Is the country ready for ASEAN economic integration?

THE ASSOCIATION of Southeast Asian Nations (ASEAN) Economic Community (AEC) is scheduled to achieve its integration goals by end-2015. The integration is expected to transform the world’s fastest growing region into a more competitive, unified player in the world economy.

The ASEAN region consists of 10 diverse economies, with a significant consumer market of 620 million.

ASEAN economic growth is expected to slow slightly to 4.7% in 2014, down from estimated 5% in 2013. But future growth is expected to be robust based on a rapidly growing middle class, strong expansion in intra-regional trade and massive investment in public infrastructure and urban development across the region over the next 20 years.

With such high growth prospects, the ASEAN region is expected to attract high foreign direct investments (FDIs) and assistance from foreign governments and financial institutions. But the ability of each member country to attract FDIs would depend on each country’s economic and political state.

In the past, the Philippines’ record in attracting FDIs had been dismal. Among the ASEAN-5 peers, it has received the least FDIs. With the ASEAN economic integration, would this change?

ZERO-SUM GAME
The ASEAN economic integration by end 2015 won’t change the economic landscape overnight. But attracting FDIs is a zero-sum game: FDIs going to Vietnam or Malaysia or to any of the other nine ASEAN countries are FDIs diverted away from the Philippines.

There’s bound to be keener competition among nations. Some countries lag behind because of their poor public infrastructure, uncompetitive tax regimes, protectionist policies, and high costs of doing business. They better fix these disadvantages or perish.

The single biggest disadvantage of the Philippines versus its ASEAN-5 counterparts is its poor state of public infrastructure. Compared to Indonesia, Malaysia, Thailand and Vietnam -- there’s no sense comparing the Philippines with Singapore -- the Philippines has the second worst overall infrastructure.

In terms of port infrastructure and air transport infrastructure, the Philippines has the worst public infrastructure. This is tragic since the country is archipelagic, with more that 7,200 islands, making efficient and reliable sea travel extremely necessary.

Costly and unreliable power supply is a major constraint to the development of manufacturing and tourism sectors. But energy capacities can’t be built overnight.

Traffic congestion imposes huge costs to the economy. A 2012 study by the Japan International Cooperation Agency (JICA) estimates that the annual costs of traffic congestion in Metropolitan Manila is approximately equal to 7% of gross domestic product (GDP).

Yet, improvements in urban transport remain bogged down. The much-vaunted public-private partnership (PPP) program that includes many urban transport sub-projects has been a colossal failure. There is a strong likelihood that none of the large-scale urban transport projects will be completed by the end of the term of President Aquino III.

The Philippines has the highest marginal tax rates for both the corporate profits and personal incomes. This has to be harmonized with its ASEAN-5 counterparts.

The restrictive economic provisions in the Constitution have to be amended.

The Philippines has a long way to go in improving its image as an investor-friendly country. While it has moved up the ease-of-doing-business ladder, it remains to be the most bureaucratic among ASEAN-5 countries.

The ASEAN economic integration is a work in progress. If we want to be benefit from it to the fullest, we have a lot of catching up to do. This challenge should be in the mind of the next President of the Republic.

(The author is Professor of Economics at the UP School of Economics and former Secretary of Budget and Management.)

source:  Businessworld