms in the financial

and corporate sectors which included bank consolidation policies upgrading of financial

regulation and supervision based on global standards.

The government offers tax incentives for those who were in Pioneer Status for high

technology products and services and so far the government had invested RM 8.1294 billion for

the advancement of these projects during 2001 and 2004.

Hutchcroft (1994) in his study of the Philippine state in the banking industry concluded that

the state was weak in terms of its poor performance and efficacy in the financial system.

However, he discovered that the state as represented by the Central Bank was a captive of

powerful elites who were autonomous and powerful. It was a also a source for cheap loans vital

to their further accumulation of wealth. He further contend that the Philippine state is continually

bombarded with demands of favored elites with particularistic demands such as favored loans or

licenses in the banking industry.

According to him, the Philippine Financial System is defective and it does not work for the

greater benefits of those who need it in society. Hutccroft explains further: ―If the system

97

genuinely worked for the greater good, perhaps weak state regulation and rampant favoritism

could be overlooked. But it does not: there are four major areas in which the Philippine financial

system performs poorly and hampers larger developmental objectives. First, it discourages the

efficient allocation of credit. There are three major types of commercial banks: patronage-

infested government banks (most importantly, the Philippine National Bank, but formerly two

small banks as well), a large number of private banks, most of which are family-dominated, and

four highly profitable branches of foreign banks, all of which have been in operation since at

least the late 1940s (1994, p. 66).‖

According to Hutchcroft (1994), the other major areas in which the Philippine financial

system are weak and which hampers growth are the following:

1. First priority in loan allocation by government banks generally goes to those with

greatest proximity to the political machinery. Within private domestic banks, first priority

on loans commonly goes to related enterprises of the extended family owning the bank.

The basic building blocks of the Philippine business community are extended family

conglomerates, and the surest means for such groups to secure a credit is through

ownership (or partial ownership) of a commercial bank. If an entrepreneur lacks access

through either of these channels, credit is very hard to obtain no matter how well it might

be put to use (1984, p. 66).

2. The banking system has a weak record of mobilizing savings, a key element in most any

successful program of economic development. In part because real savings deposit rates

have generally been negative over the past two decades, the Philippines has by far the

worst record of promoting financial intermediation M3/GNP have been very weak: .20 in

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1970, peaking at .31 in 1983, and falling to .23 in 1988. This has led to considerable

reliance on foreign savings, which may have been allocated even more inefficiently than

domestic savings (1994, p. 66).

3. The banking system has created a high degree of financial instability, the root cause of

which is regulators‘ inability to curb the milking of loan portfolios by bank owners,

directors, and officers for related family enterprises. Banks have occupied a central role

in profit-making strategies of the large family-based conglomerates that control much of

the Philippine economy. In the 1980s and particularly in the early 1960s, oligarchs

acquired banks to serve the credit needs of their family business empires; by 1965, nearly

every major family had gotten in on the act. Among bank owners, loyalty is rarely to

banking per se, but rather to the family conglomerate that the bank is meant to serve. In

some cases, banks have been literally milked to death (1994, pp. 66-67).

4. Finally, the banking system provides enormous profits to those banks that are primarily in

the business of banking for the sake of banking profits. Bankers enjoy oligopolistic power

that is unchallenged by the Central Bank, and the head staffers at the Bankers Association

of the Philippines actually admitted that prices for banking services are set by the actions

of a cartel. The large interest rate spreads guarantee high levels of profitability for those

banks whose loan portfolios are less fragrantly milked by their directors, officers, and

stockholders. As a result, the four foreign banks find profits from their Philippines

branches to be among the highest in their international branch network (1994, p. 67).

Rivera (1994) in his study also recognized the existence of a cartel in the banking system

where a few banks control the financial system and wherein there was a web of complex between

the industrial and banking sector.

99

Rivera also mentioned in his study that the affluent class as represented by local

manufacturers availed of low-interest, long-term loans offered by government financial

institutions (GFIs) and these have proven to be an indispensable source of capital for them.

In the case of a major housing financial institution which is the Government Service

Insurance System (GSIS), it was also the source of funds for pet projects of Marcos and his

cronies.

Again, GSIS money, not available for housing for almost two thirds of the population of the

Philippines, were used to fatten the coffers of the Marcos cronies. Government Financial

Institutions (GFIs) were the favorite sources of low-interest and long term loans by a particular

class or group which had access to the state machinery.

On the other hand, the financial system in the Philippines provides enormous profits to those

financial institutions and banks that were primarily in the business of banking for the sake of

banking profits.

According to a World Bank study (World Bank, 1988: iii 73), pre-tax profit margins in the

Philippines were roughly 300 percent higher than the average of such margins in eight other. The

World Bank‘s analysis concentrates on the distinction that must be made between the profit

structures of the stronger and weaker banks in the Philippine banking system: the more efficient

banks priced their products and services with reference to the cost structure of the smaller banks,

a practice which effectively enabled them to capture higher profits. In early 1991, savings

deposit rates were at 11 percent per annum, while prime lending rates surpassed 23 percent

interest per annum. Analysis of interest rates from 1987 to 1998 would show the same pattern of

high spreads as was in 1991. These large spreads guarantee high levels of profitability for

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financial institutions and banks. The interest spread to savings ratio was 196 percent in 1987 and

290 percent in 1988. In 1989, the interest spread to savings ratio was 215 percent and dropped

gradually to 90 percent in 1997. Nevertheless, the spreads were still too high in the banking

system.

This financial policy which concerns the interest rate spreads in the Philippines which were

very high and which continued even today affected the growth of savings which were needed for

sustainable investments in the Philippines. Since the savings were low due to these interest

spreads that resulted lower investment levels, the GDP growth of the country was lower as

compared to Malaysia which had tremendous increased in investments.

Moreover, the Philippines during the past had utilized import-substitution strategy but it had

some adverse affects which was based on high-tariff, quantitative restriction, and overvalued

exchange rate. However, during the period 1993-1998, policy changes meant to increasing the

competitiveness and efficiency of the industrial sector were started. The liberalization of foreign

investments were done and implemented, and as such, the foreign exchange market was also

deregulated. The Airline, banking, telecommunications, and oil industries were liberalized.

Public enterprises were encouraged to be privatized and the tariff rates were rationalized.

As a result, the macroeconomic environment significantly improved during this period. The

infrastructure problem was also solved through build, operate and transfer (BOT) schemes.

However, the problems of overvalued exchange rate, low savings rate and poor productivity have

remained. The goal of the country is to move the economy towards investments, trade and

exports. Moreover, the Medium-Term Philippine Development Plan (MTPDP) has stressed the

need to achieve global competitiveness in selected industries (see Appendices).

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Competition policy in the Philippines consists of policy reforms aimed at promoting

competitive environment as well as measures formulated to prevent a decrease in competition.

These were exemplified as mentioned policy reforms aimed at promoting competition in the

banking industry as well as policies to encourage more players in the shipping, airline, and oil

industries. Examples of measures designed to prevent a reduction in competition are policies to

discourage mega-mergers in deregulated industries and policies against unfair business practices

in liberalized industries.

The government type of Malaysia is a constitutional monarch and the country is nominally

headed by a king and bicameral parliament which consisted of a non-elected upper house and an

elected lower house. All the states in the Peninsula are headed by hereditary rulers which are

known as Sultans with the exception of Melaka and Pulau Pinang and they are headed by

governors along with Sabah and Sarawak in East Malaysia. The state government authority is

limited by the federal constitution with some exceptions to Sabah and Sarawak. The Philippines

form of government is a presidential system patterned after the United States wherein the country

is headed by a President which would rule for six years if elected but cannot run for another term

again. The executive system is run by the President and the legislative is run by Congress which

is divided into the upper house which is the senate and the lower house which is the congress.

Both upper and lower houses are elected by the people.

The problem with the presidential form of government in the Philippines is that there is no

continuity in economic development plans because when a new President is elected, a new set of

economic plans will be developed and the old plans would be changed. As such, the orientation

of economic plans in the Philippines is short to medium terms.

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On the other hand, the advantage of the Malaysian form of government is that there is a

king that rules continuously and even the prime minister who is not doing his job can be fired

right away if his economic plans are not effective. Thus, the central planning in Malaysia which

formulated a 20 year development plan was effective because of it‘s long=term horizon and this

had resulted to the effective economic growth of the country.

Skocpol (1985) looked at states as organizations that has control over territories and people

and just like corporations they also formulate strategies and objectives and implement them. If

there is independence from certain particular individuals or elites in such formulation, then there

is state autonomy. At any rate, the effectiveness of the state in economic transformation can be

seen in terms of the economic indicators that resulted from its performance.

Malaysia did well in its economic development and achieved high GDP per capita income

for its population and did well in terms of performance for governance according to the World

Bank. The aggregate indicator for voice and accountability (see appendices) for its governance

was higher than 40% as compared to other countries in 1996 and it was 35% higher than other

countries in 2008. In the category of political stability and absence of violence, it was 70%

higher than other countries in 1996 and in 2008 it was still higher by 50% than other countries in

this category. In terms of government effectiveness, the Malaysian government scored higher by

80% than other countries in 1996 and in 2008 it was 85% higher in this category to other

countries in 2008.

In terms of regulatory quality, the Malaysian government scored higher by 75% than other

countries in 1996 and in 2008 it scored higher by 60% than other governments in this category in

2008. In the category of rule of law, the Malaysian government was higher by 78% than other

countries in 1996 and even up to 2008 it was still higher by 65% than other governments.

103

In the category of control of corruption, the Malaysian government was higher by 72% in

1996 and in 2008 it was still higher by 62% in this category than other governments. These

indicators also showed that in terms of the behavior of organizations as the government of

Malaysia is an institution, their behavior is much more progressive than the Philippines and other

countries.

On the other hand, the Philippines governance indicator was significantly better than

countries with similar gross domestic product per capital in the category of voice and

accountability from 1998 to 2006. In the category of political stability, it was significantly lower

than countries with similar gross domestic product per capita from 1996 to 2006.

The capacities of states to promote economic development include societal penetration for

development as well as in the regulation of social relationships. The state can also do the

extracting of economic resources in such a way that it could benefit society as a whole (Migdal,

1988).

In the area of government effectiveness, the Philippines was significantly (see appendices)

higher in 1996 but it was significantly lower from 2005 to 2006. In the category of regulatory

quality, it was significantly higher from 1996 to 2003 and continued to be higher from 2005 to

2006. In the area of rule of law, the Philippine government was significantly higher from 1996 to

1998. However, in this same category, it was significantly lower from 2002 to 2006. Finally, in

terms of control of corruption, it was significantly lower from 1996 to 2006 (see appendices).

In terms of the direct involvement of the government (see appendices) in helping the

economy, government expenditures can help propel it. The general government final expenditure

of Malaysia increased from USD 6.728 billion in 1991 to USD 22.777 billion in 2007 and this

had definitely contributed to the growth of GDP as it is the role of government to help in the

104

development of the economy. The Philippines state had a government expenditure of USD 4.508

billion in 1991 and this increased to USD 14.166 billion in 2007. If we compare the government

expenditures for both countries, it can be observed that Malaysia had a much bigger figure as

compared to the Philippines.

