RP's economic reforms to stay after Ramos

By Cecilia Quiambao

MANILA (JP): A lower than expected growth in the first three months of the year has stoked fears of an impending slowdown as the Philippine economy adopts to free market competition while trying to avoid the travails of neighboring Thailand.

Falling industrial output and shutdowns in key manufacturing sectors like clothing and textiles, rubber and basic metals are showcase roadkills in President Fidel Ramos' drive to attain "global competitiveness" into the next millennium with the twin policies of deregulation and liberalization.

These concerns have arisen amid the backdrop of a looming uncertainty over the presidential succession next year, as well as the oft-stated concern that the Philippine economy could go the way of the Thai system, which is suffering from a financial crisis due to a property glut and lack of confidence in the banking system.

Part of the economic malaise can be traced to Manila's free- trade commitments under the World Trade Organization and the Association of Southeast Asian Nations' bid to create an ASEAN Free Trade Area by 2003, pushing uncompetitive industries close to extinction and causing what officials describe as "transitory" discomfort to the economy in general.

"There is no general slowdown," Economic Planning Secretary Cielito Habito insists in an interview published by the Philippine Inquirer newspaper. "It is a temporary phenomenon resulting from a restructuring that has had to happen because of changing competitiveness in the sectors."

Nevertheless, the figures were cause enough to worry the Ramos government, which ordered a general review of the situation.

The Philippines' gross domestic product (GDP) grew 5 percent in the three months to March, the lowest over five quarters according to official National Economic and Development Authority data. It was dragged down by an underperforming industrial sector, which expanded by just 3.85 percent compared to 6.07 percent in the same period last year. Industry contributes about 35 percent of Philippine GDP.

Manufacturing, which contributes nearly 70 percent to industry, posted an output growth of 2.33 percent in the quarter, well below the four previous quarters which had a range of between 4.9 percent to 6.3 percent.

Textile output plunged 14.12 percent, clothing and footwear fell 14.4 percent, basic metals contracted 16.7 percent, metals dropped 10.39 percent and rubber retracted 8.96 percent.

In addition, despite a new mining act designed to boost the sector, mining output was slashed 19.44 percent amid environmental concerns. A major copper operation in the central Philippines was shut down due to a mammoth tailings spill and the operations of three gold producers were disrupted by labor disputes or their failure to pass rigid environmental impact assessment tests.

Of these sectors, the clothing industry and related textile producers were a key concern since articles of clothing and apparel are the country's number two export group, behind only semiconductors.

The Textile Mills Association of the Philippines said in a statement that the reduction of import tariffs on fabrics, to 10 percent from 20 percent in 1994, "has completely wrecked the viability of our weavers and knitters." With cheaper labor costs in China and Vietnam, the sector has been in a decline since 1990, with 15 textile mills closing down between 1990 and 1995.

Cheaper imports were also the bane of rubber and basic metals manufacturers.

"To some extent, I'm willing to concede maybe some negative effects," Economic Planning Secretary Habito says.

"But the obvious objective of opening up the economy is precisely to make these industries competitive so that they will no longer need trade protection through tariff walls," he said.

"It has never happened that an industry dies because of tariff reductions. Maybe individual firms die, but the stronger ones remain."

Still, the government has adopted a six-point "action program" to deal with the situation, including a review of the tariff reduction program, rationalization of tax and non-tax incentives offered to investors, monitoring of compliance to trade agreements, plugging leaks from "duty-free" shops which threaten the local food processing sector, liberalization of inputs to industry and infrastructure development.

The fifth plan mainly concerns electricity, which is the second most expensive in the region and which contribute to higher overhead production costs.

Trade Secretary Cesar Bautista, who prepared the action plan, maintained that both the government and the private sector believed that "the policy of liberalization of both trade and industry, the test of global competitiveness, and market-led mechanisms are fundamentally sound."

"We should not stray from the winning formula. However, the review should be taken urgently, more to calibrate our actions in the face of present-day economic competitive environment, than to establish new direction."

Political scientist Alex Magno warned against the populist temptation to backslide on the Ramos reforms.

"We should draw a clear line on the non-negotiable parameters of our trade and industrial development strategy," he said. The basic thrust of liberalization and encouragement of competitiveness ought to be affirmed."

He said, "we should resist the temptation" to defend "the obsolete industries we already have at the sacrifice of more efficient new enterprises that will bring higher value-added to our economy."

The biggest threat on the political front, in the view of the business sector, is the election to the presidency of Vice President Joseph Estrada.

The actor-turned-politician who the investor community hold as having a suspect grasp of economic issues has been leading all independent popularity surveys over the past two years.

While many reforms are embedded in law, the thinking is that if the composition of the new Congress would reflect Estrada's way of thinking, many of these statutes could be amended to accommodate political interest groups or worse, reversed.

"I think that there will be volatility in the market before and after the elections," UBS Securities (East Asia) Ltd's vice president Corazon Guidote said. "If Estrada wins, we expect there will be more volatility."

But, Hong Kong's Political and Economic Risk Consultancy said in its latest country report that the Manila economy was unlikely to go the way of Bangkok.

"The Philippines is in much stronger shape than Thailand and is unlikely to go down the same road," the report said.

While acknowledging the business concern over an Estrada presidency, "the reality of the situation, however, is that no matter who is elected, the reforms enacted by Ramos are likely to remain in place."