THE WALLACE REPORT

UNCERTAIN TIMES

1. POLITICAL

The Commission on Elections (COMELEC) has now accepted 10 nominations for the next
president (2 more were added last week, it’s unclear why as they are essentially nobodies) in
the coming elections, and from one of them will emerge a new president of the Philippines –
assuming the elections are successful — a big and worrying assumption.

To win you have to have popularity/appeal, lots of money, a professionally organised

campaign, strong party support with grassroots supporters out there where the votes get
made. Counting is now, at least theoretically, out of local hands. An Ampatuan type can no
longer fake the votes (but can still influence/coerce the voters). Only a computer whiz kid
maybe can, or someone in control of the program. But let’s put that aside for the moment.
What we’re considering is winnability in a fair election. If you don’t have all four factors you
can’t win because some candidates do, and you do need them all to a meaningful degree.

Take popularity/appeal, I don’t just mean box office good looks but it can also be an ability to
appeal to the discerning voter through having a sound, believable policy program. The polls
tell you who is leading in this category. Sadly the discerning voter is very much in the minority
at this stage, although there are efforts by independent groups to bring more voters into this
discerning category. One of such groups is the amalgamation of ABS-CBN with the
Management Association of the Philippines, and Kilos Bayan, among others to conduct
regular “e-town hall” televised interviews with presidentiables and experts in various fields.
Let’s hope we get more voters to vote intelligently. If we do, Dick Gordon’s chances rise, as
do Gibo Teodoro’s. Both are sound individuals with solid credentials. Gordon has done well in
the running of Subic and later the Red Cross. Teodoro has handled the defence portfolio well,
but this is a relatively brief stint, he’s not yet had the long years Gordon has. But neither is
even on the popularity scale yet. Teodoro at a miniscule 5 percent, Gordon off the map at 0.5
percent. Gordon doesn’t have the funds (in comparable quantities), the party support or the
local leaders to bring him into the ring. He’d need something exceptional to happen for him to
have a chance. But we’ll leave him in for now because he deserves to be up there.

Estrada has proved his complete incompetence for the job. Forget the plunder issue for a
moment, he just couldn’t handle the complexity of the presidentiable task when he had it, so
how could he now.

Eddie Villanueva created a born-again Christian movement which gives him great appeal
amongst his 3 million adherents, but almost nobody else. 3 million votes (even if he got them
all) wouldn’t win an election. Last election only 60% (1.8 million) of his supporters voted for
him.

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Jamby Madrigal has been a senator for 6 years now and has been active in filing bills that
promote the well-being of women, youth and indigenous communities, but little else. And few
have passed into law.

I’ve never heard of JC delos Reyes. Apparently he’s a councilor in Olongapo and an active
advocate of human rights protection and good governance. While Ricanor Perlas who is
running as an independent on the platform of green activism and new politics has yet to
establish himself as a formidable challenger. There’s absolutely no chance, in any way,
these last five could win so we’ll ignore them from hereon. Just wonder why on earth they’re
wasting their time and (someone else’s) money. And why COMELEC even bothers to include
them, yet does include a convicted criminal.

Our position on Estrada remains unchanged, he’s a convicted criminal. Nothing more than
that should be necessary to exclude him, yet in this crazy country he’s still being considered.
Even the movies aren’t that bizarre. A pardon may make him legally innocent (in some
strange fashion) but he still committed the crime. A court found him guilty. He does have the
popularity but it’s not as wide as he likes to believe and is insufficient of itself to drive him
back into the presidency, a job he’s already shown he can’t competently handle. He has
sufficient funds but not at the levels of the frontrunners. And he has a party of sorts that has
some organizational capability, but it’s the smallest of the top lot.

Teodoro is the most intriguing. He’s got everything – the apparent capability to do the job,
public charisma, oodles and oodles of (Gloria’s) money and more politicians in his pocket
than anyone else by a long shot. But they are beginning to desert, not yet at worrying levels
but that could happen because GMA is becoming ever more a dead weight to everyone’s
chances, even his. When 73 percent of the populace (taking out the undecided) doesn’t want
you, they don’t want your candidates either.

Anyway how do you get from 5 percent to 30% legitimately in a scant 5 months when all the
others are trying equally hard to win. Mind you, you can’t discount the power of local officials
to influence, it remains quite intense. But 5 percent to 30 percent? He’s someone who can
breeze through in 2016, which should be his primary focus. This being the first step toward it.

That leaves Aquino and Villar, definitely the ones to beat. Both have strong parties with
strong backing, but lacking the wide grassroots influence of Teodoro’s party. Both have
sufficient funds for the job, although Aquino might be struggling a bit here at the moment. But
that could change as elections draw nearer if he remains in the lead.