In the area of national government revenues as a % of GDP, the Philippines posted a lower

figure as compared to Malaysia (see appendices).

The government development expenditures as a percentage of GDP has been of the lowest

in the region (see appendices) and declined from 3.3% in 2002 to only 3% in 2006. As such, its

inability to generate sufficient revenues resulted to a drop on budgets for social and economic

services and it was not able to arrest fiscal deficits which led the state to borrow from the private

sector. Thus, government expenditures as a percentage of GDP dropped to 2.9% in 2005 which

originally had 5.4% in 1997. In terms of social services, its expenditures fell from 6.5% to 4.7%

from 1997 to 2005

On the other hand, Malaysia had higher development (see appendices) expenditure as a

percentage of GDP which had 9% in 1997 but dropped slightly to 6.8% in 2005. According to

the Asian Development Bank (2008), The poor fiscal position of the Philippines was due to a

poor generation of revenues as well as insufficient infrastructure such as in electricity and

transportation. In addition, confidence of investors are weak because of poor ratings and

perception of corruption and instability. The government also was a failure in creating and

developing a sufficient base for industrialization and as such its scope led only to a small and

narrow industrial foundation.

According to Migdal, strong states are able to promote economic development and impose

it‘s will to improve social progress and weak states are those that cannot be able to improve its

105

economic as well as improve its social structure. As such, the Philippines as a weak state had

development expenditures as a percentage of GDP which had been one of the lowest in the

region and declined from 3.3% in 2002 to only 3% in 2006. As such, its inability to generate

sufficient revenues resulted to a drop on budgets for social and economic services and it was not

able to arrest fiscal deficits which led the state to borrow from the private sector. Thus,

government expenditures as a percentage of GDP dropped to 2.9% in 2005 which originally had

5.4% in 1997. In terms of social services, its expenditures fell from 6.5% to 4.7% from 1997 to

2005.

In contrast, Malaysia can be considered a strong state in promoting economic development

as well as the ability to change the social landscape of it‘s country and people because it had a

higher development expenditure as a percentage of GDP which had 9% in 1997 but dropped

slightly to 6.8% in 2005.

Rivera (1994) argued that the Philippine state was not autonomous from the pre-colonial

period up to the Marcos government since the power elites were influencing state policy-making

in favor of their vested interests.

According to Villacorta (1994), the root of the weakness of the Philippine state is its

incapacity to severe itself from the interests of the affluent class. The dominance of this ruling

class supported the view that the state is not autonomous in a capitalist system.

The Philippines as an institution is rooted to the traditions of spoils and patronage that has

turned the state bureaucracies into fiefdoms of particularistic interest mediated into fiefdoms of

particularistic interest mediated by the oligarchy and dominant political families. Under the

Marcos government, the dispensation of these privileges became concentrated, in fact, in a

narrower circle of interests. In a very real sense, therefore the state was a captive of these vested

106

interest, unable to exercise any significant degree of autonomy for transformative, and economic

projects (Rivera 1994).

Michael Todaro (1985) said that in developed countries the role of the state is important in

expanding economic activity through fiscal and monetary policies and this can be done through

increasing or decreasing the interest rates of money being lent to the private sector and this is so

because of highly efficient organizations that promote money and credit markets.

However in less developed countries, markets and financial organizations are not that

organized and usually they are dependent upon other countries as well as they are fragmented.

Private investment would be low if social returns to investment will be low. If the private

appropriability of the social returns is too minimal,and/or the financing cost high, these factors

will result to low levels of private investment and entrepreneurship. Poor social returns to

investment could be affected by poor levels of production factors such as human capital,

technology, and infrastructure.

As such, in terms of investment rates (% of GDP), the Philippines had 22% in 1990 and

declined to 15% in 2007 (see appendices) while Malaysia had a higher investment rate at 32% in

1990 and decreased to 19% in 2007. In terms of wealth, the foreign direct investment to

Malaysia increased from US $ 1 billion in 1980 to a staggering US $7 billion in 1996 while the

Philippines had US $100 million in 1980 and increased to US 1.8 billion in 1996. Malaysia

received much higher foreign investment flows than the Philippines. The Philippines as an

institution is rooted to the traditions of spoils and patronage that has turned the state

bureaucracies into fiefdoms of particularistic interest mediated into fiefdoms of particularistic

interest mediated by the oligarchy and dominant political families. Under the Marcos

government, the dispensation of these privileges became concentrated, in fact, in a narrower

107

circle of interests. In a very real sense, therefore the state was a captive of these vested interests,

unable to exercise any significant degree of autonomy for transformative, and economic projects

(Rivera 1994).

During the period from 1991 to 2007, the economic trends for both countries were

evaluated. In terms of the current account balance, Malaysia had a negative figure with USD-

0,918 billion and this deficit further decreased to USD -5,628 billion in 1994 while the

Philippines posted a deficit of USD -2,690 billion in 1990 and this also further increased to USD

-2,849 billion in 1994. Thus, both countries incurred deficits during this period and Malaysia had

higher deficits. The current account balance as a percent of GDP for Malaysia was -2.1% percent

in 1990 and increased further to -7.6% in 1994. The Philippines current balance as a percentage

of GDP was --6.1 % in 1991 and this also further increased to -4.4% in 1994.

In terms of gross domestic product per capita at current prices, Malaysia had USD 2,431,973

in 1990 and this increased to USD 3,703,376 in 1994. In comparison, the Philippines had only

USD718,114 in 1990 and this increased to USD 949,209. In this area, the Philippines had a much

lower figure as compared to Malaysia.


1990 and this increased slightly to 9.2% in 1994 while Philippines had 3 percent in 1990 and this

increased to 4.4% in 1994. The GDP in current prices was USD 44.025 billion in 1990 and this

improved to USD 74.481 billion in 1994. Comparably, the Philippines had USD 44.164 billion in

1990 and this also improved to USD 64.085 billion in 1994 which was lower to the figure of

Malaysia.

108


this increased slightly to 3.9% in 1994 while the Philippines had a much higher rate at 13.2% in

1990 and it decreased to 9% in 1994.

The current account balance of Malaysia further improved from USD 20,355 billion in 2005

to USD 22,784 billion in 2007. In contrast, the Philippines‘ current account balance was much

smaller and continued to decline further from USD 2,938 billion in 2005 to USD 2,096 billion in

2007.

As Malaysia‘s current account balance as percentage of GDP improved to 15.6% as

compared to the previous period, it declined slightly to 14.7% in 2007. However, the Philippines

had a much smaller ratio with 3% in 2005 and which declined further to 1.6% in 2007.

Malaysia‘s GDP per capita in current prices continued to improved much further with USD

5,040,048 in 2005 to USD 5,756,397 in 2007. In comparison, the Philippines only had USD

1,159,207 in 2005 which increased to USD 1,455,301 in 2007. The GDP in constant prices

annual change for Malaysia was 5.3% in 2005 and improved slightly to 5.8%. In comparison, the

Philippines had a similar rate with 5.1% in 2005 which also increased slightly to 5.6% in 2007.

The GDP in current prices for Malaysia further increased to USD 137.954 billion in 2005

from the previous year. This further increased to USD 186.721 billion in 2007. In comparison,

the Philippines had a lower GDP of USD 98.824 in 2005 but this further increased to USD

144.043 billion. However, the 2007 figure is till lower compared to Malaysia‘s USD 186.721

billion.

The annual inflation rate for Malaysia was only 5.3% in 2005 and this increased slightly to

5.8% in 2007. In comparison, the Philippines had a higher inflation rate of 7.6% in 2005 and

declined slightly to 4.7% in 2007.

109

From 1980 to 1990, the Philippines had been higher in GDP than Malaysia until 1991 where

Malaysia had overtaken the Philippines until today. In the over-all, all these economic indicators

proved that Malaysia did better economically in comparison with the Philippines.

In terms of road network coverage (see appendices), the Philippines had a higher rate of

roads paved for 4-wheel vehicle than Malaysia and also in terms of all roads per 4-wheel vehicle

but Malaysia had higher rate for all roads per 100 people and in terms of paved per 100 people.

Roads are important infrastructures for development and in the case of the Philippines their

scores are more or less even.

As regard to per capita electricity consumption which indicates the technological and

infrastructure advantage of the countries, Malaysia had a much higher rate in 2003-2004 with

2,800 kilowatt per hour in 2000. This even increased to 3100 kilowatt per hour in 2004. Malaysia

posted the highest rate in this category as compared to the Philippines. The Philippines had a

very low per capita electricity consumption of 400 kilowatt per hour in 2000 and this increased

to only 500 kilowatt per hour in 2004 (see appendices).

Furthermore, comparing the growth rates of manufacturing exports (see appendices) of

Malaysia to the Philippines, Malaysia had a higher 12% growth rate for the period 2000 to 2005

while the Philippines had a growth rate of only 2%.

The high technology exports of as a percentage of manufactured exports was 59% in 1999

and this decreased to 52% in 2007Malaysia from 1999 to 2007, the Philippines had 75% in 1999

and this decreased to 69% in 2007. As such, the Philippines had higher rates of high technology

exports than in Malaysia.

However, in terms of high-technology exports in current U.S. dollars, Malaysia had much

higher with USD 39,963,570,717 in 1999 and this increased further to USD 64,584,188,242 in

110

2007. The Philippines had only USD 24,163,367,392 in 1999 and this increased to only USD

29,507,842,699.

In terms of internet users, Malaysia had 2,800,000 in 1999 and this increased tremendously

to 14,792,700 in 2007. The Philippines had lower figures of internet users with only 1,090,000 in

1999 and this increased only to 5,300,000. As such, the use of this technology in Malaysia is

much higher than in the Philippines.

In the area of mobile and fixed-line telephone subscribers, Malaysia had 7,420,000 in 1999

and this increased to 27,697,000 in 2007. The Philippines had 5.742,415 in 1999 and this

increased tremendously to 61,284,896 in 2007.

In the category of the number of personal computers, Malaysia had 1,800,000 in 1999 and

this increased to 6,040,000 in 2007 while the Philippines had 1,260,000 in 1999 and this

increased to 6,300,000 in 2007. As such, the number of personal computers were slightly higher

during this period.

In terms of research and development expenditure as percentage of GDP, Malaysia had 1%

in 2002 and remains the same at 1% in 2006 while the Philippines had no available figures in this

area or nothing. Malaysia also had 40 technicians in Research and Development per million

people in 1999 and this increased to 63 in 2004 and decreased again 44 in 2006. The Philippine

had no figures in this area or nothing.

In the area of telecommunications investment as a percentage of revenues, Malaysia had 34%

in 1999 but this decreased to 23% in 2004. The Philippines had 11% in 2003 and this decreased

slightly to 10% in 2005.

