Democracy Lab

Asia's Next Tiger

President Aquino's anti-corruption program is just what the Philippines economy needs.

Once considered the most promising economy in Asia after Japan, the Philippines has fallen far behind Southeast Asia's nimble, export-led economies. But things are finally looking up. Tired of being scorned as "the sick man of Asia," President Benigno Aquino III asserts: The Philippines is now "open for real business."

Judging by some very visible changes, Aquino, who has been in office for two years, isn't engaging in wishful thinking. Manila's luxury hotels are crawling with Asian, American, and European investors in search of opportunity. And the city's skyline, a symbol of its past as a home to slow-moving domestic oligarchs, is now dotted with cranes. Foreign direct investment is on track to triple this year, while GDP growth is expected to rise from 3.7 percent last year to a respectable 5 percent in 2012. Karen Ward, a London-based analyst for HSBC bank, speculates that the Philippines, now the world's 43rd largest economy, could be the 16th largest by 2050.

Such optimism is hardly a consensus view. For one thing, the Philippines has yet to deliver an economic performance worthy of an Asian tiger. The IMF forecasts that, while up considerably, Philippine GDP growth will still lag behind that of the other Asian tiger wannabes -- Indonesia and Vietnam -- in 2012. And while foreign investment is rising rapidly, it's from a dismally modest base: Indonesia is expecting to attract some $27 billion this year, compared to roughly $3 billion for the Philippines.

Indeed, the standard indictment of the economy still seems daunting. For one thing, the Philippines is startlingly dependent on alms from abroad. Roughly 11 million Philippine citizens (12 percent of the population) work in a great diaspora, running from Hong Kong to New York and Kuwait, sending home about $20 billion annually to support their families. Nearly one-fifth of all Pinoys, as Filipinos call themselves, still live in deep poverty, which is defined by the World Bank as a purchasing power of less than $1.25 a day. Meanwhile, the WTO reports that "key sectors" of the Philippine economy remain "effectively controlled" by uncompetitive domestic elites.

So why am I optimistic? President Aquino -- nicknamed P-Noy -- is apparently that rare Philippines leader who is both incorruptible and competent. And his administration seems determined to change the environment of crony capitalism where who you know in government, and how much you're willing to pay for privileges, has always mattered more than what you make or how well you make it. John Forbes, a former U.S. diplomat and business consultant, whose Philippine experience goes back more than 40 years, says Aquino's anti-corruption moves are "unprecedented."

Now, the very idea that one leader or one government administration can reverse a long history of institutional sleaze makes economists and political scientists uneasy. Successful economic reform is a complex, organic process that requires support at every level of society. And the recent past is littered with economic reform plans that succumbed to cronyism -- think Yeltsin's Russia or Suharto's Indonesia or Mubarak's Egypt. But change is afoot in the Philippines, and Aquino may just be able to nudge the economy into a virtuous circle in which reform sparks economic growth, and growth, in turn, gives outsiders the clout to contest the power of the country's crony capitalists.

Aquino's immediate predecessor, Gloria Arroyo, earned her PhD in economics. By contrast, the laid-back P-Noy would never claim to be an economic savant (though he did manage to earn a B.A. in the dismal science, and one of his professors was Ms. Arroyo). President Aquino, by the way, is prosecuting Ms. Arroyo, alleging that she raked in millions of dollars in bribes. However the criminal charges are eventually resolved -- or perhaps not, considering the notoriously glacial pace of justice in Manila courts -- this much is clear: On Ms. Arroyo's watch, rampant corruption held the Philippine economy back, while in P-Noy's few years in office, honesty is producing tangible results in terms of growth.

