INTRODUCTION

Until the imposition of martial law in the Philippines in September 1972, the principles of civilian control and supremacy of civilian authority over the military governed the relationship between the civilian government and the Armed Forces of the Philippines (AFP). As a consequence of the strategy used against the agrarian-based Huk insurgency during the late 1940s to the early 1950s, the role of the military in society slowly expanded beyond the original triad of external defence, internal security, and peace and order to include socio-economic functions. However, the constitutional and institutional framework, including civilian oversight over the military, and a body of civil and political rights that ensured democratic governance, including regular elections, continued to define civil-military relations and the role of the military in Philippine politics.

This changed with Martial Law. The legislature was disbanded, civil and political freedoms were suspended, political parties were outlawed, newspapers and other media outlets were controlled, the private property of Marcos’ political opponents was sequestered on the pretext of their outstanding loans from government financial institutions, and the military became a partner of martial law and authoritarian rule. This partnership lasted some fourteen years, and in its wake left civil-military relations in disarray. More disastrously for democracy, it created in the AFP members an “interventionist” tendency.

This chapter focuses on the military in Philippine politics, particularly the implications of martial law for the country's military, civil-military relations, and democratic governance in general. It attempts to explain the emergence of an “interventionist” role for the military by documenting:

1. • the military's role expansion without civilian oversight institutions and a democratic political system;

2. • the role the AFP played in the 1986 and 2001 political successions and in providing political stability and regime survival in the 1980s and at present;

3. • the military's role in countering communist insurgency and Moro separatism; and

4. • the absence of good governance which helped shape its “interventionist” role.

In a world where economic growth is an obsession and politics more intractable than ever, the study of religion and its place in the lives of people is both fascinating and challenging. Contrary to the thinking that modernity weakens it, religion remains enmeshed in the complex fabric of human societies. Samuel Huntington, for example, cites a “global religious resurgence” happening during the second half of the twentieth century, involving people returning to, reinvigorating, and giving new meaning to the traditional religions of their communities. This revivalism has created a huge impact on the development of selected nations.

For the past several decades, scholars have been enamored with how religion — its system of beliefs, principles, and doctrines, including norms, values and practices — relates to the modernization of different societies. Robert Bellah, in his discussion of Asian modernization, for instance, examines the influence of cultural traditions, including religion, in building the modern nation-state. This is complemented by Peter Berger's analysis of religion and secularity. Pointing to a phenomenon of Asian religiosity, Berger talks about how culture has contributed to defining and molding Asia's own brand of modernity. The transformation of Confucianism from being an imperial state ideology to an everyday ethic of working people is the most widely celebrated example of this phenomenon. Complementary contrasts also exist within this Asian religiosity. For instance, while Indian Buddhism practices a “concomitant deprecation of all worldly activity, including economic activity”, Chinese Buddhism rejects this “world-denying” creed and favours a “world- affirming” doctrine. In contemporary Japanese religions, meanwhile, “pragmatic, even technical, this-worldliness” is emphasized and the individual is encouraged to strive for personal success.

Gilles Kepel, meanwhile, points to the resurgence of the great religions of Islam, Christianity and Judaism in the modern world. In his study, he observes that a new religious approach has taken shape, aimed no longer at adapting to secular values but at recovering a sacred foundation for the organization of society, by changing it if necessary.

Over 2006, financial analysts were positively optimistic about the Philippines. A Royal Bank of Scotland report in February declared, “We arrived in Manila cautiously bullish. We left Manila bullish.” In April, UBS Investment Research announced, “In the past months of marketing, we've picked up something … that we haven't seen in a very long time indeed: a palpable sense of interest and even excitement about the Philippines.” Also in April, Merrill Lynch reported,

In September, the same Merrill Lynch strategist wrote, “We expect a strong fiscal story this year, with a sharply reduced fiscal deficit. We maintain our overweight recommendation on the Philippines in our model portfolio.”

