1. Philippine Globalization in the New Millennium IDEAs Conference on A Decade After: Recovery and Adjustment since the East Asian Crisis 12-14 July 2007 12-14 July 2007

2. Macroeconomic Context Jobless Growth MTPDP 2004 – 2010 MTPDP 2004 – 2010 acknowledged the need to address the countrys unemployment problem acknowledged the need to address the countrys unemployment problem 1.5 million jobs per year; 10 million jobs by 2010 1.5 million jobs per year; 10 million jobs by 2010 Early indications Early indications In 2004: 977,000 new jobs were created; 1,289,000 new entrants into the labor market In 2004: 977,000 new jobs were created; 1,289,000 new entrants into the labor market In 2005: 455,000 new jobs were created; led to a drop in the unemployed by 100,000 but unemployment rate remained high at 11.4%. In 2005: 455,000 new jobs were created; led to a drop in the unemployed by 100,000 but unemployment rate remained high at 11.4%. Such inability to create enough jobs points to the absence of a cohesive strategy to address the unemployment issue. Such inability to create enough jobs points to the absence of a cohesive strategy to address the unemployment issue.

3. RPs External Economic Ties: Three Salient Features Business process outsourcing (BPO) Business process outsourcing (BPO) Labor migration / Labor exports Labor migration / Labor exports Bilateral trade and / or investment treaties Bilateral trade and / or investment treaties

4. Business Process Outsourcing (BPO) Types of BPO Services in the Philippines Types of BPO Services in the Philippines Contact / Call Center Contact / Call Center Back Office Back Office Data Transcription Data Transcription Animation Animation Software Development Software Development Engineering Development Engineering Development Digital Content Digital Content

5. BPO Sector: Recent Trends As of end-2005, the BPO sector employed 163,000 workers. As of end-2005, the BPO sector employed 163,000 workers. The contact / call center sub-sector employed 70% of the BPO workers in the Philippines. The contact / call center sub-sector employed 70% of the BPO workers in the Philippines. The same sub-sector contributed 75% (USD 1.8 billion) of total BPO revenues in 2005. The same sub-sector contributed 75% (USD 1.8 billion) of total BPO revenues in 2005. The whole BPO sector represented 0.075% of GDP in 2000, but this increased to 2.4% in 2005. The whole BPO sector represented 0.075% of GDP in 2000, but this increased to 2.4% in 2005.

6. BPO Sector Overview No. of Firms RevenuesEmployment USD Million% ShareEmployees% Share Contact Center1141,79275.10112,00068.61 Back Office621807.5422,50013.78 Medical Transcription64702.935,5003.37 Legal Transcriptions960.254500.28 Other Data Transcription391.633,0001.84 Software Development3002048.5512,0007.35 Animation42401.684,5002.76 Engineering Design14482.012,8001.72 Digital Content1170.295000.31 Total6162,386100.00163,250100.00

7. BPO Sector: Recent Trends Sole dynamic sector in the economy in recent years. Sole dynamic sector in the economy in recent years. Regarded by the government as the panacea of the unemployment problem / jobless growth phenomenon. Regarded by the government as the panacea of the unemployment problem / jobless growth phenomenon. Employment in this sector is projected to rise by 38% annually between 2005 and 2010. Employment in this sector is projected to rise by 38% annually between 2005 and 2010. 27% of all new jobs in the country (if current trends persist) in 2010 will be generated by the BPO industry. 27% of all new jobs in the country (if current trends persist) in 2010 will be generated by the BPO industry. Credited for surge in demand for office spaces / real estate, thus making the real property sector the highest-growing Services sub-sector in 2006. Credited for surge in demand for office spaces / real estate, thus making the real property sector the highest-growing Services sub-sector in 2006.

