April 2009
The Undiscovered Planet
It's not like Europe were a planet the Philippines hasn't yet discovered.

The world's largest single market; the world's largest outsourcing market; the Philippines’ largest foreign investor and third largest export market lies just 9,000 kilometers to the West.

Trouble is that when the Philippines looks West, it first sees China—and that’s where its definition of the West apparently ends.

And when it decides to expand trade and foreign investments, its reaction is to turn East towards the USA, which remains the main market for its top export, electronic products, and the main customer for its high growth business process outsourcing (BPO) industry.

A bit more “farsightedness” by the Philippines, however, will reveal that this “undiscovered planet” called Europe can do more to boost economic growth if the government and the private sector showed more persistence in tackling the trade, treaty and technological issues that can open more of Europe’s largely unexploited market to Philippine exports.

Hubert d’Aboville, President of the European Chamber of Commerce of the Philippines (ECCP), noted that Europe and its over 500 million consumers is the number one world market in terms of value.

“Yet it is not fully known by the Philippines,” he said.

Conversely, Europe also doesn’t know too much about the Philippines as a market for its products and services.

This “invisibility” is doing neither side any good.

PCA: a key first step
Negotiating a new free trade agreement with Europe will be a decisive step in addressing the Philippines’ view of Europe—and further opening access to local markets that can benefit from infusions of European investments and technology.

Europe has long had the aim of engaging the Philippines in a free trade agreement where barriers are significantly reduced and trade expands as a result of specialization and comparative advantage.

“The EU is interested to pursue a bilateral trade agreement with the Philippines in line with a potential regional free-trade agreement with the Association of Southeast Asian Nations (but) I am still waiting for the response we want to see,” said ECCP Executive Vice-President Henry Schumacher.

His observation stems from the delayed negotiations for the Partnership and Cooperation Agreement (PCA), a pre-requisite deal for the Philippines to qualify for the comprehensive Free Trade Agreement (FTA) between the EU and ASEAN, and the still missing official word that bilateral FTA talks can start.

The PCA is expected to enhance political cooperation and related matters, trade and investments cooperation, and economic and development cooperation through policy dialogue and technical assistance. Besides re-affirming the close relations between the Philippines and the EU, the PCA also illustrates a shared commitment to development, democracy and human rights.

Pres. Gloria Arroyo said the PCA has the potential to open more opportunities for greater collaboration in a range of areas, and would stimulate greater Philippine trade and investment links with Europe.

Negotiations for a PCA between the Philippines and the European Union (EU), which were to have begun in June 2008, were finally nudged forward after Pres. Arroyo and European Commission (EC) President Jose Manuel Barroso met in October 2008 in China. Both leaders reached the agreement during a meeting on the sidelines of the 7th Asia-Europe Meeting. The Arroyo-Barroso encounter led to two days of initial PCA talks in February 2009 during which both sides said they had made substantial progress.

The Philippines and the EU are to open the second round of negotiations in July in Manila with a third round scheduled in Brussels.

Gabriel Munuera Vinals, head of the economic, political and trade affairs of the Delegation of the European Commission in the Philippines, told the ECCP Business Review the February meetings were the first exchange of each side’s position on what the PCA would be like. He was heartened by the overall positive reaction of the Philippines to the talks.

“The impression we got is that the Philippines is definitely interested in negotiating a good PCA as soon as possible,” he pointed out.

“There was a common realization there is a great deal of convergence in our positions. This is definitely good news.”

He said the EU expects the meeting this July to result in a consolidated new draft with inputs from the initial exchange of views.

“We hope the government comes back to us with a revised counter proposal,” he said.

He then expects both sides to go into more details and reach an agreement on the text. The net result of these negotiations will be a quality agreement that underscores Philippine interests.

James Moran, EC Director for Asia and head of the first PCA negotiating round, said the EU understands the Philippine position, and that it expects to meet delays in the negotiation a comprehensive agreement that involves cooperation on human rights and the fight against terrorism.

“It’s a sectoral agreement and major areas of cooperation and also economic-related agreement. What’s important is quality that should come first. There’s no point rushing an agreement,” he said.

The Philippines’ co-lead PCA negotiators are Undersecretaries Enrique Manalo and Edsel Custodio of the Department of Foreign Affairs (DFA).

“I think under the present economic situation it’s necessary for the Philippines to network with our overseas partners to be able to go through the crisis, for example, in development and education that are priorities to us,” Custodio told media.

“In the end, there are political issues that might delay the process like human rights. We’re the same but we differ in priorities, people, and their level of standards on this is probably higher than ours.”