Aquino will campaign on promising an honest less politicised government, a break from the
past. Villar will counter this with the need for someone with experience, with a proven track
record, which he has. These strengths of each are perceived as the weakness of the other.
Aquino is criticised as having shown little for his many years in the public domain, while Villar
will be accused of dishonest dealings in becoming wealthy.

How each counters these accusations will be critical to them attracting enough votes to win. It
must be the focus of their campaign managers. Aquino must convince he can lead and
manage a country effectively. Villar must prove he’s honest. Both have a hard task ahead of
them, and I don’t think either has fully realised this yet, even if they’ve said they do.

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The fly in the ointment is Arroyo, her machinations almost certainly haven’t stopped. She just
can’t be counted on to allow free, honest elections. On top of that the shift to automation of
voting just has too many uncertainties, too many areas where failure could occur.
Deliberately, or not.

That failure will occur to some extent is inevitable, what is less certain is whether it will be
gross enough to question the election of the president (and VP) everything else fades behind
that. A few senators here and there, a governor or two (or a dozen or two) hardly matters.
And mayors, well, they’re really local. The critical issue is will there be sufficient question of
the legitimacy of the presidential/vice presidential result to bring the result into doubt. We
believe there’s a good chance there will be. There are just too many areas where it can all go
wrong, deliberately or not.

We’re talking of a sophisticated system for an unsophisticated populace. 400,000 teachers

have to be trained just to teach people how to vote. When it gets so complicated you have to
teach people how to vote you know there’s going to be problems.

I recently watched a fascinating movie called “Recount”, based on the controversies

surrounding the last presidential elections where Bush won (or did he?) over Gore by a scant
1,665 votes. The automated system had weaknesses (in this case the famous chad) that
weren’t satisfactorily resolved. If a first world, generally voting sophisticated populace with
automated voting part of the scene for many elections already has a crisis situation over the
counting what more a third (or is it now fourth) world country that’s never seen a computer
before, problems are inevitable. In the U.S. controversy older people had difficulty reading
and fully understanding what to do. In the Philippine rural areas older people don’t even have,
can’t afford glasses. There’s no way they can read a miniscule print size on a ballot 28 inches
long with a confusion of over 600 names on it. It is a nightmare waiting to happen. Is
COMELEC going to issue glasses at every polling centre? Will they get them back? Is there a
budget for them?

So will there be failure of elections? I’ve been in the Philippines long enough to know that
nothing works to plan, or on schedule. There’s always delays and hitches, unexpected
happenings that derail the original plan. Well this automation is one of the most complicated
in its detail to effect of any project and the time to do it is completely unrealistic. It should
have been done years ago and tested in the less important mid-term elections. Already there
have been delays and changes when no allowance can be possible.

Let me give you just a few of the delays that have already happened. The Precinct Count
Optical Scan (PCOS) machines themselves were supposed to be fully delivered by the first
week of February. As of January only 200 have been received, most of which are being
utilized for training. The transmission of results from the polling centres to the canvassing
centres will be done via the cellular networks. Testing of the system was supposed to be
done in November, then December, and now January – maybe. While checking that every
polling centre has cellular signal (kind of important) was supposed to be completed by
October 15, then October 30, then end of November, then first week of December, end of
December, now January – maybe. That doesn’t leave much time to fix the deficiencies. And
how much else is delayed too that we’re not even being told about.

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The ballots will have Estrada’s name on them, what happens if the Supreme Court rules, as it
should, that he’s ineligible? What happens to votes cast for him, you’ve disenfranchised. 5 to
6 million voters that could have changed the result. Now the Supreme Court has said that
Ladlad, the gay organization must be considered. They’ve issued a temporary restraining
order which means a final decision is yet to be made yet printing of ballots must be done
now.

Automating in this rushed fashion is a huge mistake. There is no question in my mind

whatsoever that there will be failure. The only question is whether it will be enough to result in
total failure. Could that, in fact, be the intent? The Constitution does not properly provide for
that possibility (a 30-day second try is meaningless). If Enrile would agree to step down and a
new senate president be elected from the holdover 12 presumably he’d be the one who could
become acting President and form a government sufficient to manage a new election
attempt. For the usual selfish political reasons Enrile has stated he won’t do that. But is it only
that? He’s the one who instigated martial law under Marcos, is he intending to repeat that
performance now with Arroyo? It is certainly a possibility. But as the military won’t go along
either in toto or through a violent split within it – such an attempt would fail. Fortunately I don’t
see it as a likely possibility.

