How the Philippines benefits from Australia’s booming links with the PRC

East Asia’s substantially market-led economic integration is a very complex process and is leading to some surprising effects.  One example is that of Australia’s booming trade and investment with the People’s Republic of China (PRC), which is pushing up the value of the Australian dollar, and consequently enticing Australian companies to outsource business processing services to the Philippines.

Over the past decade, Australia has enjoyed one of the best economic performances of any OECD country.  While many structural reforms over the past few decades and sound macroeconomic management have underpinned this, Australia’s closer relationship with the PRC has also played a major role.

The PRC is now by far Australia’s most important merchandise export destination, accounting for some 26% of total exports.  These exports are predominately iron ore, along with smaller quantities of coal, petroleum and wool.The PRC is now also the leading destination for Australia’s services exports, accounting for 11% of the total.  In particular, the PRC tops the list for foreigners studying in Australia with 126,000, or 27% of the total in 2010.  It also tops the list of international tourist expenditure in Australia, even though the UK beats the PRC into second place for the highest number of international tourists to Australia.

Chinese foreign direct investment is also making its mark in Australia.  While the stock of foreign direct investment in Australia is dominated by traditional partners (US, UK, and Japan), the fast mover over the past decade has been the PRC, whose stock of foreign direct investment (FDI) in Australia has jumped from A$3 billion in 2001 to A$17 billion in 2009.

All of these of these booming links between Australia and the PRC have contributed to the cumulative strengthening of the Australia dollar by almost 20% over the past four years.  This has also provoked strong adjustment pressures in the Australian economy, most notably through the drive to reduce costs and gain market flexibility by offshoring electronically deliverable services like customer relations, information technology, back-office support and form processing, finance and human resources.

In this context, the Philippines has emerged as the top offshoring destination for Australian firms, outranking India in all categories, according the Australian Contact Centre Outsourcing Market Study 2011.  The Philippines has become a prized offshoring destination due to its competitive labor costs, good customer service, and high English literacy rate among college graduates.  The Philippines has now become the world’s leading nation for business process outsourcing.  There are even reports of Indian companies offshoring their business processing to the Philippines.

In recent months, the mood in the Australian economy has been less optimistic because of the ongoing euro crisis, and uncertainties about the PRC’s future growth path.  In light of these factors, and the Philippines’ proven track record, large banking, financial and telecommunications institutions have been announcing their intention to accelerate offshoring of business processing services to the Philippines.

Although business process offshoring only employs at this stage about 1% of the Philippine work force, it is now the country’s fastest growing sector.  Together with the rise of creative process outsourcing (such as 3D animation, video game development, and music and sound engineering), this represents a very promising area for the Philippines.  Despite the success to date, the Philippines should not be complacent about its current comparative advantage in business process offshoring.  To better exploit its potential, it must further improve the quality of education and broaden its access, and also enhance the efficiency of its services industries, particular telecommunications and electricity.