111

In terms of its telecommunications revenue as a percentage of GDP, Malaysia had 4% in

1999 and this increased slightly to 5% in 2004. The Philippines had 47% in 1999 and this

decreased to 24% in 2004.


CONCLUSION

Thus, since the all the hypotheses are accepted, It can therefore be concluded that:


2007.



foreign investments, consumption were related to the economic growth (GDP) for both countries




In the over-all, the state as an economic institution is an important actor in economic

development. A strong state is one that can penetrate society for changes and reforms while a

weak state is a captive of its oligarchy and is influenced by certain particular classes or interests.

Thus, a strong state can effectively promote economic development. Malaysian had shown that is

a strong state as shown by its high governance index as well as its impressive economic progress

while the Philippines historically was weak as the state was not autonomous from certain classes

or interests and this had disrupted its economic growth.

RECOMMENDATIONS

112

Based on the findings and conclusion, the recommendations are geared towards the

Philippine state which should be able to strengthen its government and become more credible to

its people, investors as well as to the outside world. Malaysia had more foreign investments

because it had credibility. As such, economic policies as well as it political institutions must be

changed for the better. Old institutions and policies should undergo ―creative destruction‖ as was

done in Malaysia. Human capital and technology must further be developed to improve its

capacity to promote economic development. The state must be strong and autonomous and the

Philippines will not develop if the political will of its leaders will not be as strong in

implementing its economic goals.

As such, the only way for the Philippines to improve and develop further as a country is to

improve its political institution and minimize graft and corruption if not totally eradicate it.

The following measures are further recommended for the Philippines:

1. Accelerate and promote the growth of private investments;

2. Improve the infrastructures such as road, electricity, telephone lines, etc.;

3. Improve the use of computers as well as other technological advancements;

4. Improve the promotion of the flow of foreign investments;

5. Improve the development of capital formation as well the capital markets;

6. Increase the base of entrepreneurs and enterprises for small, medium and large scale

enterprises;

7. Focus on the promotion of industrialization and manufacturing;

8. Develop the domestic savings in the country through offering higher savings rate so that

sufficient capital can be promoted to finance economic development;

113

9. Improve the exports of the country and lessen imports which are not needed for

industrialization;

10. Lower the interest rates for financing so that the cost of capital for businessmen and

investors could encourage the development and expansion of business in the country;

11. Increase government revenues and increase the budget for development expenditures;

12. Promote policies that would encourage the development of new enterprises and provide

financial and lending support for small and medium-scale enterprises.

13. The education and learning institutions must be encouraged and restructured towards

industrialization and entrepreneurship and also the quality of education must also be

improved in terms of its standards;

14. Promote endogenous technology using local resources in order to lessen imports and

using also local human capital and technology as a base.

15. Promote nationalism and develop a culture of unity among the Filipinos and this can be

done through the educational institutions; and

16. Promote industrialization which are geared towards utilizing labor-intensive industries

and not capital intensive ones.

SUGGESTIONS FOR FURTHER STUDIES

The human development indicator (hdi) which was reflective of the Malaysian government‘s

performance in terms of per capita income, life expectancy, and education, it posted a .68 hdi

index in 1980 and this even increased to .82 in 2005 which was higher than countries in Latin

America and Carribean and also in East Asia and Pacific. It‘s human development index was

also higher than the Philippines (see appendix).

114

The human development index (hdi) for the Philippines was .67 in 1980 and increased to .73

in 2005. These figure in 2008 was lower than countries in East Asia and the Pacific and was also

much lower compared to Malaysia.

In terms of human capital, Malaysia had an unemployment rate of 5% in 1990 and this

decreased further to only 3.5% in 2006 while the Philippines had a much higher unemployment

level of 8% in 1990 and increased to 11% in 2004 but still remained at 8% in 2006.

In the area of human capital in terms of expenditures per student per capita in the primary,

Malaysia had 12% in 2000 and this decreased slightly to 11% in 2006 while the Philippines had

13% in 2000 and this decreased to 9% in 2005. As such, the Philippines had a lower rate in the

category compared with Malaysia.

In the secondary division, the expenditures per student per capita Malaysia had 22% in 2000

and this decreased slightly to 20% in 2004 while the Philippines had only 11% in 2000 and this

decreased to 9% in 2005. As such, Malaysia invested much more in its human capital than the

Philippines in the secondary division.

In the important tertiary division, the expenditures per student per capita of Malaysia posted

a high 81% in 1991 and this decreased to only 60% in 2006. The Philippines had only 15% in

1999 and this decreased further to 12% in 2005.

The literacy rate of adult female was 85% in 2000 while the Philippines had 93% in 2000

and this increased to 94% in 2004. The total literacy rate for Malaysia was 89% in 2000 while

the Philippines had 93% and remained the same at 93% in 2003.

Although, the literacy rate in the Philippines were slightly higher than Malaysia, the

expenditures per student were higher in Malaysia and the state had invested plenty for the

115

development of their human capital and this had resulted to an economic transformation that

were much high higher than the Philippines from 1991 to 2007 (see appendix).

Furthermore, human capital and technology had developed much more in Malaysia

compared to the Philippines because the Malaysian state spent much in expenditures per student

as well as in terms of the technological advancement of its people and institutions. As Cortright

(2001) stated in his new growth theory:

―New Growth Theory emphasizes that economic growth results from the increasing returns

associated with new knowledge. Knowledge has different properties than other economic goods

(being non-rival, and partly excludable). The ability to grow the economy by increasing

knowledge rather than labor or capital creates opportunities for nearly boundless growth

(Cortright, 2001, p. ii).‖

Thus, the contribution of labor and fixed capital to GDP growth were better in Malaysia as

compared to the Philippines and it can also be hypothesized that total factor productivity was

better in Malaysia than the Philippines.

Thus, the economic progress of a country can be supported by the increased through new

knowledge which resulted to the development of its human capital and this was translated in

terms of the superior economic performance and economic productivity of Malaysia as the

results had shown from 1991 to 2007 as compared with the Philippines.

As such, it is suggested that a similar study would be conducted using new growth theory not

only for the Philippines but the area of study must also be conducted for other countries in

Southeast Asia. This can include Thailand, Singapore, Indonesia, and South Korea using the

same questions as had been formulated in this study.

116

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APPENDICES

125

Appendix 1 HDI for the Philippines and Malaysia

126

Appendix 2

Human Development Index, 1975 -2007 – Using 2007 Ranking

Appendix 3

Microsoft Excel Multiple Regression Results for Malaysia

SUMMARY OUTPUT

Regression Statistics

Multiple R 0.999957

R Square 0.999913

Adjusted R Square

0.999882

Standard Error

0.484819

Rank Country Years

1975 1980 1985 1990 1995 2000 2005 2006 2007

66 Malaysia 0.619 0.666 0.689 0.737 0.767 0.797 0.821 0.825 0.829

105 Philippines 0.648 0.652 0.651 0.697 0.713 0.726 0.744 0.747 0.751

Source: UNDP (Human Development Report 2009)

127

Observations

31

ANOVA

df SS MS F Significance F

Regression 8 59538.76

7442.346

31662.84

7.71E-43

Residual 22 5.171097

0.23505

Total 30 59543.94

Coefficients

Standard Error

t Stat P-value Lower 95%

Upper 95%

Lower 95.0%

Upper 95.0%

Intercept 0.545676 0.363032

1.503105

0.147032

-0.20721 1.298559

-0.20721

1.298559

X Variable 1 1.037559 0.081691

12.70109

1.33E-11

0.868144 1.206975

0.868144

1.206975

X Variable 2 -0.21413 0.096831

-2.21136

0.037706

-0.41495 -0.01331

-0.41495

-0.01331

X Variable 3 0.07872 0.262311

0.300103

0.766916

-0.46528 0.622721

-0.46528

0.622721

X Variable 4 -0.13135 0.089259

-1.47157

0.155299

-0.31646 0.053761

-0.31646

0.053761

X Variable 5 0.093143 0.097428

0.95602 0.34945 -0.10891 0.295196

-0.10891

0.295196

X Variable 6 -0.03496 0.156464

-0.22345

0.825246

-0.35945 0.289524

-0.35945

0.289524

X Variable 7 1.123325 0.097348

11.53922

8.4E-11 0.921437 1.325213

0.921437

1.325213

X Variable 8 -0.07126 0.136576

-0.52179

0.607032

-0.3545 0.211977

-0.3545 0.211977

Appendix 4 Microsoft Excel Multiple Regression Results for the Philippines

SUMMARY OUTPUT

Regression Statistics

Multiple R 0.998592

R Square 0.997186

Adjusted R Square

0.996163

Standard Error

1.838069

128

Observations 31

ANOVA

df SS MS F Significance F

Regression 8 26338.06 3292.258 974.4741 3.17E-26

Residual 22 74.32693 3.378497

Total 30 26412.39

Coefficients Standard Error

t Stat P-value Lower 95% Upper 95%

Lower 95.0%

Upper 95.0%

Intercept 0.638482 1.615345 0.39526 0.696457 -2.71154 3.988502 -2.71154 3.988502

X Variable 1 1.283743 0.068588 18.71677 5.3E-15 1.141501 1.425986 1.141501 1.425986

X Variable 2 -0.56598 0.654681 -0.86452 0.396632 -1.92371 0.791742 -1.92371 0.791742

X Variable 3 -2.41243 0.650526 -3.70843 0.001225 -3.76154 -1.06332 -3.76154 -1.06332

X Variable 4 0.595446 0.285068 2.088789 0.048511 0.004252 1.18664 0.004252 1.18664

X Variable 5 -0.24848 0.300741 -0.82624 0.41754 -0.87218 0.375215 -0.87218 0.375215

X Variable 6 1.440834 0.575065 2.505515 0.020123 0.248222 2.633446 0.248222 2.633446

X Variable 7 0.270924 0.211256 1.282443 0.213036 -0.16719 0.709043 -0.16719 0.709043

X Variable 8 -1.09238 0.561219 -1.94645 0.064483 -2.25628 0.071513 -2.25628 0.071513

Appendix 5 Expenditures per student/literacy rate, Malaysia and Philippines

Malaysia

2007 2006 2005 2004 2003 2002 2001 2000

Expenditure per student, primary (% of GDP per capita) .. 11 .. 14 18 19 16 12

Expenditure per student, secondary (% of GDP per

capita) .. .. .. 20 25 27 26 22

Expenditure per student, tertiary (% of GDP per capita) .. 60 .. 68 89 98 109 81

Literacy rate, adult female (% of females ages 15 and

above) .. .. .. .. .. .. .. 85

Literacy rate, adult male (% of males ages 15 and above) .. .. .. .. .. .. .. 92

Literacy rate, adult total (% of people ages 15 and above) .. .. .. .. .. .. .. 89


129

Philippines

2007 2006 2005 2004 2003 2002 2001 2000

Expenditure per student, primary (% of GDP per capita) .. .. 9 9 12 11 12 13

Expenditure per student, secondary (% of GDP per capita) .. .. 9 9 10 9 10 11

Expenditure per student, tertiary (% of GDP per capita) .. .. 12 13 14 15 14 15

Literacy rate, adult female (% of females ages 15 and above) .. .. .. .. 94 .. .. 93

