Multipliers

First it was the so-called rice crisis which proved to be no crisis at all but rather an increase in prices as a result of global commodity trends. Then miraculously the rice issue disappeared from the front pages of the newspapers to make way for an attack on the largest electrical power distribution company in the Philippines over the high price of electricity. The issue of high energy prices has been with us for some time but the Manila Electric Rail and Light Company—or Meralco as it is better known—is a favoured target of politicians, especially as its majority shareholding is owned by a well-known family that also controls the country's foremost media empire and has been a thorn in the side of the present administration.

On this occasion, it was the head of a government insurance corporation (who sits on the Meralco board as a government representative, since government—through its agencies—retains a minority shareholding) who was making all the noise and declaring he would unseat the incumbent board, take over the company and lower power rates in the process. Brushed aside was the obvious question—what does an insurance executive know about the power sector? He failed of course but in all the bluster and uncertainty, the damage was done. Once again the Philippines hit the press in a manner that could only strike fear into the hearts of potential investors. The problem has not gone away and the bluster continues. It makes good headlines but scary for the investor.

At the AMCHAM energy briefing last week, Energy Secretary Angie Reyes defended the actions of Winston Garcia in taking on the Meralco board. "It was in the interests of transparency" he said. Yes, right; in the same manner as ramming an APV through the front door of a six-star Makati hotel was in the interests of peace and order. That may indeed have been the case, but the message that was sent out to the world via the media gave an entirely different perception.

The two issues or power and rice are worlds apart of course except in two aspects. Firstly, they got the bad press over corruption in high places off the front pages of the country's newspapers and secondly, they provided the opportunity for President Arroyo to be seen as a "take charge" president. The President gives a directive for government to solve the rice problem and, as if by magic, the following day there is an announcement that the problem has been solved (albeit at a higher purchase price to consumers). In the case of the energy sector, the president issues a directive to bring down energy prices and within a short space of time, her Energy Secretary, Angelo Reyes, announces that the government is on top of the situation and really all it wants from Meralco is transparency and good governance. This brings us to the second aspect: in each case President Arroyo came across as the person who saved the day—defending the rights of the downtrodden masa.

Now we are seeing the resurgence of another red herring—free texting for the masa, as if this country's workers do not have enough distractions at their place of work. Populism is alive and well and living in the Philippines. Forget about workplace productivity. Come to the Philippines and text for free is the message.

To many, it looks as though President Arroyo is hitting the campaign trail with an eye on the 2010 elections but then of course, President Arroyo has not been able to change the Constitution and cannot possibly run in 2010—or can she?

It was actually a "good news month" in more positive ways. Despite all the problems of the global economy, growth in GDP during the first quarter of 2008 at least came in within the range of 5.2 to 6.2 percent in the first quarter of the year. In the first quarter, the economy saw a 5.2 percent increase in GDP. This was lower than last year, as high fuel and food prices cut into consumer spending during the period but was better than many had expected. The country is far away from recession and is still hoping for a full year growth target of around five percent or more.

The other piece of good news came in the form of a jump in the country's competitiveness as measured by the annual survey conducted by the Switzerland-based Institute for Management and Development (IMD). From 45^th spot in 2007, the Philippines climbed five notches to 40^th place this year on the basis of 331 criteria spanning four major areas identified by IMD and its partners. The United States and Singapore topped the index.

Out of a possible score of 100, the Philippines was given this year a score of 50.478 in 2008, higher than the previous year's 47.163 points. The Philippines exhibited better scores this year, in all the four major indices, moving up to 42^nd from 45^th in economic performance. In terms of government efficiency, it improved its ranking to 41^st from 47^th; business efficiency, 31^st from 39^th; and infrastructure, 48^th from 51^st. At a briefing in Manila following the announcement, Dr. Federico Macaranas, executive director of the Asian Institute of Management (AIM) Policy Centre, which is the local partner of IMD, linked the country's improvement in ranking to the country's 7.3 percent gross domestic product (GDP) growth last year. In fact the Philippines topped the index in terms of cost of living. Manila has the lowest cost of expatriate living among all 55 cities included in the survey (and benchmarked against New York). The index confirmed what local expatriate executives claim to have known for some time—that the Philippines is actually an undiscovered secret when it comes to quality of executive living. Now, if only the business environment could match the living environment, this country would really have it made.

Sadly of course, life may be good for those at the top of the pyramid but that is not true for the population in general and despite the good news stories, life remains hard for the majority of the people of this country. Now with higher oil prices and food prices, the cost of living is again rising—last month it reached 8.3 percent and is likely to go higher.

There is already evidence that the number of poor and malnourished is again on the rise.

In this regard we should note that a new study by the Asian Development Bank (ADB) has warned that the recent surge in food prices—an estimated 10 percent increase—will drag a further 2.3 million Filipinos or more into poverty. "During the first quarter of 2008, the 9.45 percent decline in the average standard of living was solely due to food price increases. Likewise, the 50.2 percent increase in the severity of poverty in the same period was attributable to the increase in food prices," the study said.

The study also estimated that a 10 percent increase in non-food prices will drive an additional 1.7 million people into poverty—that is 4 million in total or close to another 5 percent of the population. In fact that threshold has already been crossed. This is in a country where already some 30 percent of the population are below an official poverty line which is already absurdly low. According to the official definition a person is below the poverty line if annual per capita income is less than $300 per year—less than the $1 per day criterion used by the United Nations. Even so under this definition more than 4.6 million families subsist below this level. Now there are likely to be more.

Here is the Gordian knot that afflicts the country. With interest payments on debt now below 100 percent of the budget, supposedly more money becomes available for spending on much needed physical infrastructure as well as social infrastructure—principally education, health and nutrition. But high commodity prices are likely to negate these gains. Already the balancing of the government books, that was to have happened this year has been pushed out to 2010 or beyond. The poor still get poorer and the rich still get richer. What this country desperately needs—now more than ever—is investment; instead we get the bread and the circuses. Can Mrs. Arroyo, like Alexander the Great, cut her particular Gordian knot?

What happened to the $10 billion in investment that is supposed to come in from mining? Despite the rhetoric it appears that corrupt local officials still have their way, conniving with Chinese "investors" and others who invest in small-scale mining (which is anything but small scale) and who ship out the country's mineral wealth without permits and without a centavo being paid to the national or provincial governments (in contrast to the provincial governors, mayors and barangay captains who are doing very nicely thank you very much.) In consequence, large-scale investors remain cautious and are starting to look elsewhere for their returns.

Nongovernmental organizations such as Oxfam that continue their tirade against international mining interests are either entirely gullible or in cahoots with those who would defraud the people of the Philippines.

The mineral wealth of the Philippines has been estimated at more than $840 billion. If "exploited" in the proper way, with an excise tax of 2 percent being paid to government that is $16.8 billion in royalty payments alone of which $6.7 billion would be paid to local government units. Plus a further one percent in royalties to indigenous communities—$84 billion. Now those numbers would start to make a difference.

But if local interests have their way, this money will go to the pockets of illegal miners and the local officials in bed with them. The national government and the communities will get nothing.

But the problem goes well beyond mining and appears to pervade many aspects of economic life. And as was commented on at a foreign chamber briefing last week, no longer do people talk about percentages when it comes to government projects (especially those funded by China under so-called "concessional loans), instead the talk now is of "multipliers." "Moderate their greed" was the instruction given by one senior public official to his consultant when the escalated cost of the now defunct national broadband network came to light. The multiplier in that case was assumed to be the cost of delivering a win to the ruling party in the 2007 elections. But that is not an isolated case. Sadly it seems, overpricing has become rampant to the degree of obscenity both in national projects and also in provincial ones where the price of a government permit is an overblown contract to some provincial official that is a multiplier of the true cost. ZTE was no isolated case. More will come to light.

Until there is sign of the "obscene greed" being reined in by President Arroyo, we will not even be "muddling through." Instead, the Philippines will get ever closer to becoming the basket case of Asia. It does not have to be that way.

It’s all the fault of the British

Newspaper columnist Conrado de Quiros (Philippine Daily Inquirer, May 15 2008) takes up the issue of "the Church" and "Gays." From this he goes onto a discussion of the attitude of the "Church" towards marriage and sex and the teaching that "Marriage and sex… are solely for reproduction."

The act of being gay says the "Church" is not sinful rather it is the acting out of a same sex relationship that is, because by definition such a relationship is outside of marriage. The answer he says (I assume tongue in cheek) is to "shop around for another religion."

