Manuel Pangilinan, Managing Director, First Pacific; Teresita Sy-Coson, Vice-Chairperson, SM Investments; and Jay Yuvallos, President, Interior Basics Export Corporation: Interview

Interview: Manuel Pangilinan, Teresita Sy-Coson and Jay Yuvallos

Which areas of economic activity are best positioned to benefit from deepening economic integration among ASEAN economies?

MANUEL PANGILINAN: The macro numbers for integration are compelling. ASEAN will encompass a market of 600m people and a GDP of several trillion dollars. The trick in this process will be to successfully exploit a market that is not yet unified. In theory, ASEAN would mean 600m mouths to feed; however, it is currently not easy to penetrate the regional markets and make a profit. On agriculture, for instance, the Philippine sugar industry is not competitive, because the cost of importing sugar, even if at a 5% tariff, is half the cost of domestic prices. From a consumer standpoint, the Philippines would be better off importing sugar; however, this would displace 4m workers whose livelihoods are dependent on the sugar industry.

Unless the Philippines puts certain quantitative restrictions on imported sugar, this would hurt the domestic industry. As a result, the country can either slowly transition by allowing the industry to disappear and ultimately import sugar, which would benefit consumers, or alternatively, it could enable the sugar industry to be competitive against other markets by increasing productivity, expanding sugar milling capacity and increasing the scale of farms. This is a restructuring that would take time to realise. Similarly, in rice production, the Philippines has enough land to increase the productivity of rice fields and to eventually reach self-sufficiency. Looking at the fats and oils market globally, about 55% is driven by palm oil, which is not competitively produced in the Philippines, when compared with Malaysia, Indonesia and certain countries in Africa. Large global producers of palm oil require huge commercial farms, but finding that kind of property in the Philippines is difficult. On the other hand, coconut oil makes up 7%-10% of the global fats and oils market, and the main two producers of coconut in the world are the Philippines and Indonesia.

Within the context of ASEAN, if both countries were able to coordinate their coconut development, they could dominate that particular sector and become significant players in the global fats and oils market. For the Philippine coconut industry, becoming a significant player will involve moving beyond the traditional usage of coconut as cooking oil to developing higher-value products like cosmetics or coconut water. To tap these opportunities, the country needs to increase productivity, build processing facilities, develop storage techniques and improve shipping facilities.

As most of the coconut trees in the country are old and subjected to cocolisap (insect infestation), the transition will not happen overnight.

JAY YUVALLOS: The service sector remains the country’s principal strength given its young demographic profile. As sectors access more technological innovations, the Philippines will remain in the best position to capitalise on the opportunities created by the ongoing integration process. Economic integration will not only mean that 10 ASEAN economies will increase trade with one another, but opens huge opportunities to leverage the ASEAN brand in the global market. The Philippines is poised to take advantage of integration, as it has been an integral part of the whole ASEAN growth story. ASEAN has surpassed the US, the EU and other major economies in terms of growth, and is estimated to continue growing at a rate of 5.5% annually over the next four to five years.

Given the government’s strong anti-corruption campaign and commitment to reversing underinvestment in infrastructure, coupled with a very young workforce with highly adaptable culture, the Philippines is an ideal location for start-ups and small and medium-sized enterprises (SMEs).

These firms use technology to level the playing field and to tap into opportunities in the services industry, which is still dominated by big players. Furthermore, we see a resurgence in the country’s manufacturing sector as China’s labour costs continue to rise and as integration attracts more foreign direct investment into the region.

 TERESITA SY-COSON: ASEAN leaders are coming together to pursue integration through a free flow of labour, businesses and capital. Both public and private sectors are gearing towards achieving success in that area, in spite of inevitable nationalism and protectionism in each of the ASEAN members.

Recognition of the benefits of integration is developing fast, even as true unification of the region may still be far off. The Philippines needs to put an emphasis on agricultural development, through government support and environmental calamity resilience, as it constitutes a basic employment driver for the population, whether self-employment or company employment.

Additionally, the country needs to strengthen its business process outsourcing (BPO) industry, to ensure it continues as a major employer and key enabler of the consumer economy. It is still difficult to estimate the potential contribution of manufacturing in employment numbers, given disadvantages in the country, however, the Philippines would benefit most from being part of an integrated production base in ASEAN, rather than competing with other countries.

The streamlining and harmonisation of Customs and payment systems would be a major catalyst in this integration. Not being part of the interlocked ASEAN continent, the Philippines would need to strengthen its connectivity, not only through physical infrastructure, but also digitally.

On the physical infrastructure front, roads alone will have a significant impact on economic progress in the Philippines, by making things more accessible. To complement these changes, new technologies will emerge to help in levelling the playing field for entrepreneurs, who can use the digital space to access markets and strengthen their competitiveness against larger companies.

What practical steps can be taken to encourage the mobility of skilled labour throughout countries within the ASEAN region?

YUVALLOS: The revenue of large corporations compared to SMEs is far bigger; however, in terms of employment generation, SMEs employ 65% of the population. This would need to be reversed by increasing research and development (R&D), improving training for workers and changing their mindset so that they can expand beyond domestic shores. The levelling up of SMEs to grow and create more business champions will depend on efforts from the government and private organisations.

We must understand the implications of ongoing trade liberalisation and strengthen processes to compete effectively in local and international markets. ASEAN is working towards recognition of skills and professions across the region after undergoing proper licensing and accreditation.

Mobility and mutual recognition agreements are premised on comparable standards of education within ASEAN, which could take time to mature. Education and training through the use of technology is critical at this stage.

