Total and absolute screw-up

That sums up our predicament as a nation – and economy.

But then again, think of US politics. And why I have no respect and opted not to exercise the right to vote.

But let’s speak to Juan de la Cruz; the Americans are big boys. As we talk, State Secretary Blinken is on his second day of grilling by Congress for the Afghanistan debacle. Let them be – a disaster waiting to happen, otherwise.

What does total and absolute screw-up mean?

When are we consistently confronted with the question: Which comes first, the chicken or the egg?

Let’s get to the antidote straightway: That’s why Steve Jobs finds himself in the company of Einstein and the other great minds. He was such a forward and lateral thinker that his ideas continue to blow almost everything away long after he’s gone. 

“No chief executive in history has created as much overall shareholder value as Mr. Cook. When he took over from Jobs, the company had a market value of $349bn. Today it is worth $2.5trn, more than any other listed firm ever. Under his aegis, annual sales surged from $108bn in 2011 to $274bn last year. Net profit more than doubled, to $57bn, overtaking Saudi Aramco’s oil-fueled earnings and turning Apple into the world’s most profitable company. Less widely noticed, during his tenure, the ‘Apple economy’—its annual revenue plus everything other companies make on one of its platforms—has grown sevenfold, to more than $1trn.

“The apple will surely fall, even if ever so slowly. When Tim Cook took the helm from Steve Jobs, the firm's co-founder, a decade ago, even the most boosterish of Apple fanboys worried that the company would decline. Without Apple's original Willie Wonka, the digital chocolate factory is led by an automaton that made his career organizing global supply chains and scrutinizing spreadsheets. How could someone with so little dazzle inspire Apple employees to continue creating ‘insanely great’ products, in Jobs' famous formulation?" [“The great successor’s second act,” The Economist, 28th Aug 2021]

In other words, Apple spawned subindustries, and the synergy generates over a trillion dollars to the global economy. Think of the “multiplier effect” of investment that economists like to discuss.

Let’s turn to the Philippines.

Why haven’t we learned about the fundamental given, the multiplier effect? The evidence? We borrow tons of money for the 4Ps, yet tens of millions of Filipinos are undernourished – and worse, suffer from abject poverty.

On the other hand, latecomer Vietnam arrested poverty. One enterprise alone, Samsung Vietnam, generates far more significant contributions to Vietnam’s economy than our eight top companies combined.

Why? We celebrate oligarchy and rent-seeking. And we wonder why ours is a culture of impunity?

And that comes from our caste system, our instincts: We are parochial and insular. We value hierarchy and paternalism and rely on political patronage and oligarchy that ours is a culture of impunity.

Consider: Duterte to run for VP. And who wants to be president? Bongbong? Has this country gone to the dogs yet?

But let’s dissect why oligarchy and rent-seeking explain our inability to drive the economy – and arrest poverty.

Even our best minds come from the same business environment as Juan de la Cruz — where forward- and lateral thinking is foreign. Translation: We won’t produce a Steve Jobs.

Why?

I worked for eight years in one Philippine oligarchy. We focused on costs because the business generates fragile margins yet brings in a bonanza: The market absorbed everything we produce. It was a BOI-pioneer industry with zero competition. See above; we rely on political patronage and oligarchy that ours is a culture of impunity.

And they did not want me to leave the company. If I accepted the free ride in a monopoly, this blog would not have been born. 

Instead, I would be rationalizing, if not defending, our caste system. And bat for “happiness” as the superior measure of nation-building. Disclosure: Forty years ago, still based in Manila, I had a guest from New York, and his first impression of Manila was poverty. As a local, I took it for granted. And the contrast came to me when I covered India. In my head, something was whispering: How can people take this absolute poverty for granted?

Do I still get surprised by how we do things?

Those familiar with the blog may recall that in 2015 I attended the Ateneo and UP economic briefings. Everyone was in celebratory mode between the “economic managers” and “professors” because manufacturing was resurgent. At both briefings, I stood up to question the premise, and everyone must have thought I was stupid.

But even over a dozen years ago, when I started the blog, I already questioned the makeup of the Philippine economy.

And over that period, like a broken record, the postings called out the Philippine elite and chattering classes to wake up.

Are we finally coming around to acknowledge our reality?

“I had known for years how we’ve lagged behind our comparable Asean neighbors in export earnings and foreign direct investments but didn’t realize how bad it has become until I examined the latest data.

“We are not only lagging behind our Asian peers, but we have also progressively fallen further and further behind through the years. Meanwhile, Vietnam overtook everyone else in the group one by one over the past decade, except for Singapore, to which it is now second but closing in.

“Vietnam saw FDI inflows jump last year, even in the face of the pandemic crisis.

