(Published in the ECCP Business Review, 2013)
WILL THE PHILIPPINES be a
winner or a loser with the advent of the ASEAN Economic Community (AEC) in 2015?
Clues that might yield a
final answer to this key question can be found in two Scorecards published over
the last three years by the ASEAN Secretariat based in Jakarta, Indonesia. The
scorecards track the Philippines' readiness for the AEC, and those of the nine
other Association of Southeast Asian Nations member states. There will be four
scorecards until 2015.
So far, the Philippines did
its part to ensure the free trade that underpins the AEC. It performed quite well
by ASEAN integration standards in the second scorecard, this for the period
2010 to 2011.
Of the 19 categories that
grade progress in this monitoring mechanism, the Philippines implemented all
its targeted measures in nine categories and implemented half of the targeted
measures in a further nine.
The Philippines, however,
“failed” in one category—food, agriculture and forestry—where it implemented less
than half of all targeted measures. Ominously, this sector has been identified
by Filipino experts as one of two key problem areas (the other being
manufacturing) that might suffer gravely because of ASEAN integration.
Food, agriculture and
forestry includes food security; the free flow of safe and qualified products;
improving competitiveness in international markets and the development of national
good agriculture practices.
The Philippines’ scorecard
saw it “pass” in the free flows of capital, skilled labor, and priority
integration sectors; competition policy; intellectual property rights;
minerals; ICT; taxation and e-commerce.
She did half of what was
expected in the free flow of goods, investment and capital; consumer
protection; transport; energy; SME development; initiative for ASEAN
integration and external economic relations.
But these achievements fell
short of those from 2008 to 2009 when the Philippines implemented all but two
of the 19 targeted measures. The
laggards were the free flow of services and transport.
For 2008 to 2009, which is
also described as Phase 1, the Philippines’s implementation rate stood at
94.55% as against the regional implementation rate of 86.7%. The Philippines met
91 of the 105 measures it set out to accomplish.
For 2010 to 2011 or Phase 2,
the Philippines, implementation rate was 65.92% versus the ASEAN implementation
rate of 56.4%.
The checkered performance for
2010 to 2011 reflects the increasingly difficult nature of the remaining
integration challenges faced by the Philippines as it approaches December 2015.
ASEAN has announced an AEC
Blueprint achievement rate of 80% for this period and admitted difficulty
implementing the remaining 20%.
This April, President Benigno
Aquino III said ASEAN’s efforts to create the single market are now in their
hardest phase owing to protectionist muscle-flexing by sensitive sectors such
as agriculture.
"They have finished with
the easy parts but the accomplishments will not be as fast as in discussing the
hard parts. When you reach that point, there can be some protectionist measures
taken by each economy," Aquino said.
Among the key challenges within
ASEAN identified by Aquino were creating a framework to open up the services
sector, which includes banking, telecommunications, retail and insurance.
To do list
Unimplemented measures for
both the Philippines and ASEAN are in trade facilitation and customs regulations;
standards and conformance; services and investment liberalization; agriculture
and forestry cooperation and consumer protection and transport.
The Philippines also needs to
implement six measures that affect increased foreign equity and improve market-access
in services and transport. A South Korean study submitted to the ASEAN
Secretariat showed that the Philippines’ restrictive cabotage rule remains a
major stumbling block to achieving ASEAN integration of shipping services.
The Cabotage Law of the
Philippines prohibits foreign carriers from engaging in domestic coastwise
trade and reserves coastwise trade for national flag carriers.
Also known as the Jones Act
of 1920, the law was enacted to protect the interests of local ship owners
against foreign ships. Almost a century of protection, however, has resulted in
a domestic shipping industry that is effectively a cartel consisting of five
shipping companies that control 90% of domestic shipping.
Critics blame the law for
stunting interisland trade; contributing to the dearth of safe and
well-maintained vessels; impeding the growth of local economies by fueling
expensive consumer prices, undermining
inclusive growth and discouraging investments that could make domestic shipping
more efficient.
The National Economic
Development Authority (NEDA) believes a cartel consisting of domestic shipping
companies is contributing to the exorbitant cargo fees pummeling domestic
shippers. NEDA also noted that domestic shipping lines have not been very
efficient.
The deleterious effects of the
Cabotage Law on trade can be seen in the irony that it is cheaper to ship to
Hong Kong from Davao than to ship from Davao to Manila.