Philippine investigative reporter Roel Landingin (and FT Manila correspondent) recently dug into contracts issued by the Department of Public Works, which has a well-earned reputation for bid-rigging, collusion, and non-transparency. In a classic man-bites-dog story, Landingin found that P-Noy's people working in the belly of the crony-capitalist beast have actually been awarding contracts honestly. Aquino calls his anti-corruption campaign "daang matuwid," Tagalog for "straight path." And that path has cut costs for roads and flood-control projects by about one-third. By contrast, civil-works contracts during Ms. Arroyo's tenure were marked by "systemic corruption and bid rigging," dominated by a shadowy institutionalized cartel that "may enjoy support at the highest levels" of the Philippine government, a leaked 2009 internal World Bank report noted.

Actually, P-Noy has been walking his anti-corruption walk since the day he took office (June 30, 2010).  In spite of its tropical climate and low-cost labor, the Philippines has long been a major importer of rice. How is this possible? First, rice production is very inefficient in the Philippines, thanks in large part to underinvestment in infrastructure. Adding to its woes, the Philippines tolerates a domestic shipping cartel that charges more to deliver rice from southern Mindanao to Manila than wholesalers in Manila pay for transit from California.

On occasion, this has created domestic shortages. But Philippine leaders have never seemed to mind, since shortages create opportunities for the National Food Authority to award import licenses to cronies. It's a simple scam, really. The more tax dollars those cronies spend on rice imports, the more opportunities for commissions, kickbacks and such. In the last years of the Arroyo presidency, the government cheerfully paid as much as $125 per ton over the world market price for rice. Indeed, the Arroyo administration bought so much rice so quickly, and for such high prices, that it contributed to temporary global shortages in 2008 -- and to food riots from Cameroon to Haiti.

But thanks largely to investment in irrigation improvements, domestic crop yields are rising. The Philippines may, in fact, soon cease to import rice.

Anyone who doubts the Philippines' potential to become the next Asian tiger might visit the former U.S. military bases at Clark Field and Subic Bay, about 50 miles northwest of Manila, which were left empty when the Americans departed in 1991. Now, they are far from empty; the Clark-Subic corridor is booming as an industrial park; Yokohama built a huge tire-manufacturing plant; Texas Instruments has a $1.5 billion electronics operation; Samsung is making semiconductors; Hanjin has created one of the world's largest shipyards at Subic. What's more, a booming beach resort/theme park is drawing tourists by the hundreds of thousands. "This is what an Asian tiger economy looks like," says Dennis Wright, a former U.S. Navy officer who is developing a $3 billion industrial park for a group of Kuwaiti investors.

The former U.S. air base at Clark is now poised to become the Philippines' next major international airport. Clark, which only had about 50,000 passengers in 2004, had more than 750,000 last year, and is projecting to have one million in 2012.

While the Clark-Subic boom began when Ms. Arroyo was president, she nearly derailed it after feeling the heat from Philippine airline oligarchs who did not welcome the foreign competition. Mr. Aquino, by contrast, has not let domestic protectionist politics trump the economic progress.

Still, there are lingering doubts as to how far P-Noy's anti-corruption/anti-cronyism campaign can take the country. For one thing, Philippine growth remains burdened by regulations on foreigners, who aren't allowed to own land and are restricted to 40 percent minority shares in key sectors like agriculture, mining, telecommunications, and transportation. And here, Aquino may not be much help. He has admitted to a domestic audience that he still has "a nationalistic trait" that favors "majority control in Filipino hands because, at the end of the day, if something happens, there is a Filipino who will care for this country."

Come again? The Philippines' dismal long-term economic performance is traceable to its domestic elite, the dynasties that have dominated since the country was a Spanish colony (and do just fine, thank you, when they face no foreign competition). The more recent decades of Philippine decline were fueled by Filipino-first policies dating to the 1950s -- and the recent renaissance has depended heavily on foreign capital.

It's fair to say, then, that the game has yet to be won or lost. Aquino has four years left in office to demonstrate that he can deliver on essential economic reforms. Equally to the point, new economic actors (foreign and domestic) who gain from these reforms must prove themselves willing to contest the power of the old guard -- and thereby make it difficult for a less-well-intended successor to P-Noy to reverse course.