What are the sources of the analysts' optimism? Generally, as the quotes above make clear, they are the macroeconomic indicators that are the normal grist for financial analysts' mill. In 2006, the gross domestic product grew at a respectable rate of 5.4 per cent. The growth is attributed largely to good weather (that is, adequate rainfall), which boosted agricultural production, foreign investments in the electronics sector, the rise in exports in that sector, the expansion of call centres, and the increase in tourism. Merrill Lynch thinks that the GDP growth figure may even be understated, because it does not take sufficient account of the growth in services as well as of the large informal sector.

The analysts applaud the government's improved fiscal performance, which is partly due to the implementation of the expanded value added tax, despite doubts about the efficiency of the revenue collecting agencies.

In the political struggle over the proposed amendments to the 1987 Constitution from 2004 to 2006, protagonists voiced divergent ideas, perceptions and opinions and their ideological and partisan preferences. The media actively participated not only to report on the events, the protagonists and the issues, but also to take sides in the debates and influence public opinion. The Catholic hierarchy and the largest and most influential media establishments — notably the Philippine Daily Inquirer and ABS-CBN radio and television — openly opposed the proposed reforms.

The proposed amendments were effectively opposed as selfishly motivated, unnecessary, defective, untimely, hastily done, and forced on a reluctant people and Senate. In effect the dominant opposition to proposing charter change through either the petition for a people's initiative or by Congress as a constituent assembly favoured the status quo in terms of the form, structure and processes of governance and the restrictive economic policies regarding foreign investments. The apparent agenda and vested interests of those who blocked the proposed reforms were largely obscured in the debates.

This chapter focuses at length and in substantive detail on the major proposals for constitutional reform and their stated advantages and justification, as well as summarizes the criticism and opposition of sceptics and opponents. The fierce yet peaceful struggle for and against constitutional reform ended in October to December 2006 in the decisions of the Supreme Court on the petition for a people's initiative and the failure of the majority in the House to push its amendments by a constituent assembly over the Senate's objections.

INTRODUCTION: CHARTER CHANGE FOR GOOD GOVERNANCE

In 2006 the public debate and controversy over proposals for charter change were focused mainly on the lone proposal to replace the presidential government and the bicameral Congress with a unicameral parliamentary government in the same year, or early in 2007. Prominently behind the proposal to amend the 1987 Constitution was the Sigaw ng Bayan (Cry of the People) Movement of citizens and local leaders initiated in Manila on 15 February 2006 under the leadership of Manila Mayor Lito Atienza.

INTRODUCTION

The twentieth anniversary of the Philippines' People Power was marred by the sudden declaration of a state of national emergency, a day prior to its scheduled commemoration on 25 February 2006. Reports from Malacañang Palace had cited alleged coup plots by renegade military officers and an apparent “tactical alliance” between right-wing and communist forces to overthrow the government of President Gloria Macapagal-Arroyo.

Notwithstanding security concerns, of significance in the latest coup attempt were the different ways it was viewed depending on one's vantage point. For those who are no strangers to the vicissitudes of Philippine politics, particularly for those who were outside the capital Metro Manila, it was business as usual. To the hardened cynic, it appeared as if the latest coup attempt was just one of the occasional blips that punctuated the country's political landscape, given that in the post-martial law era, the Philippines had already had nine coup attempts, including the seven mounted against the Aquino administration (1986–92). The country's recent political landscape has been starkly defined by the history of two other “people power” movements: EDSA (Epifanio de los Santos Avenue) 2 in 2001, which brought President Arroyo to power, and the lesser known EDSA 3 (also in 2001) which challenged Arroyo's legitimacy. Dramatic twists and turns followed the 2004 elections, which saw the current Arroyo administration besieged by incessant demands for her resignation due to allegations of cheatings in the past elections. These were seen in the street demonstrations that almost culminated in another Edsa-like “revolution” in July 2005 and were heard in the cacophony of discourses from a rambunctious Congress mired in political infighting. One may also add to this vista the decades-long problem of communist insurgency and the intractable issue of separatism in the Philippines' Muslim South.

From the outside looking in, the current state of affairs in the Philippines reflects a perplexing paradox in Asia's first democracy.

