SECRETARY ARSENIO M. BALISACAN
Economic Planning Secretary and NEDA Director-General
ASEAN INTEGRATION AND THE PHILIPPINE ECONOMY: CHANGES AND CHALLENGES IN THE COMING DECADE
5 December 2014, 9:00 AM
InterContinental Hotel, Makati City
Ladies and gentlemen, good morning.
First of all, I would like to thank the Angara Centre for Law and Economics for inviting me here today to talk about the forthcoming ASEAN Economic Community 2015, the upcoming changes it will bring to our country, as well as the next steps necessary to ensure that we maximize the benefits from this huge undertaking.
Indeed, the clock is ticking. Almost a year from now, the vision of an ASEAN Economic Community or AEC will come to fruition. This milestone marks the realization of deeper economic integration between ASEAN Member Countries that was boldly envisioned more than a decade ago.
The envisioned ASEAN Economic Community rests on four main pillars: the establishment of a single market and production base; greater competition within the region; equitable development for all; and enhanced integration into the global economy.
Needless to say, the ASEAN has come a long way to realizing these goals especially in the past decade. As early as January 2010, more than 99% of tariff lines between ASEAN-6 Member Countries have been brought down to zero in line with the goals of the ASEAN Free Trade Area or AFTA. Efforts are underway to hasten the elimination of non-tariff barriers. And the ASEAN has also forged free trade agreements with key global players—namely China, India, Japan, South Korea, Australia, and New Zealand—to bolster ASEAN’s position in the international stage.
The Philippines in particular is in a strong and enviable position to benefit from upcoming changes in the ASEAN regional landscape. To begin with, the Philippines has been on a higher growth trajectory since the start of the current decade with an average real GDP growth of 6.3% from 2010 to 2013, even reaching 7.2% in 2013. In fact, growth from 2010 to 2013 is the highest 4-year average growth since 1979. Our rapid growth in recent years is also the second-highest in Asia, next only to that of China.
An even closer look at our recent growth will show that structural changes are occurring in the economy, in particular the growing importance of investment spending and the industry sector. On the demand side, investment is becoming a more important contributor to GDP growth, explaining more than half of growth in 2013 alone. On the supply side, the industry sector (especially manufacturing) is responsible for a growing portion of economic growth vis-à-vis the agriculture and services sectors.
The changing composition of growth has been accompanied by sound and stable macroeconomic fundamentals. Inflation has been manageable and within target in the last five years despite recent upward pressures; there is ample liquidity in the credit markets; and the banking system is sound and stable as evidenced by strong capitalization and solid asset growth. Most notably, our external position has made our economy more robust and less vulnerable to global volatilities: our current account surplus has been supported by resilient remittances, strong BPO earnings, and rising tourism receipts.
The robustness of the economy has been supported by a wider fiscal space owing to recent reforms in taxation and spending. The fiscal deficit has been modest and declining as a percentage of GDP. With the enactment of the Sin Tax Law, tobacco and alcohol excise taxes as a percent of GDP have shot up in 2013 to levels not seen since before the current millennium, boosting revenue growth in 2013. Reforms in the Bureau of Customs (including personnel movements and systems reviews) have also improved its year-on-year cash collections by almost 20% in January to June 2014. We have also increased our reliance on domestic financing sources to nearly 90% of total sources in 2013 in an effort to improve debt sustainability and reduce vulnerability from external shocks. All in all, this wider fiscal space has allowed the government to lower revenue allocations to debt servicing and increase spending on social services like education, health, and social protection.
The resurgence of the Philippine economy in recent years has led to an unprecedented level of confidence among the international business community. Long-term sovereign credit ratings by Moody’s, Standard and Poor’s, and Fitch Ratings have all been upgraded to investment grade, leading to a tightening of credit default swap levels vis-à-vis Thailand and Indonesia; now the Philippines is among the most-trusted by investors in the region alongside Malaysia. This boost in investor confidence has been accompanied by improvements in our rankings in terms of global competitiveness and ease of doing business.
