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AEC SPECIAL REPORT - PHILIPPINES: AEC, what's that?

Publication Date : 30-12-2013

 

The envisioned Asean Economic Community (AEC) is supposed to be fully operational in two years , but awareness of the implications of regional integration is not widespread among Southeast Asians.
In the Philippines, average citizens outside the agriculture and trade sectors have not heard of it or have not bothered understanding what it is.

“No, I don’t know what that means,” said a 59-year-old mother of two who works as a part-time marketing agent in the country’s metropolis when asked whether she knows what Asean integration is.
The lack of awareness is the reason proponents are urging governments to embark on a promotional campaign. 

But on the opposite end of the spectrum, some Filipinos working in sectors expected to be significantly affected by AEC are fully aware of it and have no qualms expressing their reservations.

The Philippine Maize Federation Inc. (PHILMAIZE), a non-profit organisation of corn producers in the country, acknowledges the benefit of a bigger market that will result from integration. However, the group said Filipino corn farmers would not be able to take advantage of the bigger market—and will even be prone to income losses—if government support for their sector remains lacking.

PHILMAIZE president Roger Navarro said in an interview that the Philippines’ Department of Agriculture has an ongoing programme that provides technical assistance to the country’s corn farmers to help boost their production. He said corn farmers appreciated the support, which was enough to allow them to continue serving local demand. 
However, he said, much bigger investments were needed for their sector to be competitive against counterparts from other Southeast Asian countries. 

“The problem is that governments are talking among themselves in pursuing integration without consulting the affected people, including corn farmers, on what we need in order to be prepared for it,” Navarro said.

He said corn farmers in the country sorely lack post-production facilities. Corn farmers continue to be ill-equipped for a much tougher competition environment that will materialise once Asean economies integrate, Navarro stressed.

Also, he said, there was a lack of enabling government policies to boost their competitiveness. 

For instance, Navarro said, farmers in the country have difficulty accessing credit. While loans are necessary to finance needed investments in agriculture, Navarro said, banks are reluctant to lend to farmers.

The Philippines actually has the Agriculture Credit Reform Act that requires banks to allocate a certain portion of their resources for lending to the agriculture sector. The law imposes fines on banks that will fail to comply. 

However, Navarro said, the problem with the law is that banks can easily afford the fines and regulators allow them to simply continue paying the penalties.  As such, he said, the objective of making credit easily accessible to farmers has so far not been achieved.

“We need government policies that will truly help farmers get the financing they need,” he said.  

Another example of the lack of enabling policies, he said, is the country’s unfavourable tax environment.

Navarro said corn farmers were developing the so-called “rice corn”, which can serve as an alternative for rice as a staple. Rice corn is corn that resembles rice after undergoing a certain mechanical process.
Navarro said PHILMAIZE intends to launch the rice corn soon, but its success is challenged this early by the Bureau of Internal Revenue (BIR). Rice corn, unlike other agricultural products, shall be subjected to the 12-per-cent value-added tax (VAT), he noted.

This is because according to the country’s tax rules, only agricultural products that have not undergone mechanical processes are exempted from the VAT. Because mechanical processes give “added value” to an agriculture product, it becomes subjected to the tax.
“We are innovating because we want to contribute to efforts to increase supply of rice in the country. However, the BIR is poised to impose tax and such is not helpful,” Navarro said.

He said if the government was sincere in helping the agriculture sector be more competitive, supportive tax and other policies should be in place. 

Meantime, the Samahang Industriya ng Agrikultura (organisation of agriculture industries) declared that the Philippine agriculture sector is not yet prepared for Asean integration—and said the government should acknowledge it.

The organisation, more commonly referred to as SINAG and operates as an umbrella entity of various agricultural groups, said integration should be delayed until sufficient investments and appropriate government assistance were given to the agriculture sector.
SINAG includes as members groups engaged in agribusiness, grains, hog raising, fertiliser and pesticide making, and vegetable growing, among others. 

Rosendo So, chair of SINAG, said it was unwise for the government to simply agree to calls from the international community to fully embrace liberalisation without first doing its homework.

So said the Philippines’ farm sector lacks post-harvest facilities, while the country’s backyard industry does not have sufficient slaughterhouses. He also said there was lack of investments in farm-to-market roads and irrigation.

“If Asean integration pushes through at the current state of the country’s agriculture sector, many people will lose employment and sources of incomes,” So said.

He said before the government thinks of participating in regional integration initiatives, it must first pour the necessary investments in the agriculture sector.

The Philippine Chamber of Commerce and Industry (PCCI), one of the most influential business groups in the country, shares the view that Asean integration could bring trouble to some of the country’s small industries that are not fit yet for a tougher competition environment.
Philip Romualdez, PCCI vice president for industries, said that without any government assistance, some industries could suffer shutdowns, leading to job losses. Under this scenario, he said, the Philippines, instead of meeting the objective of reducing poverty incidence at a significant pace, moves further away from the goal.

“If concerned sectors do not get proper assistance, they would be confronted with challenges that they may not be able to surmount,” Romualdez said.