8. Development Implications of the BPO Sector Threats to Philippine performance in the global BPO industry abound Threats to Philippine performance in the global BPO industry abound safety and political issues; poor infrastructure; expensive inputs safety and political issues; poor infrastructure; expensive inputs stiff competition from India, Malaysia, China stiff competition from India, Malaysia, China Job and Skills mismatch: Hiring rate for call center applicants is only 14%. Job and Skills mismatch: Hiring rate for call center applicants is only 14%. Employee profile biased not only for highly educated individuals, but particularly graduates of top schools who could otherwise have been employed in more dynamic sectors of the economy. Employee profile biased not only for highly educated individuals, but particularly graduates of top schools who could otherwise have been employed in more dynamic sectors of the economy. Diploma from a top school guarantees English proficiency, computer literacy. Diploma from a top school guarantees English proficiency, computer literacy. Call centers also hire on average twice as many middle managers than call center agents. Call centers also hire on average twice as many middle managers than call center agents. Non-trivial wage premium. Non-trivial wage premium.

9. Development Implications of the BPO Sector Low knowledge intensity, no technology transfer / human resource development Low knowledge intensity, no technology transfer / human resource development BPO sector is clearly taking advantage of cheap skilled labor. BPO sector is clearly taking advantage of cheap skilled labor. How can the sector move up the knowledge intensity ladder? How can the sector move up the knowledge intensity ladder? Very low inter-sectoral linkages Very low inter-sectoral linkages Estimates of the sectors forward and backward linkages are well below 1. Estimates of the sectors forward and backward linkages are well below 1. The Philippine BPO industry is not a key sector. The Philippine BPO industry is not a key sector.

10. Development Implications of the BPO Sector BPO sector does not represent any opportunity for majority of the unemployed, much less the poor. BPO sector does not represent any opportunity for majority of the unemployed, much less the poor. Most of the unemployed are 15 – 24 years old with no college diploma. Most of the unemployed are 15 – 24 years old with no college diploma. Poverty is still most deeply felt by the agricultural peasantry. Poverty is still most deeply felt by the agricultural peasantry. BPO has no linkage to agricultural sector. BPO has no linkage to agricultural sector.

11. Philippine Labor Exports Deployed Overseas Filipino Workers (OFWs) YearTotalLand-BasedSea-Based 1990446,095334,883111,212 1995654.022488,621165,401 2000841,628643,304198,324 2001866,599661,648204,951 2002891,908682,315209,593 2003867,969651,938216,031 2004933,588704,586229,002 2005988,6155740,632247,983 20061,062,567788,070274,497

12. OFW Remittances, 1990 – 2006 (USD Thousands)

13. Annual Growth Rate of OFW Remittances

14. Remittances & FDI (1999 - 2006) USD Millions

15. Philippine Labor Exports Remittances have grown at an annual average of 16.286% in the past five years Remittances have grown at an annual average of 16.286% in the past five years 16.91% average annual growth rate since 1991 16.91% average annual growth rate since 1991 Dip in remittances occurred during the Estrada Administration (1998 – 2001) Dip in remittances occurred during the Estrada Administration (1998 – 2001) Along with the BPO sector, these remittances have fueled consumption growth and the recent real estate surge. Along with the BPO sector, these remittances have fueled consumption growth and the recent real estate surge. Dramatic appreciation of the Philippine peso Dramatic appreciation of the Philippine peso The government is by and large pleased with this. The government is by and large pleased with this.

16. PhP / USD Exchange Rate Trends 19961997199819992000200120022003 PhP/ USD 26.2229.4740.8939.0944.1950.9951.6054.20 % -1.9-12.4-38.84.4-13.1-15.4-1.2-5.0 200420052006 2007 JanFebMarAprMay PhP/ USD 56.0455.0951.3148.9148.3848.5247.8246.81 % -3.41.76.88.8

17. PhP Cross Rates PeriodEUROHKSKSingMalayThaiIndoIndia Dollar WonDollarRinggitBahtRupiahRupee 19973.80680.031419.797410.53410.96840.0105 19985.2790.029424.474410.45820.99810.0042 199941.72055.03370.032923.085210.28791.0340.00510.9093 200040.72465.67150.039125.624311.62961.09970.00530.984 200145.69396.54040.039728.477513.42081.14720.0051.0826 200248.81256.61740.042428.836413.69791.20060.00561.0764 200361.35066.9610.045631.123714.26591.3070.00631.1661 200469.68527.19550.04933.164414.7491.39320.00631.2391 200568.61027.0830.053833.10914.54821.36970.00571.2523 200664.44736.6060.053832.30213.99721.35420.00561.136 PhP has been appreciating against other currencies as well in the past two years.