And there’ll be no speaker of the House who’s the next in line. After that it’s the Supreme
Court Chief Justice, which could well be why GMA is determined to appoint a new one, a new
one favorable to her. Unless, in the first case, the local elections are acceptable and
congressmen are chosen even though their national leaders aren’t. And a new speaker is
elected — and that could readily be Gloria Arroyo. She gets her continuity of leadership
constitutionally, except that it is, or should be, limited strictly to organizing and arranging new
elections for the national candidates.

As so often in the Philippines no clear, simple solution exists.

The situation has changed so much since Cory died that any attempt to do anything except
ensure smooth, honest elections would be a huge mistake. A mistake that could lead to
revolution. Despite that risk it’s a mistake that could still be tried. It’s a time of considerable
uncertainty.

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2. ECONOMIC

The Philippines is listed as a developing country, and the President claims it will be amongst
the First World countries 20 years from now. But, maybe the reverse is happening, is the
country not, instead, a de-developing country. When you look at the numbers, the facts, not
rhetoric everything seems to be going backwards.

This was the shining light of Asia in the ‘50s and through to the early ‘70s just read the
reports of that time. It’s why I invested in a factory here. Today it doesn’t even get mentioned
in any assessment of Asia, let alone even South East Asia unless derogatorily or with
dismissive amusement. What went so horribly wrong?

In the real world popularity is almost totally unrelated to performance; in the Philippines it
wins elections. Mind you someone whose popular can perform (President Magsaysay comes
to mind) but it is very rare. Whilst someone who performs can also be popular but often is not
until history so judges.

But because you’re unpopular doesn’t mean you’re a good performer. In fact you’re probably
not because if you performed well it would, over time, turn that initial unpopularity into
popularity.

And this is where GMA’s logic falls down. She says she’s unpopular because her focus is on
economic reforms to improve the lot of the people. Well in such a case after 9 years the lot of
the people should have much improved — and the people would start to appreciate you.
Instead the reverse has happened, the standard of living of the people has fallen, more are in
poverty, more are without a job, all the indicators of quality of life have worsened in the past 9
years.

And where are these reforms she touts? What are they? What improvements have they
effected? We can find few, she’s unpopular for sound, verifiable reason.

So as we start a new year I want to dispel the propaganda myth that the economy has done
well under Arroyo. It hasn't, at least not to the extent she tries to claim. I maintain that what
growth and improvement we've seen would have occurred with or without her. And if
anything, growth would have been stronger without her.

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In fact I'd maintain that her influence has been negative. I base that on the fact that job
creating, new wealth - creating investment hasn't happened to the extent a successful
president would have achieved. More people (over 600,000) were without a job than there
were in 2000. Even more have little or no income from their jobs (fastest growing sources of
employment are unpaid family workers and self-employed such as sidewalk vendors), yet are
counted as employed - a deliberate deception.

As to call centers and Business Process Outsourcing (BPO) they've been a great success.
But they've been so despite GMA, not because of her. I recommended just a few months into
her term we create a Department of ICT to give it the full support and importance it must
have. Nine years later it’s still sitting in congress. What positive actions, decisions have been
taken to accelerate and encourage this sector? There are none of any consequence. It grew
because Filipinos have a natural talent for it, government added nothing. If it had it would be
double the size now.

It's been the same in mining, the enormous promise this sector offers came to near nothing
because the president was unable to counteract the virulent opposition, bring her (she claims
they are hers and, hence, are under her control) local government officials into line, or get her
bureaucracy to move at an even half - way decent pace. So the miners left, except for a too
small few. Investment in mining was an insignificant $335 million from 2003 to 2008 and the
bulk of it for exploration, not development of mines. Yet when the mining law was interpreted
(by the Supreme Court) to allow foreigners to develop mines it was confidently predicted that
investment would reach US$ 10 billion by 2010. It got nowhere close.

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Another indicator of a strong economy is that it attracts investment as it is seen as a

profitable place to go. In the past 8 years the Philippines has attracted the lowest level of
foreign investment amongst the ASEAN-6. The Philippines got US$12.1 billion; next lowest
was Indonesia at $29.7 billion; little old Singapore did best at $133 billion 11 times the
Philippine level; while Malaysia and Thailand got about the same at a little over $40 billion
each.

It’s the same when comparing to history, particularly the Ramos years which would be the
fairest comparison. The 6 year term of Ramos saw $9.5 billion enter the country while
Arroyo’s 9 years attracted $12.1 billion. Pro-rated to 6 years, Arroyo’s becomes $9.1 billion.
Converted to 1992 dollars (inflation must be factored in), FVR attracted $6.7 billion, Arroyo
$3.4 billion pro-rated. Half the level, nothing could be more damning than that in an
evaluation of the economy.

