Inclusive Growth and Jobs

32 INCLUSIVE GROWTH 3 AND JOBS SYSTEMATIC COUNTRY DIAGNOSTIC OF THE PHILIPPINES | REALIZING THE FILIPINO DREAM FOR 2040 33 A combination of structural reforms and increasing Confronting these constraints can simultaneously help remittances has fueled the country’s high growth the country maintain its high levels of growth, boost rates. While growth has begun to generate broad- inclusiveness, and create good jobs. Further private based improvements in welfare, it has not been as sector growth will increase the demand for labor, inclusive as it might have been. Median incomes have which will lead to more employment and higher wages. risen much slower than GDP per capita, while the Within the broad constraints outlined here, emphasis wealth of the Filipino elite has expanded much faster on addressing areas that most directly affect the less than the overall economy. The pace of creating good well-off can make growth more inclusive. For example, jobs also remains inadequate. Millions of workers have reducing the barriers to creating a small business and moved out of low-productivity jobs in agriculture, and building and maintaining rural roads can boost half of all workers now hold wage jobs with private shared prosperity. firms. But the large bulk of these jobs pay meager wages, and fewer than half offer basic benefits. This chapter considers the constraints to inclusive growth and job creation across three areas: limited Historically, many policies have not favored broad- economic competition, rigid labor regulation, and based growth. Economic competition has been large infrastructure gaps. It also examines particular restricted by policies that favor existing conglomerates. challenges in agriculture, fisheries, and natural Labor regulations have benefitted only those with resources, which are given special attention because formal wage jobs—less than a quarter of the workforce. of the large share of the poor they employ. Further Decades of underinvestment in infrastructure have analysis of constraints to specific sectors can be found limited possibilities for the private sector. The country in the WB-IFC Country Private Sector Diagnostic. has also failed to realize the promise of its natural resources. In particular, agriculture has been hampered by a heavy focus on rice, to the detriment of other agricultural products with far greater potential. Box 2: Country Private Sector Diagnostic A Country Private Sector Diagnostic (CPSD) was and digital infrastructure. Poor infrastructure and recently completed by a WB-IFC team. The objective corresponding expensive utility costs discourage private of the CPSD is to identify cross-cutting and policy sector investment and subsequent job creation. constraints that hinder the expansion of market opportunities and subsequent private The CPSD also highlights the regulatory and trade sector investment. The diagnostic identifies restrictions that limit competition and investment inadequate infrastructure and lack of competition as more generally. Firms trying to enter markets the main constraints and offers an extensive sector-by- are discouraged by the complexity of regulatory sector analysis. procedures, administrative burdens on startups, and regulatory protection of incumbents. Similarly, firms The CPSD points in particular to the lack of requiring imports and wanting to export face high trade competition in most infrastructure markets. Limited costs. Over 93 percent of exporters and 98 percent competition has resulted in high costs and limited of importers report procedural obstacles as the main service quality for transportation services, electricity, barriers to trade, the highest among peer countries. 34 INCLUSIVE GROWTH AND JOBS 3.1. Economic Competition ranks 171 out of 190 countries. (It ranks 95th in the overall Doing Business rankings.) Thirteen procedures The Philippines’ unlevel economic playing field limits are required to start a business (Figure 34). Only two growth, inclusion, and job creation. Large, established, other economies in the world require more procedures. and well-connected firms have advantages that limit The Philippines also ranks very poorly in enforcing opportunities of newer firms and entrepreneurs contracts (152 out of 190), which may create particular without connections. A more level playing field would challenges for smaller firms. Product market regulation produce greater competition, resulting in lower prices (PMR) data show that the country’s regulatory for goods and services, higher quality, more innovation, environment is more restrictive than comparator higher growth, and more jobs. Competition pressures countries. Furthermore, price controls and other firms to become more efficient to avoid exiting the regulations that limit competition in input