EU and the Philippines
The EU’s goals as regards its bilateral relations with the Philippines are explained in the EC’s “Philippine Strategy Paper 2007-2013.” The EU’s developmental and business assistance to the Philippines is aimed at:

“...prioritizing support for the Philippines’ further integration into the world economy through trade related technical assistance, having recognized the crucial role external trade plays in the country’s development and seeing the strong growth potential of Filipino exports to the enlarged European Union.”

In 2008, Alistair MacDonald, Ambassador of the European Commission to the Philippines, said the EU wants to negotiate a comprehensive, WTO-plus (World Trade Organization) FTA with ASEAN, drawing on the recommendations of the EU-ASEAN Vision Group.

“Such an agreement will . . . certainly bring considerable benefits to both the Philippines (and the other ASEAN partners) and to the EU,” he noted.

“In today's global world, we are all neighbors, and the prosperity of our global neighbors is an essential precondition for our own prosperity in Europe,” Ambassador MacDonald said during the EU-Philippine Relations conference in May 2008.

Bilateral relations between the Philippines and the EU are currently covered by the dated 1980 ASEAN-European Community Cooperation Agreement. Present developments, however, require an enhanced framework of relations between the Philippines and the EU.

This new framework—the PCA—should open avenues for greater cooperation in areas such as trade and investment, development cooperation, and other current economic and financial matters. The PCA provides a foundation for enhancing bilateral cooperation with the enlarged EU and its 27 Member States.

The DFA said there is a clear need for deeper engagement with the EU to further open up opportunities for trade, investment and development cooperation.

The upside for the Philippines
A 2006 study by the EU on the potential impact of an EU-ASEAN FTA said this agreement would have a large positive effect on ASEAN trade and production compared to other modes of trade liberalization.

For the Philippines, the FTA becomes profitable with the liberalization of trade in goods and a substantial liberalization in services.

Opening access to more of the country’s various markets to competition will ultimately benefit the Filipino consumer who will be faced with wider choices that offer him more value for his peso.

“Opening Philippine markets to more investments from Europe will also enable Philippine industries to be supported and move faster,” Schumacher said.

“In these difficult times, it may be good to look at those market segments that have successfully been ignored in previous years.”

Among these markets Europeans are interested in Philippine products and services, such as furnishings, gifts, processed food, fruits, BPO, medical services, and retirement and healthcare and tourism.

Chickens, said D’Aboville, are an interesting example of the opportunities the Philippines has missed by turning a blind eye to Europe. Thailand ships 500,000 tons of chicken to Europe annually. Despite this clear market, the Philippines has not shipped a single chicken to Europe.

Schumacher said the Philippines can do one better by buying chickens from anywhere, processing the chickens here into yakitori and fly these value added product to Japan, using the Clark and Subic export processing zones and logistics hub.

More exports to the EU
An FTA could also help reverse the Philippines’ disappointing trade picture with the EU. Philippine exports to the EU dropped at an average rate of 6% annually, or from €7.1 billion in 2003 to €5.6 billion in 2007.

This when exports from ASEAN as a whole to the EU were growing at about 5% per year. Vietnam’s exports grew 12.7%, followed by Thailand (8.7%), Cambodia (7.9%), Indonesia (4.9%) and Malaysia (3.2%).

Less than 1% of EU exports are purchased by the Philippines. On the other hand, EU exports to the Philippines more than tripled between 1990 and 2001.

The Philippines is also the lowest European FDI destination among middle-income ASEAN countries. The Philippines received only $1.8 billion FDIs from Europe between 1995 and 2006, compared to $50 billion for Singapore, $11 billion for Malaysia and $3 billion for Vietnam.

“In part the poor performance of the Philippines may be structural. The biggest decline came in the electronics sector,” said Ambassador MacDonald. “But when other ASEAN countries are so clearly taking advantage of EU market opportunities, it's a great pity that the Philippines is not doing the same”.

In 2006, the EU was the largest single investor in the Philippines with 28% of FDI flows as against 18% from the US and 4% from Japan. In the late 1990s, the EU was, on average, the third largest investor in the Philippines.

D’Aboville believes a focus on Europe could help to reverse the trend of declining Philippine exports to Europe.

“This would entail the tough task to expand the product range from the monoculture of electronics and semiconductors to more manufactured products, processed food and services. . . more decisive attempts have to be made to increase the visibility of the Philippines in Europe,” d’Aboville said.

Turning to the Philippines’ BPO sector, Schumacher said this would benefit more if it focused on increasing its dealings with companies in Europe, which is now the largest outsourcing market in the world.

The Philippines exported BPO services in the amount of $ 6.2 billion in 2008: 65% to the U.S., 25% to Asia and only 10% to Europe.