PANGILINAN: The availability of English-speaking and well-educated workers allows the Philippines to nurture the growth of call centres and position BPOs, as an important element of the economy. The industry serves as a counterpart to overseas Filipino worker remittances, as it effectively exports labour, although physical bodies remain onshore. There is a caveat, however, given that improved margins for BPO activities in Vietnam or China could lead to an exodus of BPOs elsewhere, as they have no fixed-asset investments in the country. An industry with big potential multiplier effects for economic growth and employment generation is mining. However, this sector is heavily regulated by the government, thus it needs the right support environment to entice exploration, facilitate cooperation with environmental groups and streamline environmental approvals.

Although there has been much discussion about labour mobility, it is unlikely that neighbouring ASEAN countries will freely open their borders to Filipino professionals, as local professionals will likely raise concerns. Theoretically, given that the Philippines produces a surplus of doctors and nurses, it should be able to export these. However, there is always a political threshold one cannot cross, as it triggers attention and restrictions.

For a Filipino doctor to work in Singapore, they would have to be accredited through a very bureaucratic process, and local governments still typically raise complaints. The disparities in political systems and stages of economic maturity among the 10 ASEAN member countries are so wide that it is very difficult to achieve labour mobility. Nonetheless, economic logic will drive expansion over time as countries see it is mutually beneficial to cooperate on employment strategies.

SY-COSON: Government should encourage the scaling-up of domestic companies, while taking care of smaller industries. There are a lot of advantages in scaling up. It enables corporations to be more competitive and stimulates inclusive growth due to spillover effects, where SMEs can tap into opportunities created by the expansion of larger industries. As long as governments make it simple for SMEs to grow by making the regulatory framework less restrictive, they will be able to supply and compete with the bigger companies by capitalising on innovation and their ability to react to the market. Big brother and little brother relations between large companies and SMEs would serve to accelerate professionalisation of the latter, as they would be exposed to best practices and adopt a more ambitious vision.

The Philippines has a good knowledge base, which enables it to export a lot of people to other countries as well. That is why the country stands to benefit from freer movement of people and businesses. Although the opening-up is happening, there is still protectionism regarding licensing, approval processes and quotas for skilled labour mobility across the region. It will take another decade for full mobility of professionals to materialise. However, there is already a regional inclination towards that goal. The hospitality industry is something close to Philippine culture. Therefore, if the country can populate the world in that space or entertainment, or even simple low-skills areas like housekeeping – it will generate significant opportunities for labour. While other countries may produce the same professions, the Philippines does have an edge, because it can supply the manpower to train workers abroad.

How can the Philippines raise the level of awareness about ASEAN integration and its benefits across domestic businesses?

SY-COSON: There has been significant positive momentum in raising awareness of ASEAN integration, and in improving the distribution of communication to reach companies and businesses across industries of various sizes. In fact, a big part of the equation has been centred on supporting SMEs and encouraging inclusive growth in the integration process. In tandem with these efforts, awareness-raising activities have been active in provincial areas to accelerate decentralisation and include provincial companies, so that they benefit from regional opportunities. ASEAN does not have a common market or common currency, but it does have the ability to strengthen coordination both domestically and between countries regionally. This will ensure that they capitalise on the opportunities springing from the integration and inclusion of private businesses. Countries realise that there is no point in working in isolation.

This explains why there is an increased awareness in the value of networking and partnerships among regional companies and governments, with the ultimate goal being the establishment of networks and expanded penetration in all markets.

YUVALLOS: Most large corporations are already global, so awareness is not an issue. Their strategic consideration is how deep do they go. However, the challenge is still with the SMEs which need to be motivated, given guidance and “hand-holding” to prepare them for the integration process. Given their domestic market mind-set, they must be inspired to explore uncharted territories by transforming their business model and pursuing active regional partnerships into their business equation. They have to improve their product quality standards, packaging and expand distribution beyond just the local market. Globalisation does not simply mean exporting but importing as well.

Since 2010, the ASEAN Trade in Goods Agreement stipulated that over 99% of products within the block would be at a 0%-5% tariff. As a result, the first step of integration and facilitating trade is now in place. The second step is the internalization by SMEs of the full benefits and opportunities that are possible due to the integration. SME’s cannot afford to stay at the bottom of the supply chain, which would have an impact on their very survival. The government, every business support organisations, the academe, and other stakeholders should ask this question: “How do we make Filipino businesses world class?” Whether we like it or not, integration and globalisation are here. Awareness and education is just the initial step if we want our businesses to thrive and succeed.

PANGILINAN: Awareness of ASEAN is important if one wants to understand integration. However, the meaningful question will be, how can companies across industries make integration work for the development of their business. SMEs will find themselves in the middle of this process and will need to be supported through technology infrastructure and telecommunications facilities.

This will facilitate their access to markets regionally and fuel efficiency. Availability and adoption of technology will bring down the cost of doing business for medium-sized companies as they seek to be more competitive when dealing with their regional counterparts. There has also been increased government support regarding incentives, tax cuts and other complementary systems intended to facilitate SME growth.

These schemes will allow SMEs to make more meaningful contributions to domestic GDP. Other ASEAN countries would also need to improve their infrastructure to encourage migration, communication and travel throughout the region. This would in turn significantly reduce the cost of cross-border business transactions.

There is simply no reason why the Philippines cannot import coconuts or sugar to be processed domestically. It should aim to increase sugar productivity to meet a portion of the 4.5m tonnes of sugar Indonesia annually imports, while Indonesia would be able to export flour or meat to the Philippine market. Increased connectivity would facilitate inter-regional trade, while also helping to enable the competitiveness of domestic exporters.