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FATE, IT SEEMS, HAS LINKED the fortunes of the Philippines and the Aquino family. The charismatic Benigno Aquino Jr. enjoyed a meteoric political career before falling out with then-President Ferdinand Marcos and leading the opposition to his corrupt and dictatorial regime. In 1983, returning to his homeland from exile in the U.S. to campaign for a return to democracy, Aquino was gunned down moments after landing at Manila International Airport.

His widow, Corazon, picked up the reform mantle and led the historic People Power Revolution that peacefully deposed Marcos in 1986 and installed her in the Malacañang Palace. Her six-year presidential term entrenched democracy in the archipelago nation but did little to improve the country’s lagging economic performance or bridge the yawning gap between rich and poor.

Today, Benigno Aquino III is seeking to fulfill his parents’ legacy. Since assuming the presidency after a resounding election victory almost two years ago, Aquino, 52, has been pursuing a two-pronged strategy that he contends will enable the Philippines to finally achieve its potential. His government is leading a crackdown on the corruption that has plagued the country for decades, and has promised to pursue wrongdoing at the highest levels. So far, it hasn’t flinched. In November the authorities arrested Aquino’s predecessor, Gloria Macapagal Arroyo, on charges of election fraud and barred her from leaving the country. In January the Senate, which is controlled by Aquino’s Liberal Party and its allies, began a trial on articles of impeachment against Renato Corona, chief justice of the Supreme Court, for failing to disclose more than 40 million pesos ($930,000) that investigators found in his bank accounts and for showing partiality in his rulings toward Arroyo, who appointed him chief justice days after Aquino’s election victory.

Although investors would relish any improvement in a country that ranks on a par with Syria for corruption, according to anticorruption organization Transparency International, there’s no guarantee that Aquino will succeed in his campaign. Opponents have criticized the case against Arroyo as a politically motivated witch hunt.

The Aquino government is also seeking to combat the Philippines’ notorious inequalities and promote more-inclusive economic growth. To that end, its six-year development plan — borrowing a page from projects pioneered in Latin America — is expanding social programs that make payments to poor families provided that their children attend school. The plan calls for increasing spending on new schools, roads and other infrastructure.

For Aquino, who campaigned on the slogan “If no one is corrupt, no one will be poor,” improving governance and extending prosperity are two sides of the same coin.

“The key challenge in the Philippines over the years is official corruption,” says Cesar Purisima, the government’s secretary of Finance. “In the 1960s the Philippines was No. 2 to Japan in terms of economic strength in Asia. In 1965 our total exports were worth more than those of Taiwan and South Korea combined. Clearly, it’s not for lack of natural resources or lack of beauty or lack of talent. What held us back was administration after administration that didn’t care and mismanaged the country.”

Can Aquino and his government deliver? The challenges they face are immense. The Philippines’ economy and political system have been dominated since colonial times by an oligarchic class of powerful, wealthy families. Weak growth and vast inequality have limited the expansion of the middle class, which at just 15 percent of the population, according to World Bank statistics, makes the Philippines an outlier among fast-developing Asian countries. An inefficient tax system leaves the government with fewer revenues as a proportion of the economy than any other member of the Association of Southeast Asian Nations. Correcting these problems will take years of earnest efforts.

One major challenge “is for the government to sustain a higher level of investor confidence by pushing ahead with policy reforms,” says Changyong Rhee, chief economist at the Manila-based Asian Development Bank, a regional multilateral lender that is hosting its 45th annual board meeting in the Philippines capital in early May. “Much remains to be done to improve the business environment so that private investment and employment grow consistently. Lackluster employment growth is a chronic problem. Unemployment and underemployment rates combined have remained close to 25 percent of the labor force, pushing nearly 10 percent of the country’s population to work in other countries.”

Purisima says the government is determined to pursue its reform agenda, but to last, those reforms must be based on sustainable growth and fiscal stability. Only then can the authorities increase infrastructure spending, which is critical to fostering greater investment, growth and job creation, he says.

