How dependent is the Philippine economy on China?

Katherine Visconti

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The Philippines has its eyes on a potential military threat from China but a potentially larger looming threat is economic

MANILA, Philippines – Amid a tense standstill between the Philippines and China over the disputed reef called Scarborough Shoal, a leading World Bank economist stressed that the Philippines’ economic fate is closely linked to its mightly neighbor.  

Of the Philippines’ trade and other economic partners, the impact China is more prominent than the European Union’s or the United States’, said World Bank’s lead economist for the Philippines, Rogier van den Brink, at a press briefing on May 23.

Every 1% decline in the Chinese economic growth may shave 0.52% off the Philippines’ own economic growth, the economist shared.  

This is higher than the 0.4% cumulative impact a 1% slowdown in the European and US economies may have, he said.

“The integration with East Asia is quite strong, particularly China. So a shock in East Asia of minus 1% growth will have a negative impact of 0.74% cumulatively on you (the Philippines), and China’s part of that is 0.52%,” he said.

Thus a threat the Philippines may need to worry about is the inevitable decline in China’s economic growth this year, which the World Bank expects to dip to 8.2% in 2012 from 9.2% in 2011.

China accounts for 14.9% of the Philippines’ total exports, with shipments amounting to $642.07 million, according to March 2012 data from the National Statistics Office (NSO). That makes China the Philippines’ 3rd largest trading partner and its 1st largest if exports from Hong Kong are included. China takes up 55.6% of the Philippines’ greatest export, electronics.

As for the other economic partners — the US and Europe — van den Brink said the Philippines has been relatively resilient to the slowdown in those regions.

He cited the Philippines’ strong fundamentals, including reasonable inflation rates, increases in revenue collections, runs in the local stock market and only a slight decline in the growth of remittances.

The World Bank maintained its growth forecast for the Philippines at 4.2% this 2012, after a sluggish 3.7% in 2011.

It predicts at 4.8% growth rate for 2013, lower than its 4.8% forecast last November.

Charting the course forward

Charting their future economic course, East Asian countries like the Philippines will want to head the headwinds from China. As China shifts away from its export-oriented economy, opportunities will open up for countries with consumer oriented export goods, said Bert Hofman, the World Bank’s Chief Economist for the East Asia and Pacific Region.

Hofman noted the World Bank’s prediction that China will slow down to a 5% growth by 2020.

“More importantly we also see China’s growth composition changing, both from the supply side as well as on the demand side. Probably going to be more consumption led, less investments led and more services and less industrial production,” he shared.

“Preparing for that trend now is important,” he stressed.

He said Korea, Malaysia and Thailand could benefit by sending more exports abroad and to China.

Infrastructure, productivity

Meanwhile, the Philippines will have to make strategic investments to take advantage of the same opportunity and to shelter itself from the drop in growth said van den Brink.

He said this was the time to invest in well prepared infrastructure projects that would stimulate medium and long term growth that would withstand external shocks.

He also stressed the need for increasing worker’s productivity. Labor productivity in Asia lags far behind the United States and is only half of what Latin America is experiencing, stressed Bryce Quillin, an economist for the East Asia and Pacific Region.

Economists pointed out that the Philippines has a unique growth opportunity: its people. Other Asian countries are expected to loose their “demographic dividend, the growth of the working age population as compared to the total population,” said Quillin.

“Some of the most successful economies of the past number of years, China, Thailand, Vietnam, even Malaysia are all expected to experience a decline in the working age to total population.”

He said the development is ‘concerning’ since “This is a lost input to the existing model of growth, so growth should be that much lower… you may have a demographic trap.”

The Philippines therefore could be an exception. “What sets the Philippines apart from the rest of the region is the demographic dividend. You don’t have that problem. If you invest wisely now in infrastructure and people, you will carry your demographic dividend for decades to come,” said van den Brink.

“Having a young and vibrant work force is one of those intangible benefits that is very difficult to replace… it seems like if you want to begin to move towards a more innovative system of doing business, having a young growing population is one of those attributes that you want to have. The decline of this effect in East Asia is concerning,” said Quillin. –

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