The ties that bind

Taipei, China August 28 2010: The Economic Framework Cooperation Agreement (EFCA) with China has now passed into law. Taiwan’s unicameral legislature ratified the accord on 17 August after 10 hours of debate. Not unexpectedly, the KMT dominated house, voted down all amendments proposed by the opposition DPP party. Government legislators naturally praised the accord saying “its implementation will ensure the country’s prosperity for 50 or 60 years”. Those in the Opposition naturally took the reverse view claiming that the ECFA has been “cooked up by the KMT and the Chinese Communist Party” to bring Taiwan under the control of China economically and hastening unification.

It is still too early to tell how the ECFA will alter the course of Taiwan’s future development but given the continued expansion of China’s hegemony over East Asia, analysts are probably right to sound the warnings – they are there for all too see.

Over the past decade and even under the DPP leadership, Taiwan’s economy has become increasingly dependent on the Chinese mainland in what has been termed a triangular pattern of trade whereby orders are booked in Taiwan but manufactured and shipped from China to other markets. One Taiwanese newspaper editorial has pointed out that the percentage of Taiwan’s trade carried out in this manner has grown from 13 percent in year 2000 to 50 percent this year. It is this triangular trade arrangement that has led to a hollowing out of Taiwan’s manufacturing base (with consequent declines in employment levels) despite the continued growth of exports and GDP.
The key question is whether the signing of the ECFA will reverse this pattern by allowing Taiwan to sign trade agreements with other countries and perhaps develop new industries (especially in services) or will it act as a vacuum cleaner sucking up what remains of Taiwan’s industrial base and transplanting it to China. The signs so far do not give much cause for optimism.
But first the good news; the government has once more upgraded Taiwan’s domestic growth prospects for this year based on improving export orders, better than expected private investment as well as robust consumer spending. The 6.14 percent domestic growth forecast for 2010 announced back in May, has now been revised to 8.24 percent.

GDP rose 12.53 percent year-on-year in the second quarter, the third consecutive quarter of growth since Taiwan came out of the 2009 recession. For the two remaining quarters of the year, further quarterly expansion rates of 6.9 percent and 1.37 percent are forecast. Looking ahead, the outlook for 2011 is for a growth rate of 4.64 percent.

The main reason for the slowdown of growth in the latter part of the year has been attributed to the base effect rather than any significant real slowdown. This could be an oversimplification as the most recent economic data from the major economies suggest that the pace of recovery could be slowing with the debt crisis in Europe not yet resolved and unemployment in the United States remaining stubbornly high.

The value of export orders in July, at US$33.8 billion, climbed to their fourth highest level ever and their second highest level since the global financial meltdown. Cumulative orders from January to July totalled $227.9 billion, a year-on-year rise of 35.2 percent (but remember the low base effect). Taiwan is hoping that for the year as a whole, orders will surpass $400 billion.

All of this looks very encouraging, but as the Taipei Times pointed out recently in an editorial, few benefits from this continued economic expansion are trickling down to the person in the street. The wealth disparity in Taiwan is at a record high: “In 2008, those in the top 5 percent of the income pyramid enjoyed, on average, an annual income of NT$4.5 million (US$140,530). The bottom 5 percent only earned an average of NT$68,000. In 1998, the highest incomes were only 32 times more than the lowest.” It appears that the winners in the economy are the exporters and their shareholders who are able to invest their growing wealth in property, pushing home prices ever higher. The same editorial pointed out that the cost of a home in Taipei City now represents more than 11 years of salary for the average wage earner.

It is hard to see how the ECFA can improve matters for the man in the street. Other commentators have drawn attention to the manner in which China is now enticing Taiwan’s high-tech farmers to China under the guise of cross-straits agricultural cooperation. As a result, high-value domestic Taiwan species: animal, fish and plant are now being bred in China on a large-scale sufficient to become a threat to Taiwan’s rural industries. Low cost entry of these products into China from Taiwan is only possible if there is a market for them. If China is replacing Taiwanese exports with domestic local production, then rather than expanding the market for Taiwan produce, it will simply disappear entirely. And once China produces these species in sufficient quantities to export, Taiwan is in further difficulty.