18. Philippine Labor Exports Moreover, the inflow of OFW remittances has enabled the BSP to increase its foreign exchange reserves to about 4 months worth of imports. Moreover, the inflow of OFW remittances has enabled the BSP to increase its foreign exchange reserves to about 4 months worth of imports.

19. Gross Intl Reserves (1997-2007) USD Millions

20. Development Implications of Labor Exports Primary example of brain drain Primary example of brain drain Mobile labor is well-educated, highly-skilled, and often belonging to the Philippine middle class Mobile labor is well-educated, highly-skilled, and often belonging to the Philippine middle class Medical doctors, nurses, and other medical practitioners, engineers, teachers. Medical doctors, nurses, and other medical practitioners, engineers, teachers. De-skilling: De-skilling: Doctors taking up nursing courses in order to leave the country. Doctors taking up nursing courses in order to leave the country. Nurses becoming careworkers. Nurses becoming careworkers.

21. Development Implications of Labor Exports Hollowing out of the labor market Hollowing out of the labor market More difficult to move up the knowledge- intensity ladder in exports More difficult to move up the knowledge- intensity ladder in exports

22. Development Implications of Labor Exports Peso appreciation Peso appreciation With further appreciation of the peso, the effect of cheaper inputs (since exports are also largely input dependent) will be outweighed by higher domestic costs, thus eroding whatever little export competitiveness the Philippines possesses. With further appreciation of the peso, the effect of cheaper inputs (since exports are also largely input dependent) will be outweighed by higher domestic costs, thus eroding whatever little export competitiveness the Philippines possesses. Already, exporters have been wary of signing contracts Already, exporters have been wary of signing contracts Standard contracts are for 2 years. Standard contracts are for 2 years. De facto Factor Price Equalization, but via the exchange rate De facto Factor Price Equalization, but via the exchange rate OFWs are complaining more and more about the smaller wage premium they enjoy. OFWs are complaining more and more about the smaller wage premium they enjoy.

23. Development Implications of Labor Exports Social cost of foreign reserves Social cost of foreign reserves Reserves generally seen as necessary to preclude financial crises Reserves generally seen as necessary to preclude financial crises

24. Bilateral Investment and/or Trade Treaties (BITTs) Argentina Argentina Australia Australia Austria Austria Bangladesh Bangladesh Belgium Belgium Cambodia Cambodia Canada Canada Chile Chile China China Czech Republic Czech Republic Denmark Denmark Finland Finland France France Germany Germany Italy Italy Japan Japan Myanmar Myanmar Netherlands Netherlands Pakistan Pakistan Portugal Portugal Republic of Korea Republic of Korea Romania Romania Russian Federation Russian Federation Spain Spain Sweden Sweden Switzerland Switzerland Thailand Thailand Turkey Turkey United Kingdom United Kingdom

25. BITTs Overview Standard provisions on Standard provisions on national treatment national treatment Expropriation Expropriation Compensation Compensation Dispute settlement. Dispute settlement.

26. Excerpts from Australia – RP BIT 1. Neither Party shall nationalise, expropriate or subject to measures having effect equivalent to nationalisation or expropriation (hereinafter referred to as "expropriation") the investments of investors of the other Party unless the following conditions are complied with: (a) the expropriation is for a public purpose related to the internal needs of that Party and under due process of law; (b) the expropriation is non-discriminatory; and (c) the expropriation is accompanied by the payment of prompt, adequate and effective compensation. 2. The compensation … shall be computed on the basis of the market value of the investment immediately before the expropriation or impending expropriation became public knowledge. Where that value cannot be readily ascertained, the compensation shall be determined in accordance with generally recognised principles of valuation and equitable principles taking into account the capital invested, depreciation, capital already repatriated, replacement value, currency exchange rate movements and other relevant factors.

