News Analysis Trade

Size matters – to a point

Asean Economic Community

Safety in numbers, combined muscle, a pooling of resources, economies of scale, the removal of trade barriers (tariffs, etc.), call it what you will, but regional trade blocs, customs unions, common and single markets – and all their splinter groups – are a fixture of the global business landscape.

And there are plenty of them. Here’s a few: the North American Free Trade Agreement, or Nafta, a grouping of the US, Canada and Mexico; the BRICS – an economic grouping between Brazil, Russia, Indonesia, China and South Africa; the European Union, a 28-nation bloc; the embattled Trans-Pacific Partnership, up until the US withdrawal in January, a proposed union of 12 countries intend on leveraging trade in East Asia; the Asia Pacific Economic Cooperation, or Apec, with 21 Pacific Rim member economies, mutual trade is at its core; the eight-states Central American Common Market; the Gulf Cooperation Council comprising six Arab states located around the Persian Gulf.

The fact is, in a globalised world, size matters. And, in the absence of any global cataclysm – a Third Conflict, for example – such blocs and groupings are here to stay. Most likely, they’ll grow in number – there are many more of them already on the drawing boards or waiting in the wings.

We turn now to the 2017-18 Global Competitiveness Index (GCI), produced by the World Economic Forum – a comprehensive study that rates the relative competitiveness of 138 countries world wide. Here, under the sub-index – ‘Efficiency Enhancers’ – we look at two indicators: ‘Market Size’ and ‘Financial Market Development’.

Let’s deal with the first of these. We’ve condensed these results to show the Philippines in the context of its peer group, the Association of Southeast Asia Nations (Asean) states. Asean member, Myanmar, is not covered in this survey. Rankings shown are the global positions of these countries.

Here are the ‘Market Size’ rankings: Indonesia, 9th; Thailand, 18th; Malaysia, 24th; Philippines, 27th; Vietnam, 31st; Singapore, 35th; Cambodia, 84th; Laos, 101st; Brunei, 110th.

The size of the domestic market is a huge factor here, based on that alone, the Philippines with the largest population in the region after Indonesia, should by rights be second in the list. What’s ensured it’s not is its poor performance of exports as a percentage of gross domestic product. We need to show the rankings for this to clarify the picture.

They are: Thailand, 19th; Malaysia, 17th; Vietnam, 11th; Singapore, 3rd; Cambodia, 18th; Laos, 81st; Brunei, 35th; Philippines, 89th; Indonesia, 114th.  Don’t dwell on Indonesia’s performance here; it more than compensated in other areas such as its gross domestic products (GDP) PPP ranking where it came 8th against the Philippines in 29th place.

What helps all these countries overall, though, is the size of their collective market – the Asean Economic Community (AEC), a bloc that came into being on 31 December 2015. Just 22 months old, the AEC’s goals are far reaching and its size is assured. To overseas investors, traders and entrepreneurs, doing business with a vibrant region – Southeast Asia – that’s welding itself into a single market and production base is vital. And the figures bear this out.

In 2015, ‘Developing Asia’ experienced foreign direct investment (FDI) inflows surpassing half a trillion dollars. As a region, it was the world’s largest FDI recipient. But what’s even more significant is that East and Southeast Asia took the lion’s share; of the US$541 billion FDI ploughed into ‘Developing Asia’, a whopping US$448 billion flowed into this sub-region. That’s 82.8% of the pie.

Let’s put that into sharper focus. A total of US$765 billion FDI went to the world’s developing economies in 2015 with 58.6% of it ending up in and around the AEC. Latin America – once the darling of the investment community – along with the Caribbean received FDI inflows of just US$168 billion – a 21.9% portion of the total 2015 pie for all developing regions.

This is why size matters. The AEC has a population of around 630 million – far bigger then than the European Union with a population of around 507 million. Furthermore, more than half of the AEC’s citizens are below the age of 30, giving it a huge advantage over regions where the populations are ageing and national workforces are becoming increasingly challenged.

Furthermore, the Asean economy – US$2.4 trillion in 2015 – is the world’s sixth largest. In order it follows those of the US, China, Japan, Germany and the UK.

The Philippines is part of this leviathan, but it needs to push ahead with economic reforms and boost its own attractiveness as an FDI destination. In many ways, Manila is at the forefront of Asean – it’s a founding member of this grouping and has maintained its lead role in a number of areas. That said, however, its economic development has not kept pace and it’s found itself trailing its neighbours in a host of sectors – notably investment inflows and tourist arrivals.

As far as numbers go, with 103 million citizens, the domestic market and the young labour force is huge. But exports and the foreign-market sector continue to operate below par – and particularly in the context of the AEC. Market reforms, therefore, should not be treated like some political football; they should be addressed in a non-partisan spirit for the good of the nation and for the greater good of the Asean Community.

The AEC needs all component states to pull their weight to the best of their ability; it’s still young and it can’t afford passengers.

Now we turn to the GCI’s rankings for ‘Financial Market Development’. Here they are: Singapore, 3rd; Malaysia, 16th; Indonesia, 37th; Thailand, 40th; Philippines, 52nd; Cambodia, 61st; Vietnam, 71st; Laos, 75th; Brunei, 87th.

We’d like to see the Philippines ahead of Indonesia and Thailand, but overall this is a fair showing. Two areas, however, where it really must improve are ‘Legal Rights’ where it found itself in the 95th slot and ‘Venture-Capital Availability’ where it came 70th. Here, doubtless, the former had an impact on the latter.

We have to say, we find it difficult to comprehend how a country that puts such great store by its legal prowess can operate such a bankrupt judicial system. Laborious, technologically stunted, bureaucratically strangled, sleazy and corrupt, it’s an embarrassment to anyone with a sense of fairness. And it’s a major deterrent to direct investors and venture capitalists.

The system needs a total overhaul to eradicate the malpractice and the mal-administration. It needs to reduce the number of non-productive, obstructionist ‘bums on seats’; it needs upgrading to automate the processes and procedures of filing cases; it needs to weed out – from the Philippine Bar Association if need be – lawyers/attorneys and judges who delay or prolong cases for no other purpose than to benefit their clients or those standing before them.

Its officers and officials would do well to trade some of their arrogance for a little humility – they have nothing to be proud of in the Dickensian state of their courts.

This particular indicator which deals with the efficiency of the country’s courts and whether or not a complainant – a foreign entity seeking legal recourse over a contractual dispute, for example – can get justice in those courts, continually hamstrings foreign investment.

The Philippine judicial system is guilty of all the above, and more. It’s time to pass sentence on it – not just for investors, but for the sake of the entire Filipino citizenry.

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