Literacy rate, adult male (% of males ages 15 and above) .. .. .. .. 92 .. .. 93

Literacy rate, adult total (% of people ages 15 and above) .. .. .. .. 93 .. .. 93


Appendix 5b

Educational Attainment in Malaysia and Philippines

Literacy rate, adult

total (% of people ages

15 and above)

% Gross Primary

Enrolment

% Gross Secondary

Enrolment

% Gross Tertiary

Enrolment

Emigration

rate of

tertiary

educated (%

of total

tertiary

educated

population

ECONOMY 1980 1990 2000 1980 1990 2000 1980 1990 2000 1980 1990 2000 1990 2000

Malaysia 70 83³ 89 101° 96¹ 100² 53° 58¹ 69² - 8³ 29² 26 11

Philippines 83 94 93 104° 107¹ 109² 67° 77¹ 83² - 284 27² 13 14

Note: °For 1985

¹For 1995

²For 2005

³For 1991

4For 1999

130

Source: World Bank (2010)

Appendix 6

http://www.imf.org/external/np/loi/031198.htm

March 11, 1998

MEMORANDUM OF ECONOMIC AND FINANCIAL POLICIES

OF THE PHILIPPINE GOVERNMENT

I. BACKGROUND

1. In recent years, the Philippine economy has made impressive progress, reflecting the

implementation of prudent macroeconomic policies and sound structural reforms, as well as a

favorable external environment. By 1996, GNP growth had accelerated to nearly 7 percent, led

by exports and investment; inflation had fallen to well within single digits; and the external

position had strengthened with rapid export growth, increasing reserves, and a steady reduction

of the debt burden.

2. During 1997, economic conditions became markedly more difficult with the onset of the

regional currency crisis. Particularly since the floating of the Thai baht last July, financial

markets have been under severe pressure. Economic and financial policies have been adjusted to

manage these pressures, contain their impact on the real economy, and prepare for an early return

of confidence. In particular, the peso has been allowed to float, accompanied by a tightening of

fiscal and monetary policies, while we have moved forward with our structural reform agenda

notwithstanding the difficult economic environment.

http://www.imf.org/external/np/loi/031198.htm

131

3. Our efforts, which were supported by an extension and augmentation of the Philippines'

extended arrangement with the Fund, have met with considerable success. In particular,

economic growth held up well in 1997 (real GNP grew by nearly 6 percent), inflation (5 percent

average) was contained below the target, and the depreciation of the peso, although substantial,

has been less than that of some other currencies in the region. Critical in this respect has been the

limited damage so far to our financial and corporate sectors, which, although facing strains, have

weathered the crisis relatively well. While much of the resilience of the economy is rooted in the

successful reform policies of the 1990s, the pragmatic and flexible policy response in recent

months has contributed as well.

4. The economy is now at a delicate juncture. While the regional crisis has not cut as deep as in

some countries, some risks remain and we must guard against further shocks in the months to

come. The economic environment remains challenging, and further shifts in confidence are

possible. While the priority is to manage the present crisis effectively and restore confidence as

soon as possible, we also recognize that recent developments have exposed certain

vulnerabilities of our economy. Our goal is to contain these risks through an economic program

that involves a tightening of fiscal and monetary policies; continuation of the floating exchange

rate regime; bolstering our pro-active strategy to strengthen the banking sector; and pursuing

other structural reforms.

5. Beyond the immediate concerns of crisis management, economic policies are being focused to

address the remaining barriers to sustained rapid growth and poverty reduction. Key medium

term requirements in this respect are to raise domestic saving, strengthen the financial system,

reduce external vulnerability, and ensure fiscal sustainability. In order to support our economic

132

program and bolster market confidence in these uncertain times, we wish to support our efforts

through a precautionary arrangement in the form of a two-year stand-by arrangement with the

Fund.

II. THE PROGRAM FOR 1998-99

A. Program Objectives

6. The main economic objectives for 1998-99 are to:

Contain the slowdown of real GNP growth to 3 percent in 1998, followed by 5 percent in 1999

and 6 percent thereafter;

Limit average inflation to around 8 percent in 1998, 6-7 percent in 1999, and 5 percent in

subsequent years; and

Reduce the current account deficit to 3.1 percent of GNP in 1998 and to 2.7 percent in 1999,

and increase reserve cover to 1.9 months of imports in 1998 and to 2.3 in 1999.

In order to achieve these goals, we have formulated a comprehensive policy package centered

on: (i) prudent macroeconomic policies; (ii) accelerated banking sector reform; and (iii) other

reforms to address the structural impediments to sustained high growth.

B. Fiscal Policy

7. An immediate priority is to arrest the deterioration in the fiscal accounts that occurred in 1997,

133

mainly as a result of worsening economic conditions and continuing weaknesses in tax

administration. Although some deviation from the medium-term consolidation path envisaged

earlier is unavoidable in current circumstances, the government remains committed to the longer-

term goals of raising public sector saving and achieving overall fiscal surpluses. We consider

these commitments as integral to our broader goals of rapid economic growth, external viability,

and successful poverty reduction.

8. After registering a deficit of P 21.8 billion (0.9 percent of GNP) in 1997, the consolidated

public sector position in 1998 will be limited to a deficit of P 26.5 billion (0.9 percent of GNP)

and to balance in 1999. While these targets are somewhat less ambitious than envisaged earlier,

they require a major effort in light of the recent deterioration in the fiscal accounts. Besides, they

still imply sizable primary surpluses in both years (4.2 percent of GNP in 1998, and 4.7 percent

of GNP in 1999). Consistent with the overall fiscal targets, the National Government budget

seeks to attain a small surplus in 1998 (P 5 billion, including privatization receipts and excluding

(negative) net income from the CB-BOL) and a significantly larger surplus of P 22 billion (0.7

percent of GNP) in 1999. The fiscal plan for 1998-99 has been drawn up in line with our

medium-term fiscal strategy (Paragraph 26).

9. Although the budget submitted to Congress for 1998 envisaged a surplus of P 16 billion, the

revenue assumptions underlying the budget have been undermined by the sharp deterioration in

the economic environment and the lower than expected net revenue impact of the final version of

the CTRP. Moreover, the tariff exemptions for agriculture and fisheries enterprises adopted by

Congress recently risk reducing revenues further, although their implementation is expected only

in the second half of 1998. Furthermore, the expenditure program has been burdened

134

substantially by the impact of the depreciation of the peso and higher interest rates on interest

payments. In the absence of corrective action the budget deficit for this year could reach P 50-60

billion (1 1/2 - 2 percent of GNP). Faced with this prospect, and with Congress adjourned until

after the May elections, the government has adopted the following emergency measures:

a 25 percent mandatory reserve on all expenditures, including government-owned and

controlled corporations other than personnel and debt service (Paragraph 11);

a 10 percent deferment in the internal revenue allocation (IRA) for local government units;

suspension of all tax subsidies of National Government agencies, government owned and

controlled corporations, and local government units;

continuation of the selective ban on the creation of new civil service positions as well as

restrictions on the filling of vacant positions (exempting health, education, and peace and

order);

suspension through Presidential veto of P 14.4 billion of new programs and projects from the

1998 budget; and

a renewed effort to strengthen tax administration, following an action plan drawn up in

collaboration with the Fund (Paragraph 12);

10. The above measures are sufficient to keep the fiscal program on track at least until mid-year

when the new government and Congress take office. However, to reach the targeted surplus of P

5 billion for the year as a whole, and to complete the structural reforms in our budget, additional

measures will be needed during the second half of the year. These could include legislative

revenue measures such as a restructuring of motor vehicle taxes and a rationalization of fiscal

incentives with a view to making them more transparent and limited. In particular, the plan is to

135

re-submit to Congress legislation to rationalize and limit the wide range of tax incentives for

both public and private businesses. Adoption of an appropriate package of measures if necessary

to achieve the P 5 billion target for 1998 will be a condition for completion of the second

program review. Quantitative limits on the public sector borrowing requirement have been

established as a performance criteria under the program.

11. In implementing the 25 percent cut in discretionary expenditures, the government will make

best efforts to protect social programs, especially those directed at poverty reduction. Measures

are being pursued by the government to minimize, if not insulate, poverty alleviation programs

from the budgetary cuts, particularly those for the 21 poorest provinces and the fifth and sixth

class municipalities. And should fiscal developments during the year permit a relaxation of the

cuts, affected social programs will be the first to be restored. Given the predominant need to

stabilize macroeconomic conditions, such relaxation will only be envisaged, however, once all

measures are in place to ensure attainment of the fiscal target for the year as a whole.

12. The improvement in the fiscal position under the program depends critically on

implementation of the action plan to strengthen tax administration drawn up in collaboration

with the Fund. We have requested follow-up technical assistance from the Fund to help with

implementation of this plan. In this regard, particular emphasis will be given to strengthening the

BIR's focus on large taxpayers as well as to a comprehensive audit plan to enhance taxpayer

compliance. Specifically, a large-taxpayer unit will be re-established and made fully operational

at BIR headquarters by the time of the first program review. The unit will be empowered to

supervise all aspects of large taxpayers' compliance including the conduct of audits. A

comprehensive audit program will be reinstated and the pending audit of one of the large tobacco

136

excise taxpayers will be promptly completed and appropriate follow-up action taken. A

mechanism to monitor tax credits issued will be set up, and action is under way to speed up the

transfer of tax revenues from commercial banks to the Treasury. To further improve customs

administration the government will curtail sharply the scope of duty-free shopping facilities that

have proven to add leakages to the system. To allow time for these reforms to be implemented,

the scheduled reorganization of the regional and district offices of the BIR will be put on hold.

13. The government is committed to further strengthening the social safety net and reducing

poverty, issues of particular relevance as we strive to cushion the impact of the regional crisis on

the most vulnerable. Under the Social Reform Agenda initiated in 1994, we are committed to

reducing the incidence of poverty through better provision of social services and more effective

poverty alleviation programs. We plan to take further measures in this area, in addition to trying

to minimize, as described in Paragraph 11, the effect of the emergency budget cuts on the poor.

In particular, we are ensuring the availability of rice stocks especially in poor communities and

developing livelihood and training programs with focus on small farmers and fisher folks.

Beyond these immediate concerns, poverty reduction continues to pervade the government's

economic strategy as an over-arching goal. Besides the major importance of sustained rapid

growth, we consider the following medium-term policies, among others, as appropriate to reduce

poverty: (i) reforms and higher budgetary allocations for education and health, with a focus on

rural areas; (ii) development of the agricultural sector requiring, in particular, improvements in

rural infrastructure and extension services, and (iii) improved targeting and efficiency of

government programs directed at poverty reduction.