INTRODUCTION: MACROECONOMIC AND STRUCTURAL PROBLEMS*

This chapter reviews some macroeconomic issues relating to the current Philippine economy. To provide a proper understanding of these issues, their link will be associated with their structural underpinnings. Persistent macroeconomic problems often require a policy adjustment, and inevitably, assessment of the problems boils down to an understanding of what gets done, what gets delayed or what is not possible to do under the circumstances. A further device in presenting the issues is through a comparison with the experience of other East Asian and high-growth countries, which include some ASEAN countries.

The review follows this sequence. First, the recent growth performance of the economy is discussed. Then, the compositions of aggregate demand and of aggregate supply are described, emphasizing the reasons for the observed changes and trends. Next, the economy's saving and investment issues are highlighted, paying notice to the large gap between saving and investment. After that, the spotlight moves to the fiscal front that is a major contributor to the country's low saving rate. The fiscal sector is discussed in terms of dealing with deficit reduction and managing the public debt. Finally, the review expounds on the economy's external trade and payments position. Current problems and new opportunities are discussed in the context of globalization and the country's open stance.

A major theme that arises from this discussion is that the potentials for development in the Philippines are not fully exploited. A relative measure of this under-performance can be derived from the immense turnaround of economic prospects in 2006 just as soon as the government was able to deal with a reform on the fiscal front. A result of these measures led to higher tax revenues being earned, thereby braking a deteriorating fiscal situation. A lot of other benefits affecting macroeconomic fundamentals were likewise experienced, changing the dynamics of political and economic discourse.

ASEAN is celebrating its fortieth anniversary in 2007. The usual busy meeting schedule is now spiced up with festivities and exuberance of spirit and colours. It will be an exciting year for ASEAN.

At the same time, the ASEAN Leaders are forging strongly ahead with their plans for the ASEAN Community, especially the effort to integrate the ten ASEAN economies into one single market and regional production base. This is an unprecedented initiative and one which would break the traditional mindset and create a new paradigm of regional cooperation and development. Many partners of ASEAN as well as stakeholders from numerous sectors are involved. Their joint endeavour would establish ASEAN a firm foundation for the intense competition and the complexities of a globalized community.

Over the past five years, the Regional Economic Policy Support Facility (REPSF) under the ASEAN–Australia Development Cooperation Program(AADCP) has supported ASEAN's community-building efforts by providing the ASEAN Secretariat and ASEAN bodies with economic policy analysis and advice to assist them in putting in place measures and actions contributing to achieving economic integration and competitiveness.

This book is a collection of select policy research on ASEAN economic integration issues conducted under the Facility. What are the implications of the goal of a single market? How will integration affect the less developed member countries of ASEAN? What strategies should ASEAN employ to free up trade and facilitate investment? How can ASEAN add value to the economic relations with its dialogue partners? These are just some of the challenging questions examined in this collection of studies by some of the most eminent policy analysts from ASEAN and Australia.

I would like to take this opportunity to express my deep appreciation to ASEAN's strong supporters in neighbouring Australia for instituting such an innovative economic research facility as part of the cooperation programme assisting ASEAN deal with the challenges of integration. I would like to commend the various experts who have been engaged by the Facility over the years. I thank them for sharing their knowledge and unique insights to help ASEAN navigate through the complicated situation. Last but not the least, I would like to thank all the relevant ASEAN sectoral bodies and the ASEAN Secretariat staff who have in one way or another contributed to these research endeavours.

This collection of studies results from the first five years of operation of the Regional Economic Policy Support Facility (REPSF), a component of the Australian Government's ASEAN–Australia Development Cooperation Program (AADCP). During this five-year period, REPSF produced a total of fifty research papers.

AADCP is the prime vehicle for the Australian Agency for International Development (AusAID) development cooperation activities carried out in collaboration with ASEAN through interaction with the ASEAN Secretariat (ASEC).

AADCP consists of three separately managed streams, namely, the Program Stream (PS), the Regional Partnership Scheme (RPS), and REPSF. The PS and the RPS implement activities of medium to small size in policy and capacity-building.

REPSF was the first stream to be mobilized in January 2002. It conducted a rolling programme of small to medium economic policy research projects. These projects assisted ASEC in its mission to provide ASEAN Working Groups with economic policy and development analysis for working towards the goal of integrating the economies of the ten ASEAN member countries (AMCs) in line with the objectives and priorities of ASEAN Vision 2020, the Hanoi Plan of Action, and the subsequent Vientiane Action Programme (VAP).