Arangkada, a project of the
Joint Foreign Chambers of the Philippines, also noted it is cheaper to
transship a container from Manila to Cagayan de Oro via Hong Kong or Kaohsiung
than to ship directly from Manila to Cagayan de Oro.
It pointed out that the
Philippines’ domestic shipping industry is not competitive due to the
predominant use of small ships (200-300 TEU container ships compared to the
more efficient 5,000 TEU foreign container ships).
The government does, however,
recognize the law’s ill-effect and in 2008 formed an Anti-Cabotage Task Force
(ACTF). ACTF said a massive reform or overhaul of the cabotage system will
definitely benefit consumers, farmers, traders, buyers, investors, tourism
operators and exporters. It noted the domestic shipping industry will also
benefit since reforms will encourage more trade and business, resulting in more
volume shipments.
Sen. Edgardo Angara said
allowing foreign shipping firms to compete with domestic shipping can reduce
the cost of transporting goods by 30%.
“This has been a
long-standing issue. If we allow the foreign shipping firms to ship to
different (local) ports, it will bring down or lower shipping costs by 30%.”
Angara’s views are not shared
by Maritime Industry Authority (Marina) that claims local shipping is not
strong enough to compete with international rivals. Administrator Vicente
Suazo, Jr. said lifting the cabotage law may kill small- and medium-scale
shipping operators.
"Instead, the country
should continue to look for additional incentives to be given to local
operators to acquire new vessels for them to be at par with their foreign
counterparts," he said.
This, of course,
does not make sense as it protects a few families that own shipping lines at
the expense of inclusive growth, job generation and making the country more
competitive. “Juan de la Cruz” continues to suffer because of the protection of
a few rich families enjoying quasi monopolies. Given the Aquino
Administration’s majority in both Houses of Congress, these reforms should be
possible.
But there are other
options: the Customs Commissioner has the power to declare more harbors as “international
harbors’” that will allow international competition or international
cooperation to lower shipping costs.
New and more modern vessels
will be needed to facilitate the free flow of goods and investments that ASEAN
has said is necessary to lower transportation and logistics costs between and
within member countries.
The Philippines’ ranked 59th
in the World Bank’s 2012 Logistics Performance Index. In comparison, Singapore
placed 1st; Malaysia, 29th, Thailand, 38th and
Indonesia 52nd.
The index reflects
assessments of a country's logistics based on efficiency of the customs
clearance process, quality of trade- and transport-related infrastructure, ease
of arranging competitively priced shipments and quality of logistics services,
among others.
The Philippine Chamber of
Commerce and Industry (PCCI) laments the constraints that lead to the high cost
of logistics. Among the leading constraints is the Philippines’ inadequate
infrastructure.
Opposition to ending cabotage,
however, is fading. A report showing that Philippine cabotage is blocking ASEAN
shipping integration could be the nail that finally shuts the coffin containing
cabotage.
The report, “Formulating an
ASEAN Single Shipping Market Implementing Strategy,” has identified cabotage as
one of the major barriers to the Philippines’ accession to the ASEAN Single
Shipping Market. It was transmitted to the ASEAN Transport Ministers meeting
this June.
ASEAN this year targets the
liberalization in logistics services such as maritime cargo handling services,
storage and warehousing services, freight transport agency services, courier
services, packaging services and customs clearance services.
The report said foreign ships
calling in Philippine ports are needed in order for the Philippines to achieve
sustainable growth and, more important, achieve a single ASEAN market bolstered
by regional shipping integration. It also cited the lack of direct shipping
services to Europe and the United States.
“The insufficient cargo base and insufficient
berth depth are some of the underlying factors for this lack of direct shipment
between the Philippines and US or Europe,” it said.
Instead, shipping lines use
Singapore, Malaysia, Hong Kong and Taiwan as transshipment hubs. This reliance
on transshipments has led to unnecessarily longer shipping times and higher
costs than under direct shipments.
Henry Schumacher, Vice
President of the European Chamber of Commerce of the Philippines, noted that
the European Union’s logistics industry urges ASEAN member states to liberalize
the maritime transport sector by allowing international shipping companies to
carry out international relays and transport international cargo.
“The industry encourages
ASEAN to relax cabotage laws and allow international shipping companies to
operate within domestic maritime to the benefit of local and ASEAN business,”
he pointed out.