27. BITTs Overview Rejection of the Calvo doctrine Rejection of the Calvo doctrine insists that investment disputes lie within the exclusive purview of domestic legislation, and insists that investment disputes lie within the exclusive purview of domestic legislation, and strikes at the core of the international minimum standard by repudiating the claim to MFN status. strikes at the core of the international minimum standard by repudiating the claim to MFN status. Japan – Philippines Economic Partnership Agreement (JPEPA): Japan – Philippines Economic Partnership Agreement (JPEPA): 9 September 2006 9 September 2006 most recent and probably the most controversial BITT that the Philippines is party to. most recent and probably the most controversial BITT that the Philippines is party to.

28. JPEPA Provisions Comprehensive BITT covering major areas including: trade in goods and services trade in goods and services Removal of tariffs on products (agricultural and non- agricultural) Removal of tariffs on products (agricultural and non- agricultural) Gradual tariff reduction towards zero tariff on selected agricultural and non-agricultural items. Gradual tariff reduction towards zero tariff on selected agricultural and non-agricultural items. MFN tariffs on the automotive sector (sensitive sector for RP) MFN tariffs on the automotive sector (sensitive sector for RP) elimination of tariffs by 2010 under AFTA elimination of tariffs by 2010 under AFTA Exclusions: Rice, wheat, milk, herrings, sardines, mackerel, and other fish. Exclusions: Rice, wheat, milk, herrings, sardines, mackerel, and other fish. Japan will allow Filipino nurses and careworkers to access the Japanese market, with conditions. Japan will allow Filipino nurses and careworkers to access the Japanese market, with conditions. must master written and spoken Nippongo must master written and spoken Nippongo must pass the nursing board exam within two years must pass the nursing board exam within two years

29. JPEPA Provisions investments investments Article 89: National Treatment Article 89: National Treatment Article 90: MFN Treatment Article 90: MFN Treatment prohibits requirements on export volumes, domestic content, input, foreign exchange earning, employment, technology transfer, R&D, etc prohibits requirements on export volumes, domestic content, input, foreign exchange earning, employment, technology transfer, R&D, etc intellectual property intellectual property Article 127 New Varieties of Plants Each Party recognizes the importance of providing a system of protection of new varieties of plants and shall, within its capabilities, endeavor to increase the number of plant genera and species that can be protected under its laws and regulations. In this regard, each Party shall consider the concerns of the other Party.

30. JPEPA Provisions government procurement government procurement accords MFN treatment in government procurement procedures, with a new round of negotiations for national treatment in five years. accords MFN treatment in government procurement procedures, with a new round of negotiations for national treatment in five years. Trade facilitation and harmonization of customs procedures, use of ICT and paperless trading Trade facilitation and harmonization of customs procedures, use of ICT and paperless trading movement of natural persons movement of natural persons competition policy competition policy

31. JPEPAs Development Implications Philippine trade law experts have said that the JPEPAs implications are very far-reaching that it may possibly require full-bodied legislation and/or amendments to existing legislation. Philippine trade law experts have said that the JPEPAs implications are very far-reaching that it may possibly require full-bodied legislation and/or amendments to existing legislation. Fiscal Impact Fiscal Impact DOF estimates PhP 4 billion in forgone revenues. DOF estimates PhP 4 billion in forgone revenues. Other estimates: PhP 3 – 5 billion range. Other estimates: PhP 3 – 5 billion range. huge costs in order to comply with numerous provisions of the treaty, most if not all of which are not development priorities. huge costs in order to comply with numerous provisions of the treaty, most if not all of which are not development priorities.

32. JPEPAs Development Implications Negligible growth impact: Negligible growth impact: Most upbeat estimate is that the treaty will contribute 0.09% GDP growth. Most upbeat estimate is that the treaty will contribute 0.09% GDP growth. Japan is already the 2nd largest trading partner of the Philippines Japan is already the 2nd largest trading partner of the Philippines USD 1.5B total exports and imports in 2005) USD 1.5B total exports and imports in 2005) any comparative advantage the Philippines has vis-a-vis Japan will come to pass with or without a JPEPA. any comparative advantage the Philippines has vis-a-vis Japan will come to pass with or without a JPEPA.