C. Monetary and Exchange Rate Policy

137

Monetary policy

14. The task of monetary policy during 1998 is to restore confidence in the peso. The proximate

goals in this regard are to stabilize the external position and contain the inflationary impact of the

recent peso depreciation. In pursuit of these objectives, interest rate policy will be guided

primarily by the targets established for base money and international reserves (NIR). Accelerated

banking sector reforms, described in Paragraph 25, will support these policies by ensuring the

continued safety and soundness of the system.

15. Consistent with the program's objectives for growth and inflation, broad money growth

during 1998 is projected to decelerate to 17 percent in 1998 (from 21 percent in 1997). Base

money is to grow by 15.6 percent (test period basis), and net international reserves (NIR) are

targeted to rise by around $920 million. In line with this, quarterly limits have been placed on the

stock of base money during 1998, and monthly indicative limits have been set to guide policy

implementation. Monetary targets for 1999 will be established during the third program review.

16. The BSP will set its overnight and term interest rates in a manner consistent with achieving

the base money and NIR targets. In setting policy interest rates on a day-to-day basis, emphasis

will be given to the signals from market interest rates and the exchange rate, recognizing the

relationship between interest rates and exchange rate stability. The central bank will adjust

interest rates as necessary during the program period, especially if the peso comes under renewed

pressure. In view of possible shifts in the demand for money, monetary targets may have to be

revised during the program period, in consultation with the Fund.

138

17. To reduce the intermediation bias against the peso, among other measures (Paragraph 22) the

central bank intends to reduce gradually the reserve requirements on peso deposits. As a first

step, and taking into account the current need for a tight monetary policy stance, we intend to

reduce the statutory reserve requirement from 13 percent to 10 percent with a simultaneous

increase in the liquidity reserve requirement from 4 to 7 percent during the program. In addition,

prior to the end of the program the plan is for a reduction in the total reserve requirement

(statutory plus liquidity), depending on monetary developments under the program. The central

bank will ensure, through open market operations, that any reduction in total reserve

requirements will be implemented in a manner that will avoid any undesired liquidity expansion.

Exchange rate policy

18. In current circumstances the Philippine economy is best served by a floating exchange rate.

Thus, our policy is to limit intervention in the foreign exchange market to what is necessary to

achieve the NIR target under the program, minor "smoothing" operations, and intervention to

maintain orderly market conditions during periods of market turbulence. Monthly indicative

targets have been set for NIR of the BSP, which the BSP will aim to meet as a prime objective of

monetary and exchange rate policy under the program. Consistent with these targets, quarterly

floors on NIR have been set as performance criteria under the program. Deviations from the

indicative NIR targets will not be sterilized, with base money targets to be adjusted accordingly.

19. To improve the functioning of the foreign exchange market and to increase flexibility of the

exchange rate, the volatility band established by the Bankers' Association of the Philippines

(BAP) will be reviewed by the BSP in consultation with BAP with a view to phasing it out as

139

soon as possible, but not later than by end-1998. In the meantime, measures will be taken to

ensure that trading outside the band will not be stopped for more than an hour. Outstanding

contracts under the nondeliverable forward (NDF) facility will be unwound gradually over the

next 18 months and no new contracts (except roll-overs) or similar schemes will be undertaken

by the BSP. The BSP henceforth will channel all its spot foreign exchange transactions (except

those with the government) through the Philippine Dealing System (PDS).

D. External Debt Management

20. Given the recent experience in a number of emerging market economies, strengthening

external debt management is a particular focus under the program. This includes an enhanced

effort both to improve the monitoring of debt flows and stocks, especially of short-term debt.

Regarding debt statistics, the BSP is using a computerized debt management system to facilitate

the compilation of statistics. We are also considering the use of survey methods to add a further

dimension to our monitoring effort. In this context, ongoing technical assistance from the Fund

in the area of balance of payments statistics will pay particular attention also to the debt

statistics. To ensure that the private sector bears the full risks of its borrowing, the government

will continue to refrain from providing any explicit or implicit guarantees on their external loans.

21. We are taking a number of steps to reduce short-term debt and encourage a better maturity

structure of debt flows as well as higher non-debt creating flows. These include, in particular,

several measures to diminish the disincentives to peso intermediation. In this regard, in addition

to the measures described in paragraph 17, foreign currency deposits of residents have been

made subject to a 7.5 percent tax on interest income, and a 15 percent liquid-asset cover

140

requirement, to be raised to 30 percent by mid-1998, has been introduced on foreign currency

deposits. (This is in addition to the 100 percent cover requirement on foreign currency deposits.)

New official external borrowing will be subject to quantitative ceilings under the program.

E. Financial Sector Reform

22. Notwithstanding the sharp deterioration of the economic environment, we are confident that

the Philippine banking system can weather the resulting difficulties and emerge from the

regional crisis in a healthier position. Nevertheless, to maintain the fundamental health of the

system, and to guard against the risk that could arise from a further economic downturn, we are

fully committed to accelerating ongoing efforts to improve our prudential and supervisory

systems as well as to resolve without delay any problems that might emerge in individual

institutions.

23. There are four main elements to our banking reform strategy. First, we are enhancing the

banks' capacity to withstand shocks by raising their capital and encouraging some consolidation

in the industry. Second, bank risks are being reduced by tightening provisioning requirements

and strengthening regulatory oversight. Third, we are leveling the playing field between different

types of instruments, especially with a view to reducing disincentives to peso intermediation.

And fourth, our bank resolution strategy is geared to the twin objectives of dealing expeditiously

with any problem banks while safeguarding the soundness of the banking system. To support

implementation of this plan, we have requested an FSAL from the World Bank as well as follow-

up technical assistance from the Fund/World Bank.

F. Structural Reforms

141

Medium-term fiscal sustainability

24. Our medium-term fiscal strategy envisages an increased revenue effort in order to achieve

higher public savings while also allowing room for increased public investment in infrastructure

and human capital. Accordingly, the medium-term framework provides for the overall public

sector balance to gradually turn from a deficit of 0.9 in 1998 to a surplus of 0.9 in 2003. Over the

same period, investment in infrastructure by the national government will increase from the 1998

level of 2 percent of GNP to 3.2 percent in 2003. Underlying this framework are measures to

increase the tax ratio, as well as a re-prioritization of expenditures through containing public

sector personnel costs, and rationalizing the transfer of funds and responsibilities to local

governments.

25. Major tax policy reform in all areas - income taxes, excises, tariffs and VAT - has taken

place over the past four years, most recently with the passage in December 1997 of the final

phase of the Comprehensive Tax Reform Package (CTRP, the income tax component of reform).

This latter package will have a positive impact on revenues in the medium term, based on a more

rational tax structure. Moreover, the adoption of revenue enhancing measures such as the

planned rationalization of fiscal incentives (paragraph 12) will have a significant revenue impact

over the medium term. Overall, these measures should permit an increase in the tax revenue to

GNP ratio of about 1.8 percentage points over the medium term.

26. Medium-term expenditure reforms to be initiated during the program period will include

shifting to a medium-term budgeting framework under which appropriations will be defined

142

within a three-year rolling macroeconomic framework. This will ensure that the future financial

implications of new expenditure decisions in each budget are made in the context of the medium-

term macroeconomic program. It will also help arrest key sources of expenditure drift, including

the growth of personnel expenditures and of transfers to local governments. Implementation of

this framework is being targeted for 1999 with the assistance of the World Bank in the contest of

the Public Sector Adjustment Loan (PSAL).

27. We will endeavor to move forward the Government Re-engineering Program which was

initiated in 1994. We will re-submit to Congress before the end of 1998, the "Re engineering the

Bureaucracy" Bill in order to obtain full authority to restructure the Executive Branch of

government. We expect the reduction in staffing will result from the merger or abolition of

redundant agencies, the devolution of activities and programs to local governments, and the

further privatization of public services to improve the effectiveness and efficiency of

government. Pending the passage of this Bill, overall national government staffing will continue

to be held down. However, efforts have been undertaken to rationalize compensation in

government to narrow the gap with those of the private sector. With low and middle level

salaries now broadly in line with the private sector, attention can be focused on the remaining

issues of raising civil service executive compensation, de-compressing the salary structure, and

improving overall personnel management.

28. Increased infrastructural investment is critical to our medium-term growth and development

prospects. While part of the increase must come from the National Government (the medium-

term fiscal plan provides for an increase of 0.5 percent of GNP), the private sector and local

governments will need to play a more active role as well. We shall further strengthen the

143

environment for investment in general, and for private sector investment in infrastructure in

particular.

Strengthening the corporate sector

29. Our structural reform agenda will increase the resiliency of the corporate sector mainly by

improving the enabling legal framework, continuing trade and investment liberalization,

developing the domestic capital market, additional privatization, and further strengthening

external debt management.

30. Significant liberalization of the trade regime has been achieved in recent years through

continued tariff reform and steady elimination of nontariff barriers. The average nominal tariff

rate was reduced from 28 percent in 1990 to 13 percent in 1997, with the maximum tariff rate

(which applies to a few agricultural products) lowered from 100 percent in 1996 (after WTO

tarification) to 80 percent in 1997. Quantitative import restrictions were lifted on all agricultural

imports (except rice) in March 1996, accompanied by their tarification as agreed under the WTO.

31. Trade liberalization will continue in 1998-99 and beyond. The average nominal tariff rate has

been reduced to 11.2 percent in 1998, and will be lowered to 10.2 percent in 1999 and to 9.1

percent in 2000. The maximum tariff rate (which applies to some agricultural imports) will be

reduced to 65 percent in 1999. We are also taking measures to increase the transparency of quota

allocation under the minimum access volumes arrangements. Furthermore, in the context of the

WTO, we are committed to reviewing the restriction on rice imports by 2004.

32. We are continuing to make best efforts toward creating an attractive environment and liberal

regime for investment. To this end, further simplification and liberalization of registration

144

requirements will be implemented during the program period. We intend to liberalize the retail

trade sector, particularly to investments in medium-and large-scale firms; draft legislation to this

end will be submitted to Congress during the program period. Investment houses are being

opened up further to foreign investment based on a law passed in late 1997 which raises the

foreign equity participation from 49 percent to 60 percent voting shares.

33. The government remains committed to carrying forward its privatization plans in the coming

years. In 1998, the privatization program is expected to generate P 7 billion, most of which will

come from the completion of the sale of the Fort Bonifacio property. Going forward,

privatization efforts will focus on disposing of remaining major items which are strategically

vital to industrial development particularly the National Power Corporation (paragraph 36).

Other key assets remaining to be sold include the PNOC-Energy Development Corporation and

the Food Terminal.

34. A comprehensive restructuring reforms of the electric power sector has been pursued by the

government, possibly with assistance from the World Bank and ADB. Under this restructuring

reform, the government intends to pursue wholesale competition and produce implementation of

retail competition through the following strategies, among others: (a) separating (unbundling) the

transmission activities of NPC from its generation activities and establishing them as a separate

legal corporate entity; (b) establishing generation companies, followed by incorporation and

subsequent privatization of certain generation companies; (c) refocusing the role and functions of

National Electrification Administration (NEA); (d) encouraging the consolidation/merger of

distribution entities; (e) applying unbundled tariffs at generation, transmission, sub-transmission,

145

and distribution levels; and (f) strengthening the Energy Regulation Board's organizational and

regulatory capacity.