“This is exactly what we want to avoid—job displacement—considering that the biggest concern of this country right now is how to alleviate poverty,” he adds.

PCCI said it is not opposed to the idea of integrating Asean economies and acknowledges that the plan has merits. But for the group, industries that are still unprepared for an environment of borderless trade should be getting all the assistance they need in order to develop and become competitive. And the assistance, PCCI said, is urgent.

“To help small industries prepare for Asean integration, there should be investments in capacity building, training, technology, and innovation. There is a lot of work to do because 2015 is just two years away,” Romualdez said.

He added that the government should play a major role in developing the country’s industries. 

Participation a must
Dr Linda Medalla, a senior research fellow at the state-run Philippine Institute for Development Studies, on the other hand, said a member country would be placing itself at a big disadvantage if it would not be part of the AEC.  

“Just imagine Asean integration without the Philippines,” Medalla said.

She said the Philippines, or any Asean member country for that matter, would be substantially left behind in terms of investments, jobs, economic output and income if it would exclude itself from AEC.
While its neighbours would be enjoying the benefits of free flow of foreign investments, the non-participating country would most likely be left out in investment-making decisions of multinational companies eyeing the huge Asean market.   

With this backdrop, she said, being part of AEC is a must. 
“The fact that they are grouped together, Asean member countries achieve a greater voice and increase their value as an investment destination,” Medalla said.

Medalla noted that although Asean integration has its disadvantages, it benefits member countries on a net basis.

“Countries should not fear integration. On the contrary, they should welcome it and look forward to its benefits,” she said. “With integration, Philippine food products like Oishi and Jack & Jill [brands of junk food] and Belo beauty products, for instance, will have a much wider market and a much bigger number of customers,” she said.  
Medalla said in an environment of free flowing investments, a country that is part of the AEC will enjoy benefits of improved infrastructure, increased employment, and SME development through training by multinational companies, etc.

Doubts over the EU model
Meantime, the crisis confronting the euro zone has led some to question the prudence of integrating Asean economies. It is unavoidable that the crisis in Europe elicits fear that Asean countries may face the same problems members of the European Union currently deal with once they integrate.

Proponents, however, say the blueprint for AEC is quite different from that of the EU. The very basic difference is the amount of sovereignty countries give up for integration.

While the EU created supranational institutions—such as the EU Council and Parliament for decision making, EU Commission for monitoring, and EU Court of Justice for dispute settlement—to facilitate the operation of member countries as one unit, AEC will not have those. Instead, government regulators in each member country will continue to fully perform their functions.

Moreover, while EU member countries operate under a legal framework that helps ensure observance of laws governing integration, AEC has much flexibility. Decision-making in AEC will be done always in accordance with the principles of consultation and consensus among member-countries.    

Doubts, fears
There are also doubts on whether the vision for an integrated economic community will indeed be realised in 2015 given that several industries across Asean member countries appear to still be unprepared.
The Asian Development Bank (ADB), which backs Asean integration, said a fully functioning AEC will not happen in 2015.

“It is becoming very clear that the 2015 self-imposed deadline is unlikely to be met,” ADB’s Menon said.

In his view, considering the rate of progress of member countries in meeting the prerequisites of integration, AEC will be realised sometime between 2020 and 2025.

“The 2015 deadline is unachievable. An interim phase of transition to full integration may happen in 2020, and full integration may be realised in 2025,” Menon said.

Asean Secretariat, the body tasked to monitor progress toward and help facilitate integration of member economies, said regional integration is not something that happens at a snap of a finger. Rather, it said, integration is a gradual process of fulfilling the various prerequisites stated in the blueprint for AEC.

Although Asean countries are not yet “fully integrated”—and may miss the target of full integration by 2015—they have, nonetheless, started the process of integration by having achieved some of the requirements for realising AEC, the Asean Secretariat said in a report on its latest scorecard for Asean integration.

Nonetheless, the Asean Secretariat said member countries have been delayed in the implementation of a still significant number of requirements to realise AEC.

The report, “Asean Economic Community Scorecard”, shows that the region as of the end of 2011 has achieved 67.5 per cent of the targets set. It said Asean member countries completed 187 out of the 277 measures due as of the end of 2011.

“This shortfall mainly results from the delays in ratification of signed Asean-wide agreements and their alignment into national domestic laws as well as delays in implementation of specific initiatives,” the Asean Secretariat said in the report.

ADB’s Menon said the delays indicate that Asean member countries lack the will to implement AEC. Although all the countries have acknowledged the benefits of AEC, he said governments have yet to fully back their words with actions.

“It seems governments have to be convinced that what they signed up for is worth implementing,” he added.

Menon said the delays in the implementation of the prerequisites to the AEC may also be blamed on lack of proper communication of the objectives of the integration.

He said if Asean member countries truly believe in the benefits of integration, their governments, and perhaps supportive private-sector entities, may embark on a public awareness campaign on the AEC. 
Proponents of AEC say a lot of income growth opportunities are in store for Asean member countries once they integrate.

The challenge for the countries, they say, is to move out of their respective comfort zones and take the plunge.

 

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