"Surely, there are several factors that have combined to bring our real economy to this sorry state over the years. Let's take a stab at a couple of them. First, our pathetic export performance mirrors our laggard showing in attracting FDI. A big chunk, if not the bulk of our neighbors' exports, come from international firms, after all. But suppose we cannot even attract comparable levels of foreign investors to export from within our shores. In that case, we will keep falling behind in exports and job creation, output growth, and overall incomes. We thus need to ask what keeps those investors—and not only foreign but moneyed Filipino investors, too—from putting their stakes in the Philippine economy." ["Pathetic laggard," Cielito F. Habito, NO FREE LUNCH, Philippine Daily Inquirer, 14th Sep 2021]

Are we surprised how Vietnam recovered from the Vietnam war? Here’s something from the US Defense archives: “Between 1965 and 1975, the United States and its allies dropped more than 7.5 million tons of bombs on Vietnam, Laos, and Cambodia—double the amount dropped on Europe and Asia during World War II. Pound for pound, it remains the largest aerial bombardment in human history.”

But then, “On 13th Jul 2000, US and Vietnamese negotiators signed a comprehensive bilateral trade agreement (BTA). Following affirmative votes in Congress and the Vietnamese National Assembly, the BTA entered into force on 10th Dec 2001, when the two countries formally exchanged letters implementing the agreement. Under the deal, the US will extend temporary most-favored-nation (MFN, also known as normal trade relations [NTR] status) status to Vietnam, a step that will significantly reduce US tariffs on most imports from Vietnam. The World Bank has estimated that Vietnam’s exports to the US will rise to $1.3 billion -- 60% higher than 2000 levels -- in the first year of MFN status, as US tariff rates on Vietnamese exports will fall from their non-MFN average of 40% to less than 3%.” 

Those familiar with the blog may recall my attesting to the US efforts to help Vietnam get back on its feet. I was in Ho Chi Minh, and even before my alarm clock rang one morning, the phone woke me up. And I was not very pleased. From New York, the CEO was about to board his flight to Washington DC to join a group of American MNCs invited by Clinton to the White House. Clinton wanted assurance from the CEOs that the US was making good on its commitment to Vietnam.

And the question to me was: Are we investing in Vietnam? The CEO understood from the financial community that we were still doing due diligence and won’t commit. And my response: I need to go back to sleep. But yes, we are investing. It can be a mistake, but it is not something we can’t fix and make good. And today, the company is in Vietnam.

But let’s get back to the Philippines. And before we do, how much damage did the US inflict on the Philippines? Did they help us get back on our feet? If I am not mistaken, Ciel Habito represented the USAID in the Philippines in some capacity.

Let’s hear now the Finance Secretary: “The National Government’s outstanding debt was equivalent to 54.6% of gross domestic product (GDP) in 2020, versus 49% for Thailand and 48% for Vietnam. The ratio grew to 60.4% in the first half of 2021 as the government continued to borrow to address the budget deficit. The Philippine debt is roughly comparable to Poland’s 57.7%.

‘The Philippines cannot be the trailblazers here. My goal always has been to land somewhere in the middle of the pack. I don’t want to be too far ahead; I don’t want to be far behind when you come to those ratios. So far, we’re just about there.’ Mr. Dominguez said in a budget hearing at the Senate Thursday.” [“Dominguez says PHL can’t be ‘trailblazer’ on deficit spending,” Beatrice M. Laforga, BusinessWorld, 9th Sep 2021]

Why are we constrained to manage debt ratios? Our economy has the equivalent of the rent-seeking character of an oligarchy that I lived with for eight years. But we call it differently, OFW remittances. And if we add the BPO industry, they generate 16% of GDP (2019).

Why does the World Bank keep lending us money? They know we have a cash cow to the tune of $60 billion. And that is why our foreign exchange and gold reserves are even much more.

Of course, we are into infrastructure big time – and that demands tons of investment.

And our debt ratio grew to 60.4%. 

But which comes first, the chicken or the egg?

We must balance fiscal discipline with the need to keep the economy afloat; else, the rebuilding becomes even more treacherous.

And that is already evident in how much the economy has contracted. 

In other words, the weakness of the Philippine economy is today much more glaring. 

And that circles back to our failure to move beyond a consumption-service economy with very little ability to spawn robust subindustries that we see in our neighbors. It is at the heart of why we are the regional laggard.

And how did they distance themselves from the Philippines? “Beg for Western money and technology,” advised Lee and Mahathir to Deng. And years later, even Vietnam heeded the call.

The good news is that the character of this universe is that of dynamism and interdependence.

And the bottom line? 

With due respect to our economic managers, we must walk and chew gum simultaneously: (a) we cannot let the economy go on a freefall; and (b) the following scenario, quoted from a prior posting, must come to fruition.

