*EPF205 08/31/2004
Transcript: Continued Growth in Philippines Needs Reform, State's Wayne Says
(Economic official pledges U.S. support for Arroyo's initiatives) (4420)

The Philippine economy has experienced relatively strong economic growth in recent years, but the country may find it difficult to sustain that growth without fundamental economic reforms, according to E. Anthony Wayne, assistant secretary of state for economic and business affairs.

Speaking at the Asian Institute of Management in Manila August 31, Wayne urged the Philippines' national leadership to "forge a consensus around a comprehensive and viable reform package."

Wayne praised Philippine President Gloria Macapagal-Arroyo for her initiatives to reduce the country's budget deficit and enact tax reforms.

"The United States supports President Arroyo in her efforts at reform and economic rationalization," Wayne said. "We believe that it is critical that reform proposals to reduce the fiscal deficit be enacted and vigorously implemented soon."

Wayne said the U.S. government would offer technical advice and targeted assistance to encourage the fiscal reform effort, but added that "the task of implementing the needed reforms lie[s] in the hands of the Philippines."

Reforms that improve the climate for foreign investment could also promote sustained economic growth, according to Wayne. He encouraged the Philippine government to adopt policies to encourage entrepreneurship, to reform the energy sector, to increase transparency and fight corruption, to protect intellectual property rights, and to improve transportation.

Citing the long history of cooperation between the United States and the Philippines, the assistant secretary said representatives of the two nations recently sat down to discuss a wide range of issues under a bilateral Trade and Investment Framework Agreement (TIFA).

"We very much believe that a strong and dynamic bilateral discussion process can be very helpful as we move forward and as the Philippines works to establish a trade and investment regime that might one day permit us to move toward an even deeper set of trade links," he said.

Wayne also held out the possibility that the Philippines could qualify next year to receive additional economic assistance from the Millenium Challenge Account, an initiative of the Bush administration that awards funds on the basis of objective indicators measuring governance, investment in health and education, corruption, economic policies, and business climate.

"The United States wants to see the Philippines succeed in tackling [its] difficult economic challenges," he said.

"Success will bring additional prosperity," he said, adding, "[T]hat is good for the Philippines, and that means it is also good for us."

Following is a transcript of the assistant secretary's remarks, as delivered:

(begin transcript)

"Working Together To Address Economic Challenges"

Remarks by E. Anthony Wayne
Assistant Secretary of State for Economic and Business Affairs
United States Department of State

Asian Institute of Management

Manila, August 31, 2004

Thank you very much for that gracious introduction. As you can see, I had a hard time keeping one job during all this period of time.

It's a great pleasure for me to be here today at the Asian Institute of Management. And I wanted to spend some time with you discussing how the United States and the Philippines work together to foster economic reform, growth and opportunity for both our countries.

As many of you are studying, we know this is a world of constant change. Markets move. Sometimes, bad things happen; sometimes, new opportunities arise. And it is the economies that have prepared themselves that survive well the bad turns and are able to take advantage of the new opportunities. Thus, in today's world it is more urgent than ever to reform and adjust our economies to make them resilient in the face of change.

Now, as you all know, the Philippines is an important ally of the United States, with enormous potential. It has the assets and the ability to be a leader among Asian economies. And, of course, the United States and the Philippines have a very long history of friendship and cooperation.

It is in that spirit of friendship that I would like to discuss today steps that many of you and your colleagues are currently discussing and debating that can help make the Philippines' economy more resilient. In doing so, I recognize that the U.S. economy faces its own challenges, and some of the thoughts that I am going to share today are born of our own experience in tackling those challenges.

Philippine Economic Growth Rebounds

As a number of you have been studying, and many of you know from firsthand experience, global and regional economies have been battered in recent years -- by the Asia financial crises, by the global economic slowdown, by terrorist attacks, and by the SARS outbreak. Many of those economies are now rebounding, some faster than others.

In the Philippines, where growth is heavily dependent on trade, private economic forecasters predict that this year's Philippines export growth will outpace overall output growth. Exports are expected to grow well over 10 percent. Trade with the U.S. will be especially important in this Philippine growth as the United States supplies about 20 percent of Philippine imports and we buy about 25 percent of Philippine exports.