Indeed, with sound fundamentals and governance reforms, the Philippines has come a long way from being the “Sick Man of Asia”, and seems poised to benefit greatly from greater regional integration through AEC. Despite these gains, however, much more remains to be done to make growth more inclusive. In particular, we need to translate high growth into faster poverty reduction and higher incomes for the bottom 40% of the population, in line with the World Bank’s notion of “shared prosperity.”
Poverty incidence, or the proportion of the population deemed poor, has declined from 34.4% in 1991 to 25.2% in 2012, with much progress, based on the first-semester nationally representative surveys, recorded between 2012 and 2013. Admittedly, the rate of poverty reduction in the country has been slow relative to our regional neighbors, and data show that per-capita income growth for the bottom 40% of the population from 2002 to 2012 has been lagging as well, even to Cambodia, China, and Vietnam. This was especially so during the first decade of the current millennium. However, World Bank  estimates suggest that it is possible to meet the updated PDP (2011-2016) goal of reducing poverty to 18-20% by 2016 if current responses of poverty reduction to income growth are maintained.
Furthermore, even as employment creation has gained traction in recent years, the unemployment rate in the country is still high at around 7%, way above the ASEAN average of 3-4%. Almost a fifth of the work force is underemployed, even as the share of wage and salaried workers in total employment, which provides a broad indicator of the quality of employment, has been rising albeit slowly. A serious skills mismatch in the labor market hinders the creation of high-quality jobs, as manifested in the very high unemployment rate among college graduates and young members of the labor force. Moreover, with the impending arrival of a “demographic sweet spot” (where an unprecedented fraction of the population will be of working age, coupled with declining fertility rates), the generation of high-quality and well-paying jobs for the growing work force may pose even more of a challenge in the coming years.
Taken together, high poverty and unemployment threaten to undermine the sustainability of economic growth we have enjoyed in recent times. Along this line, the government is continuously enhancing its efforts to expand employment opportunities and social development programs. Recent economic history (and the experiences of neighboring China, Thailand, Vietnam, and Indonesia) suggests that sustaining progress in poverty reduction requires nothing less than robust structural transformation, where the economy shifts from low-productivity to high-productivity areas of activity. This typically involves rapid expansion of high-quality employment opportunities outside of agriculture. A vibrant and efficient agricultural sector facilitates this transformation. In order to bring this about, the Philippines needs to implement a number of key reforms to address major constraints. Although some are decidedly formidable, there are numerous low-hanging fruits that can be swiftly put into action.
Two critical areas of policy reform concern investments and infrastructure. There have been modest improvements in capital formation in the Philippines, but it remains one of the lowest in the ASEAN region, as measured by gross capital formation as a percent of GDP. Where domestic capital is lacking, many of our neighbors embrace foreign direct investment (FDI). However, FDI net inflows to the Philippines, although growing remarkably in recent years, are also some of the weakest in the ASEAN, owing in no small measure to dated protectionist policies. At a time of growing inter-regional and intra-industry trade within Asia and the ASEAN, protectionist policies can prove to be “self-defeating”. Studies also suggest a two-way relationship between FDIs and economic growth, which leads us to believe that relaxing some of the restrictive economic policies, including some provisions in fundamental laws, can help boost investment spending in the country and foster higher growth.
Bottlenecks in infrastructure spending also need to be aggressively addressed. While public infrastructure spending as a percent of GDP has been rising in recent years, there is a continuous need for infrastructure to keep up with rising demands in our fast-growing economy. Congestion in our roads, ports, airports, and seaports derail the pace of economic activity (costing us billions of pesos per day) and global rankings indicate that the quality of our infrastructure continues to lag behind our ASEAN counterparts. To this end, transport roadmaps in Metro Manila and neighboring regions, as well as logistics infrastructure roadmaps for Visayas and Mindanao, have been put in place. Strengthening the government’s public-private partnership or PPP program—by streamlining pertinent rules and fast-tracking their implementation—can further bridge remaining public infrastructure gaps.