35. To implement this restructuring program, the Omnibus Electricity Bill will be resubmitted to

Congress before end-1998. Based on the new framework, and in close collaboration with the

World Bank and the ADB, an action plan to restructure and privatize the NPC will be launched.

Oil Deregulation

36. A key plank of our structural reform agenda has been the deregulation of the oil sector. The

downstream oil industry was fully deregulated in February 1997, but, effective December 8, the

Supreme Court ruled parts of the deregulation law unconstitutional. A new law was passed in

February 1998, restoring most of the deregulation provisions of the original law while correcting

its constitutional deficiencies. As part of the new regime, a transition period of up to 5 months

was introduced during which prices of domestic petroleum products remain regulated and limited

subsidies can be provided, at the discretion of the President, for the most socially-sensitive

products (liquefied petroleum gas, kerosene, and regular gasoline). By March 15, the President

will issue an Executive Order terminating the transition period for all products except for the

most socially sensitive products. For these latter products, prices will remain regulated until July

1998, at which time they will also be freed. The cost of any price subsidies for socially-sensitive

products will not exceed P 2.9 billion during 1998. This amount will be accommodated within

the revised fiscal program for 1998. Moreover, the outstanding balance under the Oil Price

Stabilization Fund (OPSF) (P 2.6 billion at end-1997) will be gradually repaid through the

application of reimbursement certificates, following the provisions of RA 8479. The total amount

146

used under the new buffer fund for socially sensitive products will not exceed P 2.9 billion, as a

performance criterion under the program.

* * * * *

37. In the current environment of regional uncertainty, close monitoring of developments under

the program will be critical. We are also committed to consulting closely with the fund on

progress with implementing the program. Accordingly, quarterly reviews are envisaged under

the program. The first review, to be completed in May 1998, and subsequent reviews will focus

on (i) implementing the financial program including interest and exchange rate policies, as well

as on (ii) progress with banking reforms and (iii) tax administration. In addition, the second

review, to be completed by August 1998, will provide an opportunity to discuss the new

government's economic agenda, including the measures needed to meet the fiscal target for 1998.

Appendix 7 Philippine Medium Term Development Plan 2004-2010

II. GOALS, STRATEGIES AND ACTION PLANS

A. Targets

Investment rate is targeted to increase from 19 percent to 28 percent of GDP as a result of

increased investment promotion activities. Increased spending on public infrastructure by

PhP100 billion shall be pursued through greater private sector investments. Exports of goods and

services are targeted to increase from US$39 billion to US$50 billion in two years or a minimum

growth of 10 percent every year as the government focuses on priority areas such as ICT,

automotive, electronics, mining, health care, and tourism. These are where the country has

147

comparative advantage because of its human resources and geographic location and the

revitalization of the power, airlines, and shipping industries.The government will strengthen its

program to support three million entrepreneurs and small and medium enterprises (SMEs) by

providing credit, technology, and marketing assistance. Loans to selfemployed small business

owners will be tripled.

B. Strategic Measures

To strengthen and sustain our global competitiveness and create 10 million jobs, the government

will focus on five strategic measures:

1. Make food plentiful at reasonable prices to make our labor cost globally competitive

(Chapter 2: Agirbusiness).

2. Reduce the cost of electricity to make the cost of running our machines and our

manufacturing processes regionally competitive (Chapter 11: Power Sector Reforms).

3. Modernize the physical infrastructure and logistics system at least cost to ensure efficient

movement of goods and people (Chapter 6: Infrastructure).

4. Mobilize and disseminate knowledge to upgrade our technologies and increase our

people‘s productivity (Chapter 19: Science and Technology).

5. Reduce red tape in all government agencies to reduce transaction costs (Chapter 21: Anti-

Corruption).

C. Job Creation Thrusts

Job creation shall focus on the following:

1. High skill industries and services, namely, software, business processing outsourcing or

BPO, contact centers, fashion garments, jewelry, medical services, automotive,

electronics, health care;

148

2. Medium skill industries and services, namely, agribusiness (Chapter 2), mining (Chapter 3),

tourism (Chapter 5), hotels and restaurants, entertainment; and

3. Simple skill industries and services such as construction, SMEs, micro-enterprise.

D. Policy Objectives

1. Promote investments in agribusiness.

2. Promote entrepreneurship and SME development.

3. Promote energy independence and savings.

4. Promote investments in infrastructure.

5. Promote investments in exports.

Appendix 8 Philippine Medium Term Macro-Economic Development Plan 2004-2010

Growth strategy

Addressing the fiscal problem is primary and essential to achieve a sustained and accelerated

pace of growth (Chapter 7: Fiscal Strength). If the fiscal problem is not addressed, growth will

considerably be much lower on account of a severe erosion in investors confidence, which could

create balance of payment difficulties, as well as deep cuts in government spending if the

government will seek to achieve fiscal balance by 2010 in the face of lower revenue growth. The

lack of progress on the fiscal front will also increase the risk premium on interest and exchange

rates and undermine long-term investment. The national government is aiming to balance the

149

budget by 2010 and to reduce the CPSD to 1.0 percent by 2010. Underpinning the fiscal program

are measures to boost the revenue to GDP ratio to 18 percent in 2010 from 14.6 percent in 2004,

mainly from higher revenue collection efficiency. A credible fiscal program will lead to a

positive shift in investor and creditor confidence. It will also boost growth by providing the fiscal

resources to raise public infrastructure spending from 2.6 percent of GDP in 2003 to 4.2 percent

of GDP by 2010.

The government is targeting inflation to decline to 3-4 percent by 2007 based on expectations of

a drop in global oil prices and a modest depreciation of the exchange rate. The inflation target is

based on the assumption that Dubai oil prices will fall to less than US$30 per barrel by 2006 as

oil producers, such as Russia, increase supply and geopolitical tensions normalize in Iraq.

Moreover, the peso is to remain stable as market participants see fiscal reforms taking place. The

peso will also be supported by strong capital inflows arising from an improvement in investor

sentiment and higher receipts from exports of goods and services and remittances of OFWs,

which will lead to a current account surplus of 0.5 percent of GDP.

The government is aiming to achieve its growth targets on account of strong investment spending

and exports. Investment spending is targeted to increase to 28 percent by 2010 from around 20

percent in 2003, while exports of both goods and services are targeted to reach more than US$50

billion by 2006. To achieve these targets, the government shall pursue policies that address the

root causes of declining competitiveness (Chapter 1: Trade and Investment). These include

keeping the cost of food items and other wage goods at competitive rates through greater

productivity; reducing transport and distribution costs through better transport and digital

infrastructure and logistics, especially with the completion of the nautical highway system

(Chapter 6: Infrastructure); providing more competitive power

150

rates through the elimination of cross-subsidy between industrial and residential users and

other power sector reforms (Chapter 11: Power Sector Reforms); mobilizing and

upgrading knowledge to increase productivity; and addressing corruption and simplifying

business procedures (Part V).

In addition to policy reforms that will benefit all economic sectors, vigorous support

is given to micro, small and medium enterprises (MSMEs) and agribusiness to decentralize

development and address the problem of high unemployment and rural poverty.

Government financial institutions (GFIs) are being tapped to enhance the access of MSMEs

to credit, technology and marketing information (Chapter 1: Trade and Investment).

The growth strategy also rests on maximizing the use of the country‘s natural resources and

geographical competitive advantage through wealth creating projects in mining, exploration of

oil/gas wells, land reclamation, reforestation and maximizing the use of upland resources, and

the development of Subic-Clark as the logistics-center in Asia. Major infrastructure investments

such as the nautical highway and roads in tourist

destinations shall be financed mostly from build-operate-transfer (BOT)-type modes and

nonrecourse project financing where the cash flows of a financially viable project will not

require the proponent to seek government guarantee. Other innovative financing strategies and

revenue-generating strategies include capturing the increase in property values arising from the

development of major roads and highways such as the Subic- Clark-Tarlac Highway. Given the

fiscal constraints, the investment priority plan shall be focused on areas where the Philippines

has natural and human resource advantage. These are identified as: IT-related industries,

BPO/contact centers, tourism, fashion garment, jewelry, medical services/healthcare/wellness,

electronics, automotive, agribusiness/mariculture, and shipbuilding.

151

This investment and export-led growth strategy is expected to boost the industrial

sectors—mining, manufacturing, construction, and utilities. Industry growth is expected to

rise from the modest rate of 4.4-5.2 percent in 2004 to 8.5-9.5 percent by 2010. It shall be

the fastest growing sector. Construction is expected to receive a boost from higher

infrastructure spending and the construction of new power plants to meet 5,200

megawatts of demand to avert a power crisis by 2010. The development of a Halal food

industry in Southern Mindanao is also expected to kick up the food processing industry.

The services sector is seen to expand from 5.7-6.6 percent in 2004 to 7.2-8.2

percent by 2010. It shall benefit from the sustained growth of information and

communications technology (ICT)-related businesses like contact/call centers and BPOs,

which shall prop up the real estate industry. The government‘s support for tourism is seen

to greatly boost private services. In addition, the financial and banking sector is seen to

grow at a faster pace as business confidence improves and as savings products for small

savers and OFWs are developed (Chapter 8: Financial Sector)

II. GOALS, STRATEGIES AND ACTION PLANS

The primary goal of reforms in the domestic financial system is to mobilize savings to achieve a

savings to GDP rate of 25 percent to 30 percent. This will support an increase in investment ratio

to 28 percent of GDP, with an increasing amount of resources channeled to support the

development of agribusiness, including lending to micro, small and medium enterprises.

Key reforms in the financial market shall focus on: (a) ensuring macroeconomic stability

through prudent monetary and fiscal policy (see Chapter 7 for fiscal reforms); (b) promoting a

152

stronger, stable, and deeper financial system; (c) reforming the pension system; and (d)

providing easier access to funds by SMEs to achieve the target of tripling lending to SMEs and

support their development.

A. Ensure stable macroeconomic environment to reduce long-term risk by managing

inflation

Prudent monetary policy is important for price stability. However, inflationary pressures,

especially those which arise from supply cost factors cannot be addressed by monetary policy

alone since controlling supply and cost shocks through tight monetary policy can undermine

growth and ultimately affect inflation itself. Thus, inflation management will necessitate

pursuing both monetary policy and measures to ease supply constraints and cost build-up.

1. Manage inflationary expectations by announcing inflation target and intensifying

information dissemination on the concept of inflation targeting and core inflation.

2. Mitigate impact of cost-push pressures on the economy:

a. Ensure ample supply of commodities in the domestic market by improving agriindustry

productivity; reducing postproductive costs through improvement in logistics and transport

system; and timely and adequate importation of necessary basic food items and agricultural

inputs (Chapters 2 and 6).

b. Strengthen coordination among public and private stakeholders under the umbrella

of the National Price Coordinating Council.

c. Lessen the impact of imported fuel and energy prices by shifting to least cost

source of energy and reducing dependence on imported energy sources. In

addition, the government shall promote the use of energy-saving devices and timeof-

use demand management practices in the consumption of electricity by

153

industries (Chapter 10).