The Philippines would also do well to promote itself as a BPO destination more aggressively. Because of its weak efforts to convince European firms to relocate their back offices to the Philippines, the country is steadily losing BPO business to India and other destinations.

"Europe has many options, including South Africa, North Africa, South America and Eastern Europe. If Europe wants to go beyond these, it will consider India as India has presented itself in Europe for years. The Philippines has much to do to catch up," Schumacher said.

This year, however, has the makings of a good year for the Philippines’ BPO industry despite the international financial crisis with Europe the main reason for this optimism.

European investments in the Philippines’ BPO industry are expected to grow, according to Business Processing Association of the Philippines (BPA/P) President Danilo Reyes.

He expects European investments to rise in 2009, but said the Philippines will have to be more aggressive in attracting European investors to make this growth more likely. Europe is the largest outsourcing region in the world but only 10% of BPA/P firms are from Europe.

ASEAN to sign FTA
During the sixth ASEAN-EU joint committee meeting held in Kuala Lumpur last March, ASEAN trade officials said the group would collectively sign an FTA with the EU.

The overall consensus is that an ASEAN-EU FTA would benefit both sides. A May 2008 report shows that with an FTA, ASEAN exports to the EU by 2020 could rise by 18.5%, or 2% of its gross domestic product, while total EU global exports could increase by almost 2%.

The report also said both regions can gain significantly in the area of business services. ASEAN is the fifth largest trading partner of the EU while the EU is the second largest trading partner for most ASEAN member countries.

More European tourists and investments
The signing of the Tourism Bill 2009 into law by Pres. Arroyo, most likely this May, should finally liberalize the tourism industry to an extent that it fulfills its promise as a major economic growth engine.

The bill will declare a national policy that recognizes tourism as an engine of investment, employment, growth and national development. The government also believes the signing of the bill will pave the way for a greater cooperation between the public and private sector.

The proposed law aims to promote the Philippines as the premier tourist destination in Asia, and to upgrade its level of international competitiveness through a system of accreditation, standards-setting and classification.

The Senate version, or Senate Bill 2138, is entitled “An act declaring a national policy for tourism as the primary engine of investment, employment, growth and national development.”

It is welcome news since Philippine tourism—long an underperformer compared to Thailand, Singapore, Indonesia and Malaysia—should blossom with the strengthening of the Department of Tourism (DoT) and its attached agencies.

The bill also provides that the Philippine Tourism authority be reorganized into the Tourism Infrastructure and Enterprise Zone Authority (TIEZA) that will designate, regulate and supervise tourism enterprise zones (TEZs), and develop, manage and supervise tourism projects in the country.

TIEZA will extend fiscal incentives to European and other investors such as income tax holidays, a 3% tax on gross income earned in lieu of all national and local taxes and tax-free importation of goods.

With these policy pillars in place, the Philippines should become a more attractive place to visit for both tourists and tourism investments—including those from Europe. The establishment of the TEZs is an especially welcome development for European investors, tourists and retirees.

Tourist arrivals increased from two million in 2007 to over three million in 2008, with tourism revenues rising to $5 billion. From 2004 to 2007, tourism registered annual average growth rates of 10.5% and 34.9% in terms of tourist arrivals and receipts.

The government attributes the positive tourism performance in 2008 to the strong performance of European markets led by Russia, which posed a growth of 34%, France (l9%) and the United Kingdom (10%).

Tourism generated some 3.5 million jobs in 2006, but still contributed less than one percent to the country’s GDP compared to Hong Kong (10%), Singapore (10%), China (5%) and Thailand (5%).

Expensive air travel
The rosy future for Philippine tourism, however, must be accompanied by re-liberalizing the local aviation industry. As it stands today, documents such as Executive Order 500A issued in August 2006 are stifling the open skies policy vital to growing the tourism industry.

EO 500A imposed restrictions on foreign airlines flying to and from the Diosdado Macapagal International Airport (DMIA) in Pampanga, including the withdrawal of the fifth freedom right. It overturned EO 500 issued six months before that allowed foreign carriers to fly to DMIA without restrictions on capacity, frequency and air freedom rights, except cabotage (the right to fly domestic Philippine routes).

Fifth freedom is the right of an airline from one country to land in a second country, to then pick up passengers and fly on to a third country where the passengers deplane.

This means that foreign carriers must be designated as official carrier by their respective governments in order to avail of the unlimited third and fourth freedom traffic rights to DMIA and Subic Bay International Airport (SBIA). This impedes the operation of low cost carriers (LCCs), which carry the bulk of tourists and charge cheaper air fares, since most of them are non-designated carriers.