The Underestimated Prince Nayef

Saudi Arabia’s crown prince is dead. He will be missed far more than most observers of the kingdom will admit.

DOHA — Nayef bin Abdulaziz Al Saud, Saudi Arabia's crown prince and interior minister, has died. His stint as the country's second-in-command was short -- only eight months, following the death of his older brother Sultan. Nevertheless, his passing brings into focus once again the key question of succession in one of the world's largest oil-producing states.

The rapid graying of Saudi Arabia's most powerful princes -- all sons of the kingdom's founder, Ibn Saud -- means that such decision points will occur with accelerating frequency. Although Nayef was the obvious choice for crown prince, constant worries over his health plagued his short tenure. Even though Nayef was some 10 years younger than his half-brother King Abdullah, kingdom-watchers knew from the beginning that there was a distinct possibility he would not outlive him.

While such transitions are intrinsically fraught, two factors suggest that the House of Saud will not be in disarray for long. Firstly, stability is the order of the day in the kingdom. The top Saudi princes attempt as best they can to reconcile factions within the family for the sake of regime survival whenever issues of succession arise. Secondly, given this evident fact, the Sauds are well aware of the problem of their aging senior royal family and have not ignored it. The ruling elite has taken Nayef's illnesses into account, and although a longer life would have made succession planning easier, his death will not radically alter Saudi politics or policy.

Indeed, some of the most important Saudi policy decisions are already being made by the top princes' sprier sons. In the Interior Ministry, it was largely the efforts of Nayef's son, Mohammed, that led to the massive modernization programs and restructuring policies that are currently taking place. Budget allocation, personnel changes, and policy priorities have for the most part been set on their course. The Interior Ministry is gigantic; the ship cannot be turned around simply because Nayef is dead. Indeed, so pervasive is Mohammed's influence that such a move would likely be impossible. Although Prince Ahmad bin Abdulaziz, Nayef's full brother, has been promoted to head the ministry, the ministry will likely remain the de facto domain of the Nayef clan.

In the foreign affairs arena, Saudi Arabia is also locked into a set of policies that are the product of consultation among many royals, including the king, Foreign Minister Saud al-Faisal, Intelligence Chief Prince Muqrin bin Abdulaziz, Salman, Nayef, and other senior military officials and princes. In Bahrain, for instance, it wasn't only Nayef pushing the Saudi policy to send troops to prop up the faltering monarchy -- it was National Guard riot control units that entered the island, not Interior Ministry ones.

Similarly the recent push for a union of Arab Gulf countries, which could lead to closer integration with Bahrain, has been more at the insistence of the king and Saud al-Faisal. Though Nayef was openly supportive of the move, he was not its main champion. Saudi's interests in Syria or Iran will likewise not be drastically reformulated in light of Nayef's death; these policies have been developed as part of a prevailing consensus of which Nayef played only a part (albeit an important one). Nor will Nayef's death affect the overarching strategic "cold war" currently playing out between Saudi Arabia and its Persian foe.

This is not to diminish Crown Prince Nayef's achievements. His legacy is a well-developed internal security apparatus that has improved significantly under his tenure. Many have painted Nayef as a brutal oppressor, but the detail and rigor with which the Interior Ministry considers how best to minimize casualties and reform questionable security practices is incomparable to any similar body in the Middle East. Saudi Arabia is by no means the perfect state, but it was never Nayef's job to make it so. He was merely charged to ensure that it remained internally secure and stable -- and this without doubt he achieved.

Nayef's single-minded determination to eliminate the threat of al Qaeda from the kingdom between 2003 and 2006 is perhaps his most notable achievement. His assumption of responsibility for securing the annual Hajj, a monumental task if ever there was one, also compares favorably with the historical record. While problems still exist, security has improved year upon year even as the crowds have grown ever larger and more difficult to control.