Mr. de Quiros always has something interesting to say although oftentimes I find him a tad too radical in his thinking; but this time he struck a chord with me. What struck me the most as a foreigner living in the Philippines is the manner in which the Roman Catholic Church in this country has been able to masterfully appropriate the brand. Christianity for most Filipinos is synonymous with being a Roman Catholic. Any other form of Christianity and celebration of the Eucharist is an "aberration" that possibly ranks along with the practice of sodomy in the eyes of many. How sad that I cannot break bread with my fellow Rotarians with whom I enjoy fellowship each week. My Church allows it but theirs does not.

It is a great pity because it confines the Philippines to a pre-reformation time warp of its own making. As a Christian - but not a Roman Catholic Christian - the "Church" in the Philippines comes across as being firmly rooted in the sixteenth century unlike the Roman Catholic Church in other places which has moved forward and accommodated others while still retaining its own core values. How else can you explain the attitude of the "Church" here towards sex and to human relationships? Indeed as Mr. de Quiros says "whatever happened to love? Whatever happened to ecstasy?" Well Sir, both are alive and well but it seems many in the Philippines—even heterosexuals—have to enjoy closet love and closet ecstasy because the "apple pie" type seems to be the only kind naively allowed by the powers that be.What a pity! What a travesty! Where is the celebration of the joy of life that sexual experience can bring?

It reminds me of another item from the same newspaper, this time a cartoon. The cartoon was written in Tagalog so I may have missed some of the salient points but the gist of the storyboard was an academic claiming that in order to move forward and get the country out of poverty, we needed to practice population control in this country. To which poor old Juan dela Cruz replied to the effect "No, the problem is corruption." So easy to ignore another inconvenient truth and deflect reason when of course the Philippines needs to make progress on both population control AND corruption.

Well Mr. de Quiros, the Anglican Church (Church of England or Episcopalian in the United States) is both Catholic and Protestant at the same time.  To many it offers the best of both worlds: Catholic forms of worship but tempered with a level of rationalism that comes from knowledge and understanding. It is a small church in the Philippines but claims adherence of more than 77 million people globally. After Roman Catholicism and Eastern Orthodox it is the largest branch of the Christian faith. Of course, the Roman Catholic Church does not accept the view that it is a "branch" of Christianity at all but rather that adherence to the Roman tradition defines the Christian faith. To those outside, this is a dangerous proposition and shackles any attempt at reasoned debate. "I am right and you are wrong" has never been a good means of handling dissenting opinions. People, even churches, that cannot accept that they may be not be the sole repository of truth have never moved humanity forward. Often they have held us back.

Anglicanism follows many of the rites of the Roman Church but has also embraced many of the reforms of the age of enlightenment, most notably that both faith and works are the pathway to salvation and that while accepting the "sufficiency of scripture," scripture has to be interpreted in the light of reason and knowledge. Mankind moves forward; so does our understanding. Actually the Vatican embraces a very similar approach nowadays to some issues of faith but from the silence of many in "the Church" on the social ills of this country you would never know it. "Sin all you like during the week just as long as you attend Mass on a Sunday" appears to inform the approach of many (although I would be the first to admit, not all. I have many wonderful Catholic friends). No wonder there is little incentive to change attitudes. To those who have lived outside of the Philippines, some of the practices of the "Church" do appear to fly in the face of rationalism and at times borders on irresponsibility.

Yes, the Anglican Church does have women priests, even women bishops and—shock and horror—in the United States it has also ordained a gay bishop. Gay relationships are accepted. So what? Perhaps to some this may be overly progressive but it is as well to remember that it was the Anglican Church that has time and again taken the lead in defining social justice, be it the abolition of the slave trade, the abolition of child labour, the right to a decent wage and working conditions (a century before the ILO took up the same issue) and the universal right to education even among the very poor. More recently it was Archbishop Desmond Tutu, the Anglican Archbishop of Capetown and Primate of South Africa who was instrumental in leading the fight against apartheid. Time and again, in the U.K. and America it was the Anglican Church which directly as a Church and indirectly through its adherents, that influenced the course of participatory democracy.

I mean no disrespect to my Filipino friends, but where was their "Church" on these issues? Where is their "Church" today? Yes, Mr. de Quiros, social justice seems to be of little concern to many clerics in the Philippines. "You cannot be pro-mining and also a Christian" rants one bishop. What poppycock. Does the "Church" have a vested interest in keeping people in ignorance?

What happened to the spirit of Oscar Romero, the late Roman Catholic Archbishop of El Salvador who was assassinated in 1980 for his social stand against oppression of the poor by the right-wing government of the day? Who fights for social justice in the Philippines? Sadly too often, in spite of its infallibility, the "Church" has been found on the wrong side of history.

Back in 1762 a British invasion force briefly occupied Manila during the European "Seven Years War" which Britain had entered earlier that year with a declaration of war on Spain. In 1763, the Treaty of Paris ended the war although bereft of internet and cell phones, the news did not reach Manila until the following year. The British, so the history books tell us, were farewelled with much banqueting and fanfare by the Spanish. It was not until the arrival of the Americans that the Anglican Church gained a toehold in the Philippines with missionary work among the un-Christianized mountain people of Northern Luzon. In the Philippines today it remains regarded as a church of the poor and the marginalized. 

Had the British decided to stay back in 1764 and, with an enlightened and reformist church following them, the story of this country might have been written somewhat differently. You can blame the present state of affairs on the British. 

Mr. de Quiros' article may be found here.

http://opinion.inquirer.net/inquireropinion/columns/view/20080515-136597/Natural

The consequence of consequences

In dealing with Climate Change, adaptation as well as mitigation is needed in order to protect human activity and develop social resilience

Our Executive Forum meeting last month (April 2008) looked at the issue of climate change. The record of that meeting has already been circulated to members. Our meeting was followed in quick succession by a second meeting on a similar subject hosted this time by the Asian Institute of Management as part of its globalization lecture series.

That meeting gave an entirely different—but equally valid—perspective, to the issues confronting humankind.

Whereas our own meeting took the traditional path and looked at climate change from the standpoint of mitigation efforts needed to slow, and eventually reverse, the rate at which anthropogenic greenhouse gas emissions are changing climate patterns, the AIM meeting took a rather more radical approach and looked at adaptive patterns of behaviour needed now in order to address change already upon us. It was an interesting contrast and in the interest of providing a holistic and balanced perspective to the issue, needs to be reported.

The A.I.M. meeting, which was sponsored by the Konrad Adenauer Institute, took as its own reference point the report "A climate of conflict—the links between climate change, peace and war" produced by London-based think-tank, International Alert (IA). IA is an independent peace-building organization that works to lay the foundations of lasting peace and security in communities affected by violent conflict. According to its website the organization works "…in over 20 countries and territories around the world, both directly with people affected by violent conflict as well as at government, EU and UN levels to shape both policy and practice in building sustainable peace."

The proposition examined was that climate change was already upon us and that the physical consequences of these changes have started to unfold. The consequences will be both physical—in terms of more extreme weather patterns, melting glaciers and shorter growing seasons, and social—in that the added uncertainty will heighten the risks of conflict and political instability, both within communities as between the "haves" and "have nots" and internationally between those responsible for climate change and those suffering the consequences. Change will come in the form of both sudden shocks as well as slow and incremental shifts but one thing is certain, the past cannot be used to predict the future.

Hardest hit will be people living in poverty in under-developed and unstable states and those under poor governance. Extreme weather events will cause drought, floods, reduce land fertility, create drastic changes to the crop output, rising sea levels, famine, displacement of communities, disease and pestilence. And these are just the start. Climate change has the potential to become a "threat multiplier" if the consequences are not addressed through appropriate policy and attitudinal shifts.

Thus alongside mitigation strategies (which are now the focus of growing political attention) we also need adaptive strategies to allow us to survive as cohesive societies. Adaptation has so far failed to attract serious advocacy, yet the need is the more urgent one. The key risks to be addressed through adaptation include (a) increased political instability, (b) economic weakness, (c) food insecurity and (d) demographic shifts.

This proposition is of particular importance to the Philippines as it is one of 46 countries—home to 2.7 billion people—considered to be most at risk. A total of twenty provinces in the Philippines are vulnerable to a one-metre rise in sea level and these are in those regions with both the highest poverty incidence and greatest food insecurity. Naga City in Albay province would be among the first to suffer and would all but disappear with a one-metre rise in sea-level.

