ASEAN ECONOMIC COMMUNITY:
A FOCUS ON THE PHILIPPINES

The blueprint for realizing an ASEAN Economic Community (AEC) by 2015 was adopted and signed by ASEAN Leaders in November 2007 in Singapore during their annual Summit Meeting. One of the main objectives of an AEC is to create a single market and production base by ensuring a free flow of goods, services, investment, capital and skilled labor.
While the ASEAN Integration is expected to level the playing field among industries in the region, it is also expected that Philippine firms should brace for an intense competition with their ASEAN counterparts. An intense competition will therefore raise the bar for innovation, quality and productivity, which will enable businesses to compete head on with other players. The question is, are we prepared to meet the competitive challenges in terms of integrating with other countries in the region?

Policy measures are being implemented based on the AEC Blueprint agreed upon in 2007. However, progress among the ASEAN member countries in meeting their commitments has been uneven. Moreover, many difficult regional issues have not yet been resolved. Among these are wide development gaps, entrenched domestic interests, and the slow pace of Philippines in implementing fundamental economic and political reforms. Hence, achieving the AEC in 2015 may be on the optimistic side.

The AEC blueprint calls for creating a single market and production base which will improve the competitiveness of the region. In this context, the Philippines stand to benefit a great deal since its level of competitiveness lags those of many economies including its ASEAN neighbours.

Some groups believe that the Philippine may not yet be out of the race to promote integration of our economies, since the country somehow seems unprepared to meet the competitive challenges, for instance, when trade barriers are lifted to allow for the free flow of goods and services in the region.

In the case of the Philippines where many claimed our unpreparedness, we can only jive with the AEC when we can fix our problem mainly on the structural problem of the Philippines. Political economy considerations highlight the structural problems that continue to plague the Philippine economy. The major factors that have prevented the Philippines from maximizing its gains from globalization can be traced to policy shortcomings, and can be summarized as:

1. Low investments in infrastructure

According to World Bank estimates, a middle income country in East Asia will need to spend at least 5 percent of GDP on infrastructure to meet their needs in the next 10 years. Infrastructure expenditure in the Philippines is far below this benchmark as it only accounts for 2.8 percent of GDP. In addition, resources allotted for infrastructure development are spent inefficiently. Infrastructure upgrading is necessary to improve economic performance of the country as it would help attract more investments and reduce production costs. The lack of infrastructure program is largely related to the fragile fiscal situation of the government.

2. Lack of political will to implement a sustained and credible fiscal reform program

Weak fiscal institutions created policies that increased the debt burden and inherently put bias towards deficit-spending. They are also responsible for the fiscal blunders created such as politicized spending and delayed fiscal consolidation during crises—as epitomized during the aftermath of the 2008 global financial crisis. To be effective, fiscal reforms, should aim at creating stronger fiscal institutions that adhere to rules and do not easily give in to populist demands. Reforms should also create accountable and more transparent institutions that will implement the revenue generation programs and include capability enhancement measures to reinforce technical capacity of these institutions to fully mobilize revenues for the country’s needs.

3. High Transaction Costs

Transaction costs refer to market-related infrastructure, facilities and services needed to conduct business, including logistics. It also includes costs in acquiring and exchanging information in transactions and contract enforcement. If transaction costs are high, these become a disincentive to producers to participate in any market exchange. It has been argued that the relatively poor performance of Philippine exports may be explained by high transaction costs in the country rather than market access issues. Logistical cost disadvantages—as pointed out earlier in this paper— have hindered domestic industries from benefiting fully from the effects of trade liberalization and have discouraged foreign investors from considering the Philippines in their production and logistical networks.

4. Lack of a coherent industrial policy

This is an area that has been overlooked because of the controversy it generates. However, recent work has attempted to provide a pragmatic approach that eschews ideological prescriptions and instead looks more closely at historical experience. The basic argument is that industrial policy is as much about eliciting information from the private sector on significant externalities—primarily information and coordination externalities—and their remedies as it is about implementing appropriate policies. However, the capacity to apply industrial policy is also important, which leads to the importance of governance and institutions. There were also gaps in the implementation of reforms and this is related to failure to address issues in good governance. This focuses on anti-corruption initiatives and institutionalization of corporate governance practices. The Philippines has always been cited as a country whose potential for growth has been eroded by corrupt institutions. According to World Bank figures, 20 percent of annual government budget is lost to corruption. It is of utmost importance that measures to curb corruption are undertaken. Anti-corruption strategy should be reinforced by a committed leadership and able management skills to implement the programs and sustain the progress made. Continued re-engineering of the bureaucracy is necessary, with reforms focused not only on achieving efficiency and effectiveness, but also instilling a culture of adherence to rules. The Philippines has to work on addressing governance issues that hinder the country to take advantage of opportunities from regional integration. A committed leadership that has the political will to pursue genuine reforms would be critical. The Philippine experience has shown that elite groups, at their will, could impede implementation of reforms. Hence, mechanisms toward reducing opportunities for monopoly of power that undermine reform efforts should be installed.

Political economy factors largely explain the slow progress in implementing economic reforms, including AEC commitments. These factors include the need to adhere to the democratic process and the presence of entrenched domestic interests. Meanwhile, even if reforms are implemented, economic agents—especially private firms—are unable to take advantage of the opportunities presented. This can be explained by structural factors including supply-side constraints. Poor infrastructure and the absence of a strategic and effective industrial policy are the main elements of supply-side constraints. The intersection of these two sets of factors is aspects related to poor governance and weak institutions. Unfortunately, economists do not have the ready answer to the question of how to strengthen institutions. This would require a multi-disciplinary approach. But definitely credible and visionary leadership is an important consideration.

Although the self-imposed deadline for the realization of the ASEAN Economic Community (AEC) is 2015, it should not be viewed as a hard target. One should not expect 2015 to see ASEAN suddenly transformed its nature and processes abruptly changed, its members’ interests substantially altered. Rather, 2015 should be viewed more as a milestone year — a measure of a work in progress — rather than as a hard target year.

Nevertheless, the commitments to the various dimensions of an AEC do reflect the value placed by the ASEAN member countries on regional economic integration, and give them something to both invoke and aspire for.