In December 2005 Australia's Foreign Minister Alexander Downer announced the funding of a further AUD5 million for joint research examining economic integration between ASEAN nations and the other East Asian nations — Japan, the Republic of Korea, China, India, New Zealand, and Australia. Therefore REPSF was given an extension period from the completion of REPSF I in January 2007 to 30 June 2008 for this East Asia Summit Research Initiative.

REPSF is a funding mechanism which, in consultation with its key stakeholders AusAID, ASEC and ASEAN's Senior Economic Officials Meeting (SEOM), provides ASEC with the capacity to develop and implement a programme of priority economic policy research. It is more specialized than the other two streams of AADCP. Its programme of economic policy research on aspects of ASEAN economic integration is undertaken by researchers selected through either competitive tender or deliberative invitation (depending on the budget level of the study). ASEC personnel and ASEAN sectoral bodies monitor the research in progress. During the project the researchers present drafts of their report to audiences of relevant ASEAN or other experts.

The vision of an ASEAN Economic Community (AEC) by 2015 is certainly bold and ambitious. Although there are already building blocks in place such as the ASEAN Free Trade Area (AFTA), the ASEAN Investment Area (AIA) and the ASEAN Framework Agreement on Services (AFAS), ASEAN faces a number of daunting challenges in realizing this vision. From the studies presented in the preceding chapters, a number of compelling questions emerge. Among these are:

1. (i) whether or not the roadmap to achieve the AEC is realistic given the relatively short timeline set to undertake this endeavour;

2. (ii) whether the progress made in expediting economic integration, particularly of the fast-track integration of the priority sectors, is on track to achieve its targets and objectives;

3. (iii) whether ASEAN has the institutional framework to support such deeper economic integration; and

4. (iv) whether ASEAN would be able to successfully address the economic development divide among its member countries.

There is also the nagging question of what is the ultimate end-goal of the AEC — is it a European-style common market or just a free trade area? To be sure, these challenges need to be seriously addressed in the short to medium term. In this concluding chapter, key issues are discussed reflecting the challenges ahead.

Addressing the Stumbling Blocks to Economic Integration

Tackling Barriers to Trade

Although most ASEAN countries have complied with tariff reductions under AFTA, Tongzon (2005) found the utilization of the Comprehensive Effective Preferential Tariffs (CEPT) has been relatively low due to lack of clear and transparent procedures, a lack of mutual trust between preference-receiving country and preference-granting country, low margin of tariff preferences (between CEPT and most-favoured nation rates) and a lack of private sector awareness regarding AFTA concessions. Furthermore, the less developed ASEAN countries may be reluctant to fully implement AFTA given the huge losses in customs revenue due to the implementation of the CEPT (Tongzon and Khan 2005). Intra-ASEAN trade has not increased significantly since the signing of AFTA in 1992 (see Figure 10.1). Studies in this book on the priority sectors have also found that non-tariffs measures (NTMs) continue to persist and impede greater intra-ASEAN trade. Hence, effectively tackling NTMs, particularly those that are barriers to trade, would be crucial if a fully functioning AFTA is to be feasible by 2015.

Introduction

One of the difficult challenges facing Cambodia, Lao PDR, Myanmar, and Vietnam (usually referred to as CLMV) as new members of ASEAN is how to implement their commitments and obligations as signatories of the ASEAN Free Trade Area (AFTA). There is a real concern that, as they reduce their tariffs in accordance with the AFTA guidelines, they will suffer significant revenue losses with adverse economic and social implications. Revenues from import tariffs in these countries constitute a sizeable proportion of their government revenues (for example, the share of import tariffs in total revenue among CLMV countries has ranged between 7 per cent and 25 per cent).