“Member countries should
exercise non-discriminatory procedures in maritime trade and services with
ASEAN countries.”
Schumacher said the EU’s
logistic industry urges ASEAN to implement a common de minimis baseline of
US$100, moving towards US$200 and the EU to implement a commercially viable de
minimis baseline exempting shipments from import duties and taxes such as VAT,
and any customs declarations.
“European business strongly
supports the objectives of the ASEAN Logistics Roadmap and the Master Plan on
ASEAN Connectivity in contributing to the ASEAN Economic Community by 2015
through liberalization and facilitation measures in logistics services and the
creation of the integrated ASEAN logistics environment that includes maritime
services.”
The bottom line is that to
facilitate the free flow of goods and investments, AEC needs to lower
transportation and logistics costs between and within member countries.
Cabotage has no place in this.
The upcoming Roll-on/Roll-off
(RoRo) ferry service between Davao City and Bitung, Indonesia has the potential
to cut transportation costs between both ports by 5% to 10% compared to regular
shipments, said the Philippine Exporters Confederation, Inc. The service is
expected to begin in the third quarter of this year.
The Davao-Bitung
RoRo will promote easier trade between Mindanao’s producers and markets in
Indonesia. Bitung or Kota Bitung is a city on the northern coast of the island
of Sulawesi. It lies some 350 nautical miles to the south of Davao City.
The direct route to
Indonesia will correct absurd shipping situations such as that faced by one
major food company that transports its cereals produced in Mindanao to
Indonesia by first shipping these cereals to Manila, and from Manila to
Singapore and from Singapore to Indonesia.
Ready or not
Cabotage is part of a larger,
ongoing conversation about the Philippines’ preparedness for the AEC. Judging from published comments by pundits,
the Philippines will not be ready for the AEC by 2015.
There is near unanimous
opinion that agribusiness and manufacturing—because of their
uncompetitiveness—will suffer the most from the AEC’s more liberalized markets.
The Philippines’ inability to
develop or articulate a “strategic positioning goal” for itself has also come
under scrutiny. Malaysia has said it wants to dominate “green technology” in
the AEC; Indonesia wants more investments. And the Philippines?
But what causes the most
anxiety among those fearful the Philippines will let slip the advantages
offered by the AEC is a nagging perception the country remains unprepared for integration
despite laudable progress to the contrary.
Rafael Alunan, former
Secretary, Department of Interior and Local Government, believes “. . . the
prevailing sense is that the country somehow seems unprepared to meet the
competitive challenges when trade barriers are lifted to allow for the free
flow of goods and services in the region.”
He noted that the business
sector needs a carefully constructed environment to steel itself for the
onslaught of liberalization while giving foreign competition a serious run for
their money.
“Whenever ASEAN integration is
taken up, the lack of preparedness and synchronicity of the government and
private sector and weak state of competitiveness dominate the conversation,” he
said.
Alunan sees agricultural and
manufacturing sectors as the most vulnerable to ASEAN integration’s risks while
BPO and tourism stand to benefit.
“Exploiting opportunities
arising from ASEAN integration requires that we lessen our vulnerabilities to
foreign competition and exposure to market risks.
“I’m not aware of contingency
plans that aim to mitigate the risks posed by cheap products and services, and
to strengthen our competitive advantage where we shine or could eventually
shine.”
Romulo Virola, Secretary-General
of the National Statistical Coordination Board until his retirement in 2012, said
the Philippines is not yet ready to benefit from economic integration in 2015
given that we still have to focus on economic problems.
The PCCI’s leadership feels
that policies need to be in place before the Philippines can truly integrate
with ASEAN. Donald Dee, Vice-Chairman for Multilateral Trade, said these policies
include a national single window and customs certification; mutual reciprocity agreements
on export standards and a dispute settlement agency. The Philippines has to do
this immediately “. . . or we will be left behind.”
The government, however, says
the AEC is nothing to be scared of. Secretary of Trade Gregory Domingo told
local business leaders to develop the confidence to seize opportunities.
“There are only two and half
years before AEC. Do we have to panic? No,” he told PCCI members.
He reminded businessmen that
integration will no longer have a significant impact on trade in commodities.
Tariffs on over 99% of products traded within ASEAN were removed on January 1,
2010.
“If you’re thinking of lower
tariffs because of the AEC, don’t worry. You’re already competing with other ASEAN
countries.”
