The Philippines’ Secretary of Finance Carlos Dominguez III sits down with The Worldfolio to discuss the election of President Rodrigo Duterte, regional integration and Japanese investment in the country
On May 9th of 2016 president Rodrigo Duterte was elected with more than 39% of the vote giving him a 15-point victory over the second best performing candidate. What is your take on the election results?
He won because our campaign was very focused on what the real problems of the country were. These include problems such as growth without inclusivity, authorities’ neglect of the drug problem, and the past administration’s failure to address the key issue of peace in our country. Those are the driving points of the administration until today. In line with these issues, our main goals include what we want the country to be in 2022 when we leave office.
One is to have a country where the poverty rate is reduced from the current percentage of around 22% to around 14%. The main strategy that we will employ is by having investments in infrastructure outside the greater Manila area, because approximately two thirds of our GDP are produced in this area. As a result, one third of the GDP is divided into the other regions. We have a situation wherein the gross national income per capita per annum in the greater Manila area is around P400,000, while the income in the poorest areas in the Philippines, which is the Autonomous Region in Muslim Mindanao, is P26,000. The growth numbers of the Aquino administration were good, but they were not shared in the entire country, thereby causing a lot of social unrest and violence. This is also the same situation as to what happened in the United Kingdom, where Brexit won, because the people did not feel that the growth of the country was lifting their standards of living. The same thing happened in the US, and most probably the same thing will happen in France. It is a period where people are realizing that globalization has been a good tool in increasing wealth, but not a good tool in spreading it. Therefore, reducing poverty by making our economic growth more inclusive is one of the main priorities of the administration, as shown by our ten-point socioeconomic program.
You mentioned that globalization is creating wealth, but has an issue in spreading it. What are your expectations about your collaborations with other countries?
The Chinese have a very nice saying, “Better a friendly neighbour than a distant relative.” It makes more sense to us to make sure that we are totally integrated within the ASEAN. First of all, that is an obligation we brought upon ourselves. It is also important for us to recognize that the Asian region is growing much faster than the West. Second, when the president decided to reorient our foreign affairs and economy towards ASEAN and our neighbours, namely China, South Korea, and Japan, it certainly looks like a smart move. This is especially true as the US has started to look inward and to limit international trade.
Taking into consideration that the ASEAN is a market that represents strong growth in consumption and general GDP, what synergies do you see between these countries and, for example, Japan?
We have had a long relationship with Japan even prior to World War II. The Japanese in Davao, for instance, were a significant part of that population. They invested there in the production of natural fibre, namely abaca or Manila hemp. After the 60s, Japan needed a lot of wood for their construction industry, and so they bought large amounts of wood from us. Now, the collaboration between the Philippines and Japan relies on the fact that Japan’s population is aging. The Japanese are going to need workers, and they would like to invest in areas outside of Japan, and the Philippines is one of those areas. Although most relationships are rocky, in the last 50 years ours with Japan has been smooth.
There are many opportunities particularly in manufacturing, wherein the Japanese vehicles dominate our market here. In fact, the first car that rolled out with 70% Filipino components was just inaugurated this week. It is called the Mitsubishi Mirage G4. So those are the areas of opportunity we provide: a growing market for Japanese products, and a growing supply of young, energetic, and smart workforce.
Having mentioned that the country’s need for infrastructure would be one of the main investment opportunities for Japan and China, how do you see this affecting growth over the next few years?
As I mentioned, our major anti-poverty tool is going to be investment in infrastructure, and I am not only talking about physical infrastructure. I am also talking about education, training, science, and technology, but obviously physical infrastructure is what we need to primarily focus on. The past administrations have spent half of what other ASEAN countries spent as a percentage of GDP on infrastructure. Thus, we have a big problem here. But that problem is in fact an opportunity for us to use investments in infrastructure to lower poverty.
For instance, Japan cannot invest in infrastructure anymore. The opportunity is not only to make our economy more efficient, it is also to make sure that jobs are created in the areas that need the jobs – outside of Metro Manila. We are going to use this tool, and we have raised a total of USD 18 billion on committed ODA and commercial loans in addition to USD 15 billion for investments with the private sector. Close to half of it is investments in the private sector. To give an example, from Japan, a family-owned company called ISE foods are planning to invest around USD 50 million in egg production at Bukidnon. It is an opportunity for us to lower our costs in egg production.
Many Japanese companies are following the main manufacturers to set up small and medium-sized enterprises here, which is what we want. The big factories are also important, but the feeder operations are also quite important for us. With ODA, we will certainly use this to implement our major infrastructure projects, which include railways, ports, roads, and bridges.