A number of other equally important legislative measures also need to be pursued:
• For instance, the passage of the proposed Competition Law (now pending in Congress) and amendments to the cabotage law can help diffuse market power and concentration in a spectrum of key industries, including manufacturing and logistics. This will also ensure that small and medium enterprises (SMEs) are competitive in preparation for the fulfillment of AEC.
• Reforming the tax system and raising tax efforts to levels at par with our regional peers is also crucial to sustaining fast-paced growth. Some areas that need further institutional reform include: improving the tax effort among the self-employed and corporations; curbing smuggling; improving the current mining fiscal regime; and rationalizing fiscal incentives.
• The passage of the Bangsamoro Basic Law will also mark a crucial window of opportunity by which just and lasting peace in Mindanao can be realized alongside inclusive and sustainable growth. While the Bangsamoro Development Plan has already been put in place, much more work needs to be done to ensure that the foundations of the newfound Bangsamoro economy are strong and stable.
Recognizing the growing importance and relevance of natural disasters, climate change, and energy stability is also imperative. The Philippines is deemed the most disaster-prone country in the ASEAN and the most at-risk from climate change. As demonstrated by the onset of the Visayan earthquakes and Typhoon Haiyan/Yolanda last year, a single event can reverse years of progress in growth and development in poorer areas of the country. Also, continual energy shortages in Mindanao (and the prospect of nationwide shortages in 2015) similarly threaten the pace of growth and development. Hence, there is an urgent need to fortify our institutional preparedness to disaster risks via investments in appropriate technologies, the more prevalent use of geohazard maps, and the expansion of social safety net programs. Proper management of energy supply and demand through sound policy is also necessary to support growth in key sectors like manufacturing and tourism.
Finally, efforts to promote human capital formation and employment creation need to be strengthened. There is no more effective solution to high poverty than to increase investments in areas that could generate remunerative and high-quality jobs especially for low-skilled workers. With the lack of domestic jobs, the AEC could allow an expansion of employment opportunities for our people in the rest of ASEAN, but this requires harmonizing our education and labor standards with our regional neighbors. Skilled workers and professionals in particular stand to gain the most from the envisioned “single ASEAN labor market”, but still there is a need to watch out for “brain drain” effects, especially at a time when remittances are becoming less significant as a percent of GDP.
Aside from massive job creation, there is a need to further increase social protection programs especially for the vulnerable segments of the population. This can be done by continuing the expansion of healthcare coverage, basic education, and socialized housing. The country’s CCT program—which has grown in budget by more than 500% since 2010 and now covers more than 4 million beneficiary households from only 630,000 households in 2009—is already one of the largest in the world and has demonstrated early gains in improving human capital outcomes of the poor. The recently instituted K to 12 Basic Education Program has also jumpstarted comprehensive reforms in the education sector in the hope of improving the capabilities and competitiveness of our future work force and abating the skills mismatch in the labor market.
In sum, AEC is all about deeper economic integration with our regional neighbors, in view of even deeper integration for the Borderless ASEAN Community by 2030. While several reforms have been instituted in the Philippines putting it in a favorable position to benefit from AEC, many developmental constraints still need to be addressed to maximize our gains from AEC, especially in opening up investments, accelerating infrastructure development, and generating high-quality jobs. While low-hanging fruits are within reach, some policy reforms are much easier said than done. In truth, many of these crucial reforms should have been done decades ago, but the AEC 2015 is a welcome deadline highlighting their importance and adding pressure to their urgency. Once these policies are in place, the AEC can only prove to amplify the country’s recent economic progress and improve its prospects toward higher, more inclusive, and more sustainable growth in the long term.
On that note, I end my speech. Thank you very much for your kind attention.