The downside facing the
Philippine business community as regards the AEC, however, is that Filipinos
have not been aggressive in taking advantage of the opportunities presented by
lower tariffs, a failure Domingo said was caused by the absence of a local AEC
information campaign.
The problems with agribusiness
The worst case scenario for
the Philippines’ agriculture sector is a slow and painful decline at the hands
of the AEC. This vulnerable sector accounts for over 10% of the Philippines’
GDP and 35% of the country’s workforce.
It’s also the chief source of
the poverty bedeviling the Philippines, which has a poverty incidence of 40%.
The World Bank estimates that about half of the rural population in the
Philippines is poor.
A report by the University of
Asia and the Pacific in 2010 identified agriculture as the main source of
livelihood and income among the poor. It pointed out that developing agriculture
by increasing incomes from land and non-farm jobs will have a tremendous impact
on reducing poverty.
It recommended crafting a
blueprint for the agriculture sector and pushed for increasing non-farm and
off-farm jobs by increasing investments in food processing.
Arsenio Balisacan, NEDA
Director General, said solving the huge underemployment problem in agriculture
is crucial to reducing poverty and achieving “inclusive growth.”
He urged the private sector
to help farmers and other agriculture workers increase demand for their
products.
“Linking agricultural workers
to the supply chain will increase effective demand for agricultural output and,
hopefully, increase returns to their labor. However, we are aware that the
agriculture sector will need to improve the quality and increase the quantity
of its output,” he said.
Balisacan “. . . hopes the
business sector can take on a huge role in this, perhaps through technology,
additional training, equipment or others.”
Hence, the need to develop
agribusiness, both as a means of making Philippine agricultural produce more
competitive in the AEC and in mitigating poverty among farmers.
A turnover of PhP 123 quadrillion
ASEAN agribusiness carries massive
potential economic power and the EU is proof of this. Businesses in the EU
agri-food chain generate a turnover of PhP123 quadrillion (Euro 2.2 trillion)
and provide direct employment to over 33 million Europeans. Taken together, the
European food and drink industry is the largest manufacturing sector in the EU
in terms of turnover, value added and employment.
Schumacher noted that Philippine
agribusiness has a great future if built on successful models like Nestle
Philippines and La Frutera, Inc.
Nestle has a long-running
program that develops rural areas and communities by aiding coffee farmers and
facilitates indirect and direct employment. Its 20-year old agronomy program
provides access to farming technological advances; trains farmers and promotes
sustainable practices.
Based in Maguindanao province,
La Frutera is the Philippines' largest banana exporter. Its employees are
practically all Muslim Filipinos, many of whom formerly fought against the
government. La Frutera is proving that providing jobs, especially in rural
areas, is the direct and sustainable way of alleviating poverty.
In ASEAN, outstanding
regulatory issues are hindering development and growth. Further ASEAN agribusiness
growth can be nurtured by solving issues in the regulatory arena that constrain
development.
Schumacher identified some of
the regulatory issues affecting ASEAN and the Philippines as tariff, taxes and
non-tariff barriers; sanitary and phyto-sanitary standards and technical
standards and product classification rules.
Among vital recommendations
for solving these market access issues include phasing out import tariffs and
non-tariff barriers over time; ensuring that ASEAN member states develop taxes
and regulations that are simple, transparent and fully compliant with rules of
the World Trade Organization and basing technical standards and product
definitions on internationally recognized standards.
In the Philippines,
agribusiness is being held in check by a dearth of locally made mechanized
implements to speed-up production; limited irrigation; expensive fertilizer and
the inability to combine small farms into larger farms to attain economies of
scale through mechanized farming.
Manufacturing needs to resurrect
The debilitated state of
Philippine manufacturing can be traced to a skewed “industrialization” over the
past century that favored import substitution and exports of agricultural and
forestry products having limited value-added. Coupled with high tariffs
protecting factories that sold mostly to the domestic market, this
“industrialization” rendered Philippine manufacturing unfit to compete in
today’s globalized world.
The Philippines also didn’t
develop its potential to be a major exporter and instead became dependent on
remittances for much of its economic growth. Robust exports usually generate
quality jobs in manufacturing and increase direct revenue for the government
that overseas jobs cannot.
