"Philippines: Growth Prospects and the Future of ASEAN"

May 21, 2002

Her Excellency Gloria Macapagal Arroyo
President, Republic of the Philippines

I would like to thank Nihon Keizai Shimbun for inviting me to this conference, which is a wellspring of leadership, competence and commitment.

The year 2001 may be a year most countries would want to forget. With the sharp contraction of the global ICT industry, not a few economies underwent recession or stagnation. Then the September 11 terrorist attacks came and changed the world altogether.

On top of these external shocks, we in the Philippines had to contend with internal problems. When I assumed office in January 2001, business confidence was at its lowest ebb. The political scandal involving my predecessor had induced capital flight, jacking up interest rates and the inflation rate, and sinking the value of the peso to historic lows.

Upon assuming the presidency, our economic team initiated a budget deficit-reduction program, in order to prevent government from crowding out the private sector for investment funds. On the monetary side, my administration focused on price stability as the main objective.

The results of these policies were gratifying. Inflation and interest rates also fell, reaching historic lows.

In an otherwise bleak global landscape, our economy registered a real GNP growth rate of 3.7 percent.

The spreads of the country's sovereign issuances became narrower, making future government borrowings cheaper.

The major credit rating agencies upgraded the country's credit rating outlook from negative to stable.

The peso-dollar exchange rate stabilized despite the decline in export receipts. Gross international reserves now stand at an all-time high.

The explanation for our economic performance is the hard work of the Filipino people, their support for my administration, and the assistance of friendly countries such as Japan.

Private analysts and multilateral agencies such as the Asia Development Bank and International Monetary Fund attest that the Philippines has the strength and capacity to build on these achievements.

The expected rebound in exports and investments due to the recovery of the first world economies will hopefully accelerate our GDP growth.

We are committed to foster development to uplift the lives of the poor.

We are strengthening the pillars of our house to meet the challenges and opportunities of the global environment. The Philippines is fortunate to be at the center of the action, because East Asia is projected to be the hub of the highest growth in the world in this century.

The emergence of China as a market economy is integral to our regional growth scenario. The Philippines regards China as the catalyst for rapid economic expansion in Asia.

There are concerns that China would be a formidable competitor for ASEAN.

But ASEAN exporters have been competing with China in major markets for more than twenty years, ever since China obtained most-favored status from the US in 1980. in this sense China's entry into the WTO is to ASEAN's advantage, because China has come into the ambit of universal norms.

ASEAN is able to trade with China. ASEAN-China trade totaled 39.5 billion US dollars in 2000.

Complementarities within manufacturing industries, along horizontal divisons of labor, have enabled ASEAN to take advantage of niche markets and design differentiation.

A case in point is the semiconductor industry of the Philippines. Demand for this component in China has led to a hundred-fold increase from 1995 to 2001. Industrial manufactures now account for 62 percent of Philippine exports to China, and electronics such as semiconductors and other components account for 90 percent of this type of exports.

In the short term, China may add to competitive pressures. However, in the long run, China's market would function as a magnet for products and services in the region.

The agenda for ASEAN firms is how to remain efficient and market-savvy.

A free trade area between ASEAN and China would upgrade market efficiencies.

The rush into China is, more than anything else, a race to secure a foothold in its huge consumer market. Here, then, is another incentive for creating an ASEAN-China free trade area. Large integrated markets, not small fragmented ones, are what attract investors.

ASEAN's population is 500 million, as against China's 1.3 billion population.

But ASEAN's GDP is almost the same size as China's. Combining them would give birth to a market of 1.8 billion consumers, or almost a third of humanity. The wide variety of traditional strengths, talent and natural resources of the two areas would shape the contours of this giant consumer market. As it evolves, investment flows would be redistributed in the future.

The Japanese consultant Kenichi Ohmae has pointed out that the China exporting to Japan is not actually made up of Chinese firms, but is part of a production system conceived in Japan that simply uses Chinese land and labor. Since China by itself would not have been able to penetrate the Japanese market, he said it is basically still a case of "Japan competing with Japan."

To build on AFTA, a number of ASEAN member countries have suggested multiplying the Japan-Singapore Economic Partnership Agreement or EPA. It promotes not only trade, but also ties in science and technology, tourism, human resources development, and other important sectors of the economy.

Regional and bilateral trade agreements, as long as these remain as open arrangements, complement and strengthen the multilateral system of the WTO.

Developing countries have devoted their collective energies to ensure that the DOHA round of the WTO would be a truly developmental round. Economies that have adopted market-driven policies should be rewarded by more open markets, especially for products that are particularly important to them.

Regional and bilateral trade areas are hubs of open regionalism. The task before us is how to expand our cooperation to other areas.

ASEAN should foster multiple linkages in areas such as finance, energy, environment, and peace and security in this part of the world.

In finance, the landscape of globalization is littered with quicksand. To shelter ourselves from destabilizing flows, we have set up a network of bilateral swap arrangements under the Chiang Mai Initiative within the ASEAN plus three framework.

We welcome the additional protection offered by the recently concluded arrangement between the central banks of China and Japan. Since Japan and China have the largest foreign exchange reserves in the world, this agreement fortifies the region's firewall against speculative attacks.

The network of currency swap arrangements is the first step toward much deeper financial and monetary cooperation in East Asia. In the future, we can further explore the feasibility of having a common basket of currencies.

Aside from finance, the time is ripe for cooperation in the energy sector. The continued growth of our economies would depend on a stable supply of energy at a competitive price relative to other regions. The European Union has demonstrated, from its beginnings as the European Coal and Steel Community, that energy can be a catalyst for regional cooperation.

Aside from finance, the time is ripe for cooperation in the energy sector. The continued growth of our economies would depend on a stable supply of energy at a competitive price relative to other regions. The European Union has demonstrated, from its beginnings as the European Coal and Steel Community, that energy can be a catalyst for regional cooperation.

The region can, for example, explore cooperation in common stockpiles of oil, environmental quality control on oil products, interconnecting power systems, and utilization of natural gas.

China's cooperation is vital in environmental issues.

In laying the groundwork for multiple linkages, East Asia must cultivate an environment of peace and security.

It is important to present a united front against terrorism and international crime, such as illegal trafficking of children and women, and money laundering. But much farther than that, we have to recognize that beyond physical security, there is the broader concept of human security, which relates to basic human needs such as food, shelter, education, and employment.

Unless both are effectively addressed, impoverished and disillusioned communities will continue to be breeding grounds for terrorism. Japan's leadership in the reconstruction of Afghanistan is a prime example of this keen awareness of the paramount value of human security.

In all spheres of cooperation, the role of Japan is crucial.

More than a century ago, in 1886, a young Japanese author named Tokutomi Soho wrote a book titled "The Future of Japan." After analyzing European geopolitics in the 19th century, Soho said that "the World of Might" would be replaced by the "World of Wealth," and he predicted that interdependence, especially through trade, will become the path to peace.

The challenge before us in East and Southeast Asia is how to integrate our multiple linkages into a common vision for the rest of the 21st century.

All countries today aspire for pacific solutions. we share the same prayers for peace, good health, justice, dignity, and prosperity for our peoples. And most of all, we all believe we can achieve so much more by acting together.

Building peace and attaining prosperity in East Asia would be our noblest contribution to the world.

Thank you.

Titles of speakers, names of companies, etc., were correct as of the time when the forum was held.