Challenges to Sustained Growth

Last year, the Philippines registered relatively strong economic growth of 4.5 to 5 percent. And I noticed in this morning's newspaper some positive data from the last quarter. However, in that same newspaper, observers have raised serious doubts about whether the Philippines can sustain or improve its growth.

Now, President Arroyo is taking steps to address the challenges the Philippines faces, and she has launched a wide-ranging debate on the steps to take. In an editorial last month in the Wall Street Journal, she acknowledged that many fundamental reforms remain to be implemented. She highlighted the need to tackle the budget deficit problem and to enact tax reform that broadens the tax base and boosts tax compliance, that expands foreign investment, and that reduces red tape in government.

I would like to focus today on two of these areas-the Philippine budget deficit and foreign investment.

The Urgent Need to Tackle Fiscal Reform

Persistent fiscal deficits of 4-5 percent of gross domestic product each year have led to a rapid build-up of public sector debt in the Philippines. The national government's debt currently stands at nearly 80 percent of GDP. Overall, public sector debt exceeds 120 percent of GDP. For 2004, the national government has targeted a deficit of 4.2 percent of GDP, but the consolidated public sector deficit could well top 6 percent.

Those figures worry international investment firms and banking houses, and they worry the friends of the Philippines around the globe. Country risk services have increased the Philippine risk rating and downgraded performance indicators relative to other low middle-income developing economies. Now, as many of you know and you're studying, such higher risk ratings will scare off investors. They'll raise the price the Philippines has to pay to raise capital on international markets, making debt service more costly. The University of the Philippines School of Economics warned in a recent report that the Philippines could at some point in the future default on its debt, if the country fails to stem the rapid growth of debt and narrow the budget deficit. Commenting on this report, President Arroyo acknowledged that the Philippines faces serious fiscal challenges.

Experts here in the Philippines point out that what is needed urgently is to increase government revenues from their exceptionally low level and to ensure effective revenue collection. Also needed are improved overall efficiency and integrity of the revenue system. Long-time observers agree that it is important, not only to have the right policies, but also to ensure effective implementation.

Now, a good starting point for raising tax revenues begins by implementing present tax law, and prosecuting and convicting tax cheats. Personally, I don't like paying taxes. I would guess that not many in the room like to pay their taxes either. But we are all much less aggrieved at paying those taxes if we know that all others are paying theirs, too.

The United States supports President Arroyo in her efforts at reform and economic rationalization. We believe that efforts to increase revenues by broadening the tax base and improving tax administration will help deal with the immediate problem of low government revenues. We believe that it is critical that reform proposals to reduce the fiscal deficit be enacted and vigorously implemented soon.

The time to act is now. The international economic environment is relatively benign. Global growth is increasing. Interest rates are low. Moreover, as President Arroyo pointed out in her recent State of the Nation address, the sooner the reform effort begins, the better for the people of the Philippines. Delay in implementation will only make solving these difficult problems harder.

We encourage the Philippines to continue to work with the International Monetary Fund and other international institutions on economic reform, and to utilize their advice and support to move forward.

For our part, the U.S. government will do what we can to assist the Philippines. We will offer our best advice, our encouragement, and provide targeted assistance.

But, the decision to tackle the Philippines' deficit, and the task of implementing the needed reforms, lie in the hands of the Philippines. It is the urgent challenge now before the national leadership of the Philippines to forge a consensus around a comprehensive and viable reform package. As world leaders recognized when they gathered in 2002 at the U.N. Conference on Financing for Development in Monterrey, Mexico, developed and developing countries must work together to mobilize domestic resources, attract international investment flows and promote international trade as an engine for development, but each country has primary responsibility for its own economic and social development.

Improving the Investment Climate

Let me turn now to a second area that can help spur economic growth in the Philippines: reforms that improve the investment climate.

That same U.N. Conference in Monterrey, Mexico recognized that "private international capital flows, particularly foreign direct investment, along with international financial stability, are vital complements to national and international development efforts." Foreign direct investment is especially important for its potential to transfer knowledge and technology, create jobs, boost overall productivity, enhance competitiveness and entrepreneurship, and ultimately eradicate poverty through economic growth and development.