Arangkada gave this sober
assessment on the state of manufacturing in a recent report:
“Domestic manufacturing has
never faced more challenges to survival than today, such as high business
costs, low import duties and extensive technical smuggling. As long as
smuggling provides better profits than manufacturers, the economy will be one
of traders and smugglers.”
Compounding these drawbacks is
the absence of a national policy identifying manufacturing as a key component
of economic development. There is also no national industrial master plan while
funding for overseas trade and investment promotions remains puny.
More than a year
ago, the Department of Trade and Industry asked industry sectors to prepare
roadmaps to growth. Almost 40 were submitted, according to sources. These
roadmaps, however, have not been made public and the Philippine Institute of
Development Studies (PIDS), the government think tank, is said to be still
drafting a strategy on the basis of these roadmaps.
The “Arangkada”
team recently held focus group discussions on manufacturing, trying to zero in
on five industries with the potential of employing a large number of people and
five issues per industry that need to be addressed to make the selected
industries grow.
The identified
industries are garments/footwear; food/ agriculture; shipbuilding; electronics
and automotive/aviation. Some of the issues hindering the growth of these
industries are the inflexible Labor Code; unrealistic minimum wages; the need for
domestic-market oriented industrial zones (managed by the Philippine Export
Zone Authority); inadequate infrastructure and the excessively high cost of
power and domestic transportation.
Despite manufacturing’s
weakness, Balisacan said that the country must continue planting the seeds of a
structural transformation of the economy to make it more industry and
investment-led.
Infrastructure is the key
Former Budget Secretary
Benjamin Diokno is pushing for more spending in public infrastructure to revive
the manufacturing sector, which plays a key role in job creation.
"The message is clear.
The best way to prepare for ASEAN integration is by making the Philippines
stronger domestically. We have to ramp-up public infrastructure spending,"
Diokno said.
Diokno emphasized that the
cost of financing is at historic lows. If projects are rolled out now, the
Philippines can build more for cheaper.
"We will be stronger and
ready to march forward with the rest of the world. That’s when we will benefit
fully from ASEAN integration.”
To the Philippines’
advantage, public spending on infrastructure by the Aquino Administration is
now robust, overturning a contraction in 2011. Spending surged in the first
four months of this year to P75.2 billion, up a huge 45% from P52 billion year-on-year.
Infrastructure spending from
January to April went mostly to covered road projects of the Department of
Public Works and Highways; the construction of irrigation systems, classrooms and
other educational facilities and hospitals and health centers.
“Through our budget reforms
and, consequently, the improved quality of public spending, we were able to
fill out crucial resource-and-supply gaps that may have affected the country’s
fast-growing industries,” said Budget Secretary Florencio Abad.
The higher spending is
closing the Philippines’ gap with other AEC member states. The Philippines last
year invested 3% of its gross domestic product in infrastructure compared to
the previous 2%. Average government spending on infrastructure in Southeast
Asia, however, stands at 5%.
The aggressive infrastructure
investments could help eliminate the poor infrastructure that remains one of
the major causes of the Philippines’ inability to draw more foreign direct
investments of FDIs.
The
Philippines received a trickle of FDIs from 2001 to 2011. In these 11 years,
only US$16.7 billion in FDIs flowed into the Philippines. In contrast, Thailand
took in US$77.8 billion; Indonesia, US$64.7 billion; Malaysia, US$58.2 billion
and Vietnam, US$49.4 billion.
In
2011 alone, the first full year of the Aquino administration, total FDI inflows
were a miniscule US$1.3 billion. In this same year, Indonesia attracted US$18.2
billion; Malaysia, US$16.6 billion; Thailand, US$9.6 billion and Vietnam,
US$7.4 billion.
The Asian Development Bank
said the Philippines needs to target infrastructure spending equivalent to 7%
or 8% of GDP to compete head-to-head against its neighbors in cornering FDIs. The
World Bank suggested the Philippines increase its public infrastructure
spending gradually, to reach 5% of GDP by 2016.
Like the European Economic
Community on which it’s modeled, the ASEAN Economic Community is facing a
win-win game—and so is the Philippines. It’s now a matter of the Aquino
administration seeing through the remaining tough economic and political
reforms that will ensure the Philippines win-wins in the face of entrenched
monopolies; misguided nationalism and political meddling.
The only other alternative to
the Win-win game now being played is the more lethal Zero sum game—and this is
a game the Philippines can’t win, and shouldn’t be playing.