The IA report puts forward the proposition that climate change needs to be treated as an opportunity and become the occasion for enhanced interational, national and local cooperation. It has to engage governments, the private sector and community organizations within the process. Although adaptation is starting to feature on the international agenda, it is mitigation that takes the lion's share of the headlines and the focus of funding and policy initiatives. A more balanced approach is necessary.

Two central motives should drive the international debate on adaptation: the need to maintain international peace and security as well as support for sustainable development. With cataclysmic events within the bounds of possibility, demographic shifts may be sudden and dramatic—remember the Vietnamese boat people of the 1970s? That sudden demograhic shift took more than a decade to address.

But while there is a need to direct international attention towards the adaptation aspects of climate change, the community is the vital level for action to take hold since at the end of the day; adaptation and conflict resolution has to take place within the communities themselves. Elsewhere it is called "stakeholder engagement." In this case, most communities are not aware that they are yet stakeholders.

International companies operating in at-risk countries have both an interest and a responsibility in safeguarding their investments by working together with governments and communities on climate adaptation. Business practices need to be climate sensitive. This is not a problem to be addressed in the future but needs to be integrated into corporate planning as of now—both as a contingency and as a further aspect of community engagement.

The key take-away from this meeting was that that there is a real and immediate risk that climate change will compound the propensity for violent conflict and that the Philippines is especially vulnerable. It is not poverty alone that drives the risk but the uncertainty and the perceived risk of future insecurity that amplifies current problems.

While the Philippines contributes only one half of one percent to global pollution and is not among those causing global climate change, it is certainly a country that will be among those suffering the most devastating consequences as a result of it.

Any programme—government or private sector—focused on adaptation has to be a bottom-up, rather than a top-down, approach starting at the community level; because community buy-in is essential to the process. A study of conflict dynamics shows this lesson very clearly. Now in dealing with conflict management and resolution, an additional variable needs to be factored into the equation or the risk of ultimate failure is heightened.

As an under-developed country, the Philippines faces an especially high risk of violent conflict created by climate change interacting with and compounding persistent economic, social and political concerns. On the other hand, as one speaker at the meeting noted, the Philippines was also known for its "adaptive" capacity. Sadly, however, the capacity for adaptation in this particular case is constrained by a number of factors: weak institutions and limited technology, poor resource bases and inequality of income. For government to address these problems, it will require some long-term strategic planning that goes beyond the next election. As Congress starts to debate Charter Change yet again, that may be too much to hope for.

Clearly there is opportunity here for the private sector and especially those which operate in rural areas to include these issues in their own planning and community consultations. Government is unlikely to take the lead but the issues are too important to ignore.

The times they are a changin’

Come gather 'round people
Wherever you roam
And admit that the waters
Around you have grown
And accept it that soon
You'll be drenched to the bone.
If your time to you
Is worth savin'
Then you better start swimmin'
Or you'll sink like a stone
For the times they are a-changin'.

Bob Dylan on climate change
1964

Times are tough and by all accounts they are becoming more so. We read about it every day in the press now and, thankfully for Malacañang, people are becoming more concerned over rice, oil and the prospects of a US recession than they are about the latest scandal to hit government. This is a pity really because it makes reform,or the groping towards reform, even less likely than it was before. This can only lead the country into a tailspin.

Finance ministers from around the world met last weekend to grapple with the deepening financial crisis that started in the United States but which is now spreading like a virus to the rest of the world. Forget the 1997 Asian meltdown; the looming crisis has been described as "the biggest threat to the global economy since the Great Depression."

The latest US employment data suggests a labour market that is rapidly deteriorating. This is putting further pressure on the US housing market which in turn is facing a credit crunch. The problems of the US housing sector are now being felt more widely. The problem has grown beyond the US sub-prime market and—in part because some central bankers are responding to the weakening US dollar by raising interest rates in an effort to avoid inflation—now has global implications with house prices receding in many markets. The US dollar continues to slide putting additional pressures on those countries who have tied their own currency to the greenback.

Both the Economist Intelligence Unit as well as the IMF have this past week reassessed their global growth forecasts for this year and next. Both come up with very similar numbers. The IMF now sees world growth this year at 3.7 percent and at 3.8 percent in 2009. The EIU forecast is 3.7 percent this year rising to 3.9 percent next year. (Both are at Purchasing Power Parity rates although assumptions may vary.)

The IMF believes that there is a "25 percent chance that global growth could fall below 3 percent this year—equivalent to a global recession." This is scary stuff. Up until recently we were all expecting slower growth this year but nobody was talking about a global recession.

Both the IMF and the EIU see the chances of a mild recession in the United States as becoming more likely. Indeed the EIU believes it to be a certainty although a slow rebound is expected in 2009. The pace of the rebound will be largely governed by lingering problems in the housing market and balance sheet adjustments of US banks.

Inflation at a decade high

Rising food and energy costs are prime drivers of global inflation at the moment. In developed economies the annual consumer inflation rate is now up at around 3.5 percent while in the emerging economies is has risen to around 6.5 percent (a consequence of the fact that food and fuel prices assume a higher proportion of spending patterns in such markets). Both are trending sharply upwards. Core inflation is not rising as quickly as overall inflation and responses have varied. Central bankers in the US and in the UK are focusing on the risk of recession by cutting interest rates so as to stimulate spending while elsewhere interest rates have been raised in an effort to reduce liquidity and slow the inflation rate. The results are uncertain—remember "stagflation"?

The benign inflation environment of recent years is believed to have come about as a direct consequence of globalization and the transfer of much of the world's manufacturing resources to countries such as China, India, Russia and the former Eastern bloc. But wage rates in these countries are now increasing rapidly and the goods they manufacture for the world market are becoming more expensive adding to the squeeze on consumers and nowhere is this more pronounced than among the poorer sections of society. Globalization as a factor in ensuring a low-inflation growth climate may now be a thing of the past.

Many countries, China and the Philippines included are raising workers base salaries to mitigate the effects of inflation but this itself is inflationary and only protects those in the formal sector (which in the case of the Philippines is only a fraction of the workforce) and only serves to worsen the plight of those in informal employment and who are usually at the bottom of the social pyramid.

Exchange rate volatility

While the US currency continues to show a longer-term decline, financial markets generally are becoming more volatile.

According to a recent G7 communiqué, the Euro has risen more than 17 percent against the US dollar over the past year and is believed to now be overvalued—"no longer in line with economic fundamentals" is how the EC Commissioner for Economic and Monetary Affairs described it recently. This overshoot has already impacted on European exports and contributed to the economic slowdown there.

Part of the currency problem is due to the present current account imbalances—most notably that of China and the Gulf States. And emerging markets are flexing their financial muscle—as the Philippines knows only too well in its recent dealings with China.

A realignment is called for but it will not come about easily. China, the biggest winner so far from recent growth is slowly appreciating the Renminbi but continues to do so at a slow pace and to the chagrin of the United States which pays much of the price for an undervalued Chinese currency.

Food and energy

According to the World Bank, global food prices have increased by 83 percent during the past three months and by 147 percent over the past year. Farm costs are increasing around the world and cost pressures on the agricultural sector are intensifying as fuel and fertilizer costs soar in price.

Rice prices have more than doubled since the beginning of 2008. World Bank President Robert Soellick warned recently that 33 countries—the Philippines and Indonesia among them—were at risk of social upheaval because of rising food prices. Rioting over the rising cost of food, which can account for up to 75 percent of a family budget in the poorest communities, has already broken out in several African countries and in Haiti the president was forced to resign over the food price issue. No wonder Malacañang is taking the rice issue very seriously indeed.

The high price of oil—which this past week broke the $112 per barrel for May 2008 delivery—has been blamed largely on speculators but while speculation is playing a role in the food market too, it is not the primary factor. US policies pushing corn-based ethanol have been singled out for criticism at recent international meetings but this too is only part of the story. Commodity prices are rising generally as populations in emerging markets become more affluent and with the emergence of a middle-class with middle-class appetites. The general consensus is that high food prices will be around for a while. Countries such as Brazil that base their ethanol production on sugar are in a good position to reap the benefit of the changing market condition. Is there a message her for the Philippines?

As several analysts have pointed out the real danger of food scarcity comes from reverse protectionism as countries move to protect their own food reserves by banning or taxing exports. Indonesia, which is experiencing a bumper harvest and is expected to produce 32.63 million metric tons of rice this year (and with a surplus of 1.2 million tons), has said it will ban private commodity traders from exporting Indonesian rice. Indonesia's long-term position remains precarious however, although for the moment it appears to have the situation under control.