33. Overview of Philippine Tariffs SectorNo. of LinesSimple AverageWeighted Ave. Agriculture and Food 1,40711.859.22 Chemicals and Chemical Products 2,1224.644.16 Textiles, Paper, Wood, and Leather 1,9669.186.84 Base Metals and Non-base Metals 1,3175.693.69 Machinery and Transport Equipment 4,4977.961.78 Agriculture 1,40711.879.22 Mining 1312.472.79 Manufacturing 9,7117.262.97 Overall 11,3097.773.56

34. JPEPAs Development Implications It can be argued that further reduction of tariffs will no longer pose much harm to industries. JPEPAs pernicious elements, however, lie beyond the standard tariff reduction requirements of a FTA / BTT agreement, particularly in its provisions on other issues such as the following: The Singapore Issues: The Singapore Issues: investment, competition policy, trade facilitation, and government procurement investment, competition policy, trade facilitation, and government procurement have not made headway in the WTO talks, with developing-country members insisting that the more fundamental and developmental issues. have not made headway in the WTO talks, with developing-country members insisting that the more fundamental and developmental issues. The Philippines was part of the G-22 alliance during the Cancun ministerial of the WTO (2003). The Philippines was part of the G-22 alliance during the Cancun ministerial of the WTO (2003). All these issues now have been included in the JPEPA. All these issues now have been included in the JPEPA.

35. JPEPAs Development Implications JPEPA and IPR JPEPA and IPR JPEPA effectively restricts and stifles the recognized flexibilities under the TRIPS JPEPA effectively restricts and stifles the recognized flexibilities under the TRIPS International Treaty on Plant Genetic Resources for Food and Agriculture (ITPGRFA) (September 2006); awaiting concrete national implementation. International Treaty on Plant Genetic Resources for Food and Agriculture (ITPGRFA) (September 2006); awaiting concrete national implementation. JPEPA does not recognize the inherent right of farmers to accumulate, use, exchange and sell farm-saved seeds and/or propagating materials by either providing a limitation on its IPR provisions or sufficient safeguards acknowledging and protecting it. JPEPA does not recognize the inherent right of farmers to accumulate, use, exchange and sell farm-saved seeds and/or propagating materials by either providing a limitation on its IPR provisions or sufficient safeguards acknowledging and protecting it. Strengthening and increasing the scope of plant variety protection will only promote further monopoly control over seeds by TNCs. Strengthening and increasing the scope of plant variety protection will only promote further monopoly control over seeds by TNCs.

36. JPEPAs Development Implications Legalization of trade in hazardous and toxic waste Legalization of trade in hazardous and toxic waste Almost all goods, including toxic wastes, will be granted a preferential tariff rate of zero percent. Almost all goods, including toxic wastes, will be granted a preferential tariff rate of zero percent. Article 29 Originating Goods 2. For the purposes of subparagraph 1(a) above, the following goods shall be considered as being wholly obtained or produced entirely in a Party: … (i) articles collected in the Party which can no longer perform their original purpose in the Party nor are capable of being restored or repaired and which are fit only for disposal or for the recovery of parts or raw materials; (j) scrap and waste derived from manufacturing or processing operations or from consumption in the Party and fit only for disposal or for the recovery of raw materials; (k) parts or raw materials recovered in the Party from articles which can no longer perform their original purpose nor are capable of being restored or repaired;

37. DESCRIPTIONMFNJPEPA Ash and residues (other than from the manufacture of iron or steel), containing arsenic, mercury, thallium or their mixtures 3%0% Ash and residues from the incineration of municipal waste3%0% Waste pharmaceuticals20%0% Residual products of the chemical or allied industries, not elsewhere specified or included; municipal waste; sewage sludge; other wastes 30%0% Municipal waste30%0% Sewage sludge30%0% Clinical waste adhesive dressings and other articles having adhesive layer; wadding gauze bandages, surgical gloves 30%0% Other clinical waste30%0% Waste organic solvents halogenated, and other30%0% Other wastes from other chemical or allied industries containing organic constituents, other 30%0% Wastes of metal pickling liquors, hydraulic fluids, brake fluids and anti-freeze fluids 30%0% Worn clothing and other worn articles/0% Used or new rags, scrap twine, cordage, rope and cables and worn out articles of twine, cordage, rope or cables, of textile materials /0%

