July 25, 2016    4 minute read

The Philippines’ Strongman Might Weaken The Economy

Extreme Politics    July 25, 2016    4 minute read

The Philippines’ Strongman Might Weaken The Economy

The newly elected president Rodrigo Duterte, nicknamed ‘The Punisher’, poses a potential risk to the Philippines’ hard-earned status as one of Southeast Asia’s rising tigers. Foreign investors have expressed concern regarding Duterte’s unpredictability and disregard for the rule of law, particularly in light of his controversial agenda to abolish the Philippines’ congressional system and to eradicate crime at the cost of human rights.

The Philippines became one of Asia’s fastest expanding economies, growing at an average rate of 6.2% a year since 2010, abandoning its given title as the “sick man of Asia.” During the same period, the World Bank saw the country’s business ranking rise from 144 to 97. Outgoing president Benigno Aquino and his predecessor, Gloria Macapagal Arroyo, were responsible for the dramatic economic changes and reforms in the Philippines.

The Duterte administration has been tasked with the challenge of continuing the growth momentum achieved by former President Aquino. Since the state of the economy inherited by Duterte was already strong, the Economist Intelligence Unit forecasts it to grow by at least 5% a year in 2016-2020. Duterte has expressed the intention to closely align his economic policy with that of the former President’s, announcing his “eight-point plan” of economic proposals in May:

  1. Continue and maintain current macroeconomic policies, while reforming the tax collection system
  2. Accelerate infrastructure spending to reduce inefficiencies in public-private partnerships (PPP)
  3. Improve the investment climate by addressing ownership restrictions for foreign firms
  4. Develop the agricultural sector through business support to farmers
  5. Address bottlenecks in land administration and management systems
  6. Strengthen the educational system to improve the skills of the workforce
  7. Introduce a lower or more progressive income tax system
  8. Expand and improve the conditional cash transfer program

His first State of the Nation Address (SONA) was supposed to further elaborate on these proposals, in order to settle concerns regarding the lack of concrete strategy behind these economic plans. However, in his first SONA on July 25th, he re-enforced many onlookers’ apprehensions about pursuing his security policy at the expense of economic development. The speech was subsumed by the war on drugs and aside from reiterating his pledge to lower personal and corporate tax rates, he failed to clearly elaborate on the economic policy.

Duterte’s crusade against crime by any means necessary has caught the attention of many human rights groups, including the Catholic Church. “Huwag Kang Papatay” (Thou Shall Not Kill), a Church campaign, was started as a backlash against the 300 extrajudicial killings that have taken place since Duterte took office on June 30th, 2016. Although Duterte has not outwardly encouraged these killings, his position on violence is indicative of his passive support regarding such acts. In his SONA speech he promised to continue his relentless war against drugs, stating: “we will not stop until the last drug lord, the last financier has surrendered, been put behind bars or below the ground if they so wish.” This could worry businesses who seek the protection from authorities.

Investor Uncertainty

The President’s insistence to oust the current congressional system and replace it with a federal government spells additional uncertainty for investors. With an updated timeline to try to introduce a federal system by the 4th/5th year of his term, he aims to decentralise power and offer greater funding to local authorities. Often compared to Malaysia in terms of culture, outlook and ways of looking at government, one could infer that federalism poses further risks of corruption within the Philippines. Malaysia, since the introduction of de facto federalism in 2008, has suffered from crippling amounts of corruption from its own Prime Minister. Like the Malaysia prior to federalism, the Philippines has weak governing institutions. This will make local leadership challenging under federalism creating a poorly coordinated federal system. Furthermore, in pursuing a federal system, the Philippines could risk complicating tax policies and renegotiation processes for contracts which will act as deterrents to business activity.

Being a President who has little regard for the rule of law in the pursuit of ridding the country of corruption and crime, Duterte poses a high risk of undermining the Philippines’ political and legal framework. It is likely, given the President’s continued and almost exclusive emphasis on the war against drugs and the agenda to handicap current political institutions, which the country’s economic growth may slow in the short term and potentially the long term too. However, being only at the beginning of Duterte’s presidency, it is still unclear how he will attempt to keep the Filipino economy dynamic and prevent his security and constitutional policies from stunting economic growth.

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