In light of this concern, this study aims to investigate if there is any empirical basis of this concern and to draw out some policy implications. Except for the studies made by Fukase and Martin (1999a–d) for the World Bank and by Lao-Araya (2002), no in-depth study has yet been undertaken to assess the tariff revenue implications as a result of their participation in AFTA. Fukase and Martin (1999a–d) used a static computable general equilibrium model (CGE) based on a full market equilibrium assumption. Lao-Araya (2002) used a partial equilibrium approach but her estimates due to the lack of disaggregated data were highly aggregative and did not take into account the growth of imports. This paper uses a partial equilibrium approach and takes into account the growth of imports. Its estimates are also derived from disaggregated data which have become available.

The rest of the paper is organized as follows: section 2 provides a brief review of the major aspects of AFTA and the trade liberalization commitments made by CLMV countries as new members of ASEAN; section 3 discusses the revenue structure in CLMV countries; section 4 briefly presents the theoretical basis and the methodology used for this study; section 5 discusses the revenue impact; section 6 suggests a set of policy recommendations followed by some concluding remarks in section 7.

Introduction

ASEAN integration offers significant gains to all members. It allows them to capture the gains from interactions with other countries both within ASEAN and with the rest of the world so as to facilitate faster economic growth and improve living standards. The gains include those from freer trade in goods and services, from more open capital flows and from transfers in technology.

Increasing economic integration with other ASEAN countries and with the world brings these benefits, but it also involves more competition and change. For example:

1. • Market shares are continually evolving, and new suppliers continue to emerge in the home market and in third-country markets. China and its impact on world markets is the most recent startling example, but the same processes are at work within ASEAN as well.

2. • Not only does competitiveness in traditional products change, but also new products emerge. The finer division of production processes, the greater complexity in global supply chains and the growth of trade in components in the region are examples.

3. • There are new ways of organizing business and new forms of international business. The rise in significance of trade in services in its own right and as a complement to other forms of international business is an example.

4. • Foreign direct investment (FDI) has always been a critical part of the business-led integration of economies in East Asia. Businesses losing competitiveness in higher income countries have relocated offshore. Now new investors are emerging, and new partnership possibilities are developing. Examples are related to the growing flows of FDI from India and from China.

These changes are all sources of benefit, but the willingness of a community to open their economy demands a level of confidence about the ability to adjust to them. The importance of this confidence and its impact on the process of integration are key issues in capturing the gains from integration. We comment on the connections between community confidence, policy reform and economic integration below.

Introduction

Until recently, the European Union (EU) was the only major Regional Trading Agreement (RTA) that had formally adopted a Single Market as a goal. Since 2002, the Caribbean Community (CARICOM) has styled itself as a Single Market and Economy. The 2003 Declaration of ASEAN Concord II declared “The ASEAN Economic Community shall establish ASEAN as a single market and production base.” Australia and New Zealand are members of the regional trading agreement (RTA) known as the Closer Economic Relations (CER) Agreement. In January 2004 the Australian and New Zealand Prime Ministers announced an intention of creating a “single economic market” (Prime Ministers Howard and Clark 2004). Thus, there are now four regional groups that are committed to the goal of a single market.

The meaning of the term “single market” is not clearly defined in any of the four RTAs that have adopted this goal but the interpretation of the term will have a vital effect on the evolution of each agreement. The achievement of the declared goal of a single market can be made only if political decisionmakers and bureaucrats understand fully the meaning of a single market and the measures required to implement it. The meaning of the term, therefore, requires careful examination.

To clarify the issues, section 2 defines a single market in terms of concepts of economic integration and the Law of One Price. Section 3 discusses the conditions that are necessary for the Law of One Price to hold. Section 4 discusses the progress that has been made towards complete economic integration in a sample of RTAs, including ASEAN and two of the three other RTAs that have adopted the goal of a single market (the EU and CER). Section 5 considers the steps necessary for ASEAN to become a single market.

A Single Market = The Law of One Price

The idea of a single market comes of course from the European Economic Community (EEC)/EU. Initially the EEC created by the 1957 Treaty of Rome was a Common Market. This European concept of a common market was expressed in terms of the “four freedoms”, that is, freedom of trade in goods, services, capital, and labour. A Common Market required the abolition of all border restrictions on the movement of goods, services, capital, and labour. It also required the establishment of “common policies” in four designated areas: external trade, agriculture, transport, and competition.