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There seems to be a clear correlation between how the international business community
perceives the country’s state of competitiveness and the actual flow of investment. They are
not impressed.

Investment by Filipinos has been equally desultory if you remove malls and other retail
outlets as I think you must. They're just there to pass on the goods someone else produced
with that someone else being far too often these days in a country far away. Now it can be
fairly argued that this is OK because the Philippines is a services economy, it can pay for the
goods someone else produces with the money earned in services. The trouble is services
requires education - and that has definitely deteriorated in the Arroyo years.

Today, out of 100 Filipino kids who enter school, only 65 get to finish primary. Back in 1998,
70 got to finish; while only 42 finish high school compared to 54 who did in 1998. Add to that
the fact that public expenditure per high school student (as a percentage of GDP per capita)
fell from 10.7% in 1999 to 9.2% in 2004. While the education department has been getting a
bigger allocation from the government (from P90 billion in 1999 to P149 billion in 2008),
there’s been no significant increase in real terms— P90 billion vs P92.5 billion for example.
The total Education budget’s share to NG budget has been declining (19% in 1999 to a little
over 11% in 2008).

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Other sad notes on RP education:

Education budget is only between 2% to 2.5% of the country’s GDP, lower than the 4%-
5% recommended by UNESCO; Major East Asian economies allot 5% to 6%
The country spends the least on educating its kids ($318 per child vs. Thailand’s $1,048)
RP has the largest student-teacher ratio at elementary level in Southeast Asia, next to
Cambodia
About P22 billion is reportedly lost due to overpriced materials. The amount could’ve
been used to build 4,500 classrooms or procure 11 million desks or 440,000 computers.
Or pay teachers a decent wage.
An IMD report noted that together with Indonesia, the Philippines has the worst
secondary school enrollment rate among the Asian countries

The Philippines is a “striking example of under performance” said UN Secretary General Ban
Ki-Moon.

So how can you claim to have had a focus on education?

Another sorry statistic is Gross Capital Domestic Formation (additional investments in fixed
capital assets by businesses in an economy) which as a percent of GDP has been on the
decline. In all other ASEAN countries it’s been growing since the 1997 Asian financial crisis.
In Vietnam it rose from 22.2% to 40.4%, the Philippines declined from 29.1% to 14.7%. And
of course it’s the lowest in the group.

The most serious weakness is that this has been a consumption led economic growth, not
production driven as under Ramos. This indicates a weak economy that will be, and already
is, unable to provide the jobs for its people.

In agriculture the Philippines is now the world's biggest importer of rice despite that food self
sufficiency was a major plank of her platform. Growth of agriculture has been dismal,
averaging 3.7% from 2001 to 2008, compared to over 6% for Services (call centers growing
at an average of 25%). The Philippines has an ideal climate, fertile soil, available land, yet
agriculture is a gradually declining part of the economy. Its share in GDP at current market
price has declined from 17.1% in 1999 to 14.2% in 2007. Jobs provided by agriculture in
2007 have also fallen – from 39% in 1999 to 36%. She also couldn't stop the ill - considered,
populist but proven ineffective (in what it was intended to do) agrarian reform law. It was
extended without any modification.

There has been less spending on infrastructure. For the past 8 years the Arroyo
administration has only managed to accomplish one major infrastructure project per year, and
these were all conceived by previous administrations; President Arroyo just took them over
and took far too long (on average 7 years) to complete them. Spending on infrastructure as a
percentage of GDP is down to about 2 percent from 3.2 percent under Ramos. In monetary
terms, this translates into an annual average of $1.8 billion as against $2.4 billion. And if we
take into account inflation, the $1.8 billion reduces to only (in mid-Ramos pesos) $ 1 billion. In
other words Arroyo is spending less than half of what Ramos did. And that certainly wasn’t
enough for a country 20-plus years behind everyone else.

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Yet an ad appeared in the newspaper recently claiming great success in infrastructure

construction (see our separate report FAIRYLAND for detail on this).

The president has said she fully recognizes the importance of building infrastructure yet
spending on it has been disappointing as a percentage of GDP (a fair measure) . So how can
she make such a claim. Worse spending as a percentage of GDP has been growing slower
than GDP — about half the rate. A minimum of 5% needs to be spent on infra just to begin to
catch up, let alone get ahead. Infrastructure spending is directly related to economic growth,
so it’s important to do it. But it hasn’t been done. She can crow about Ro-Ro, but what else?
You can't even get to where some 18 percent of tourists go by direct flight to Boracay. That
project is still a gleam in someone's jaded eye.