Not so in the Philippines which continues to be the world's largest importer of rice due in large part to the short-sightedness of agricultural policies. According to the Bureau of Agricultural Statistics, annual per-capita rice consumption in the Philippines grew by 28 percent to 118.7 kilograms per year in 2006 from 92.53 kg in 1990. That works out to around 11 million tons of rice a year in total. This year local consumer needs will be met by importing 2.2 million tons of rice from neighbouring countries—assuming supplies are available.

Per capita rice consumption is higher in the Philippines than elsewhere in Asia, mainly because of the lack of other dietary alternatives. Rice consumption generally declines as per capita income increases. In Japan the comparable per capita figure is 61 kg; in Taiwan, 48 kg and in South Korea, 79 kg. These numbers put the political importance of rice supply into perspective.

As pointed out in the April 14 2008 issue of the Wall Street Journal, "alone among World Trade Organisation member nations, the Philippines imposed quantitative restrictions on rice imports, implemented by a government monopoly." The result has been domestic rice prices that have been historically around twice the global price while, ironically, local rice farmers have remained among the poorest of the poor. In the highly politicised environment (which will only get worse in the run up to the 2010 presidential election) there is much finger-pointing and stop-gap measures being put in place but no sign of a longer-term strategy.

Climate change

This commentary is about global uncertainties and would be incomplete without a mention of climate change. Climate change remains the wild card in the pack. There is now little doubt that human-induced activities are changing the world's weather patterns and the rate of change is accelerating. Extreme weather events are increasing. Eleven of the twelve warmest years on record (at least insofar as the last two centuries are concerned since records were first kept) have occurred since 1995. In the summer of 2007 the Arctic Ocean had 23 percent less permanent ice cover than it did in September 2005. This not only means rising sea levels but also—because of reduced reflectivity and greater absorptive capacity of sea water compared to ice—the rate of global heating is increasing. A number of scientists believe that the world is close to the "tipping point "if it has not been reached already. (At present rates of decline in the polar ice cap, it will be possible to sail to the North Pole during summer months by 2015.)

The Philippines because of its long coastline and coastal communities as well as because of its location in a typhoon belt is one the countries at greatest risk. More on climate change another time (this subject will be dealt with in our Executive Forum meeting next week) but we point out here that once more the Philippines appears to be ill prepared.

Uncertain times indeed

The Philippine government now concedes that it may have to lower its official gross domestic product (GDP) growth target range (of 6.3 percent to 7.0 percent ) for 2008 though is still hopeful that growth may yet come in at the lower end of the forecast provided remittances continue to grow and support domestic consumption.

But already there is an obvious shallowness in efforts to talk up the economy. While remittances, investments and exports may be increasing in dollar terms (helping the balance of payments data and gross international reserves), in peso terms the reverse is the case. Filipinos are earning less for their exports and remittance income is buying less. Heaven help the country if remittances actually start to decline. The net OFW outflow appears to have been around 370,000 last year compared to twice that number the previous year. This is not a good sign.

The IMF takes a more sober view and assesses domestic growth prospects for the Philippines this year at 5.8 percent and the same for 2009. The Economist Intelligence Unit, its latest country forecast, predicts 5.4 growth this year and 5.5 percent for next. We believe that these numbers are more believable but may yet turn out to be optimistic. The trend of forecasting is clearly downwards.

Even so, the number of people going hungry in the Philippines has increased despite the unprecedented global growth of the past decade which has washed off onto the Philippine economy. If the government could not get it right before, what chance does it have now?

The times they are a changin' indeed. Times are not only getting tough; they are getting downright dangerous.

The mining industry in India starts to be noticed

An article in last week's Wall Street Journal Asia (see: India Unveils Details in New Mining Policy dated April 11) should be a salutary reminder that the Philippines is not the only game in Asia when it comes to country prospectivity and development of the minerals industry. India is certainly playing catch-up—according to reports, only 2.3 percent of the country has been explored for mineral deposits—but suddenly the Philippines may have competition for the investment dollar.

India is not there yet. The intention to develop a new National Mining Policy was foreshadowed in mid-2006 and the draft legislation was approved by India's Cabinet only last month. It still has to face the hurdle of a rambunctious national legislature and easy passage is not a certainty. But the new policy signals a more aggressive approach by India to attracting the investment dollar and, if approved, will likely bring that country into sharper focus.

Mr T. Subbarami Reddy, Union Minister of State for Mines, said at a recent infrastructure conference that the Indian government is looking for fresh annual investment of up to $2 billion as a result of the new policy.

According to reports, this new policy has three major focuses designed to fast-track investment into the mining sector. Firstly, the new policy will allow minerals exploration companies to go direct to the production phase without risk that others will come in and exploit the discoveries made; secondly it will allow exploration companies to sell their mining concessions to others at a profit if they do not wish to carry out the commercialisation themselves and finally, it will permit the auction of rights to minerals discoveries made by publicly funded entities to private sector investors.

India is understood to have substantial reserves of bauxite, iron ore, manganese and gold. In addition the minerals map of India shows deposits of lead and zinc, copper and coal.

In a market where there is growing global demand for metals across the spectrum, these are not necessarily commodities that are in direct export competition with the Philippines; the primary danger could come at the exploration stage with companies attracted by the vast expanse of India that remains untapped so far and the fact that minerals discoveries once located can be exploited or the rights sold to others. Clearly this seems a much better defined concept than the tangle of production sharing or FTAA agreements required of companies operating in the Philippines. At least it may appear so although we would be the first to admit that the devil will be in the detail. The point is that attention of investors may be distracted. There is the added factor that much of the metals production that will be taking place in India will be meeting the domestic demand of the world's second fastest growing economy. Export? Who cares?

Before getting too carried away we should add also that India is not immune from the problems of local governments, environmental lobbyists and insurgents. Mining in India is likely to encounter many of the same troubles faced by the Philippines. But will the Indians prove to be fleeter of foot in solving them?

Secretary Atienza, the present "Philippines mining czar" was in Singapore last week leading the Philippine delegation to the annual Asia Mining Congress and, as expected, he gave an up-beat assessment of the local industry. Between now and 2011, according to Secretary Atienza, the industry is expected to grow five-fold and bring in another $9 billion to the 1.4 billion already invested.

We agree that progress is being made in developing the industry here in the Philippines but the pace of that development remains agonizingly slow. We are told that minerals exports were up by 5.5 percent last year in US dollar terms; but in a situation where the dollar declined against the peso by more than 15 percent, that is hardly much of an accomplishment?

And if there is a shortage of industry specialists now, how will mining companies cope if the industry is five times the size? Nine billion dollars within the next two to three years? Given the present track record, we doubt it.

Indeed, with financial problems in the global economy becoming more serious, the investment shine may already be starting to fade. If Mr. Atienza is serious about bringing in the investment he has promised then now more than ever "time is of the essence."

Mulcting motorists (revised blog)

Local governments argue over traffic ticketing—but read between the lines

 

It seems simple in theory; a single traffic and vehicular enforcement system for Metro Manila roads and to be implemented by the Metro Manila Development Authority (MMDA). As the situation is now, each "city" within the greater Manila metropolitan area sets its own rules and enforcement procedures. Executive Order 712 issued by President Arroyo on March 11, the same day as a one-day transport strike that crippled the national capital, was intended to resolve this problem by making the MDDA the agency responsible—but as is so often the case, the local mayors cannot agree.

Republic Act 7924 which provides the mandate for operation of the MMDA states that the agency "will install and administer a single ticketing system, fix, impose and collect fines and penalties for all kinds of violations of traffic regulations, whether moving or non-moving." However the Supreme Court has ruled that the MMDA can only enforce traffic laws or regulations when given the power to do so by local government units involved. So far, four of the cities that make up the greater Metro Manila area are opposing the scheme. Those opposed are Makati, San Juan, Navotos and Pasay City, each of which wishes to continue to issue their own regulations and set their own standards for traffic violations.

This can lead to absurd situations in that vehicles that are perfectly legal in one metro jurisdiction can be illegal in another. Protective number plate covers—for example—is illegal in Makati even those affixed to a vehicle at the factory prior to delivery. Yet so-called "vanity plates" (special plates such as "ASEAN SUMMIT" that cover and disguise the real licence plate number are tolerated.

As of the time of writing an interim compromise appears to have been reached whereby, according to MMDA Chair, Bayani Fernando, MMDA will enforce laws on national roads while local roads will continue to come under the supervision of local mayors. The new scheme, supposedly went into force on Saturday March 29. In the meantime a "technical working group" will seek to thrash out the differences.