Despite the continued reassurance from President Ma Ying-jeou that the signing of cross-straits economic pacts have no political significance; such claims are sounding increasingly hollow. China’s agenda for Taiwan is clear for those who want to read the signs and is worrisome not only for Taiwan but for much of East Asia.

Back in the 1990s China passed domestic legislation claiming the entire South China Sea as its territorial waters; this was widely considered to be an ambit claim since many other countries bordering the Sea, including Vietnam, Malaysia, Indonesia and the Philippines were making claims of their own. Recently China upped the ante by proclaiming to visiting US officials in March that the South China Sea was part of its “core national interests” and crucial to its territorial integrity.

Similar to its claim to Taiwan, this puts the matter beyond negotiation as far as China is concerned.

One third of the world’s maritime commerce passes through the South China Sea and the implications of this declaration are only too clear. This is a clear laying down of the gauntlet to the United States and in particular the US Navy.

The US attitude towards China’s strategic expansion has appeared ambivalent and as a consequence, President Barack Obama’s overtures towards China have given Beijing the impression of US weakness. This has tempted China’s leaders to press their advantage believing that the US is unwilling to challenge China directly. While US Secretary of State Hillary Rodham Clinton was quick to reassure ASEAN nations that the US considers the maintenance of security and stability in the South China Sea as matters of US national interest, China’s foreign minister Yang Jiechi, was equally quick to issue a condemnation of Clinton’s comments.

And while ASEAN is seeking multinational negotiations to resolve issues involving common interest maritime areas, Beijing is equally adamant in insisting that the ASEAN countries negotiate bilaterally.

A multilateral forum would, of course, involve the United States, Japan and possibly Korea and this is the last thing that China would want to happen. Nevertheless, where there is action there is reaction. The interesting aspect in all of this is that such a multilateral form – whether or not Taiwan was given a seat at the table (and the likelihood is that it would not be invited) – would serve to give Taiwan a little more freedom to manoeuvre.

But not only has Taiwan’s President Ma Ying-jeou followed a policy of appeasement towards Beijing, he is on the record as vowing that no matter what, he will never ask the US to defend Taiwan. No wonder that most of Taiwan’s population are bewildered.

With the US economy decidedly shaky, the question for the State Department to ponder is how to deal itself back into the game.

Social Networking - course outline

A new paradigm for the Philippines

Manila, 24 August 2010: As this is being written, the Philippines once again has been thrust into the glare of international media attention and for all the wrong reasons. A former officer of the Philippine National Police, sacked over corruption charges, hijacked a bus full of Hong Kong tourists and held members of the 200-strong rescue team at bay for more than 11 hours on August 23. Eight tourists were killed together with the hostage taker during the bloody shootout as police eventually stormed the bus.

The entire event was played out on national TV and relayed around the world for all to see. Up to the minute reporting took on a whole new meaning as reporters covered live, all police activities allowing the hostage taker to monitor what was happening outside the bus and anticipate police moves.

To make matters worse, a group of college girls visited the scene in their school uniform and treated the entire affair as a party even posting their group photos to their Facebook accounts. Tasteless activity in the extreme – whatever were they thinking?

Former Senior Inspector Rolando Mendoza, who – according to reports – was dismissed in 2008, had seized the bus in an attempt to negotiate reinstatement into the police force. Live coverage of his brother being taken in for questioning by police apparently threw the hostage-taker into a frenzy. According to reports from hostages posted to their Facebook accounts, to that point Mendoza had been civil and considerate towards them. It was seeing the manner in which police manhandled his brother which sent him into a rage and changed the entire mood.

President Aquino declared August 25 as a day of mourning as anger mounts in Hong Kong over the manner in which the incident was handled. Four senior members of the Philippine SWAT team have been relieved of their posts over the botched rescue. Hong Kong authorities have issued a travel advisory warning against travel to the Philippines and China itself is expected to follow suit. Overseas Filipino domestic workers in Hong Kong are being summarily dismissed from their jobs as retaliation according to reports.

In the overall scheme of things, while the deaths of eight people will be quickly forgotten by the world at large it has once again signalled the violent nature of Filipino society. It may be recalled that the last time the Philippines made world news was in November 2009 when more than 50 people were gunned down in Maguindanao during a turf war between rival political clans.