B. Promote a stronger, stable and deeper financial system

1. Accelerate reduction of nonperforming assets

The Bangko Sentral ng Pilipinas (BSP) will accelerate financial sector restructuring by

pushing for the intensified implementation of the SPV law to facilitate the offloading of

idle assets from the books of banks and other financial institutions. This will significantly

pare down the banks‘ nonperforming assets.

2. Prevent and minimize systemic risks by strengthening regulations in accordance with

international standards for greater transparency and accountability

a. Amend the BSP charter to include immunity of supervisors from law suits,

authority to compel banks to implement prompt corrective action and higher

capital build-up, shift away from the strategy of forbearance and liquidity

assistance, and stronger criminal and administrative penalties for violations of

banking laws;

b. Amend the Insurance Code to empower the Insurance Commission to preempt

financial distress or intervene to help resolve financial problems of an insurance

company;

c. Provide the Securities and Exchange Commission (SEC) with adequate legal

protection, access to bank records in an investigation, ability to obtain freeze

orders, and visitorial powers over regulated companies and their auditors.

Furthermore, SEC‘s enforcement actions shall be strengthened through effective

coordination with the Department of Justice, the Supreme Court, the National

Bureau of Investigation and the Philippine Judicial Academy by means of

154

enhancing its law enforcements partners‘ capability to investigate and prosecute

securities fraud cases;

d. Strengthen the framework for quick resolution of financially-distressed enterprises

through the passage of the Corporate Recovery Act;

e. Enhance and rationalize the regulatory framework on investment companies and

the sale of preneed plans through the government‘s support on the passage of the

Revised Investment Company Act and the Preneed Code;

f. Restructure the Cooperative Development Authority into a regulatory body

through the amendment of the CDA charter to provide the regulatory framework

for the development of cooperatives nationwide. In addition, capacity building for

CDA and other stakeholders shall be pushed in order to implement an effective

regulation and supervision of credit cooperatives;

g. Introduce the risk-based capital adequacy framework for providers of financial

services and products under SEC regulation and supervision;

h. Strengthen consolidated supervision mechanisms via closer cooperation and

coordination among financial services regulatory agencies. This is to rationalize

the incentive structure for the financial sector and achieve competitive parity

across bank and nonbank sectors. The government shall also ensure consistency

of rules and regulations intended for promoting a level playing field and that

overlaps/gaps in supervision are minimized;

i. Intensify coordination and consultation among government agencies, market

participants and private sector groups. This includes the creation of a Financial

Governance Council, establishment of an organized forum to facilitate

155

coordination activities and consultations, and conduct of consultation meetings,

trainings, symposia and related activities on a periodic basis;

j. Implement a coordinated disaster recovery plan to ensure undisrupted operations

or timely reopening of financial sector institutions in the aftermath of a

catastrophic event; and

k. Implement a long-term development plan or blueprint for the Nonbank Financial

Sector to promote growth and expand contributions to the economy.

3. Improve market liquidity

a. Establish a Fixed-Income Exchange capable of providing a modern screen-based

system for dealers of fixed-income securities. This includes the establishment of a

competitive secondary market for corporate debt, a settlement mechanism that

supports an appropriate delivery versus payment process, and firm legal

ownership of bonds being traded recording of ownership to beneficial owner level;

b. Encourage new listings of equities in the Philippine Stock Exchange (PSE). This

includes listing of Board of Investments/Department of Energy -mandated

companies, select government companies, SMEs, and bonds issued to retail

investors and overseas Filipino workers. To promote listings, information

campaigns and related investment-promotion activities shall be conducted from

2005-2010. Likewise, PSE‘s competitiveness shall be enhanced by improving

liquidity for secondary market transactions and development of in-house ―think

tank‖ for new products that can be introduced in the exchange; and

c. Develop and fasttrack mortgage-backed securities market encouraging the

immediate securitization of housing loan portfolios of various government

156

Medium-Term Philippine Development Plan 2004-2010

institutions. This can also be done by developing a transition strategy toward

nondistortionary housing support programs, standards and systems in lending,

underwriting and servicing, and fast and effective collateral foreclosure regime

for mortgage lending.

4. Protect investor and creditor rights

a. Minimize investor risk by improving the settlement, clearing, and custodianship of

instruments (e.g., centralized ownership records and elimination of physical

certificates, and introduction of national identification numbers). A national

financial market infrastructure shall be established that will seamlessly link market

activities from trading, clearing and settlement to postsettlement disposition of

equity and debt securities. This includes migration from checks to electronic

payment system, expansion of delivery versus payment coverage to investor level

and across all instrument types, development of custody activities for equity and

debt securities, and dematerialization of all securities;

b. Support amendments to the Corporation Code to enhance minority shareholder

rights and provide remedies for corporate malfeasance;

c. Sustain reforms in corporate governance by aligning corporate practices and

financial reporting structures with international best practices. This includes

strengthening the role of independent directors for public companies and adopting

International Accounting Standards and International Standards for Auditing in

SEC‘s rules and regulations. This also includes implementing certification

procedures for at least one officer or director of financing companies, investment

157

houses, fund managers, distributors and mutual fund/investment companies and

preneed plan companies certified by examination as compliance officers;

d. Support the passage of a Credit Reporting Bill. This would permit sharing of

information to protect investors and lenders and reduce the cost of borrowings by

investors and consumers; and

e. Pursue amendments to the Consumer Act to include protection against fraudulent

consumer financial products and services.

5. Tap savings through new financial products

Support the passage of the Personal Equity Retirement Account Act to improve the

country‘s savings rate.

6. Remove tax distortions

Harmonize the tax treatment of financial instruments and institutions to support the

development of the capital market. This shall include, among others, removing the double

taxation of insurance products.

C. Rationalize government pension and retirement schemes

1. Allow increase of members’ contribution to pension fund to narrow the funding gap.

This will require the updating of actuarial study that shall be the basis for

determining the increase in members’ contribution to ensure that the financial

condition of pension funds is actuarially sound.

2. Introduce a clear set of credentials or qualifications that will become the basis for

the appointments to the boards of main pension providers, namely SSS and GSIS.

3. Designate an appropriate agency as the regulator to supervise the activities of

pension funds and ensure their viability.

158

D. Increase SME access to financing (Chapter 1: Trade and Investment)

Appendix 7

Majlis Perasmian Kongres Teknologi Maju (Advanced Technology Congress

(ATC) 2003) , Hotel Marriot, Putrajaya 20 Mei 2003, 9.30 pagi

Monday, September 06, 2004

Kongres selaras dengan proses perindustrian Malaysia, yang mana sudah jelas

mengalami peralihan / transition kepada industri-industri yang mempunyai kandungan

teknologi yang tinggi, di samping didorongi oleh proses-proses yang berasaskan

pengetahuan / knowledge based.

Malaysia sudah mempunyai landasan / foundation, untuk menampung industri-industri

159

yang berasaskan teknologi maju dan terkini, dan, diiringi oleh sokongan kerajaan,

dalam menggalakkan pembangunan industri-industri tersebut. Sungguhpun pada

asasnya, industri elektronik dan elektrik merupakan berpotensi yang besar, untuk

perkembangan ke arah aplikasi proses dan bahan-bahan, serta teknologi maju dan

terkini, industri-industri lain, seperti kejuruteraan, pertanian, bioteknologi, dan asas

sumber, juga mempunyai ruang untuk penggunaan teknologi maju, serta bahan-bahan

dan proses-proses terkini.

The continuing process of industrialization in Malaysia, is witnessing the shifting of the

manufacturing value chain up on to a higher plane with higher inputs of technology

and skills, and utilization of new and advanced materials. The breakthroughs in

Research and Development globally, in materials, products and processes, have

enabled investors in the manufacturing, and related sectors, to bring in such new

technology and processes into their Malaysian operations, and on the domestic front,

collaboration between academia and industry have contributed towards market - driven

technological development and research and development.

Malaysia's substantial bio-diversity, and abundance of biomass, have also spurred

R&D into a variety of applications, and spawning projects in the bio-composite

industry, such as the manufacture of products, from fibre - reinforced polymer

composite, utilizing materials such as oil-palm bio-mass, rice husks, and other

agricultural waste fibres.

The government offers tax incentives of either the Pioneer Status or the Investment

Tax allowance for projects manufacturing value-added products from oil palm biomass,

and other agricultural waste, or by-products, and todate, 16 projects with total

investments of RM118.4 million have been approved, with 8 already in operation.

The increasing application of new and advanced technology, has also spurred the

160

establishment of projects to produce automatic and semi-automatic equipment and

systems for production processes and material handling, and more than 30 such

projects are in operation in Malaysia.

Within the electronics industry the utilization of cutting - edge technology has enabled

manufacturers to produce the latest high technology and high value-added products.

Robotics, advanced packaging, micro-electromechanical systems and the manufacture

of other advanced electronic components, as well as nano-technology, are some of the

promoted activities for which tax incentives are offered by the government.

In 2001 and 2002, investments in advanced manufacturing in electronics projects

amounted to RM8.1294 billion.

Although the development of high-technology manufacturing is largely spearheaded

by the private sector, in order to have the necessary competitive edge operating in

the global market, the government, on its part, has put into place, a range of support

programmes, to complement the private sector effort.

The Malaysian Technology Development Corporation (MTDC) has been given the

task of promoting the usage and application of advanced technologies amongst local

industries, through the management of grants, under the Technology Development

Programme (TDP) and the Technology Development Cluster programme.

The Technology Development programme emphasizes the promotion of high

technology application amongst local companies, and the commercialization of R&D

results, through the grants available under the commercialization of R&D Fund and the

Technology Acquisition Fund.

Between 1997 and 2003, a total of 165 projects have been approved with grants

amounting to RM164.98 million, under the programmes. Out of these, 50 projects were

given grants totaling RM45.102 million for the commercialization of R&D, and 115

161

projects were approved grants for Technology Acquisition, totaling RM118.88 million.

The Technology Development Cluster Programme of the MTDC, introduced in

1996, has the objective of providing a physical platform for technopreneurs to

collaborate with local universities and research institutions, in efforts to promote

the commercialization of technology. The programme involves the developing and

managing of technology incubation centers, built within the confines of universities and

research institutions, in which technopreneurs can rent space, and take advantage of

available R&D facilities.

Todate, RM73 million has been allocated in both the RM7 and RM8 for the

development of the Technology Development Centres, and 4 incubation centers have

been built viz:

1. The UPM - MTDC Technology Incubation Centre one, in Serdang, focusing

on IT and Multimedia.

2. The UKM-MTDC Smart Technology Centre in UKM, Bangi, focusing on

biotechnology.

3. UTM-MTDC Technovation Centre at UTM, Saudi, with emphasis on IT and

electronics.

