RP's economic reforms to stay after Ramos

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."