The EO also effectively limits direct flights from Europe to designated national carriers such as Lufthansa, the only European airline regularly serving the Philippines. The airline industry also has to contend with high Philippine taxes, another disincentive to tourism.

Tourists are, therefore, faced with the option of paying more to travel to the Philippines or not traveling to the Philippines at all.

A report by the House of Representatives recommended the government seriously consider re-liberalizing its air policies to circumvent the negative impact of the re-imposition of these restrictions on air travel.

The value of tourism
In 2006, the World Tourism Organization estimated that tourism represented some 35% of the world’s exports of services and over 70% in least developed countries.

In the same year, the Philippines accounted for only 0.34% of world visitor arrivals compared to Vietnam, Singapore, Thailand and Malaysia, which ranged from 0.42% to 2.07% of world tourist arrivals.

The Philippines took 0.34% of world tourist receipts, which was also behind most of its ASEAN neighbors.

The tourism law should also help correct these imbalances (if properly implemented) and with public-private partnership.

Retiring to the Philippines
It also bodes well for the country’s fledgling retirement industry since more tourists should also help convince retirees from Europe, the USA and other developed nations to consider the Philippines as their retirement home.

The Joint Foreign Chambers (JFC), including ECCP, have consistently taken the lead in promoting the Philippines as a retirement destination.

They have begun talks with two Filipino companies to develop retirement villages in Mactan and Tagaytay that will provide a complete lifestyle for retirees. Once built, the retirement homes will be fully supported by ECCP and the other chambers of commerce comprising the JFC.

Schumacher said these retirement villages will be built according to JFC recommendations to ensure foreign retirees they will be in good hands. The retirement homes will use a Thai retirement village as their model, both in the design and the financial aspects.

“Of course, if we will promote the Philippines, we also have to protect the people who will be coming here,” he said.

In July 2008, ECCP recommended Subic, Bonifacio Global City, Tagaytay, Cebu and Dumaguete as among the best retirement havens for retirees from Europe, China, Japan, and Korea.

These areas were chosen on the basis of medical service availability, hospital locations, universities and other amenities.

“There should be a different way in dealing with international patients," Schumacher said. “We want to know how these hospitals would be able to address those needs."

Schumacher said both the Philippines and the EU should make arrangements to extend the health insurance coverage of Europeans to the Philippines.

“These (initiatives) can increase relations between the Philippines and the European Union, and open up more doors of opportunities,” he added.

Schumacher said they will also seek the help of Trade Secretary Peter Favila to remove restriction on the practice of foreign professionals in the Philippines, especially for doctors. He said the presence of European doctors and other health practitioners in Philippine retirement homes will make European retirees feel more comfortable here.

After Tagaytay and Mactan, the next area targeted for a retirement village is Clark because of its proximity to the international airport and the presence of amenities for retirees.

The Philippine Retirement Authority (PRA), the government agency promoting the Philippines as a viable retirement haven, said the retirement industry hopes to achieve its target foreign exchange receipts of $40 billion, with four million jobs generated, by 2015. PRA said most American retirees receive $9,000 a year, a small amount to live on if one retired in the U.S.

The government estimates that if the Philippines took only .05% of the 360 million retirees today over the next 10 years, this number would infuse some $20 billion annually into the economy.

It said most retirees would come from Germany, Italy, France, the UK, the USA, Japan, Korea and Taiwan.

Beyond BPO
The steady growth of Business Process Outsourcing (BPO) confirms the shift in employment and investments from call centers to the skills quality and competence of BPO, specifically to its Knowledge Power Outsourcing (KPO) segment, also called the “Knowledge Industries.”

BPO’s growth surge is being fueled not by low-value-added call centers but by KPO services such as back office work, medical transcription, legal services, animation, Web design, software development and shared services.

The number of people employed in back office work is expected to jump to 299,000 by 2010 from 36,000 in 2007, a growth rate of 730%.

Medical transcription is experiencing a growth rate expected to top 1,600 % from 2006 until 2010, with employment surging from 7,000 to 122,000. Employment in software development is projected to jump from 16,000 in 2006 to 75,000 in 2010.

BPA/P expects BPO industry revenues to almost triple to $12.1 billion by 2010 from the 2006 level of $3.45 billion.

In 2006, however, call center firms continued to contribute most of the revenues from foreign clients, some 77%. BPA/P estimates call center revenues at $5.29 billion in 2010, up a huge 97% over three years, but, more significantly, less than 45% of total BPO industry revenues.

BPA/P believes back office services, medical transcription and software development will replace call centers as the high growth BPO sectors. All these sectors will experience faster revenue and employment growth than call centers.