On the surface this issue is about a logical rationalisation and harmonisation of Manila's chaotic road system but many suspect the real fight is about money. Mulcting of motorists by so-called "enforcers" is a lucrative pastime on Manila roads and the confusing mismatch of rules and regulations makes it so much easier to redistribute wealth from motorists to the enforcers. Traffic violations are usually settled on the spot with payment of a non-receipted fee.

So at risk of getting personal, let us quote a few examples:

The "no right turn on red" sign outside the InterContinental Hotel in Makati appears to be there just to catch motorists. It is a non-standard sign in a non-standard place that might just as well be hand-written and goes unnoticed by many motorists. The first time that is. Why is it that when traffic is turning left (thereby preventing any through traffic) it is illegal to turn right? The option is to get a ticket or pay on the spot.

While in Makati, we cannot overlook the scam that occurs at the Ayala and Makati Avenue intersections where one group of enforcers waves the traffic on in spite of a red light while a second group waits the other side of the intersection to fine the motorists who obey the first group. This is designed to catch people who wish to make a left turn towards Greenbelt.

From experience, Makati police typically charge motorists Php200 as an alternative to license confiscation while MMDA enforcers charge between Php500 and Php850. Receipts are not issued.

Motorists of course have an option. Option 1 is that the enforcers will write a ticket, take your license and force you to go to their head office to pay the P2,000 fine before you can legally drive again.

Or to save the inconvenience, you have Option 2. You can plead guilty to a lesser charge (unspecified) and pay an on-the-spot fine of Php850 which goes unreceipted. Ask for one and the stock answer is "If you want a receipt we have to fine you Php2000 and you can get the receipt when you pick up your license." Is it surprising that most motorists plead "no contest."

Want to know what you are being charged with? Usually it is "reckless driving." This can be manoeuvring ("swerving") to avoid a tricycle, an alleged illegal turn or crossing an intersection on an orange light. This at least was the claim of the officials that stopped us last weekend in Alabang (but what were they doing on a local road anyhow if the MMMDA were supposed to be on national roads?) The defence that the choice was between proceeding across the intersection as the lights changed or jamming on the brakes and being rear-ended by the jeepney behind us cut no ice. Our only consolation—the jeepney got collared also.

A few weeks back we were travelling north on EDSA and trying to enter the Farmer's Market in Cubao but were unable to make the right turn needed because buses were blocking the intersection. We had no choice but to continue along EDSA. We had gone only a few yards when the MMDA stopped our vehicle because we were in a "bus only" lane. "No, we are not we declared, we are trying to make a right turn." But we didn't make the turn did we? It cost us Php500 on that occasion. And yes, you are right, the MMDA had no interest in the buses causing the obstruction.

Last weekend in Alabang, we stood and observed the sting operation (for that is what it was) for 30 minutes and on average with each change of lights, five vehicles were flagged down. If that works out to one vehicle per minute and each motorist chooses to pay the P850 (rather than the unattractive alternative of going without a license, having to go to MMDA headquarters to reclaim it and then pay a Php2000 fine) then that one intersection nets the enforcers around Php50,000 per hour. No wonder there is a fight over who controls this particular racket.

In the overall scheme of things, this hardly rates as an issue except that it is yet a further example of how petty corruption pervades society and undermines the image that the Philippines tries to project of itself as a friendly and caring society. The system appears designed to confuse and hinder—thereby providing the opportunity for mulcting.

There are solutions of course: legalise on-the-spot fines for genuine offenses, have a single national set of rules for vehicle enhancements rather than the absurd situation where places such as Makati can override national rules, and make receipts for violations mandatory. But that would spoil the fun wouldn't it?

Mulcting motorists

MMDA officials soliciting donations outside
Filinvest in Alabang on 29 March 2008

Post deleted and reposted so as to enable comments

Earth hour goes unnoticed in Manila

Last Saturday evening, 29th March, people around the world were enjoined to turn off their lights for one hour, between 8 and 9 pm as a symbolic gesture to draw attention to the relationship between energy use and global warming.

With much of Manila close to sea-level one might have expected the occasion to have been taken seriously. Alas it was not to be.

As the photo of Alabang Town Centre shows, in Manila, both government and private sector alike largely ignored the event. There was no noticeable difference at all to the public lighting during the one hour period.

Employment and under-employment in the Philippines

Be careful how you read the numbers
When President Arroyo assumed office in 2001, she promised one million new jobs per year but the domestic economy has failed to produce anywhere near such numbers. And with the population of employable age swelling by more than one million annually, even a million jobs a year falls short of providing full employment. In fact the reality is much harsher. No wonder there is such emphasise on overseas employment.
According to a release last week from the National Statistics Office (NSO) quoting results of the latest quarterly Labor Force Survey, the country’s unemployment rate in January stood at 7.4 percent. This result represents a slight deterioration from the previous survey (October 2007) when the rate stood at 6.3 percent[1]. However, it represents a slight improvement when compared on a year-on-year basis. In January 2007 the unemployment rate stood at 7.8 percent. It all depends how you look at the numbers. With the end of the school year and a further influx of school leavers to the labour market, the April figures will bear close watching.
Table 1: Results from the January 2008 Labor Force Survey (LFS)
Philippines
January 2008 1/
January 2007
Total 15 years old and over (in '000)
57,389
56,145
Labor Force Participation Rate (%)
63.4
64.8
Employment Rate (%)
92.6
92.2
Unemployment Rate (%)
7.4
7.8
Underemployment Rate (%)
18.9
21.5
Notes to the table
1/ Estimates for January 2008 are preliminary and may change. 2/ Population 15 years and over is from the 2000 Census-based population projections.
According to the NSO, the unemployment rate in January translates to around 2.7 million jobless Filipinos out of the 36.4 million which the government claims to make up the labour force. But the official numbers on labour force size are based on the 2000 Census-based population projections. The baseline is now eight years old and the estimate could be wide of the mark.
Be that as it may, the official numbers tell only part of the story and could be misleading to outsiders without further clarification.
New labour market concepts introduced in 2005[2] ostensibly brought the Philippines into line with ILO standard definitions although many analysts have questioned both their applicability to developing markets generally as well as the specific manner in which these definitions have been applied—especially the concepts of “availability” and “underemployment”—in the Philippines through the survey questioning.
As we see below, the end result of applying these new concepts has been that many people previously categorised as “unemployed” or “underemployed” were removed from the labour force and the effect was an immediate reduction of around four percent in the unemployment rate.
Employment Status Concepts
“In the Labor Force” or “Economically Active Population”
· This refers to population 15 years old and over who are either employed or unemployed in accordance with the definitions described below.
Employed
· Employed persons include all those who, during the reference period are 15 years and over as of their last birthday and are reported either:
- At work. Those who do any work even for one hour during the reference period for pay or profit, or work without pay on the farm or business enterprise operated by a member of the same household related by blood, marriage or adoption; or
- With a job but not at work. Those who have a job or business but are not at work because of temporary illness/injury, vacation or other reasons. Likewise, persons who expect to report for work or to start operation of a farm or business enterprise within two weeks from the date of the enumerator’s visit, are considered employed.
Underemployed
· Underemployed persons include all employed persons who express the desire to have additional hours of work in their present job or an additional job, or to have a new job with longer working hours. Visibly underemployed persons are those who work for less than 40 hours during the reference period and want additional hours of work.
Unemployed
· Unemployed persons include all those who, during the reference period are 15 years old and over as of their last birthday who have no job/business and actively looking for work. Also considered as unemployed are persons without a job or business who are reported not looking for work because of their belief that no work was available or because of temporary illness/disability, bad weather, pending job application or waiting for job interview.
Persons Not in the Labor Force
· Persons 15 years old and over who are neither employed nor unemployed according to the definitions mentioned. Those not in the labour force are those persons who are not looking for work because of reasons such as housekeeping, schooling, etc. Examples are housewives, students, disabled or retired persons.
“Employed” covers all those who worked at least one hour during the reference period and not those who had a full-time job. It also includes people who undertook unpaid family work. The crude employment rate tells us very little about those who work in full-time paid employment.
Furthermore, labour market analysts believe that many people are now being classified as out of the labour force by the manner of the questioning as to their availability for work and that those conducting the surveys are not sufficiently probing on this aspect. As a result it is estimated that between 2 and 3 percent of those at present considered out of the labour force should really be included were definitions applied more stringently.
Returning to the present numbers, we see that as well as a slight rise in the unemployment level, the underemployment rate also rose—to 18.9 percent in January from 18.1 percent in October 2007. The NSO defines the underemployed as those who were working but who were seeking additional hours of work. If unemployment and underemployment are considered together then in January 2008 some 26.8 percent of the labour force was in need of work or additional work.
Were the pre-2005 definitions to be applied, the labour force would probably be sized at around 38 million rather than the 36.4 million given in official estimates and the unemployed would amount to around 4.4 million rather than 2.7 million as inferred from Table 1.
If this were the case then the official unemployment rate for January 2008 would jump immediately to 12 percent rather than the 7.4 percent, given in the above table. While at first sight the unemployment numbers appear to have declined in absolute terms, this is only because of the change in definition. In fact neither in unemployment nor in underemployment is any clear downward trend evident.
Definition changeFigure 1: Unemployment and underemployment