“Mayor Isko, if not president-to-be, can assemble a task force to advise him. Take Bill Gates. And also the CEO of Apple and the CEO of Samsung. He can add Warren Buffett too.

‘I want the Philippines to leapfrog our Asian neighbors. But I would be grateful if you could guide me. [Translation: It is an exercise in forward-thinking.] So that you would yourself want to invest in the Philippines as heavily as you would elsewhere.’

“The devil is in the detail. But Mayor Isko must first set the tone. And tap the right people instead of the Philippine oligarchy.

“It is long past the time for us to undo our reality and define and forge a common good.

“We will continue borrowing tons of money for the 4Ps, infrastructure, supporting OFWs, and the BPO industry. Our top companies will continue to do their thing.

“But this universe is characterized by dynamism and interdependence.

“We need a brand new playing field that we haven’t had for the longest time. Let’s not pretend we know how to build it.”

What’s the bottom line?

Innovation is foreign to us, but rent-seeking is our cup of tea.

Ergo: We can’t drive revenues or the top line. [Recall the blog put up the challenge of raising GDP by an incremental $200-B to leapfrog our neighbors.] But we see there are lots to loot from the government coffers. Or tax revenues to farm out.

That comes from the crab mentality that we can’t recognize the import of “per capita income.” Calling our economists.

Our backs are against the wall. 

Let’s hold it right there.

We can no longer be philosophical about the plight of Juan de la Cruz.

And that’s why the blog often speaks to my old MNC-company and Eastern European friends. They lived through hell and overcame the odds. 

And that is why Apple is a great best-practice model. IBM was once the be-all and end-all. In fairness, IBM still owns the most patents. 

But that’s why the blog keeps stressing that this universe’s character is that of dynamism and interdependence. Perfection is not of this world. And enterprises and economies can’t go it alone.

And it is beyond a numbers game.

Recall that I changed the planning and budgeting system of my old MNC-company.

I was one of the “change agents” hired in the ten principal subsidiaries. And the Philippine subsidiary was making more than threefold the rate of the global company.

And that global picture made the company a takeover target. 

With its back against the wall, the company had to embark on a massive restructuring program – across its global markets. And I was tapped to join one team. Later on, I would lead restructuring efforts myself as the company learned to keep reinventing itself. 

In the meantime, we were divesting rapidly, which meant cutting total global revenues by half. It was a daunting challenge. We had to drive revenues back up quickly and generate twice the profitability.

And I saw how the number crunchers focused on a cost-reduction mantra. And while visiting New York and attending the top managers’ meeting, I realized why. The CFO was presenting the parameters of the ensuing year’s budget. And I could not believe my ears that Wall Street was dictating how to run the business.

The CFO looked at me, and I must have been wearing my emotion on my sleeves that he came to me afterward.

“You did not like what I said”? Bob, why do we have Wall Street dictating on us? They don’t know our business as much as we do. They are looking at ratios.

Fast-forward to when I had a regional role. And I created a different approach to the planning and budgeting process. And when the president visited a couple of subsidiaries, he recognized its power.

The next thing I knew, he had me present to the CEO and his senior staff – and the rest, as they say, is history.

But it works even in an MSME. And why my Eastern European friends became a model for Europe.

The first time we developed a premium brand, we needed funding, and a Western bank bought into our game plan. Today, this business generates 18% of the total revenues and more than one-and-a-half the profitability rate.

But that’s not the end of the story. We added another business using the same raw material base to match the 18% share of sales, if not more, because it can reach a far broader market.

Why did we develop premium brands? Even an MSME can’t embrace the mantra of “serving the bottom of the pyramid” to compete against Western behemoths. That mantra kills forward- and lateral thinking, which is what innovation is.

The evidence? Why can’t our eight top companies – combined – match the economic contributions of one Vietnam enterprise? And who pays but Juan de la Cruz?

How did Jobs drive Apple to the stratosphere?

Innovation. Innovation. Innovation.

In other words, he was a forward- and lateral thinker.

What does total and absolute screw-up mean?

When are we consistently confronted with the question: Which comes first, the chicken or the egg?

Let’s get to the antidote straightway: That’s why Steve Jobs finds himself in the company of Einstein and the other great minds. He was such a forward and lateral thinker that his ideas continue to blow almost everything away long after he’s gone. 

But let’s pause and ponder; why oligarchy and rent-seeking explain our inability to drive the economy – and arrest poverty.

Even our best minds come from the same business environment as Juan de la Cruz — where forward- and lateral thinking is foreign. Translation: We won’t produce a Steve Jobs.

Yet, Juan de la Cruz solely pays a heavy price. I no longer take it for granted as I did as a local. 

We in the Philippine elite love to travel. Visit India and see if it will open your eyes as it did mine.

Gising bayan!