ASEAN

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opinyon-editorial
Last April 22, a Bangko Sentral official said that the Philippines will miss the first phase of the single market integration targeted by the Association of Southeast Asian Nations (ASEAN) by 2015.

Yet, the Aquino administration is being confident that the country is ready with necessary measures come 2015.
Even if BSP Deputy Governor Diwa Guinigundo is giving assurances that the ASEAN 2015 integration is optional, that doesn’t seem to be the case among government spin doctors.

There is this pervasive feeling that the country is being rushed to join into the planned economic community, not because we actually need to, but because of desperation.

It is a kind ofdesperation to keep up to a perceived notion that we have to match up to our neighbor countries, rather than minding what actually matters for the economy.

This talk of economic integration and the promises sold with it does not even ring a bell as far as the average Filipino worker is concerned. Juan Dela Cruz still sees the prices go up, and his earnings cannot match the cost of living here.
Most people view Bangko Sentral officials as more obsessed with keeping the status quo so that only big business can benefit, despite claims of having anti-poverty programs.

Some analysts would say that very little of the wealth gained from an improving economy is trickling down.
The man who has to toil in labor on a daily basis just to give his family enough food would tell us that it’s all meaningless talk.

The truth of the matter is that whether there is anything trickling down at all, almost nobody feels it.
It’s an extreme of having too much on one side and having nothing on the other end.

PNoy can keep assuring us with a tired script about an emerging economy, a fairy tale that sounds good to the ears, but brings no comfort to most of us who have to work day in and day out to get our daily bread.
Nobody believes it anymore, except for those few who choose to fool themselves.

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Boon or Bane?

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Editorial

The Philippines is not ready for the Initiative for ASEAN Integration (IAI) in 2015. The Initiative for ASEAN Integration refers to reducing various forms of disparities among and within member States where some pockets of underdevelopment persist, which could narrow the development gap in the region.

With the integration, people would be allowed to purchase, sell products and services, work and invest in any of the member countries of the ASEAN with lesser restrictions unlike strict protectionism. This would be enjoyed by all ASEAN member countries.

But according to Asian Development Bank, the economic integration of the Association of Southeast Asian Nations (ASEAN) will likely not be attained by 2015. Although various reasons were cited for the continued difficulties of attaining the AEC targets, what stands out is the unawareness of the private sector.

Since 2010 when this integration was first hatched, the Philippine government failed to prepare for it. In trade relations alone, where products are supposed to be exported to a less-restricted environment, the recipient chooses which products to accept or to reject.   Naturally the more superior product in terms of quality and price are allowed into the member country. How can we export cheaper products when the cost of production is high? Electricity and labor costs, which are factors to production, are high.

Also, promoting greater mobility of skilled workers and better regulation and management of unskilled labor movements are to be addressed. In the Philippines, unemployment and underemployment are pervasive. Skills do not commensurate with job requirements. Can we compete with our ASEAN neighbors in the labor market?

What about our infrastructure?

There are so many things that we have to prepare for in order to be competitive. If we are not competitive, what benefit can the Initiative for ASEAN Integration do for us? Nada.

 

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The Travails of MSMEs (part 2)

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by Miriam Tan-Fabian

LET us continue where we left off on the challenges, issues, and obstacles that MSMEs need to hurdle just to start, maintain, and sustain micro, small, and medium businesses.

Market transaction costs

Aside from financial support, MSMEs also need to contend with transaction costs. The Philippines is again mentioned as one of the countries with the most expensive power rates in the ASEAN. In fact, if you look at your electric bill, one of the items you are paying for are costs of transmission loss. Instead of customers shouldering this cost, should not Meralco shoulder such inefficiencies which the company should deal with and not customers? While this is already one concern for ordinary citizens like us, it is even a bigger headache for business owners whose power needs are several times more than individuals or even whole families.

In the electronics sector, currently one of the fastest growing industries, electricity is a major manufacturing cost. In the case of Myanmar which has an unreliable power and seasonal black outs, the cost of power is a real limitation even in the agro-processing industry, specifically, the edible nut industry which requires milling machines to process. More importantly, to ameliorate the inadequate power provided by the government, businessmen who own factories, mills, or some kind of machinery have to purchase diesel-powered generators, where the resulting costs of running them are four times the cost of government-produced electricity, just to maintain operations. Another country, Cambodia, also cited high energy cost as a barrier to business.

Another transaction cost is labor costs where the relatively high labor cost in the Philippines could well be losing us investments when compared to the lower labor costs for Vietnam and China. Thailand too, recently approved a minimum wage increase, prompting complaints from the private sector and the closing of several MSMEs.

What are ASEAN governments doing about it?