Note to the chart
The unemployment numbers dropped significantly as a result of the change of definitions in April 2005 but the total of unemployed and underemployed, while showing cyclical variation has not changed in any significant way.
The average of the quarterly unemployment rate from April 2005 to January 2008 is 7.7 percent whereas the average unemployment rate in the eight quarters preceding the definition change was 11.7 percent—a difference of four percent. Such is the influence of the changes made at that time.
Averaging employment growth over the period between January 2008 and April 2006[3], shows that in absolute terms, the local economy has been creating jobs at an annual rate of only 550,000 p.a. or a little over half what is required to keep pace with new entrants to the workforce in this country.
Quality employment lags
Perhaps of equal concern is the quality of employment offered. According to the latest Labor Force Survey, labourers and unskilled workers continue to make up the largest proportion (31.6 percent) of the total employed population. Farmers, forestry workers and fishermen registered the next largest group of workers with 18.2 percent in January 2008 against 17.6 percent in January 2007.
More than half (51.7 percent) of the total employed persons in January 2008 were wage and salary workers mostly working for private establishments (38.2 percent). Those working for the government or government corporations accounted for 7.9 percent. More than one-third of the total employed persons were own-account workers accounting for 36.1 percent with self-employed workers registering the highest share (32.3 percent of total employed). Unpaid family workers were estimated at 12.2 percent. This amounts to 4.4 million people who are considered to be in the workforce but unpaid for the work they do.
More money for education
Against this stark background, the signing into law last week of the 2008 budget and with some Php140 million earmarked for the Department of Education is a welcome sign but it is only the first step on a long road towards enhancing the skill-base of the country. State-owned colleges and universities will receive a further Php19.4 billion. Specific budget allocations to support higher learning and skills development through TESDA and the CHED were not disclosed in the statement although it has been announced that a total of Php200 billion has been allocated this year for the various agencies dealing with education.
Also in recent days the state-owned Development Bank of the Philippines has announced the creation of a Php100 million scholarship programme to provide free college education for deserving students under the DBP Endowment for Education Program. Interestingly, priority under the programme will be given firstly to those wishing to study nursing and secondly towards seamen—both career paths that will enable graduating students to find employment outside of the Philippines. This is a drop in the bucket of course and will only support some 150 to 200 students but it is a step in the right direction. Hopefully other financial institutions may come to the party with creative financing solutions to enable promising students from disadvantaged economic groups to finance their education against their future earning power. Other countries have come up with creative programmes for student loans, so models exist that could easily be adapted to the local system. Perhaps one of the major donor
Foreign Direct Investment per capita (2007 data)
Population
FDI
FDI/pc
(millions)
(Billions)
US$
1323.1
96.1
73
1110.4
20.2
18
234.7
6.3
27
27.2
6.6
243
91.1
2.3
25
4.5
29.0
6,459
66.5
10.9
164
86.0
6.1
71
Source: PBLF estimates based on EIU forecasting data for 2007
countries could assist in the setting up of such a scheme?
Given the structural nature of the problem, finding quick solutions will not be easy. But the first step is to recognize that much of it stems from the poor investment climate. As we have noted elsewhere recently[4], the level of per capita FDI flowing into the Philippines is among the lowest in Asia and certainly the lowest of those countries who wish to be considered as “emerging markets.” Using recent Economist Intelligence Unit forecasts, we estimate that in 2007 Singapore received almost $6500 per head in FDI; Malaysia, $243; Thailand, $164 while Indonesia and the Philippines received $27 and $25 respectively.
With new volatility in global markets, it will be those countries that develop their domestic economy to drive future economic growth that will prove to be the most resilient. The young population demographic of this country could be a boon if it provides the basis for domestic consumption generated within the local economy. But as it is, while almost 70 percent of GDP growth comes already from domestic consumption, the funding of that consumption is offshore. That is a kind of double jeopardy that has to change. We need quality jobs here in the Philippines and that means a significant improvement in the investment climate.
[1] Such survey’s are conducted quarterly
[2] See box next page
[3][3] Earlier comparisons would be distorted by the definition changes
[4] AIM Conference on ASEAN Charter, 12 March 2008

Commentary

Progress in national mining policy?

There is much happening in the Philippines mining industry and yet investors remain concerned that national mining policy could yet unravel. As we reported last week in this column, the prestigious Fraser Institute of Canada has again rated the Philippines high in potential but low in terms of investment desirability.

Nothing happens fast in this country. It is in the nature of the people to make changes slowly and with due consideration. This can be frustrating to Western companies used to quick reaction times or who seek to apply their experience in Africa to their mining activities in the Philippines and who are then surprised that it doesn't work. Progress has been slow, but there has been progress.

Just looking at the stories reported this week shows some of the activity underway to strengthen the underpinning of the minerals sector. For one, the listing and compliance rules of the Philippines Stock Exchange have been strengthened using the Australian model as the basis of drafting the local rules and regulations. DENR Secretary Atienza is seeking to enforce the small-scale mining regulations by restricting such activity to hand-tool operations as the law intended but which for years has been flaunted by local officials.

In many areas small-scale mining is anything but small-scale. Well funded but rarely operating to standards of international best-practice it is the owners of the small-scale mines that often have been seeking to stir up problems for international companies seeking access to their areas. As a result of their own activity environmental degradation has become rampant and has cast a pall over the entire sector but such activities rarely attract the ire of either the Church or the NGO anti-mining lobbyists for the simple reason that they are perceived of as being "local" and engaging in traditional activities. Poisoning of watersheds and rivers with mercury and other toxins is hardly a "traditional" activity but it is surprising how many people—including well-known international NGOs—are prepared to look the other way.

Of course it is all about money. Local governments control the permit system of small-scale miners and enjoy the revenue from it. Falsification of records and permits is rampant in many areas and is a major reason why the Mines and Geosciences Bureau, the national government agency with the mandate to implement and regulate the Mining Act, is unwilling to devolve too much responsibility to the local level despite calls of local officials to do so.

Small-scale mining activity is also believed to be a major factor in evasion of export taxes since export permits for ore from small-scale mines are also handled at the local level. As a result, many such shipments are undervalued and taxes evaded. China has reported that its two-way trade with the Philippines in 2007 amounted to US$30.6 billion. Yet the Philippines reports the figure at only $9.76 billion. According to the Chinese customs data, China imported US$23.1 billion of goods from the Philippines in 2007 while the Philippines recorded only $5.7 billion in exports to the PRC. Since Taiwan and Hong Kong are both separate customs territories their figures are not included. So why such a huge discrepancy?

There are many who believe that the explanation lies in the undervaluing of shipments from the Philippines to avoid export taxes and that this includes the products from mining. With China seeking to gain a major strategic foothold in the Philippines minerals industry could Chinese companies be colluding with small-scale mining interests to circumvent the Mining Act and gain access to minerals shipments at knock-down prices? The answer is that we don't know; we merely report that many people are starting to fear this may be happening. If so, then Secretary Atienza and his team may have an uphill battle on their hands.

It all comes down to money and with the failure of local governments and many communities to see much material benefit from international mining activity it is no wonder there are so many problems remaining. But these problems are starting to be addressed.

At a recent industry meeting arranged last week by PBLF (copies of the record are available to members upon request), participants were told that the MGB was working with the Bureau of Internal Revenue (BIR) on the collection side to ensure proper revenues were collected from industry and with the Department of Budget and Management (DBM) on the expenditure side to ensure the timely release of funds appropriated both in support of the industry and in terms of allocations due to local government units. Indeed, the President had ordered the early release of 2007 allocations to LGUs before the end of the first quarter of 2008 and any entitlements from earlier years would be released progressively after that. If this happens, and money starts to flow, there may be a sea-change in attitudes from many quarters since it will strengthen the resolve of the provincial leagues (League of Mayors, League of Governors, League of Municipalities and the League of Provincial Board Members) to support mining that adheres to best practice. The leagues have already given their endorsement of support for the implementation of the 1995 Mining Act but each of them still have their waverers and discontents to deal with.

