In John Landis’s 1983 hit movie Trading Places, Billy Ray Valentine, a bum and hustler played by Eddie Murphy is picked up from the streets, cleaned up and dressed in an expensive business suit as part of an experiment instigated by wealthy brothers Randolph Duke and Mortimer Duke. The made-over Valentine is then set up in their firm Duke & Duke and introduced to his new colleagues as an up-and-coming hotshot trader.
Ordinary Filipinos are elated by the Fitch Ratings upgrade!
As the film unfolds, the success of Valentine’s makeover quickly becomes evident. He starts out looking like a million dollars with his newly-manicured looks and power suit, then proceeds to step up and actually perform like a million dollars.
Fast forward 30 years later. Top-tier rating agency Fitch Ratings recently
awarded the Philippines an investment-grade credit rating paving the way for the country’s improved access to a windfall of capital, presumably to fund further economic growth.
“This means much more than lower interest rates on our debt and more investors buying our securities,” Mr. Aquino said in a statement. “This is an institutional affirmation of our good governance agenda: Sound fiscal management and integrity-based leadership has led to a resurgent economy in the face of uncertainties in the global arena. It serves to encourage even greater interest and investments in our country.”
Fitch Ratings cited “improvements in fiscal management” begun under Mr. Aquino’s predecessor, Gloria Macapagal Arroyo, as one of the reasons for its decision to lift the Philippines’ rating from junk status, increasing it one notch, to BBB- from BB+. The rating applies to the country’s long-term debt denominated in foreign currency.
What this means is that Philippine businesses now have access to cheaper overseas foreign-currency-denominated loans. And with the peso rapidly appreciating, this is not a bad deal. Low interest rates combined with a depreciating principal means good times ahead.
Or does it?
Access to cheap capital is a double-edged sword. Much like the way sugar- and caffeine-fortified “energy drinks” boost performance over the short run, cheap dollar-denominated loans are notorious for their addictiveness. This is exactly what happened in the 1990s in the lead up to the infamous currency crash of 1997. The Philippines in the early 90s was awash with cash. The stock market was soaring, “blue-chip” IPOs were being hawked to starry-eyed “investors” by every “investment banker” and her dog, ordinary schmoes hit with the “wealth effect” bug were pouring excess highly-leveraged cash into real estate.
Then in 1997, the market tanked.
After Thailand ran out of money to fund the Thai baht’s peg to the US dollar, its Central Bank was forced to float its currency which, as expected, fell in value versus the greenback. The crash of the Thai baht quickly rippled across Asia, but the seeds for what was to become the Asian Currency Crisis of 1997 had already been planted long before. At the time, Thailand had acquired a burden of foreign debt that made the country effectively bankrupt even before the collapse of its currency. As the crisis spread, most of Southeast Asia and Japan saw slumping currencies, devalued stock markets and other asset prices, and a precipitous rise in private debt.
As local currency values plummeted local firms all over southeast Asia holding foreign US-dollar loans effectively saw their debt burden double and even triple. When you are stuck with a business that is earning in pesos while owing in dollars, you’re pretty much toast.
If we think being given a big piggybank full of money to “invest” will necessarily result in sustainable development, we should think again. In 1994, economist Paul Krugman published an article attacking the idea of an “Asian economic miracle”. He argued that East Asia’s economic growth had historically been the result of increasing the level of investment in capital. However, total factor productivity had increased only marginally or not at all. Krugman argued that only growth in total factor productivity, and not capital investment, could lead to long-term prosperity. Krugman himself has admitted that he had not predicted the crisis nor foreseen its depth.
The causes of the debacle are many and disputed. Thailand’s economy developed into a bubble fueled by “hot money”. More and more was required as the size of the bubble grew. The same type of situation happened in Malaysia, and Indonesia, which had the added complication of what was called “crony capitalism”.
Most people will agree that capital allocation in the Philippines is largely controlled by a small clique of wealthy oligarchs. Indeed, the Aquino-Cojuangco feudal clan is not just one such but one of the biggest of them all. So just on that alone, the manner and fairness with which any increased capital inflow into the Philippines will be channeled remains an iffy proposition. Will capital be channeled to the most deserving business proposition? Or will it be funneled into the portfolios of the most well-connected oligarchs?