While it is true that MSMEs have many challenges to surmount, it would be unfair to assert the ASEAN governments are not doing anything about MSMEs. In fact, many of them have put up two to three, or even more government agencies, departments, or other instrumentalities to assist MSMEs. One of these would definitely have something to do with trade and or industry, investment, and what not. In the Philippines, we have the Department of Trade and Industry (DTI), which has a section totally devoted to MSMEs, while Vietnam has the Ministry of Industry and Trade (MOIT), and Indonesia has a Ministry of Industry.

Most governments to have a medium or long-term Development Plan for MSMEs or SMEs. Vietnam has the SME Development Plan of 2011-2015; Indonesia has a Strategic Plan for SMEs, and the Philippines has a Philippine Development Plan for SMEs for 2005-2009. While most strategic planners enjoin top public officials to plan long-term, meaning 10 or more years, the electoral reality is that top government officials, unless they are re-elected, will stay in power for only less than 10 years.

For example, in Vietnam, there is a Vietnam General Office of Statistics which monitors MSMEs.
Several ASEAN countries also have specific laws specifically designed to benefit MSMEs. The Philippines for example has the Magna Carta for SMEs. Indonesia has a Presidential Decree No. 7 of 2005 which includes items on SMEs, and Thailand has Small and Medium Enterprises Promotion Act, and the Tax code of Thailand. This Thai tax code was expanded by several royal decrees to promote SMEs. Although there are some countries though like Myanmar and Vietnam who have yet to craft specific SME laws, policies, and regulations, their governments are aware of this problem and are already in the process of drafting such laws.

Many countries also provide trainings for MSMEs. In the Philippines for example, the DTI’s training arm is the Philippine Trade and Training Center (PTTC) which offers training programs through three modes: 1) onsite or face-to-face, 2) customized in-company courses, and 3) through online training videos. Thus, as long as you have reliable internet access, you can even learn from your house.

On the other hand, if you tend to learn better with a group, you could take up the face to face trainings programs instead. PTTC’s onsite programs include such interesting and relevant topics like: Accounting for Non-Accountants, Analyzing Business Target and Business Buying Behavior (Dealing with Competition), and Basic Business Recording, topics which would be useful for most entrepreneurs. Further, these courses are affordable and competitive when compared to their private sector counterparts, costing anywhere from Php 250 to 500 for half-day affairs and Php 1,750 to Php 3,000 for trainings of 1 to 3 days.

It is unfortunate then that many MSMEs do not know of these programs. Thus, there is a need for the government to actively reach out to these businesses, through a stronger marketing campaign, the effective and active use of social media, and even through the LGUs which hold annual business registration activities for MSMEs and businesses in their jurisdictions. What better way for LGUs to ensure more taxes being paid by these businesses than by helping to improve their capabilities and capacities?

Moreover, since China and India’s economic influence and dominance are felt strongly by neighboring Asian countries, there is a need to seriously work towards the goal of ASEAN economic integration by 2015. We cannot expect to be more competitive if we remain insular, especially since many of the MSMEs in the ASEAN region suffer from the same challenges and obstacles. Hopefully, such a situation will enable some proposed common solutions to be effective in addressing these similar MSME issues and concerns across the region.

Two ways by which we can do this is first through actively enhancing and supporting the implementation of ASEAN Free trade agreements (FTAs) which should enable a regionally mobile workforce, open up foreign markets even to MSMEs, and promote technology transfer. This labor force too can be trained with the required minimum standards through a common labor certification program.

Such an initial step though presumes of course that the state will mainstream these FTAs into national development strategies.

A second way is through the creation of a regional MSME business registration system to facilitate enterprise identification for financing and/or credit guarantee programs and domestic and export market access. This tactic will also aid international organizations like the ADB design a more responsive credit risk profiling of MSMEs in the region.

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The Travails of MSMEs (part 1)

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by Miriam Tan-Fabian

MSME’s relevant contributions to the economy

MSMEs or micro, small, and medium enterprises often have it hard even if these enterprises are considered the “backbone and the lifeblood of the economy” within ASEAN countries. These enterprises, depending on which ASEAN country you are looking at are firms are generally categorized either by number of employees, asset size, or revenue. In Cambodia, micro enterprises are defined as having less than 11 employees and less than 50,000 riel (Cambodia’s currency) in revenue. In the Philippines, micro enterprises have less than 20 employees and have assets of less than Php 3M versus Indonesia’s 500M and lower and revenues of 300M or lower in rupiah, Indonesia’s local currency.

These MSMEs account for a significant bulk of the GDP. For Indonesia, for example, the contribution of MSMEs lie anywhere from 56.53% to 60% of the country’s total GDP. Gross Domestic Product or GDP is the monetary value of all the finished goods and services produced within a country’s borders in a given time period, and is used as a common metric to measure the health of a country’s economy. Generally, the higher the country’s GDP, the better the economy and the lower the GDP, the weaker the economy.

