Apec: What’s changed, and what’s left to do

IN 1996—the last time Asia-Pacific Economic Cooperation (Apec) leaders were in town—the Philippines was in the early stages in a series of reforms that would reshape the economy.

The year before, legislation was passed that eventually dismantled the Philippine Long Distance Telephone Co.’s (PLDT) monopoly. The year before that, the water utility industry was liberalized.

This year’s batch of Apec heads of state will see a host country that, in many ways, has moved ahead to free its economy of protectionist policies. However, a long road lies ahead and no shortage of political will is required to move closer to a target that itself is continuously shifting.

Several industries have benefited from reforms. In 1994, it was banks with the first wave of relaxation of foreign ownership—a measure that Congress followed up in 2014.

In 1995, the telecom sector was liberalized, leading to the heightened competition seen in the industry today. That same year, then President Fidel V. Ramos signed the executive order that liberalized the airline industry, breaking down the inefficient monopoly enjoyed by Philippine Airlines, and giving birth to a vibrant aviation sector.

The privatization of water utilities followed in 1997, and in 1998, the oil industry’s deregulation.

The new millennium saw the passage of the controversial Electric Power Industry Reform Act (Epira), which was then followed by the establishment of the Wholesale Electricity Spot Market (WESM) in 2006. Both measures aimed to introduce competition by encouraging investments in the power sector.

In 2009, the country took another step with the privatization of the assets of National Transmission Corp. and National Power Corp., aiming to bring in private sector efficiency.

Macroeconomic policies

The financial industry has also changed significantly in the last two decades. The Bangko Sentral ng Pilipinas (BSP) was created in 1993, replacing the old central bank, which at the time was holding crippling levels of debt.

Economic stability gained another boost in 2003 with the adoption of the inflation-targeting framework for macroeconomic policies. This empowered monetary authorities to more effectively manage the rate of consumer prices increases.

Regulation of local banks and other financial institutions have also improved in the past decade. In 2004, the BSP, together with the Securities and Exchange Commission and Insurance Commission, formed the Financial Sector Forum, improving the level of coordination among industry supervisors.

In 2011, the Philippine Financial Reporting Standards was also institutionalized across several agencies, increasing the level of transparency in the private sector.

The government’s ability to pay for infrastructure and social welfare projects has also improved, thanks to a series of tax reforms.

Under President Gloria Macapagal-Arroyo’s administration, Congress in 2007 passed the controversial expanded value added tax (E-VAT) law, which last year gave the government about P373 billion in additional revenue. This represents a significant chunk of 2014’s total tax take of P1.3 trillion.

In 2013, higher taxes on excise products such as tobacco and alcohol were approved after two decades of languishing in Congress. Last year’s take from excise or “sin” taxes reached P140.4 billion.

Dividends from this long list of reforms are apparent. The average growth rate of the Philippine economy has risen steadily since the 1990s. Between 1991 and 2000, gross domestic product (GDP) grew by an average of 2.9 percent.

The following decade saw GDP growing an average of 4.8 percent annually. Today, the Philippines’ potential output has risen to 6.125 percent, according to the World Bank.

Consumer prices have moved at more predictable rates. In 1996, inflation was north of 7 percent. This year, consumer prices are expected to rise by an average of 1.6 percent.

Poverty incidence has declined to 25.8 percent in 2014 from 33 percent in 1996 and 34.4 percent in 1991. Meanwhile, unemployment has improved to 6.5 percent in the first half of 2015, according to latest government data, from 8.6 percent in 1996.

Resilience

The country is now more resilient to external shocks. In 1996, the country’s dollar reserves, which serves as the economy’s main buffer, stood at $11.7 billion. Thanks to the contribution of remittances from overseas Filipino workers (OFW), the Philippines’ dollar reserves reached $79.5 billion at the end of last year.

This year’s Apec hosting stint puts into focus measures that failed to progress and kept the Philippines from living up to the promises of 1996.

Lawmakers are currently deliberating the modernization of the Bureau of Customs, and the rationalization of tax incentives for local companies. The former aims to simplify processes for the movement of goods in and out of the country, while the latter would remove redundant tax perks for big corporations.

“Some items have not moved as much as they should,” said Guillermo Luz, a member of the Apec Business Advisory Committee. Apec’s list of priorities has also grown, putting more pressure on local policymakers.

“The scope today is much wider. It’s moved away from almost exclusively trade to a lot of developmental areas. In 1996, no one talked about resilience, human capital, education, disaster management, healthcare, life sciences and food security,” Luz said.

Infrastructure also remains a main hurdle to progress for the Philippines. “We still have our physical constraints, which is infrastructure. We face it everyday in Metro Manila,” University of Asia and the Pacific economist Victor Abola said in an interview.

Abola added that the Philippine government’s level of political will has varied from issue to issue.

Congress this year passed the country’s first Competition Law, the implementing rules for which have yet to be crafted. The measure aims to loosen oligarchies’ stranglehold on major sectors of the economy to give smaller businesses a better chance at success.

“What we’re seeing is that we have these nice laws but we have a soft state,” Abola said. He said implementing the Competition Law—arguably the most significant piece of economic legislation passed by the Aquino administration—will serve as a test to the current and future governments in resisting vested interests.

Another reform the country would need to advance is the passage of the freedom of the information bill, which would enhance accountability and reduce corruption in government, Abola said.

Seen from the lens of 1996, many parts of the Philippines are barely recognizable. But in 2015, it should be apparent to local policymakers that the bar set by the country’s Apec peers has never been higher. “What’s clear is that curing poverty is much more complex than we ever imagined,” Luz said.