But less-understood is the fundamental weakness of the capital base of the Philippines. Most “investments” in the Philippines are on highly speculative “assets” that do not contribute to real increased productivity (the ability to increase the efficiency with which we make and maket tangible stuff) that is enabled by a fixed tangible capital base (robust indigenous technological capability, stable manufacturing capacity, and a workforce equipped with the most relevant skills) — which is why despite reports of “healthy” rates of increase in the country’s “gross domestic product” (GDP), employment remains flat (and OFWism continues to gallop ahead), and per capita income remains at wretched levels.
Indeed, the Philippines remains that quintessential society of “educated hard workers” that remains impoverished and utterly vulnerable to economic forces and trends outside of its control.
When a society’s economic house is built on top of a sand dune of me-too approaches to business development, employment hinged upon capital created by entities not inherent or indigenous (in other words, external or foreign) to it, and ephemeral cost-plus commercial transactions, it is difficult to see a bottom in the event of economic collapse. There is no real equity at the core of such a society’s economic house of cards. There is nothing in the Philippines beyond the muscle of its workers that is worth buying. When demand for labour vanishes, Filipinos are left with virtually nothing. No world-class business assets and brands to sell, no safe and pleasant (much less interesting) cities and countrysides to offer to European and Japanese backpackers, no lush forests to pitch to researchers and eco-tourists, no world-class cutting-edge indigenous technology and scientific achievement to fall back to and build upon from scratch if necessary. Nothing.
Rather than build an asset base of people, infrastructure, knowledge and expertise, and culture of enduring value, Filipinos spent the better part of the last half-century harvesting its low-hanging assets and exporting them raw as stop-gap measures to prop up a mediocre economy. Much of what Filipinos take pride for in their country is its natural beauty. But that is rapidly being physically degraded as well as overlooked because of peace-and-order issues in the remaining viriginal parts of the archipelago. That leaves the human achievement component of the intrinsic value of the Philippine Nation. Not surprisingly, while Filipinos get heaps of kudos from their foreign employers (and themselves) for being such hard workers, not much can be said about the collective design and innovation faculties of the society. Unfortunately it is in the furnaces of design and innovation that Capital (with a big “C”) is ultimately forged.
Design-added-value results in creation of enduring value. Even in stillness, a truly valuable painting or literary work, for example, can keep a viewer transfixed, spellbound and reflective; offering a richness and depth that continuously reveals subtle aspects of itself with every additional hour spent exploring it. Its value is inherent and stored. Its value is capitalised — a finite amount of labour input resulting in an immeasurable quantity of value continuously delivered over a timescale that transcends the labours of its creator. On the other hand, labour-added-value is fleeting and volatile. The value it yields over time is dependent on a sustained effort. The need for said effort can easily disappear in one of those turns in fortunes that are notoriously impossible to forecast.
The Philippines’ is a labour-added-value economy. And it is the worst kind — a labour-added-value economy propped up by the remittances of a vast army of overseas workers.
It has no solid core no tangible capital base of consequence to collapse to in the event of that “market correction” that is always around the corner. In good times, the economic value sustained by commercial activity in most economies keeps peoples’ quality of life safely above the absolute poverty line. The inherent risk that is always present in labour-intensive economies becomes apparent in bad times.
Whereas a robust equity base in a well-capitalised economy helps keep its peoples’ heads above water in a depression, there is no such rock bottom in a labour-intensive economy. Like a super-massive star destined to collapse into a dimensionless black hole, economic collapse in a labour-intensive economy can plunge the majority of its population below absolute poverty into wretched levels of existence.
Will the Philippines live up to the new power business suit it’s been given by the world’s “credit rating” agencies the way Billy Ray Valentine did in Trading Places? Or will Filipinos merely rest upon the coming windfall of easy money and delegate their already deficited thinking faculties to the multinational firms that will likely make a beeline to cash in on Filipinos’ new-found perception of prosperity?
As always,
Abangan ang susunod na kabanata.