So, if investment is so good for us all, how do we get more of it? Well, there are many factors that combine to create a climate that encourages investors to put their money here rather than there.

First, I might mention fostering entrepreneurship. In its recent report, the U.N. Commission on the Private Sector and Development stressed the importance of entrepreneurship in fostering foreign direct investment and other types of private sector activity. Your government can adopt and implement policies to do this, and we are willing to help. For example, the leaders of the G-8, recently meeting in the United States, announced an action plan to promote and support entrepreneurship in developing countries. As part of this plan, G-8 countries will work with selected pilot countries and support their efforts to improve their climates for supporting and developing entrepreneurship.

A second, important area is reforming the energy sector. A secure and stable energy supply is essential for modern manufacturing and service industries. As is being discussed -- here and in many other countries around the world -- a competitive investment climate will more easily attract the investment needed to ensure a stable energy supply.

The Philippines, like the United States, is a net importer of oil. Fuel imports account for roughly 10 percent of Philippine imports. A recent study by the University of the Philippines School of Economics concluded that, "Any large external shock, such as a sustained increase in world oil prices, or a sharp fall-off in workers' remittances, or ironically, even rapid growth that would cause the import bill to rise, would make the country increasingly vulnerable" to economic destabilization.

The prospect of power shortages and rising fuel costs already looms over the Philippine economy. The Electric Power Industry Reform Act requires Napocor to unbundle generation, transmission and distribution assets, and to privatize these businesses. And yet, progress in implementing this act has been halting at best. Foreign power companies, many of them in the U.S., that would seem "naturals" to participate in Napocor's privatization, have shown little interest. Some who might be interested are put off by the likelihood of bureaucratic interference, corruption, an uncertain regulatory environment, and the lack of viable tariffs for power.

Yet, as is now being widely discussed here in the Philippines, the reform of the power sector would help stem the huge losses that seriously aggravate the Philippines' fiscal deficit and would lead to increased productive capacity to support Philippine economic growth.

While reform of the power sector is something that the Philippines government must do, the United States and the Philippines are working together to enhance energy security. The U.S. Department of Energy is working closely with the Philippines and China and other countries in the region on clean coal technologies, regulatory reform, and a host of other energy issues. Through the International Energy Agency and APEC, we are working with countries in the region to encourage coordinated energy responses to supply shocks, including information sharing and stockholding of petroleum. And this week, as I am speaking to you, we have in Manila a team of five U.S. experts -- from the U.S. Department of Energy -- on oil storage and distribution. They will be working with their Philippine colleagues to assess existing Philippine facilities and to make suggestions to your government on the development of a strategic oil stockpile.

Third, it is very important to take action to increase transparency and to fight corruption. Transparency International, a well known non-governmental organization, ranked the Philippines 92nd out of 133 countries that it rated in 2003. And in that same rating, the Philippines scored only 2.5 out of a possible 10.0, which was one of the worst scores among lower middle-income countries. Now, America and Americans are willing to work with you on the worthy goals of increasing transparency and fighting corruption. In fact, we are working through a number of USAID programs at present with the Government of the Philippines. The American Chamber of Commerce here in the Philippines also released a paper in 2003 called "The Roadmap to More Foreign Direct Investment," and they have just issued an update of that for 2004. In that paper they suggest a number of steps the Philippines could take to increase transparency and to fight corruption. We very much look forward to seeing government officials, business executives, and civil society organizations taking the steps that have been recommended in this roadmap and in other studies, that can benefit both foreign and domestic businesses in the effort to increase transparency and to fight corruption. We also want to work together in APEC, which has agreed on sector-specific transparency standards and is drafting an APEC Course of Action to fight corruption.

The fourth area that I would like to mention is the effort to protect intellectual property rights (IPR). Counterfeiters encourage a culture of crime. Counterfeit products such as counterfeit car parts and counterfeit medicines can endanger lives. Foreign companies will fear bringing their latest technology into a country if they think their technology and trade secrets will be stolen. When a country protects intellectual property rights, it is also protecting its own artists and its own innovators. It is preserving and helping to preserve its own cultural heritage, and it is providing a strong foundation for future investment in the "knowledge" economy. The Philippines has made a good start -- for example, with the recent passage of the Optical Media Act. But much more needs to be done. For example, still needed are regulations to implement that Optical Media Act, and effective and deterrent enforcement against all forms of trademark and patent infringement. The United States stands ready to assist the Philippines in achieving the goal of strong IPR protection, with all its attendant benefits.

