A new path: While business process outsourcing has helped to generate growth, more needs to be done to build up export industries

Unlike many of its South-east Asian neighbours, the Philippine economy is less export dependent and more consumption oriented. More importantly, the country has two critical sources of revenue that are largely insignificant in other members of the ASEAN community: business process outsourcing (BPO) and foreign remittances. These two elements have helped keep the local economy afloat during challenging times and could help generate rapid and steady growth going forward. Indeed, while some economists are counting on exports to carry the Philippines, essentially following the path of many other Asian economies, others suggest that the country may be charting a new course forward, one that is less centred on selling products into global markets, and more focused on the sale of services. Shanaka Jay Peiris, the IMF’s resident representative to the Philippines, told OBG, “Just because exports led to growth in many parts of the world does not mean it is the only way to achieve economic success.”

KEY SECTOR: In 2012 the BPO sector generated $13bn in revenues, equal to 5.2% of GDP, compared to merchandise exports of $52bn. It is estimated that BPO revenues could reach $16bn in 2013, growing faster than both exports and overall GDP. The sector currently employs about half a million people in the country, according to the Information Technology and Business Process Association of the Philippines (IBPAP). It is expected that BPO will expand at about 15% annually and, assuming these ambitious growth targets are met, the sector will continue being a major driver of the economy. The IBPAP expects revenues for the sector to hit $25bn and BPO employment to reach 3.2m by 2016. It is estimated that if these targets are met, the Philippines will have 10% of the global BPO market and the sector will represent 9% of the country’s GDP.

Promoting the BPO sector is seen as a particularly good way to generate economic growth. There is minimal environmental impact, the jobs are well-paid and less physically demanding, and there are beneficial spillovers into other sectors. Property developers enjoy the boom in related office construction, while tech companies are kept busy supplying call centres with computer systems, software and connectivity solutions. The sector is advancing quickly, meaning that the quality and sustainability of the work will improve and bring related benefits to society. The BPO industry in the Philippines, which began 20 years ago with cut-rate call centres, is moving towards providing more sophisticated support functions for corporations. Meanwhile, international investors see BPO itself as a good target for their capital; the sector could ultimately help improve the country’s foreign direct investment situation.

THIRD PLACE: As of 2013 Manila has overtaken Delhi as the world’s third-largest BPO destination according to a 2013 ranking by global outsourcing and investment advisory firm Tholons, with Cebu, another major BPO hub in the Philippines, placing eighth in the survey. Manila’s popularity was in large part due to the Philippines’ English-language abilities, as well as foreign investment in the sector and the addition of more target markets.

“The Philippines is a very attractive labour market for multinationals, especially US-based companies, because of its cost competitiveness and availability of good English speakers,” Dan Spinks, the vice-president and general manager of Fluor Philippines, told OBG. “The English proficiency and good quality of education are crucial competitive advantages, the latter being reflected in the nearly 30,000 engineers graduating in a year in the Philippines”

Despite the many benefits offered by the BPO sector, these may be somewhat limited over the long term. While call centres are relatively easy to establish, this also means they are easy to lose if other locations become more attractive. Manila took the third-place position in the global rankings from Delhi and could advance further on the top two BPO destinations, Bangalore and Mumbai, but in total about 100 cities around the world are vying for BPO business. While the Philippines has a great language advantage and a significant pricing advantage over competitors such as Toronto, observers say that the situation could easily change. For example, throughout 2012 the Philippine peso gained value while the Indian rupee stayed relatively stable to the US dollar, eroding one of the country’s cost advantages.

OUTSTANDING CHALLENGES: In the medium to long term, the Philippines will inevitably face the same issues that have challenged India. In India, the BPO sector helped create a middle class, but as the middle class develops, demands have increased, leading to higher wages and more difficulty retaining workers in call centre jobs. Career options in BPO facilities are often limited, employees may encounter health issues due to prolonged computer usage, burnout is high and the product is largely commoditised, resulting in a simple push on the part of management for lower costs and higher output. While the BPO sector has been good for the Philippines, especially during times of difficulty, it is still unclear whether it will ultimately deliver a well-trained, highly motivated and creative workforce.

Cognisant perhaps of this risk, public-private partnerships are being formed to sustain and exploit the Philippines’ advantages in this sector. A key reform in the educational system is the government’s K12 programme, which aims to provide sufficient time for mastery of concepts and skills, and prepare graduates for tertiary education, middle-level skills development and entrepreneurship.

At the same time, there is always a risk of BPO operators opting to relocate to a more desirable location. While the Philippines has been working hard to alleviate any potential concerns for BPO operators, the sector will continue to be influenced by a range of factors, some outside of the country’s control. One example is the US Call Centre and Consumer Protection Act of 2013, a recently introduced bill. If passed, US customers sent to an overseas call centres would have to be informed of the location of the call centre and would have to be transferred to a US location upon request. The bill also bans companies using overseas call centres from receiving federal loans or grants. While it is not expected to pass, it highlights one of the challenges the local BPO sector could face. NEED FOR EXPORTS: Despite the country’s balanced growth, it is becoming increasingly apparent that some improvements on the export side are still needed. In part, this is a recognition of the limitations of BPO and remittance earnings. While they bring in considerable funds, they add less to the economy than manufacturing, which employs more people domestically. BPO workers are better educated than average while overseas Filipino workers (OFWs) are often skilled. Export industries bring jobs to an even wider range of people, including the unskilled, and they leave even more money onshore. Overseas workers spend at least some of their salaries in their countries of employment. If they work in the Philippines, most of their earnings end up being spent or invested in the domestic economy.

The Philippines is becoming aware that while BPO and OFW earnings have done much for the country, they have drawbacks. The domestic economy is less balanced than it should be, and while BPO business and OFW remittances do take the edge off some shocks, they have the potential to leave the country more exposed. Without a sizable industrial base, the Philippines is always at risk of losing considerable earnings should outsourcing or guest workers meet resistance overseas. Manufacturing at home will not be immune to economic downturns, but it is relatively safe as long as global trade remains free.

INEVITABLE: Another argument for building local manufacturing is the simple math of growth. While the country has a balanced structure, none of the components of the economy, save exports, can fuel another Asian economic miracle. Consumers are not wealthy enough to buy the growth, and the government is too fiscally restrained to force a rapid and sustained rise in GDP. The domestic corporations cannot possibly invest enough to push the country beyond a certain level. Exports are ultimately needed if the dream of rapid expansion is to be achieved. To be sure, the Philippines has spared itself much hardship by avoiding dependence on the global markets, but it might be necessary to accept that a certain level of exports are needed to accelerate growth.

Recognising the potential gap in the economy, the Philippine Export Development Plan (PEDP) calls for the doubling of exports to $120bn by 2015 (from $50.1bn in 2010). Under the PEDP, products will be improved and promotion and marketing strategies developed, while free trade agreement countries and high-growth Asian economies will be targeted. Sectors of interest include electronics, agribusiness, car parts, textiles, garments and home products, with emphasis place on value-added production.