38. JPEPAs Development Implications According to law experts, the importation of toxic and hazardous wastes comes into conflict with numerous Philippines laws: According to law experts, the importation of toxic and hazardous wastes comes into conflict with numerous Philippines laws: Under the Constitution, the State is mandated to promote the peoples right to health (Art. II, Sec. 15) and right to a balanced and healthful ecology (Art. II, Sec. 16). Under the Constitution, the State is mandated to promote the peoples right to health (Art. II, Sec. 15) and right to a balanced and healthful ecology (Art. II, Sec. 16). Republic Act No. 6969, the Toxic Substance and Hazardous and Nuclear Waste Act of 1990 Republic Act No. 6969, the Toxic Substance and Hazardous and Nuclear Waste Act of 1990 Republic Act No. 6969 Republic Act No. 6969 Clean Air Act of 1999 Clean Air Act of 1999 Republic Act No. 4653 Republic Act No. 4653 Basel Convention, which was adopted in 1989 by 133 countries (including the Philippines and Japan) to minimize the production and regulate the trans-boundary movement of hazardous and toxic materials. Basel Convention, which was adopted in 1989 by 133 countries (including the Philippines and Japan) to minimize the production and regulate the trans-boundary movement of hazardous and toxic materials. Basel Convention Basel Convention

39. Overall Development Challenges Absence of an overarching industrial and development strategy Absence of an overarching industrial and development strategy Particularly in the context of already extremely low tariffs Particularly in the context of already extremely low tariffs Aggressive negotiation and pursuit of trade deals in spite of the absence of a master plan Aggressive negotiation and pursuit of trade deals in spite of the absence of a master plan DTI handles GATT, NAMA, et al DTI handles GATT, NAMA, et al DoA handles AoA DoA handles AoA NEDA handles GATS NEDA handles GATS The Governments strategy is laissez faire. The Governments strategy is laissez faire.

40. Overall Development Challenges GDP Growth at 6.9% in the first three months of 2007 On the production side: On the production side: Service sector is highest contributor to growth (9.1%) Service sector is highest contributor to growth (9.1%) Important Sub-sectors: finance (13.4%); transport, communications, and storage (9.6%); wholesale and retail trade (9.1%); private services (8.9%); government services (7.1%) Important Sub-sectors: finance (13.4%); transport, communications, and storage (9.6%); wholesale and retail trade (9.1%); private services (8.9%); government services (7.1%) Industry grew at 5.3% Industry grew at 5.3% Agriculture at 4.3% Agriculture at 4.3% Demand / Expenditure Side: Demand / Expenditure Side: Consumption grew at 5.9% Consumption grew at 5.9% Government Spending grew at 13.1% Government Spending grew at 13.1% Due to expenditures in preparation for May 2007 elections Due to expenditures in preparation for May 2007 elections Exports grew at 9.1% Exports grew at 9.1% Investments grew at 0.6% Investments grew at 0.6% Investments in durable equipment decreased by -0.4% Investments in durable equipment decreased by -0.4% Government construction grew 16.9% Government construction grew 16.9%

41. Overall Development Challenges Dismal outlook on overall economic performance Government spending surely not sustainable: News on recent fiscal revenues have not been good. Government spending surely not sustainable: News on recent fiscal revenues have not been good. Export outlook has also been bleak. Export outlook has also been bleak. Electronics demand worldwide is expected to slow down, alongside projected slowdowns of major economies in the world. Electronics exports comprise almost 75% of our exports in recent years. Electronics demand worldwide is expected to slow down, alongside projected slowdowns of major economies in the world. Electronics exports comprise almost 75% of our exports in recent years. Indeed, the paradoxical shrinking of the import bill has been partly due to a weakening of imports of electronic inputs. This is clear evidence of an export slowdown in the near future. Indeed, the paradoxical shrinking of the import bill has been partly due to a weakening of imports of electronic inputs. This is clear evidence of an export slowdown in the near future.