The growth of the Philippines’ Knowledge Industries despite the global financial crisis continues, and is an opportunity for both Philippine and European KPO firms. One BPO firm reported an increasing number of manpower requests for back-office positions including accounting and finance practitioners, graphic designers, and bilingual candidates who service clients in Europe.

Growing Creativity
Last January, the government announced it would give more attention to the country’s creative industries in its international promotional activities undertaken through the Center for International Trade Expositions and Missions (CITEM).

CITEM officer-in-charge Ma. Lourdes Mediran said this is part of the government’s initiative to take advantage of a worldwide trend in which countries move up the intellectual property value chain by nurturing their creative sectors.

A United Nations Development Program (UNDP) report said the Philippines was one of the Top 10 exporters of visual arts among developing countries in 2005. The Philippines exported some $107 million worth of goods for a market share of 0.48%.

The Philippines’ creative industries contributed 4.9% to GDP and 11.1 % to the labor force in 2005.

The government defines the Creative Industry as those industries which have their origin in individual creativity, skills and talent, and which have a potential for wealth creation and job creation through the generation and exploitation of intellectual property.

The Creative Industry includes individuals and organizations involved in fashion design, audio-visual design, space design, industrial design, multimedia, handicrafts, writing-based industries, culinary arts and performing arts.

With the holding of the "1st Philippine Creative Industry Forum" in 2005, the government tacitly recognized the existence of the Creative Industry as an Industry alongside others such as manufacturing and services. Held in September at the CCP, the forum was the first real effort to take a closer look at this nascent but vital industry. "Nurturing Creativity" was the conference theme.

Creating a "Creative Industries Coalition" of individuals and organizations, private and government, local and abroad, as proposed by Schumacher would be a giant leap in furthering the growth of the Philippines' Creative Industry, and supporting the Creative Economy Agenda.

Schumacher said it is necessary to focus on the design sector initially, that a design environment be created that would allow design to thrive as a service industry in the Philippines. Initiatives will have to be undertaken to develop the next generation of Filipino creatives.

It would also make sense to invite international designers to develop a top rate School of Arts and Design in the Philippines funded by the private sector. Creative laboratories will also have to be established. The government of Singapore is heavily involved in advancing that country’s design sector.

In developing its Creative Industry, the Philippines can learn much from the United Kingdom and The Netherlands, whose Creative Industries contribute significantly to their countries’ economic growth.

The UK’s creative industries accounted for 8.2% of gross value added in 2002, and had grown 8% from 1997 to 2000.

The creative industry contributed Euro 2.6 billion to the Dutch economy, or 0.7% percent of The Netherlands’ GNP. In fact, the design industry accounts for a larger share of the economy than the Dutch oil industry or traditional sectors such as shipbuilding.

“Look West”
It is clear the Philippines today must “Look West,” that is, towards Europe, which is weathering – by and large—the global financial crisis better than the giant in the East.

“Even if the EU market is suffering, it is still open to partnering with the Philippines in areas such as tourism and BPO,” according to Schumacher.

“If the U.S. market is not that attractive at the moment, maybe it is useful for the Philippines to ‘Look West’ to Europe. At the end of the rainbow is Europe.”

Schumacher said the Philippines should aggressively boost its trade relations with the EU where untapped trade opportunities are waiting to be explored. It is clear, however, that these markets are not going to be delivered on a silver plate. Sweat and tears before the success!

“We believe it’s worthwhile for the Philippines to widen its market access, to ‘Look West’ (to Europe). There was a lot of interest in Philippine products and services evident in some recent trade exhibitions in Europe,” Schumacher said.

He noted that trade missions of local BPOs to Europe were infrequent and that the Philippines has yet to create a big buzz among potential European BPO clients.

D’Aboville said European businessmen would like to see more Europe focus in Philippine politics and in the private sector.

“We feel that Europe is not getting the deserved attention,” he said.

“I feel there is an inadequate recognition in the Philippines, among decision-makers in public and private sectors, of just what the EU has become, of the role the EU plays in today's global market-place, of the possibilities for benefiting from stronger economic and political ties with Europe”.

Misplaced protectionism
Moves towards economic protectionism—whether in the form of “Buy Filipino” movements among Filipino businessmen or leftwing critics saying the EU-ASEAN FTA process is undermining Philippine interests— appear to be rising in step with the financial crisis. Choking off foreign investments in the name of misplaced nationalism, however, will only worsen an already serious economic problem.

“There is nothing wrong with buying Filipino, but don’t make it anti-foreign,” Schumacher said.

“In these difficult times, intense nationalism should take a back seat. We are all in the same boat and we have to work together to get out of this mess”.