Fifth, I would like to mention the importance of improved transportation. A secure and efficient system of transportation contributes directly and indirectly to economic growth. If your manufacturers have access to secure, efficient transportation, their products will be more competitive. If business people have reliable, safe, competitively priced flights, for example, in and out of the Philippines, it will make it easier for them to do business there.

Now, I would like to focus a minute on the aviation part of the transportation nexus. The United States generally pursues open skies agreements with our aviation partners. These are the civil aviation equivalent of free trade agreements. They let the market decide how many flights there will be, where they will go, and when they will fly.

In Asia, the United States has Open Skies agreements with many of the Philippines' neighbors, including Brunei, Indonesia, Malaysia, Singapore, Taiwan, Korea, New Zealand, Samoa, and Tonga. And we have cargo-only Open Skies agreements with Australia and Thailand. And just this last July, we concluded a landmark air agreement with China, which has very generous cargo rights and increases passenger capacity nearly fivefold. We also have a new, liberal agreement with Vietnam. These agreements bring growth to both parties, and they help stimulate trade in high-value, time-sensitive industries.

Now, we recognize that some in the Philippines believe that they are not ready for Open Skies. Nevertheless, we think it is time for the United States and the Philippines to negotiate a more liberal aviation set of terms to replace the outdated and restrictive rights currently in place. Revising our air agreement could open more U.S. destinations to Philippine carriers directly and via code sharing. This would benefit the traveling public and shippers of both countries, and it would provide new opportunities for economic growth and competitiveness. Open skies would also work to reduce air fares between our two countries and enhance tourism, which I think, as many of you know, is a sector of great, but unrealized, potential in the Philippines. No member of the aviation community can afford to stand still while the rest of the industry is moving ahead -- the Philippines needs to act now to become more competitive with its neighbors, or it risks falling behind them. We look forward to resuming a dialogue of enhanced rights for mutual benefit.

Overall, there has been an ominous signal recently and that is that foreign direct investment flows into the Philippines have steadily declined since 1999. They dropped to just $618 million in 2003. But if the Philippines' national leadership forges a consensus and implements reforms to foster entrepreneurship, to vitalize the energy sector, to increase transparency and fight corruption, to protect intellectual property rights, and to improve transportation, investors -- both foreign and domestic -- are likely to sit up and take notice. The United States will be happy to work with you wherever we can.

Working in Partnership, We Can Strengthen Our Economies

Now, I would also like to mention some of the areas where the United States and the Philippines can work together productively in an international domain as well as bilaterally. We have a long history of working together in regional institutions, multilateral institutions, as well as developing our own bilateral economic relationship. And I would like to mention three important opportunities that we have before us right now.

The first is working together to ensure a successful conclusion to the WTO negotiations, the World Trade Organization. In the late hours of the July WTO meeting in Geneva, the 147 members of the WTO approved a framework agreement to reinvigorate the WTO trade negotiations that had become bogged down in Cancun ten months ago. Following weeks of intense discussions, this new framework sets a tone that will allow us to move these important negotiations forward.

Now, there is much hard work ahead of us, but this framework provides a structure and direction to the ongoing trade talks. It addresses such sensitive issues as agriculture, development, cotton, non-agricultural market access, global services markets, and expanded trade between developed and developing countries, as well as increased South-South trade. WTO members, including the Philippines and the United States, need to continue to work in this spirit of flexibility, which made that agreement possible at the end of July, so we can move beyond that framework and really reap all the benefits of the increased trade that will be possible if we can forge a new WTO agreement.