Infrastructure: Arroyo Administration’s priority?

RP has limited access roads. There is need to build more major thoroughfares and focus
on big-ticket projects (connecting SLEX, NLEX, SCTEX for example)

There is a need to move from “asphalting” as maintenance work, to “concreting” of some

of the roads to prevent the frequency of re-occurrence of potholes. It’s been a cycle.
When the rainy season comes, potholes (giant craters) appear, when what is needed is
concreting. (Industry observers have said that “asphalting” works are one of the greatest
sources of corruption as this is easily cheated).

Farm-to-market roads remain inadequate. More needs to be done, RP tagged as having

the worst distribution infrastructure in Asia

Country is worst amongst ASEAN-6 in terms of paved roads as % of total roads.

Roads are being built but maintenance is being neglected. Try EDSA sometime.

The latest global travel and tourism report released by the World Economic Forum
(WEF) showed the Philippines faring poorly in terms of air transport infrastructure (73rd
among 133 countries), ground transport infrastructure (90th)and ICT Infrastructure (92nd)

Tourists agree with the businessmen, they’d rather go somewhere else. The country attracted
a little over 3 million tourists in 2008 assuming that figure too isn't falsified by incoming
balikbayans. Thailand gets 14.5 million, Indonesia attracts 6.3 million, Vietnam 4.3 million. In
1999, Vietnam had 1.8 million, the Philippines 2.2 million. Which one would you rank as a
success?

The 5.2 million the government claims just can’t be believed. There are no official figures yet,
and an extra 2 million just couldn’t have happened. A part from anything else the
accommodation doesn’t exist to house them.

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It’s the same in everything else. The situation is worse today than when she came to power.
Not only that it ranks at the bottom of the ASEAN-6 on everything too. This is not the mark of
a successful economic manager, just look at a few of the comparisons.

• The Philippines ranked 87th out of 133 countries in the world (14th among 18 Asian
countries and last among the ASEAN-6) in the World Economic Forum (WEF) Global
Competitiveness Index Ranking for 2009-2010. The Philippines fared worst in WEF’s
institutions (113th), labor market efficiency (113th), innovation (99th) and infrastructure
(98th) pillars.

• The country ranked a poor 43rd out of 57 countries in the International Institution of
Management Development (IMD) global Competitiveness Ranking for 2009 (11th out
of 11 Asian countries, and obviously last among the 5 ASEAN members – Vietnam
was not surveyed — on the list). It was second to last in infrastructure and 51th in
economic performance.

• The country placed 139th out of 180 countries in Transparency International’s

Corruption Perception Index (CPI) Rankings in 2009 (the worst among the ASEAN-6
member countries)

• The Philippines was 144th among 183 countries in the International Finance
Corporation’s (IFC) Doing Business 2010 Report, also last among the ASEAN-6. The
country ranked poorest in starting a business (155th) and closing a business (153th).

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In almost all these statistics, the Philippines is the worst, or if it’s not Timor Leste is — I
wonder where that is. I certainly wouldn’t want to be compared to such a minor country.

She claims to be an economist yet goes against sound, proven economic principles to try and
score (unsuccessfully as it turns out) populist points. Every economist of any consequence
today recognizes and accepts that an open, free market provides the venue for the greatest
success. That government intervention deters investment and costs the economy more than
any short term gains that may be obtained.

Yet despite this knowledge the president has imposed artificial controls in key industry
sectors: Power, oil, cement, telecoms, and pharmaceuticals (do you think anyone will invest
where the price of their products is halved? No one has 50% margins.). Food too has not
been spared. Six sectors that are fundamental and essential to the economy. Well no one of
consequence will now invest in these sectors whilst she’s in power.

There is much more but this is more than sufficient to belie any claim of successful
management of the nation. Yet the president has claimed many times that her unpopularity is
because of her focus on the economy and making things better for “her people”. Well as
these numbers amply demonstrate the lot of the people has worsened under her reign. And
the people obviously recognize it as 61% are dissatisfied with her, 73% if you take out the
undecided, as you should.

The bottomline is you don’t measure an economy by GDP, you measure it by the quality of
life of the people. All the evidence says the people are worse off today. Where’s the
improvement? What is it she’s done? I’m at a loss to find it, and no one in the Palace seems
able to tell me, despite I’ve asked several times. When oh when does it sink in: The
Philippines is a failing economy under Arroyo. That’s not my assessment, that’s factual data
properly, fairly read.

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