Lessons from China and India

Investing in world-class infrastructure and on the education of our people are two things we know we ought to be doing if we want our economy to finally take off. We need quality infrastructure to attract the foreign investors who would provide the capital for job creating businesses. As for education, we all know from our call center experience that even at the low end of the value chain in today’s digitized global economy, a good education is basic.

But given our extremely scarce resources, which is more important? A thoughtful article in last Tuesday’s issue of the Financial Times argues that based on the lessons learned from recent experiences in China and India, quality education should take top priority.

Written by Yasheng Huang, an associate professor at the MIT Sloan School of Management, the article asserts that "China made a costly mistake in the 1990s: it created many world-class facilities, but badly under-invested in education… India, meanwhile, has quietly but persistently improved its educational provisions, specially in the rural areas. For sustainable economic development, the quality and quantity of human capital will matter far more than those of physical capital."

India, as we now know, has broken out of its usual two to three percent GDP growth rate and now registers at the 7.6 -8.1 percent range. What Prof. Huang finds impressive is that "India is achieving this result with just half of China’s level of domestic investment in new factories and equipment, and only 10 percent of China’s direct foreign investment." The evidence is clear, the professor writes, "China’s growth stems from massive accumulation of resources, while India’s growth comes from increasing efficiencies."

The professor also questions the popular obsession with FDI as a growth driver. There is no convincing evidence, the professor asserts, that FDI is the best path to economic development compared with responsible economic policies, investment in education and sound legal and financial institutions." Alas, methinks we are screwed. Our economic policies change often, we have not invested enough in education, our legal system is clogged and too prostituted to deliver justice and our financial institutions still need to be strengthened.

As far as the professor is concerned, the economic litmus test is not whether a country can attract a lot of FDI but whether it has a business environment that nurtures entrepreneurship, supports healthy competition and is relatively free of heavy handed political intervention. Woe, woe, woe! We are terribly screwed. Ask any entrepreneur and he will say our business environment discourages entrepreneurship starting from step one of seeking a business permit, vested interests work against healthy competition and political intervention is the biggest daily scourge of any local businessman.

Anyway, the professor concedes that most of the world-class manufacturing facilities in China are products of FDI, such that the "Made in China" label, is not necessarily made by China. The "Made in India" label however, is largely made by India… by companies like Infosys in software, Ranbaxy in pharmaceuticals and Bajaj Auto in automobile components.

In any case, the professor attributes the "China miracle" to bold economic liberalization and institutional reforms that created competition and nurtured entrepreneurship and not because it had glittering skyscrapers and modern highways. The professor points out that when the "China miracle" started to happen in the early 80s, China’s infrastructures were as poor as any in a Third World country. But they had the right economic policies that unleashed the native entrepreneurial prowess of the Chinese people.

I might add that in the case of both India and China, one key factor for their economic takeoff has got to do with having leaders who had the political will to transform their countries beyond their wildest dreams. The form of government didn’t matter. They just did what Nike had been telling the world: Just do it.

So, there is the formula… there are the somewhat different strategies to growth we could learn from the experiences of China and India. As a Filipino who still dreams of seeing economic takeoff in his lifetime, I say, we may be screwed now but not hopeless… unless we all say so.

OFW Earnings

A former member of the Monetary Board told me that just as I had written last Monday, it is a good idea for the country to use OFW remittances as a means to cut the cost of our foreign debt. In fact, there was a proposal to this effect made some years back by Morgan Stanley, a US investment bank.

The idea is to securitize OFW remittances, with the resulting debt paper getting the highest credit rating, even better than sovereign, because there is historical track record and the foreign exchange had been set aside already. This should save us quite a bit, given the below investment grade rating of our sovereign debt papers these days.

Then again, I still think a special bond issue designed as an investment instrument for OFWs should also be given a lot of thought. If we have to pay foreign exchange as interest for our foreign debt, we might as well pay that to Filipinos. It is also a way of giving our OFWs an investment option other than going into the taxicab or FX business or putting up a sari sari store.

In this regard, I just got an e-mailed response from BSP Governor Say Tetangco.  He said "BSP is discussing with the B of Treasury the possibility of issuing a bond for OFWs." How’s that for a quick response? It is Omar Cruz’s ball now.

Military banking

If Congress wants to pass one useful law before it adjourns, lawmakers should consider one that would ban the military from ever getting involved in managing banks, pension funds and similar financial undertakings. The AFP has proven itself incompetent in matters of finance unless it has something to do with "conversion", supplier kickbacks and laundering.

Media reports have it that a banking arm of the Armed Forces of the Philippines (AFP) is flirting with bankruptcy as a result of apparent mismanagement. Retired Col. Conrado Tolentino, was quoted by one media report as saying that the Armed Forces and Police Savings and Loans Association Inc. (AFPSLAI) has been incurring huge losses in its investments for the past two years.

"The loss of P517 million and the subsequent diminution of AFPSLAI’s declining profit margins in two years, 2003 and 2004, are very alarming," Tolentino was quoted by one newspaper report saying. He added the savings and loans association’s non-performing loans skyrocketed from P1.3 billion in 2000 to P4.1 billion in 2003 and P4.56 billion in 2004.

AFPSLAI also owns 81 percent of Centennial Savings Bank (CSB) and 60 percent of the equity of Centennial Financing Corp. (CFC), both of which are also bleeding. Its investment of P521,450,000 with CSB is now worth only P49,640,000 or a loss of P471,810,000 according to an audit report. Its investment of P30 million with CFC is now down to P22,297,000.

AFPSLAI, the credit and pension fund for policemen and soldiers, has to be managed professionally. While there are top notch finance people who used to be in the military, Rene Valencia comes to mind (but he left the military early as a captain), those who have managed military financial institutions in the recent past have not been known to be that competent, or as some stories have it, that honest.

The military should stick to its knitting and just be soldiers. Let competent private sector finance professionals manage their pensions and related requirements. But in the meantime, the proper government agencies should save AFPSLAI and its beneficiaries from further damage. We owe it to our soldiers and policemen to assure their financial security. Maybe the GSIS should step in. And the BSP should do an audit for unsound banking practices.

Sign language

Dr. Ernie E sent in samples of grassroots American creativity.

Sign over Gynecologist’s Office: "Dr. Jones, at your cervix."

On a Septic Tank Truck in Oregon: "Yesterday’s Meals on Wheels"

On an Electrician’s truck: "Let us remove your shorts."

On a Plumber’s truck: "Don’t sleep with a drip. Call your plumber."

In the front yard of a Funeral Home: "Drive carefully. We’ll wait."

Boo Chanco’s e-mail address is [email protected]