Aside from a significant share of a country’s GDP, MSMEs also account for majority of the total number of establishments in a country. In Myanmar, a developing country, MSMEs account for 90 percent of the industrial sector and 99 percent of the manufacturing sector. Similarly, in Japan, a developed country and economic powerhouse, 99.4% of manufacturing firms are small and medium-sized firms, which employ three quarters (75.1%) of the manufacturing industry’s employees. Comparably, in the Philippines, the MSME sector accounted for 99.6% of total establishments and contributed 61.2% of the country’s total employment.
Thus, MSMEs contributes significantly to the country’s well-being, and anything to do with MSMEs will be significant.

It isn’t easy being an MSME

Imagine that you wanted to formally put up a small eatery, one example of an MSME. From the get go, you will already be facing many challenges, issues, and concerns just to jumpstart the eatery. There is the paperwork, certifications, and permits; a steady stream of predictable funds, the staff, and the location, among others. It should therefore come to no surprise why, despite the big numbers of MSMEs in all of the ASEAN countries, they die out naturally within the first year they are established, succumbing to these difficulties.

Moreover, despite all the contributions that MSMEs provide the local economy and the presence of government agencies and policies for MSMEs, across the ASEAN, MSMEs continue to be vulnerable to a list of challenges, issues, and concerns that read like a bad case of symptoms of someone really sick, many of these symptoms are repeatedly mentioned across the countries of the ASEAN region.

Several obstacles to hurdle

Financial support
One of the major concerns is the financial support. More often than not, if you want to put up your own business, you will need to raise the initial capital on your own. Most big banks won’t touch you with a ten-foot pole because of a whole slew of reasons. The banks know little about funding MSMEs, MSMEs are considered too risky to provide loans for especially if the bank requires credit information, and the bank’s products are mismatched with the needs and conditions of MSMEs.

On the other hand, on your part, you might not also like dealing with banks because they require some collateral or a good track record, and unfortunately, you have neither of both. I find the track record condition unreasonable. If it is your first time to put up a business, you would naturally have no track record, so this condition alone is discouraging for anyone who’d consider loaning from a bank. Worse, commercial banks charge high interest rates of 10 to 18% per year for top banks. This means that for every Php 100,000 pesos you loan, that’s already Php 10,000 to Php 18,000 for the bank for every year until you finish off paying the bank.

Discrimination and preference by size or sector
There is also some discrimination on the part of banks, they prefer larger enterprises who are given more favorable interest rates, and certain sectors like agriculture (farming) and hospitality enjoy the highest loans. Consequently, if you are a micro or small enterprise that is neither into the agriculture or hospitality sector, while your size already makes you vulnerable compared to larger enterprises, your lower access to funds exacerbates your financial concerns.

Poor capability, skills, and lack of trainings
Another issue was the capabilities of micro and small enterprises. Many micro and small enterprises do not have sufficient know how, technical, and management skills. Thus, MSMEs are hard pressed to produce good business or marketing plans for financing. Most of these enterprises also have poor and sub-standard accounting systems because of self-operated accounting practices, the lack of historical accounting records, and weak financial reporting. While most skills remain poor, the lack of trainings and professional development opportunities further weakens the capabilities of MSMEs, thus lowering competitiveness and productivity.

With limited management and financial capabilities, many MSMEs are unable to quickly respond to both the local and foreign markets. MSMEs have a low ability to meet the threats of local and global competition because of their ignorance of information on market access and business environment; failure to attain scale economies needed to produce quality goods and services; and the sector’s laid-back approach to seeking new markets and responding to market needs.

Poor infrastructure and logistics
Yet another issue which MSMEs have little control over is poor infrastructure. This was one key issue identified by potential investors as a turn off when investing in the Philippines. They specifically identified the dilapidated roads and the horrible traffic in the CALABARZON area where some of the country’s economic zones are located.

Added to these woes is the poor logistics such as the lack of charter flights needed for cargo shipments, lack of direct shipping and air routes or linkages to export processing zones, inadequate cargo hub operations, and the high cost of freight and cargo handling services. These signs of inadequate or poor logistics lead to increased production costs.

The Philippines though is not alone in this issue. Laos, a land-locked country of a mere 6M people have to contend with the country’s largely mountainous terrain, a poor network of market access roads, together with cross-border trade impediments with neighboring countries, has meant high transport costs and fragmented markets. The generally poor condition of the road network results in high rates of damage to both trucks and cargo. (to be continued)

For feedback: miamfabian@gmail.com

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