In terms of the bridges, we need only two bridges to finally interconnect the north to south roads. These bridges will connect Bicol to Samar, and Leyte to Surigao. They are less than 30km each. We will also have bridges to connect the islands in Western Visayas—Iloilo to Guimaras, and Guimaras to Bacolod. We also need ports. Lastly, we will need three or four large railway projects. One from Manila to Clark, Clark to Subic, and Manila to Bicol, which is almost 700km. Finally, a railway project around and across Mindanao – that should enable us to lower our logistics costs.
What do you expect in terms of ease of doing business in the Philippines and what would you say are the sectors that would benefit most from initiatives to improve it?
The agricultural sector will be a big beneficiary, because we are also going to implement a lot of irrigation projects. Just simply lowering the costs of moving agricultural products from the farm areas to the consumer areas is going to be a big factor. It will spur investments. For instance, upon the completion of the Subic to Clark railway, Subic now becomes a major port.
In CALABARZON (Cavite, Laguna, Batangas, Rizal, and Quezon) during the Cory Aquino administration, the Japanese funds were essentially used to improve the roads, and a lot of Japanese companies have located in industrial parks. This is a trigger for creating jobs outside of the Metro Manila area. For instance, when you link Clark and Subic together, which is around 80km, the manufacturing industries in Clark will certainly get a big boost, because the shipments of the raw materials can come through Subic and be transported by rail quickly.
One thing that is still worrying some of the investors is the subject of foreign ownerships, because there are still many restrictions. How could 100% ownership for instance of certain sectors help to also create more investments and generate more revenue?
We have a robust Negative List of industries where foreign investments are not allowed. For instance, media. The Negative List defines internet selling as media, so companies cannot come and do e-commerce. Just redefining those terms will open a lot of business opportunities in the country. In e-commerce, probably a redefinition of what public utilities mean will potentially open areas in foreign investments.
In manufacturing, there’s no limitation. The limitation is land ownership, because the companies cannot own the land. There are creative ways of getting around this. For instance, one way is a long-term lease, say for 50 years for a factory, and that’s been done. We are going to open the areas, but not for land ownership as the president said. The point is to use the land, not to own it.
In the Philippines, the middle-class accounts for around 40%. Which are the sectors that are mainly pushing the growth of the Filipino middle-class?
Creating a robust middle class depends on people having good jobs. The government’s role is to provide the infrastructure that will encourage investments in various parts of our country. Hopefully, these jobs will be created by companies that will settle outside of the Metro Manila area. For instance, agri-industrial processing for domestic consumption or exports can be done. Our demand for sugar is already very high, so rather than just produce raw sugar, we can probably instead get a dispersal of the food processing industries outside Metro Manila.
We are, however, not talking of big companies. When you look at the industries in Japan, people like the look of the Sumitomo and Mitsubishi. But what drives them are the small and medium sized industries – the small companies that feed into these large ones or feed into the local production. For instance, there is a company in Chiba that produces a large percentage of the egg sandwiches that are consumed in the railway stations. That is what we are seeing here even, small companies that are popping up in the country. Their only limitation is infrastructure.
We have witnessed the government being supportive of the private sector by implementing initiatives that will not only benefit the people but also businesses. What is your expectation in the Philippines’ private sector throughout this mandate?
The private sector sees the opportunities that our ten-point socioeconomic program is providing them. For instance, our heavy investment in education is going to make it easier for them to train Filipinos to do their jobs. We are reorienting a lot of our education towards making the kids ready to work at 18 years. From the previous educational system, we now adhere to the K-12 program, which includes 12 years of grade school and high school. By the end of 12 years, people can get decent jobs. Most countries in the world already have the K-12 program; the Philippines is one of the last to adopt it.
Having served the country for many years and with experience in several departments and administrations, what legacy do you want to leave?
In agriculture, what we focused on when I was Secretary of Natural Resources was to reorient the policy of the Department of Natural Resources from exploitation to sustainable development. It was the fact that we focused on the farmers’ incomes rather than rice. Rice is an important crop, but more important are the farmers’ livelihoods. For instance, one of the things I did there was to reorient the research in agriculture, from researching on what the best crops are to what the farmers are going to do with their land. Maybe even the best corn will not grow in all lands, so we looked at ecozones and based our recommendations according to those ecozones.
In terms of the Department of Finance, what I would like to leave behind is to place the country in a sustainable growth path. The only way to do that is to make sure we can finance the infrastructures that we are establishing through a good tax reform program. Naturally, the politicians are hesitant to impose taxes, but many people in our society recognize the necessity of the tax reform program to ensure the sustainability of the ten-point socioeconomic program over the years. That will bring us to what we want to achieve as a society, which is mainly a comfortable middle class-dominated society that is at peace with itself and its neighbours.