Since taking office in June 2010, the Aquino administration has adopted a series of belt-tightening measures to cut spending, while intensifying revenue collection efforts, including a crackdown on corporate tax evasion and smuggling, a widespread problem that undermines revenues from tariffs. The actions helped reduce the government’s budget deficit to a modest 2 percent of gross domestic product last year from 3.5 percent in 2010 and trimmed the national debt by 2.1 percentage points, to 40.1 percent of GDP. That’s down from a high of more than 80 percent a decade ago and compares favorably with Malaysia’s debt ratio of 58 percent and Thailand’s 46 percent. Foreign exchange reserves, swelled by remittances from Filipinos working abroad, rose 24 percent last year, to a record $77.7 billion.

Aquino’s government will be judged, however, on whether it can translate this fiscal strength into stronger growth and broader prosperity. The economy slowed down markedly last year, reflecting the effects of global weakness and the government’s budget tightening. Output expanded by only 3.7 percent in 2011, down from 7.6 percent in 2010. The government and most private economists expect a rebound in activity this year. The ADB forecasts the economy will grow by 4.8 percent.

“Philippine growth has lagged behind its regional peers, while poverty, inequality and labor market outcomes have not improved as much,” the World Bank said last month in its latest quarterly report on the country’s economy. Per capita GDP stands at a modest $2,255, according to the International Monetary Fund — less than half of China’s $5,184 and well behind Indonesia’s $3,429.

The economic slowdown last year was part of the government’s strategy to strengthen its finances and lay the basis for sustainable growth, Amando Tetangco Jr., governor of the Philippines’ central bank, told more than 300 senior business executives at a presentation by the government’s top economic officials at a Manila convention center last month. He noted that the Philippines last June won a one-notch upgrade in its credit rating from Moody’s Investors Service, to Ba2. “We believe the Philippines can lay claim to economic resilience,” Tetangco said.

Going forward, the government hopes to stimulate growth by boosting infrastructure spending at a rate of 12 percent a year through 2016. The lack of paved roads and highways has long hampered the nation’s growth and discouraged foreign investors. The administration also is promoting public-­private partnerships by reaching out to investors, reducing bureaucratic red tape and promoting five pillar industries — agribusiness, business-process outsourcing, tourism, infrastructure development and creative manufacturing such as high-end furniture and handicrafts — that draw on the natural advantages of the Philippines, a resource-rich country that stretches across an archipelago of 7,100 islands.

To combat poverty, the government is dramatically expanding a social welfare program of conditional cash payments to families provided that they send their children to school and take them to health clinics for regular checkups. The program, designed with the help of the World Bank, makes payments of between 500 and 1,400 pesos ($11.65 to $32.65) a month to households. The program began on a modest basis under Arroyo in 2007, but the Aquino government has expanded it dramatically, tripling the number of households receiving payments over the past year, to some 3 million.

“We are giving stipends to the poorest of the poor to keep children in school and bring them to health centers so that they train for the workforce later on,” Finance Secretary Purisima tells Institutional Investor in an interview in his office in the central bank complex, which overlooks picturesque Manila Bay. “We plan to continue to expand the program until all 4.8 million families in the poorest 20 percent of the population are covered,” a level officials expect to achieve by 2014. In addition, the government will spend 10.5 billion pesos this year to expand existing schools and build new ones. The program aims to construct 9,300 new classrooms, with a particular focus on rural areas.

Education is critical because the Philippines has one of the youngest populations in Asia: The median age is just 22, compared with 25 for Malaysia and India, and 28 for Indonesia and Vietnam. Purisima says the Philippines will enter a “demographic sweet spot” in 2015, when the working-age population will begin to peak while the segment of the population under 15 years of age drops below 30 percent and that over 65 falls below 15 percent.

“Countries that have entered the demographic sweet spot in the past have seen acceleration of growth rates,” the Finance secretary says.

Such a takeoff would be overdue for the Philippines. For decades subpar growth and low levels of job creation have forced Filipinos to go abroad in search of work. Currently, more than 11 million Filipinos — compared with a domestic population of 94 million — work abroad. The export of labor has a silver lining, though: Overseas workers sent $20 billion back to the Philippines last year, providing a whopping 10 percent of the country’s $199.6 billion GDP.

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