BizCLIR

The Philippines has been subject to the influence of various cultures and political structures throughout its history, from the colonial control of far-away powers to the local rule of would-be despots. Even today, as the country settles more deeply into a system of representative democracy, there is seemingly still doubt as to the durability and sustainability not only of particular leaders, but at times of the system more generally. Not too coincidentally, this historical pattern of shifting and changing power structures has led to a business environment with many—and sometimes clashing—stripes. While this report describes specific areas of commercial and trade practice, certain of these stripes, or themes, permeate most, if not all, of the areas of investigation. They thus merit separate discussion for readers to be able to fully understand not only the mechanics of a particular area of practice but also the culture in which it operates.

It should first be noted that as a result of, or, perhaps in some areas, in spite of, its diverse legal background, the Philippines has a strong legal framework on the books in almost all major areas that support the business environment. Perhaps the most common thread that was woven through almost every interview and discussion held as part of this diagnostic, however, was the corrupt practices within the public and private institutions that make up business-enabling environment. This not only makes the functions of important institutions suspect, but also limits the effectiveness of the otherwise rich legal framework. Corruption, obviously, it is a sensitive and difficult issue. Interviewee after interviewee, however, related anecdotes and patterns of corruption in many of the key institutions needed for business: the Bureau of Customs and other trade-related agencies, the courts, the registries, etc. The forms of corruption described to the diagnostic team were of many different varieties, but the most commonly cited was that of facilitation fees, or payments made outside normal and legally required fee structures to move a good, or a case, or a property title through the respective system. The fault is difficult to pinpoint—there were as many stories of private individuals volunteering these facilitation fees as there were of public officials seeking them out. In many ways, such fees have become accepted as part of the cost of doing business in the Philippines. The complicated bureaucratic systems and acceptance of the resultant chaos by design that a businessperson must traverse in the Philippines to achieve proper licensing, registration, etc. makes the payment of facilitation fees more appealing and, to some, arguably necessary. Quite simply, the onerous administrative procedures faced by businesspersons within most of the various agencies related to business, and the acceptance of this inefficiency, provide a disincentive to formalization and innovation, and impede growth.

Sadly, as a result, the country’s image has been tarnished, raising the eyebrows of current and prospective investors in the country, both local and international. This is not to say, however, that the Philippines has turned a blind eye to its plight. Both the Office of the Ombudsman, responsible for investigating and prosecuting government officials in the Philippines who are allegedly guilty of crimes, and the Sandiganbayan court, with jurisdiction over criminal and civil cases involving graft and other illegal practices committed by public officers and employees, have clear mandates to fight corruption. Nonetheless, the problem persists with far-ranging effects including lowered government revenue—making the provision of government services more difficult—to established political patronage. Most directly relevant to this diagnostic, however, there is a loss of investor confidence and higher costs of doing business. When the choice for a businessman is between spending extensive amounts of time in lengthy bureaucratic processes that may not, in the end, achieve the desired result, or attempting to work around this process through illegal payments, many will opt for a third choice and take their business and money elsewhere. Tackling the pervasive problem of corruption would lead to greater efficiencies for all. Most significant, it would assist the smaller businessperson—for whom as of this point the costs of doing business are too high—as only those with the time, money, and access are able to regularly and successfully achieve the desired results.

In this regard, historical patterns have led to a well-developed corps of family businesses who have become the controlling shareholders in a few large companies. This has led to centralized wealth into the hands of a few. Throughout the Spanish and American periods and until World War II, a small number of families first amassed land holdings. They then continued their growth through the development of trading companies. As the breadth and depth of their businesses expanded, wealth grew and was passed on to their heirs over several generations. The industrial elite have maintained highly concentrated ownership and wealth, have influenced—and continue to influence—commercial policy, and have profited from government protection against competition. As a result, micro, small, and medium enterprises within the Philippines struggle to survive, chilling entrepreneurship and the desire to affect the changes necessary to allow them equal access to services and opportunities. The repercussions of this are far-reaching, as banks, for example, are less likely to extend credit to such businesses due to a lack of trust that borrowers will be able to repay.

A well-educated, highly literate population—for both males and females, with one of the highest literacy rates in the region—remains a regional comparative advantage, although concerns over this advantage have begun to arise. Importantly, a significant portion of the population speaks English, giving the Philippines an advantage over many of its neighbors in the Association of Southeast Asian Nations (ASEAN), and leading to high-capacity human resources ready for broad international commerce. Investors and local businesses have leveraged this English-language advantage to expand various sectors. For example, call centers and tourism have both expanded in large part because the providers of these services are English speakers.

Concerns have arisen in this regard, however. A shortage in teachers and space for students is challenging the ability to maintain these high levels of education. A secondary problem is that while overseas Filipino workers (OFWs) are an important part of the economy because they remit significant sums of money into the country, those that leave are often the best and brightest, leaving a gap at home that is difficult to fill. It is a reflection of the quality and importance of these OFWs, however, that they are sought-out worldwide to fill a variety of positions. The Philippine government has invested significantly to ensure that such workers have more than adequate support to find jobs abroad, are supported while there, and have assistance when resettling at home. In any case, while the government has recently invested in education, more is needed. This will not only encourage continued widespread English-language proficiency, but will also help to ensure that education for more of those seeking advanced degrees in commercial law and trade will receive instruction of the quality necessary to participate in an international market.

Perhaps arising from the high levels of education is a broad and deep civil society that can freely communicate with the government to address needed reforms. More than other countries investigated in the SEA CLIR region to date, the Philippines has a glut of organizations, chambers, and associations poised to contribute to the commercial process. Significantly, many agencies serve not only local but also foreign investors who are in a position to participate as well. In addition, the media are large and active and report on all facets of business and commerce (although there are reports of a lack of objectivity within that sector).

Despite regular interaction with agencies and widely available technology to support such interaction, however, such organizations and other supporting institutions regularly reported that they feel that their positions are not heard. In many cases the private sector reported that the partnerships they had with the government were “less than meaningful.” Throughout the business environment, from having greater participation in the needed re-engineering of import processes to being able to officially provide comment on implementing regulations of various commercial bodies, greater participation of the private sector in developing new processes and rules would be advantageous. It would create a sense of ownership in the system, greater respect for the implementation of such changes, and increased overall confidence in the system. It also would help to ensure that such changes were actually meeting the needs of end users.

Woven through all of these issues as well as the specific subject matter discussions is a sense that many in the Philippines are either content with or overwhelmed by the status quo, and accordingly the diagnostic team was often left with the feeling that change is difficult to achieve. While there are many who are eager to seek and achieve improvements, questions of who is responsible for those activities and how they are to be sought often makes it difficult to see the trees for the forest. A number of other issues, the combination of which is unique to the Philippines relative to other developing nations, bring about this slower pace of change: a large and educated population (a large portion of whom lives abroad); a large and bustling economy that is resistant to shocks from the larger international economy; a strong international presence, both in the sense of businesspersons and international assistance organizations; a complex array of laws based on both common and civil law traditions; and wealthy and sophisticated businesspersons and politicians. These characteristics make for a complex situation where broad and bold strokes of reform, while needed in some areas, may not be feasible. Nonetheless, reform is both possible and needed, and this report provides guidance in that regard.