4. UM-MTDC Technology Incubation Centre at UM, Kuala Lumpur focusing on

advanced manufacturing. Another incubation Centre is being proposed by

MTDC, in collaboration with FRIM, to develop a cluster of high-technology

companies involved in forestry-based technology.

Todate, 67 projects have been started in the various technology Incubation Centres.

Close collaboration between Universities and Research Centres, and industry

is essential in order to ensure that there is a matching of supply and needs and

requirement. In particular, R&D efforts should be market driven, and geared towards

162

the need for industry to be increasingly cost efficient, highly productive, and have the

necessary competitive edge that advancements in technology and processes, can

provide.

Industry should optimally utilize the available R&D resources in the Universities and

research centers, and undertake formalized arrangements, to task researchers to

upgrade their manufacturing technology and processes over time. While much of the

advanced technology can be imported sourced from abroad through various licensing,

and other acquisition arrangements the government would like to see more efforts in

developing endogenous technology, particularly in areas and sectors, where Malaysia

already has the competitive edge, and is already a significant market player.

In addition, investments are encouraged in the manufacturing and fabrication of

machinery and equipment which can directly enhance the technological capabilities of

the manufacturing and related sectors, as well as have export potential.

Special incentives are given to encourage such investment, in the form of Pioneer

Status with 100% tax exemption for 10 years, or the Investment Tax Allowance of

100% on qualifying Capital expenditure incurred within period of 5 years. Amongst the

machinery and equipment for which their manufacturing can be given the incentives

are:

• Material handling equipment

• Robotics and factory automation equipment

• Specialized and process machinery for equipment for specific industries

• Machine tools.

It is hoped that Universities and research centers can serve as catalysts and prime

movers to encourage small and medium sized manufacturing entities to move towards

automation and systems integration, and to optimize the use of new technology and

163

processes to reduce costs, improve efficiency and quality, minimize wastage, and

meet the dictates of the market place, for responsible care of the environment.

Conferences such as this one organized by Institute of Advanced Technology should

always be market oriented, so that the outcome of the deliberations can help to move

the industrialization forward.

Appendix 8

Governance Indicators

-2.00

-1.50

-1.00

-0.50

0.00

0.50

1.00

1996 1998 2000 2002 2003 2004 2005 2006 2007 2008 Malaysia

Philippines

Political Stability & Absence of Violence/Terrorism

164

Source: The World Bank, 2009


-0.80

-0.60

-0.40

-0.20

0.00

0.20

0.40

0.60

1996 1998 2000 2002 2003 2004 2005 2006 2007 2008Malaysia

Philippines

Voice & Accountability

-0.50

0.00

0.50

1.00

1.50

1996 1998 2000 2002 2003 2004 2005 2006 2007 2008

Malaysia

Philippines

Government Effectiveness

165



-0.40

-0.20

0.00

0.20

0.40

0.60

0.80

1996 1998 2000 2002 2003 2004 2005 2006 2007 2008

Malaysia

Philippines

Regulatory Quality

-1.00

-0.50

0.00

0.50

1.00

1996 1998 2000 2002 2003 2004 2005 2006 2007 2008

Malaysia

Philippines

Rule of Law

166


Appendix 9

-1.00

-0.80

-0.60

-0.40

-0.20

0.00

0.20

0.40

0.60

0.80

1996 1998 2000 2002 2003 2004 2005 2006 2007 2008

Malaysia

Philippines

Control of Corruption

Summary of Governance indicators for the Philippines (Selected Years)

Governance

Indicator

Years

1996 1998 2000 2002 2003 2004 2005 2006 2007 2008

Voice and

Accountability

+ + + + + + + - - -

Political Stability - - - - - - - - - -

Governance

Effectiveness

- - - - - - - - - 0

Regulatory

Quality

+ + + - - - - - - -

Rule of Law - - - - - - - - - -

Control of - - - - - - - - - -

167


Corruption

Summary of Governance indicators for the Malaysia (Selected Years) Governance

Indicator

Years

1996 1998 2000 2002 2003 2004 2005 2006 2007 2008

Voice and

Accountability

- - - - - - - - - -

Political Stability + + + + + + + + + +

Governance

Effectiveness

+ + + + + + + + + +

Regulatory

Quality

+ + + + + + + + + +

Rule of Law + + + + + + + + + +

Control of

Corruption

+ + + + + + + + + +

168

Appendix 10

Comparison of National Government Revenues (% of GDP)

Source: Asian Development Bank, 2008

169

Appendix 11

Source: Asian Development Bank, 2008

Appendix 12

Selected Technological Indicators, Malaysia, 1999 to 2007

2007 2006 2005 2004 2003 2002 2001 2000 1999

High-technology exports (%

of manufactured exports) 52 54 55 56 59 58 58 60 59

High-technology exports

(current US$)

64,584

,188,242

63,410

,667,185

57,650

,291,242

53,222

,673,792

47,331

,742,991

43,543

,951,769

40,912

,481,519

46,998

,538,988

39,963

,570,717

Internet users 14,792

,700

13,474

,800

12,465

,300

10,636

,500

8,643,

000

7,842,

000

6,346,

000

4,977,

000

2,800,

000

Mobile and fixed-line

telephone subscribers

27,697

,000

23,805

,822

23,910

,648

19,057

,264

15,695

,561

13,722

,903

12,094

,564

9,756,

093

7,420,

799

Personal computers .. 6,040,

000

5,600,

000

4,900,

000

4,200,

000

3,600,

000

3,000,

000

2,200,

000

1,800,

000

Research and development

expenditure (% of GDP) .. 1 .. 1 .. 1 .. 0 ..

Technicians in R&D (per

million people) .. 44 .. 63 .. 57 .. 40 ..

Telecommunications

investment (% of revenue) .. .. .. 23 23 26 26 28 34

Telecommunications revenue

(% GDP) .. .. .. 5 5 5 5 4 4


170

Appendix 13

Selected Technological Indicators, Philippines, 1999 to 2007

2007 2006 2005 2004 2003 2002 2001 2000 1999

High-technology exports (% of manufactured exports)

69 68 71 73 74 74 72 73 75

High-technology exports

(current US$)

29,507

,842,699

27,625

,618,563

25,997

,824,194

25,855

,091,670

23,942

,090,486

23,867

,718,529

21,013

,784,543

25,240

,098,062

24,163

,367,932

Internet users 5,300,

000

5,000,

000

4,614,

759

4,400,

000

4,000,

000

3,500,

000

2,000,

000

1,540,

000

1,090,

000

Mobile and fixed-line

telephone subscribers

61,284

,896

46,502

,100

38,146

,248

36,373

,368

25,849

,560

18,693

,934

15,474

,254

9,515,

746

5,742,

415

Personal computers .. 6,300,

000

4,521,

000

3,684,

000

2,847,

000

2,200,

000

1,700,

000

1,480,

000

1,260,

000

Research and development

expenditure (% of GDP) .. .. .. .. .. .. .. .. ..

Technicians in R&D (per

million people) .. .. .. .. 10 10 .. .. 20

Telecommunications

investment (% of revenue) .. .. 10 .. 11 .. .. .. ..

Telecommunications revenue

(% GDP) .. .. .. 24 25 25 44 47 47


Appendix 13b

Internet users (per 100 people) Economy Years

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Malaysia 1 2 7 12 21 27 32 35 42 49 52 56 56

Philippines 0 0 1 1 2 3 4 5 5 5 6 6 6

Source: World Bank (2010)

171

Appendix 13c Malaysia Internet Users, 1996 to 2008 S Curve

Appendix 13d Philippines Internet Users, 1996 to 2007 S Curve

-20

0

20

40

60

80

Mal

aysi

a In

tern

et

Use

rs

Year

Year Line Fit Plot

Malaysia InternetUsers

Predicted MalaysiaInternet Users

-2

0

2

4

6

8

Ph

ilip

pin

es

Inte

rne

t U

sers

Year

Year Line Fit Plot

Philippines InternetUsers

PredictedPhilippines InternetUsers

172

Appendix 14

Source: ADB

173

Appendix 15

Source: ADB

Appendix 16

Source: ADB

174

Appendix 17

Source: ADB

Appendix 18

Computation Procedure for the Long-term Economic Growth Model

175

L

dL

Y

L

dL

dY

K

dK

Y

K

dK

dY

A

dA

Y

A

dA

dY

Y

dY

Now, divide through by Y and we are done!

Percentage

change in

ProductionElasticity of

Production with

respect to

technology

Percentage

change in

Technology

LKAY LKA %%%%

This is the basic growth accounting equation

Y

X

dX

dYX

where

176

3

2

3

1

LAKY

The most common production function used in Macroeconomics is the Cobb-Douglas

production function

1

3

2

3

13

2

3

1

LAK

ALK

Y

A

dA

dYA

3

1

3

1

3

2

3

13

2

3

2

LAK

KLAK

Y

K

dA

dYK

3

2

3

2

3

2

3

13

1

3

1

LAK

KLAK

Y

L

dA

dYL

LKAY %3

2%

3

1%%

This is the basic growth accounting equation

Year Real GDP (Billions of

2000 dollars)

Real Capital Stock

(Billions of 2000 dollars)

Employment (thousands)

1939 1,142 1,440 29,923

2006 11,257 12,632 135,155

2007 11,467 12,883 137,180

Lets decompose the most recent data first…

85.1100*257,11ln467,11ln% Y

97.1100*632,12ln883,12ln% K

48.1100*155,135ln180,137ln% L

Note that capital is

growing faster than

employment

20.48.13

297.1

3

185.1% A

177

Year Real GDP (Billions of

2000 dollars)

Real Capital Stock

(Billions of 2000 dollars)

Employment (thousands)

1939 1,142 1,440 29,923

2006 11,257 12,632 135,155

2007 11,467 12,883 137,180

Now, lets look at long term averages

39.3100*

68

142,1ln467,11ln%

Y

22.3100*

68

440,1ln883,12ln%

K

23.2100*

68

923,29ln180,137ln%

L

84.23.23

222.3

3

139.3% A

1939 - 1948 1948 - 1973 1973-1993 1993-2007

Output 5.79 4.10 1.96 2.63

Capital 3.34 4.24 2.10 2.94

Labor 4.46 2.10 1.86 1.60

Productivity 1.71 1.28 0.02 0.59

A few things to notice:

Real GDP growth is declining over time.

Capital has been growing faster than labor

Contributions to growth from capital, labor, and technology vary across time

period

178

LKAFY ,,

We are concerned with capital based growth. Therefore, growth in technology

and employment will be takes as given

Technology

grows at rate

Ag PopPop

LF

LF

LL

Population

grows at rate

Lg

Employment

Labor Force= Employment Ratio

( Assumed Constant)

Labor Force

Population= Participation rate

( Assumed Constant)

Appendix 19

Remittance inflows as a % of

GDP

HDI Rank Country 2007

66 Malaysia 1

105 Philippines 11.6

Source: UNDP

Documents

Comparative Analysis of the Economic Growth of Malaysia and the Philippines 1