markets, such market. It also ensures that when more productive as professional services, hinder the competitiveness firms increase their market share, it is at the expense of downstream firms. World Bank (2018c) estimates of less productive ones. Greater competition erodes indicate that tackling the restrictions in the services the rents that otherwise accrue to firms with monopoly sector could boost GDP growth by 0.2 percent or oligopoly power. Additionally, the presence of only per year. a small number of employers, known as monopsony power, can repress wage growth. Given the dominance Public subsidies given to particular firms further of a single employer in many rural areas, monopsony limit competition. The discriminatory granting of power may be one factor limiting wage growth in government subsidies to firms, whether state-owned the Philippines. enterprises (SOEs) or private players, can uneven the playing field between competitors. World Bank research The unlevel playing field is largely the consequence of shows that 8 percent of product markets across sectors government regulations. One key barrier to inclusion reported at least one firm receiving a subsidy. In 40 and the formation of small businesses is the high percent of those markets receiving subsidies, just one regulatory hurdle to forming a new firm. The Philippines firm received a subsidy (World Bank 2018c). is one of the most difficult places in the world to start a business. In terms of the Starting a Business subindex High trade costs further restrict competition and of the 2020 Doing Business indicator, the country reduce opportunities for domestic firms to access Figure 34: Number of Procedures to Start a New Business, 2019 14 12 10 8 6 4 2 0 Philippines Indonesia Lao PDR Malaysia Cambodia Japan Vietnam Thailand China Australia Singapore Hong Kong Korea, New Zealand SAR, China Republic of Source: World Bank 2020. Note: Regional peers are shaded yellow. SYSTEMATIC COUNTRY DIAGNOSTIC OF THE PHILIPPINES | REALIZING THE FILIPINO DREAM FOR 2040 35 larger markets. Trade costs in the Philippines are among Months earlier, they ordered Angkas to stop ferrying the highest in ASEAN. Investors in the Philippines pay passengers because motorbike transport services were twice as much as those in Thailand to export or import not permitted. The Philippines’ youthful demographic a shipping container. In addition, the Philippines ranks and its large population make e-commerce an attractive lowest among peer countries on the World Bank’s investment opportunity, but regulations restrict foreign Logistics Performance Index; it scores especially low on investment in retail. connectivity to international markets.14 Besides tariffs, importing and exporting firms need to comply with A symptom of limited competition is that foreign nontariff measures (NTMs), which encompass a wide direct investment in the Philippines remains low range of requirements, including technical regulations, relative to its peers. Limited FDI results in part from product standards, and custom procedures. NTMs have restrictions on foreign investment. Such barriers include become an increasingly important obstacle to trade in explicit rigidity stipulated in the Philippine Constitution, the Philippines. A survey conducted by the International which imposes foreign investment restrictions Trade Center in 2015 shows that 60.7 percent of on natural resources, public utilities, mass media, Philippine exporters and 69.6 percent of importers educational institutions, and the practice of professions. reported obstacles due to NTMs. These figures are high In addition, the country’s foreign investment negative compared with peers. list puts a 40 percent cap on foreign equity ownership in most sectors. As a result, compared with its peers in Partly because of restrictions on competition, the the region, the country’s level of FDI is still low—2.6 innovation ecosystem lags behind ASEAN peers. percent of GDP versus 4.3 percent in Malaysia in 2016 Philippine start-ups raised a total of $28.8 million from (Figure 35). Moreover, a decomposition of net FDI into venture capitalists (VC) in 2018, the smallest amount direct-equity and intercompany borrowing reveals that among major ASEAN economies. Myanmar, a much direct-equity investment in the Philippines’ economic smaller economy with a lower per capita income, sectors fell from 0.8 percent of GDP in 2005 to 0.7 outperformed the Philippines with $32.8 million of VC percent in 2016. Most of the increase in net FDI has funding while Indonesia attracted $1.6 billion (Venzon been due to an increase in intercompany investment 2019). Philippine regulators recently denied the through debt instruments, which increased from 0.3 application of Go-Jek, an

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