There are two areas where Saudi Arabia will keenly feel Nayef's loss. First, his relationship with the kingdom's powerful religious hierarchy was critical: His ties to the Committee for the Promotion of Virtue and the Prevention of Vice, more commonly known as the haia, allowed him to monitor the behavior of Saudi Arabia's religious police force, the mutawa, who serve under the command structures of his Interior Ministry. His influence was instrumental in reforming and even gently admonishing the mutawa when they were perceived to have gone too far in their often zealous enforcement of religious law, as occurred in June 2011 when Nayef politely "suggested" that the mutawa treat Saudi citizens with more respect.

Nayef was also adept at keeping the clerical establishment on its toes, primarily through a mixture of coercion and redistribution of land grants. This granted him great sway over the behavior of the kingdom's garrulous religious sheikhs, and his death leaves space for a potentially more assertive clerical establishment in the coming months. Although the king has waded into this topic -- as evidenced by his sacking last month of vice minister of justice and royal advisor Sheikh Abdelmohsen al-Obeikan -- Nayef's loss will most certainly affect how the religious establishment projects its power in the future.

Saudi Arabia's Yemen policy may also suffer from the lack of a powerful figure at the helm. Both former crown princes, Sultan and Nayef, held considerable sway when it came to relations with the kingdom's southern neighbor. Both men funded large and extensive patronage networks in the country, balancing the need for a strong central government capable of destroying al Qaeda with the need to prevent former President Ali Abdullah Saleh from becoming too big for his britches. The result was a curious mix of funding and interference that formed a cobweb of interests and associations, deeply linking Saudi Arabia to Yemen's fate. When Sultan died, Nayef assumed much of this portfolio, but was unable to replicate the depth of his brother's connections. Now that Nayef is himself dead, there is no strong man in Saudi Arabia to oversee Yemen's fragile post-Saleh transition, and it is unknown whether Nayef's former subordinates are up to the job of maintaining Saudi influence in Yemen.

No discussion of Nayef's death, of course, would be complete without a mention of succession. The next choice for crown prince has already been named: Defense Minister Prince Salman bin Abdulaziz, Nayef's full brother. All those who know the man speak highly of his work ethic, his attention to detail, and the impact he has made since becoming defense minister in November 2011.

What is more concerning is who succeeds Salman, and that question has no easy answer. It is possible that Salman could become king at any moment given Abdullah's age and health concerns, leading to an urgent need for yet another crown prince. At this moment, a shift to the next generation is highly unlikely, for no grandson of Abdulaziz is yet ready to assume the mantle of crown prince. While there are some very strong candidates -- the strongest of whom is arguably Mohammed bin Nayef -- more time is needed for these princes to establish themselves in a strong enough position with all branches of the family. Age is a crucial factor in determining seniority in the House of Saud, and while Mohammed or Saudi Arabian National Guard commander Miteb bin Abdullah are clearly capable, their relative "youth" is currently a major hindrance. The exception here is Mecca Governor Khalid al-Faisal, who at 71 years old possesses both age and gravitas -- but at the present time there is little to suggest he is widely favored.

Excluding sons who do not seek the throne, this leaves four potential candidates from Ibn Saud's surviving sons: Interior Minister Prince Ahmad, Riyadh Governor Prince Sattam, Prince Muqrin, and potentially Baya Council senior member Prince Hazloul -- and there is no clear indication of which might be viewed favourably at the current time. Muqrin in particular is at a disadvantage given his Yemeni mother, but Ahmad and Sattam, although well known among the Saudi population, are not true powerhouses in the Saudi decision-making apparatus and certainly would not win outright support from the Baya Council in its future deliberations over a crown prince. Hazloul is something of an unknown quantity, though kingdom watchers would do well to see how he positions himself in family politics in the coming months.

While there is no clear line of sight as to who might take over as crown prince if and when Salman vacates the position, one thing is for sure: Whoever is chosen will receive the family's automatic backing. Such is the way with the princes of the House of Saud: They will accept these decisions for the good of the ruling collective, as they have always done. Nayef's death injects some urgency into the process, but it's the desire for stability that is the true king of Saudi Arabia.