The Philippines is at the very top in prospectivity with an estimated $1 trillion in reserves. As we report below, the government is looking at Php26.8 billion in revenue from mining in 2009 alone. By 2011, total investments are expected to amount to $10.47 billion.

These are impressive numbers which we duly report but there is always the caveat that so far, investments pledged are always much higher than investments actualised. This is true not just of mining but across the entire economic spectrum. The investment climate in this country leaves much to be desired.

While many within the mining and investment community are hoping for the best; they are well aware that the industry could yet unravel. In particular there is concern that the depletion of resources at the MGB will aggravate future problems and delays in the processing of licensing and permit applications as well as in compliance monitoring.

With the increased activity within the mining sector since the Supreme Court ruled in 1995 with finality on the validity of the 1995 Mining Act, the Bureau has lost 60 percent of its personnel. If not addressed, this problem could have a domino effect on the industry as already it was finding difficulty in properly fulfilling its mandate. It is literally "running on fumes" and its operations need to be put onto a much firmer footing if it is to play its part in servicing and in regulating the needs of the mining sector.

For its part, the MGB had used recent budgetary support from the World Bank to progress three key projects: geohazard mapping, the rehabilitation of abandoned mines and in a study of groundwater resources but it appears that little has been set aside for a performance audit of its key functions. How will it cope as industry expands? Not only that, but the renewed interest in mining is drawing out other stakeholders who demand—and who are entitled to—a voice in the consultative process. Failure of government to address this resource constraint will likely reduce the strong commitment given to the international mining community to mere lip service. Failure to strengthen the MGB will play directly into the hands of the small-scale mining interests and will leave investors wondering whether this has not been the intention all along?

Assessing ASEAN competitiveness and its readiness for East Asian Regionalism

An address by

Dr. Michael Clancy
Chairman and CEO, Philippine Business Leaders Forum

AIM International Conference on the Implications of the ASEAN Charter for
East Asian Integration

12^th March 2008

Sofitel Philippine Plaza, Manila

Note: This is an edited version of the address that incorporates both the text of the prepared speech as well as the figures and text contained in the supporting slide presentation.

Good morning ladies and gentlemen

"Assessing ASEAN Competitiveness and its readiness for East Asian regionalism." That is quite a topic to cover in 20 minutes or so and at best I can give you some ideas that will hopefully lead into lunchtime discussion and which will also set the scene for the topics that will be covered this afternoon. Let us start by looking at the issue of competitiveness before we look at readiness for integration.

The changing regional dynamic

"Unity in diversity" is the phrase commonly used to rally the faithful to the cause of ASEAN integration but what does it mean really? Does it, in fact, mean anything more than "non-interference" in each other's affairs?

Is the region really moving towards integration in any meaningful sense? Or rather is it being pushed by outside forces that are largely beyond its own control? With the emergence of giants on its borders, can ASEAN determine its own destiny or has that opportunity already passed? Does ASEAN want to fly in the slipstream of China—as one speaker mentioned earlier—or does it want to be flying alongside the likes of China? This is a question we will come back to later.

The promise of the ASEAN Charter is that it will provide a legal basis for economic, political and social integration—or at least "alignment" which is perhaps more meaningful a term at this stage—and create a single market of half a billion people here in Southeast Asia.

Sadly in the minds of many people, ASEAN has gained a reputation as being little more than a "talk shop," an entity that is incapable of meaningful decision-making and which, instead of becoming master of its own destiny, is being integrated by default into an East Asia that is dominated by China's economic muscle.

Greater ASEAN is often referred to as the heart of Asia Pacific. It is wedged between two of the most populous and fastest growing countries in the world—India and China. Both countries are aided by relatively low population growth rates (at least compared to the Philippines) and are rapidly improving the life of their people.

China has 1.3 billion people India has 1.1 billion while ASEAN has around 550 million. Both China and India are achieving rates of GDP growth that are the highest in the world. China's expansion has been based on global trade and an opening of its economy that of India has been much different and has relied traditionally on domestic consumption and internal capital to fuel its growth.

While ASEAN sits strategically between China and India. It is China—and East Asia—that commands most attention because of its growing importance to trade, manufacturing and the global economy.

Thanks to 30 years of unprecedented economic dynamism, China is rapidly expanding its middle class. China's per capita GDP (measured at purchasing power parity rates) is also increasing at a fast clip. By 2010 China will have caught up with Thailand and will be poised to overtake Malaysia. Aside from the special case of Singapore which is far and away the most successful country in Southeast Asia, Northeast Asia continues to pull away in terms of affluence as compared to ASEAN. Yet even with all the dynamism that China is showing, it will be nowhere near knocking at the door of developed country status any time soon. And if even China is not achieving that target, it is hard to see how the Philippines can do so. That is reality.

A report from the Economist Intelligence Unit, Foresight 2020—economic, industry and corporate trends, published in 2006 sought to gain insight into what the world would look like by the end of the next decade. That study predicted that by 2020, China would have overtaken the United States as the world's largest economy . (Again this is when measured at purchasing power parity rates; the USA would still likely be in the first spot when GDP is measured at market exchange rates.)

Interestingly although in terms of GDP per head, in 2020 China will still be well down the list. Singapore, followed by Taiwan and South Korea are expected to have the most affluent populations in Asia and would be the only ones able to lay claim to having achieved "first world status."

So if competitiveness is to be measured by growth in per capita GDP, China is far ahead of the ASEAN countries—and just about everyone else.

Competitiveness in terms of trade patterns

Table 1: Exports to the United States as a percentage of nominal GDP
	2001	2007
Malaysia	19.2	17.6
Singapore	14.1	11.9
Thailand	11.4	8.7
Philippines	12.6	6.7
Indonesia	4.8	2.9
Source: EIU estimates

Over the past decade the rise of China as a global trading giant has been nothing short of phenomenal. The table shows how ASEAN exports to the US have been falling comparatively while from Figure 3 we see how the share of exports destined for China has risen rapidly in each of the major ASEAN countries, but for the Philippines most of all.

The US economy still impacts on the region but, increasingly, China is the intermediary. Raw or intermediate products are shipped from ASEAN to China before heading for the USA, Europe and Japan.

But beyond that, as we have seen, the economies of East Asia are growing rapidly also and internally generated demand within East Asia is becoming a significant factor that cushions to an extent the ramifications of any slowdown in the US economy. Note that it will not compensate for a slackening of US demand but it will certainly mitigate it.

Figure 4 (below) gives us the bigger picture. Exports to the USA are still increasing but it is China that is driving US import growth. India hardly comes into the picture in terms of merchandise trade. It is simply not a global player.

And what about ASEAN intra-regional trade? While trade with East Asia is growing, Intra ASEAN trade is actually falling. Intra East Asian trade now accounts for around 60 percent of the regional total but intra ASEAN trade has fallen from 22.4 percent of the total in 2000 to 20.9 percent today. Vietnam and Singapore have both seen their ASEAN trade decline the most.

Only the Philippines and Thailand appear to be more dependent on intra-ASEAN trade today than they were in 2000. The decline is somewhat surprising and suggests a need for ASEAN to look at its With the rapid rise in the value of the peso against many other ASEAN currencies it will be interesting to watch to see what happens to the Philippines trade pattern over the next one or two years.

So while ASEAN talks a lot about integration—especially economic integration, we have not yet seen very much from that process to transform ASEAN to a higher and more dynamic growth path that builds and reinforces interdependence. Indeed, quite the opposite seems to be happening. It can be argued that the issues that divide ASEAN member states are possibly greater than those that unite them.

Is ASEAN becoming more competitive? The numbers here do not suggest so. In the broader global picture, ASEAN is doing better than many emerging markets but in comparison with the regional giants, and the smaller Confucian tigers, ASEAN just hasn't got its act together. And while Asia is still the dynamo of global growth and with ASEAN performing better than much of the emerging world elsewhere, were it not for the China factor, would the Region be doing anywhere near as well as it is? ASEAN is already firmly in the Chinese slipstream.

Following the money

Let us approach our look at competitiveness from another angle. How does business view the prospects of the region? One measure of this is to look at foreign investment flows. Business votes with its cheque book.

