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Much Remains to be Done in the Philippines

It is ironic that the first country to enforce the latest UN sanctions against North Korea by impounding a cargo vessel is the Philippines. That is because, until the election of President Aquino in 2010, the Philippines was not necessarily considered to be a leading example of adherence to the practice of best standards in enforcing international law. After six years of leadership under President Aquino, that appears to be changing, but as the country’s presidential election looms, it underscores the importance of maintaining the momentum that has been achieved over the past six years.

In a July 2011 report, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network revealed that the Philippines had made a high-level political commitment to work with the Financial Action Task Force to address its strategic deficiencies in anti-money laundering (AML) and counter-terrorism financing (CTF), but although the Aquino Administration had made some progress at the time, strategic deficiencies remained. Among the recommendations made were that the country should continue to criminalize money laundering and terrorist financing, implement adequate procedures to identify and freeze terrorist assets and confiscate funds related to money laundering, and enhance financial transparency.

That said, in 2012 the Philippines was noted by the U.S. Treasury for the continuation of ‘strategic deficiencies’ in its AML/CTF battle, but by 2013, the country was found to be in compliance with its obligations under the AML/CTF regime.

The seizure of the North Korean vessel is high profile evidence of that, but much remains to be done to bring the Philippines into compliance with international law and best practices on a diverse range of other issues.

For example, the country remains on the U.S. Trade Representative’s Watch List for non-compliance with Intellectual Property Rights, and as numerous international businesses continue to discover, equal protection under the law does not always apply to foreign investors in the Philippines.

A good example of other areas of success is the battle against corruption. In 2010 the Philippines was ranked 134th out of 178 countries in Transparency International’s Corruption Perceptions Index. The country’s 2016 ranking is 95th (out of 168 countries), tied with Armenia, Mali and Mexico. And according to the World Economic Forum (WEF), the Philippines’ competitiveness ranking jumped by 7 slots, from 52 in 2013-2014 to 59 in 2014-2015. The country’s gain of 33 places since 2010 is the largest over that period among all countries studied, the WEF said.

That said, the Philippines has done rather poorly in the World Bank’s (WB) Doing Business rankings, which judges the desirability of doing business in a country based on 10 key indicators. According to the rankings, the Philippines slipped 9 places (out of 189 countries) from 86th in 2014 to 95th in 2015 (the lower the score being better), and another 8 places to 103rd in 2016. The Philippines actually declined in 8 of the 10 indicators in 2015 and in 9 of the 10 indicators in 2016. So while, according to the WEF, it is becoming more competitive, according to the WB it is becoming less desirable as a place to do business – a rather strange dichotomy.

The incidence of poverty remains virtually unchanged — at 25 percent since 2009 – as has the unemployment rate, which has remained in the 6-7 percent range. Proponents of ‘inclusive growth’ accuse the Aquino administration of growing the economy without raising the percentage of workers who benefit in the process. Likewise, the Gini Index, which measures income inequality, has remained little changed, at .43 (out of 1.0, a lower score again being better) since Aquino took office. So while Aquino has been successful in moving the economy forward, his administration has not been a success at tackling the most pervasive and structural problems facing the Philippine economy – unemployment and income inequality. In the latter, he is not alone, as income inequality is rising around the world, and is proving to be the most pressing and intransigent economic challenge of our time.

Since inclusive growth and jobless growth will become the two key economic issues for Aquino’s successor, the President has encouraged that person to continue the ‘daang matuwid’ (or the ‘straight path’) reform platform of his administration. After garnering at least eight sovereign credit rating upgrades by Moody’s and other rating agencies since Aquino took office in 2010, and with the Philippines having attained ‘investment grade’ status with a positive outlook, Aquino’s successor must be able to translate the gains in the macro economy into tangible gains in human development. It will no doubt also prove to be as difficult to achieve going forward.

In fairness to Aquino, his reforms were only generated in late 2010 and early 2011, so they have only been in effect for five years. The Supreme Court’s declaration in 2014 that both the Priority Development Assistance Fund (PDAF) as well as the Disbursement Acceleration Program (DAP) – two of Aquino’s key programs designed to speed up public spending — were void and unconstitutional, had a chilling effect on the Congress and all line agencies under the executive, and made legislators more risk averse to anything related to budget-driven public spending. Yet, there is no question that Aquino’s accomplishments have exceeded many expectations and have outperformed all previous administrations. In nominal terms, the Philippines has grown at least 10 percent year-on-year. Inflation has remained steady and real GDP per capita grew nearly 18 percent between 2010 and 2014.

Aside from the burden of transposing the gains in the economy into tangible gains in poverty alleviation and inequality, Aquino’s successor must be able to translate economic leadership into a more meaningful role in regional politics. The country’s largest trading partner is also its most contentious, in terms of conflicting claims to the islands of the South China Sea. The Philippines’ biggest import partner in 2015 (China) accounts for 13 percent of all Philippine imports and 12 percent of all Philippine exports.

While the Aquino Administration has aggressively challenged China in the Permanent Court of Arbitration at The Hague, his successor will need to do more to strengthen the country’s military alliances to be able to more assertively protect its interests in its territorial waters and Exclusive Economic Zone. Since re-establishing permanent U.S. bases in the country is not an option under the 1987 Constitution, Aquino’s successor must maintain various Status of Forces Agreements (SOFAs) and conduct ad hoc joint military exercises with the U.S. (and Japan) to enhance its military presence near the disputed islands.

While Aquino’s and Roxas’s daang matuwid have brought about the kind of change the country really needs through its strong anti-corruption campaign, Liberal Party stalwarts expect that the new administration will end up using it against them, the Philippine political process not having changed its stripes since 2010. Rather than focusing on the substance of an issue, Philippine politicians (like those around the world) tend to cherry pick their concerns, engage in demagoguery, and appeal to the lowest common denominator among the electorate.

Now the question is whether Filipino voters can break their own well-worn path of choosing a member of the country’s famous dynastic political clans, or business tycoons, or celebrities to lead their country, or will deliberately choose a new brand of politicians. The Philippines has made some important changes to the way it does business, but there is much more work to be done. Philippine voters should choose to build on that change, rather than settle for ‘business as usual’ traditional politics. The country’s recent achievements could easily be undone by reverting to the tainted political model of the past.