The second opportunity we have before us is continuing to work bilaterally between the United States and the Philippines. A few weeks ago, a colleague of mine from the U.S. Trade Office sat down with Philippine Under Secretary for International Trade, Thomas Aquino, to discuss a wide range of issues on our bilateral agenda. We have an agreement, which is called a Trade and Investment Framework Agreement (or TIFA), which allows us to address a wide range of issues, from existing commercial disputes to future potential for deepened economic partnership between us in the trade and investment area. We very much believe that a strong and dynamic bilateral discussion process can be very helpful as we move forward and as the Philippines works to establish a trade and investment regime that might one day permit us to move toward an even deeper set of trade links, should both our countries wish to do so.

The Millennium Challenge Corporation

Finally, the third area I would like to talk about is something that I think is pretty exciting, and very innovative in the United States' approach to development assistance. It is something called the Millennium Challenge Account.

President Bush initiated this innovative approach to assistance about two years ago, with a speech that he gave just before the 2002 U.N. Conference on Development in Monterrey, Mexico. Last January, Congress approved the proposal and created a Millennium Challenge Corporation, and approved $1 billion for the first year of funding for the Millennium Challenge Account. Now, the Millennium Challenge Account, or MCA, is designed to help countries around the world develop themselves. These are countries that are showing that they are doing the right kinds of things with the resources that they have on hand. It established a Board of Directors for the Millennium Challenge Corporation that looks at countries with an independent set of indications of governance, corruption, investments in health and education, economic policies, and business climate.

The idea behind the MCA is that there is an independent set of indicators, across the range of performance in a country. These indicators are not developed by the U.S. Government. They are developed by the World Bank, by non-governmental organizations, and by others around the world. In that sense, they form a set of fairly objective indicators of how governments are spending their resources, how they are shaping their policies, and how they are implementing those policies. And then what we do is we look at how these governments score, and the Board of the Millennium Challenge Corporation then tries to pick out the very best candidates for additional assistance. It is somewhat like awarding or recognizing the best and the hardest working students and giving them a little extra support as their going ahead. Now, I will add, at this point, that it doesn't mean that the United States is reducing the other assistance that it has available. This assistance is on top of our existing and pre-existing development assistance.

As I mentioned earlier, we have $1 billion that was appropriated by Congress for fiscal year 2004. In May, the Millennium Challenge Corporation's Board of Directors selected 16 countries that will be eligible to now apply for Millennium Challenge assistance this year. The Philippines was not a candidate for MCA in our fiscal year 2004, because of requirements built into our legislation. However, the Philippines is one of 70 potential MCA candidates for the next fiscal year. We expect significant funds to be available in future years, but this is, as I mentioned, a competition. To determine eligibility, the MCA Board will look at how the Philippines compares with other developing countries on independent indicators of governance, corruption, investments in health and education, economic policies and business climate. Countries' scores for these indicators, including the Philippines', will be posted to the MCC website soon. This is in an effort to make this a very transparent process. Now, if any of you are interested in seeing whether the Philippines will qualify, you can even now look at the indicators and the sources of the scores that are on the website, and you can start to evaluate how competitive the Philippines, or other countries, will be in this process. In the preparation for that, the Philippines may want to focus its efforts on categories where there might be relative weaknesses, such as fiscal policy and investing in people. Indicators like immunization rates, health expenditures, primary education expenditures and school completions. This is a competition, but the winners will be the people who live in the countries that govern wisely, that invest in their people, and that promote economic freedom.

Conclusion

Ladies and gentlemen, true friends speak frankly with each other. The United States wants to see the Philippines succeed in tackling the difficult economic challenges that all acknowledge are in front of us today. Success will bring additional prosperity. A poor response will risk the Philippines falling behind. The hard policy choices needed to reform the Philippines' economy and make it resilient are choices that must be made by the Philippines. And the hard task of implementing good policies must be done by the Philippines.

But we are your friends and partners. We work together bilaterally, in regional organizations, and multilaterally. We will work hard to support you as you make the difficult choices and forge consensus on what actions to take on the tough tasks. We want you to succeed because that is good for the Philippines, and that means, it is also good for us.

I have offered my remarks today in the spirit of the long friendship between the Philippines and the United States. I want to thank all of you for your attention, and I look forward to your comments, and questions and discussion. Thank you.

(end transcript)

(Distributed by the Bureau of International Information Programs, U.S. Department of State. Web site: http://usinfo.state.gov)

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