Figure 6 shows the trend in Asian FDI from 2005 projected out to 2011 as forecast by Economist Intelligence Unit. At first blush ASEAN does not look to be doing badly at all. Between 2005 and 2007 FDI flowing into China amounted to US$253.3 billion while India received a total of $44,4 billion. ASEAN as a sub-region received a total of US$151.9 billion. But let's take a moment to decouple Singapore from the equation. The result then looks quite different.

We don't have to break the numbers down too far to show the manner in which investment into Singapore skews the ASEAN data. Almost half the total net flow into ASEAN goes to one small island state.

To look at the data another way: Just computing over the past three years, China has received some $194 in FDI for each man, woman and child; Singapore received more than $15,000 per capita while the Philippines received just $74. That tells us something about regional competitiveness.

Table 2: Inwards Fixed Direct Investment in US Dollar billions
	2005	2006	2007	2008	2009	2010	2011
China	79.1	78.1	96.1	85	87.6	90.9	92.9
India	6.7	17.5	20.2	25.0	30.0	35.0	37.0
Indonesia	5.3	6.1	6.3	6.5	6.7	7.0	7.5
Malaysia	4.0	6.1	6.6	6.5	6.8	7.0	7.5
Philippines	1.9	2.3	2.3	2.4	2.4	2.3	2.4
Singapore	15.0	24.2	29.0	27.4	27.3	28.5	29.1
Thailand	9.0	10.8	10.9	10.5	9.5	9.0	9.0
Vietnam	2.0	4.0	6.1	6.8	7.5	8.5	9.3
total ASEAN - Sing	22.2	29.3	32.2	32.7	32.9	33.8	35.7
Total ASEAN	37.2	53.5	61.2	60.1	60.2	62.3	64.8
Source: EIU estimates and forecasts; December 2007

The lions share still goes to China and warnings of overheating and a potential meltdown has done very little to abate the appetite of investors for China. In 2007 an estimated $96.1 billion went into the PRC as FDI. India attracted $20 billion in that year while ASEAN did very well at around 60 billion. Singapore took almost half of the total at $27.4 billion. Even Thailand, emerging from a political crisis managed to pull in $11 billion while the Philippines managed to get barely $2 billion—or around 1 percent of the total flowing into East Asia.

China is now the world leader among emerging markets for fixed investment as shown by figure 9 which estimates gross fixed investment as a proportion of GDP using 2006 data. The Philippines is playing catch up not just to China but to the rest of ASEAN—at least insofar as those members of the group that the Philippines most closely seeks to emulate. Investment competitiveness around the region shows wide disparities but the sad fact of life is that the Philippines is bringing up the rear.

Much more needs to be done to improve the investment climate in this country. Loans—even loans on concessional terms—are no match for bricks and mortar investment. Concessional loans may be a cheap alternative (according to one participant) but whether they be from China, Japan or Australia for that matter, they usually come on terms that give the recipient little control over the implementing agency which is usually specified by the donor.

Really, and as problems over the ZTE deal have shown, Build-Operate-Transfer schemes generally deliver a much better cost-benefit ratio than loans. For one in a BOT scheme, hard cash—private sector cash—is put into bricks and mortar that is truly fixed investment. And if the builder has to operate the facility in order to get a return on the investment there is a very strong incentive to build a project that will stand the test of time.

If figures recently quoted in the press are true, that the Philippines is already indebted to China for around $8 billion then that represents an obligation of around $100 for every man, woman and child in the Philippines.

My final slide in this section (reproduced as figure 10) shows the manner in which foreign exchange reserves have changed over the past ten years. This phenomenon is what The Economist called recently the "invasion of the sovereign wealth funds. This is perhaps the most telling slide of all. It takes us back to the Golden Rule—"He who has the gold makes the rules."

With around $1.5 trillion in reserves it is no wonder that China is flexing its muscle and using its new found wealth to advantage. No nation on Earth thinks more strategically or negotiates more adroitly than China but that does not mean that ASEAN countries—the Philippines in particular, should not strengthen their hand in terms of coming to terms with China. Sadly we see very little by way of strategic thinking from ASEAN at the present time.

So what does it all mean?

ASEAN was inaugurated originally on 8^th August 1967 in Bangkok. This year it is already forty years old. China this year celebrates 30 year's of Deng Xiaoping's economic reform programme. Which of the two has made the most progress?

While ASEAN still talks about integration and reform, China has got on and done it.

This brings me to my final point. Whether or not ASEAN now develops its Charter and its priority integration areas is largely irrelevant. China has a carefully planned programme of strategic investments that allow it increasingly to call the shots. While ASEAN wrings its hands over whether to allow further foreign direct investment, China has gone ahead and done it.

The trade and investment pictures tell the story. Most ASEAN businesses are not looking at each other except as competitors. Tariffs may have gone down but the non tariff barriers are still there.

Regional integration has been an underperformer because it has failed to produce a cohesive single market and shows little signs of doing so even now. With 550 billion people ASEAN could be a force to be reckoned with. And growth in the future has to come more and more from domestic consumption rather than reliance on export led growth drivers. It is those countries that show strong domestic demand that will weather the vagaries of global fluctuations the best.

And here again, the Philippines is extremely vulnerable. I believe around 70 percent of GDP growth now comes from domestic consumption. But this consumption is artificially skewed by remittances and as such is vulnerable to the vagaries of the global cycle. Take remittances out of the equation and domestic consumption would just about collapse. To build a Philippines that is genuinely strong, we need jobs and wealth generated within the domestic economy and that means foreign direct investment and not more foreign indebtedness. I don't see any other solution that would lift the Philippines out of the bind that it is now in.

Ladies and Gentlemen, Regionalism is a fact of life already but ASEAN is not in the driver's seat. My prediction is that unless there are some rapid changes and genuine leadership, ASEAN will likely be a permanent appendage to the Chinese juggernaut, a supplier of components and raw materials but unable to influence the terms of its engagement in any meaningful way.

It need not be like that. But, outside of one country, ASEAN leaders have so far failed to show the kind of leadership necessary to make the rest of the world sit up and take note. And for that, one only has to look at the investment flows. The ASEAN region is not yet ready for integration of itself so how can it be ready for integration into a wider grouping? "Absorption" maybe, but that is not the same thing.

But the Philippines can take the lead in a manner that would improve its international competiveness. Leaving aside the so-called ASEAN priority integration areas which appear good on paper but which seem beset still with problems posed by those non-tariff trade barriers we spoke about earlier—even after the formal barriers have been removed—my personal view is that the Philippines should emphasise and work towards the following:

• Governance
  

  Problems of governance are the most pressing of all. Nobody underestimates the problems of bringing corruption and rent-seeking behaviour to heel but equally it has to be recognised that it is the biggest single deterrent to long-term foreign investment. It simply has to be addressed.
  

• Reform of the Labor Code
  

  After corruption, dealing with the complexities of the Labor Code appear to be a major disincentive to foreign investors coming to the Philippines. I recognise the complexities of labour market reform in the context of a democratic society. But surely some harmonisation of codes throughout ASEAN would provide suitable cover for the Philippines to look at how the world has changed and to introduce labour market reforms that—ASEAN-wide—conformed to global best practice.
  

• Logistics
  

  I am told it costs more to ship a 40' container from Manila to Cebu than it does from Manila to Hong Kong. Transport and logistics charges are a major impediment to cost-competiveness throughout the region. If logistics can be made more efficient, perhaps regional trade would prosper to a greater extent than it has so far. As an archipelagic economy, this is no more than self-interest.
  

• Education
  

  ASEAN—the Philippines in particular—could be Asia's education hub. But foreign investment into the education sector needs to be liberalised and fast. It will reap domestic benefit. It will reap foreign exchange benefit.
  

• Agricultural collateralisation
  

  East Asia built its prosperity—in Taiwan and Korea anyway (two countries in which I have previously lived and worked)—on the basis of land reform that enabled farmers and rural dwellers to borrow against their land value. This created cottage industries and then wide-scale industrialisation. While in both countries for many years, politics was the preserve of the elite, that elite allowed the masa to grow rich through the sweat of their labour. In the Philippines sadly, the elite appears to want both the politics and the economy to itself. Yet, people in this country are hard-working and industrious. Give them the means to prosper and watch this country take off big time.
  

Neither the Philippines nor ASEAN as a whole need be swept along by events. But it will take leadership to change the paradigm.

There is much I have left out and much I am sure you could take issue with. But in the time available I hope I have done two things. In the short-term there is some food for thought to go with the lunch being served and in the longer-term some benchmarks against which we can judge progress the next time we meet.

Thank you and good morning.