Despite the contraction in global tourism worldwide in the aftermath of the Global Financial Crisis, inbound tourism to the Philippines held up well in 2009, rising by 1.5 percent to 3.14 million. Tourism accounts for 6.2 percent of the country’s GDP and China has been emerging as an important and rapidly growing market with arrivals from China, Hong Kong and Taiwan all posting significant recent growth thanks especially to the introduction of direct charter flights to regional tourism centres in the Philippines. Undoubtedly, as a result of this incident, there may be a dip in numbers from East Asia for some time to come denting prospects of further growth in the months ahead.

In terms of foreign direct investment, immediate fallout within the East Asian region is expected to be minimal. China (including Hong Kong) accounted for a little over five percent of FDI in 2009 – up from 1.9 per cent in 2008. Much of China’s investment is strategic and goes into agriculture and resources and this is expected to continue. Rather, this episode has once again demonstrated the volatility of the local environment for foreign investors generally.
It is the last thing that newly installed President Benigno Aquino II (already dubbed P-Noy – a clever play on the term “Pinoy” which loosely translates as “quintessentially Filipino”) needed. President Aquino has been in the job less than two months but already the mood of the country has shifted, and for the better. While his detractors have been quick to criticise his lack of a roadmap for getting the country out of poverty as he has promised to do, he has been given full marks by most people for changing the paradigm of government. His proclaimed mission statement is to wipe out corruption and to make the government more responsive to the basic problems of the Filipino people – mass poverty, increasing malnutrition, unemployment and underemployment, substandard education and poor social services. And that is just to begin.

Both his inaugural speech delivered on 30 June and his State of the Nation (SONA) address to the Philippine Congress four weeks later, underscored this basic theme. His message was not about programs of governance – that will come later, but rather about quality of leadership. Despite his detractors, his message resonated with the ordinary people; and as one newspaper columnist put it, he is regarded as the most credible and most sincere politician to emerge in a long time. It is leadership by example: a leadership which does not exploit power, a leadership that immediately confronts corruption by refusing pomp and perks and disables a source of abuse and discrimination.

While it may be too much to expect corruption to be wiped out during the term of his presidency, with the right leadership from the top, he stands a very good chance of making a significant dent in the problem and rolling back the tide that engulfed the nation during the Arroyo years.
His task is a formidable one. The Central Bank has pointed out that even if the rate of growth can be accelerated, the Philippines has fallen so far behind its neighbours that it will take decades to catch up. Even if the country could achieve a GDP growth rate of 10 percent over the term of his presidency, by 2015, in per capita GDP terms, the country would only be where Indonesia was in 2009. To get to where Thailand is today would take until 2028 and current Malaysian levels of prosperity would only be achieved by 2038.

The refreshing aspect of this announcement was in its honesty – a far cry from the ludicrous claim of Arroyo and her supporters that the Philippines would achieve developed country status by the end of the current decade.

Change will not come easy and already it is evident that there are many, especially those who prospered during the Arroyo years who want to see business as usual. Ten days into his presidency there were five extrajudicial killings including two teachers, a peasant leader a local official and a journalist. Nobody has yet been brought to account.
While resistance to reform is expected, especially from those in Congress used to presidential largesse, Mr. Aquino has something going for him that former President Arroyo never had – the support of the people. That can be a formidable weapon.

The Philippines and the Clean Development Mechanism

Preface to the report

In geological terms, the world's climate has gone through periods of warming and cooling over eons but, as far as we are aware, never as rapidly as that being experienced at the present time. Perceptible change can now be measured within the space of a decade. There is a conclusive body of scientific evidence that this present period of warming is being caused by anthropogenic emissions of greenhouse gases. Global warming will not only change the earth's biomes, it will impact on all human activity from agriculture and food security, coastal and marine resources, water resources, land use and forestry, energy and energy security as well as human health.

Although responsible for only a small portion of anthropogenic greenhouse gas emissions globally, Southeast Asia, including the Philippines, has been identified as being among the regions of the world most vulnerable to climate change. Local consequences will include sea-level rise and flooding, altered crop cycles and land-use patterns as well as an increasing number of extreme events (typhoons) as weather becomes less predictable. Changing water temperatures will also impact on the marine environment compounding the effect of sea-level rise and introducing additional uncertainty into fisheries and aquaculture which remain important generators of income for many.

While debate continues as to the extent that the world's climate will change, there is general agreement that over the short to medium term, it is irreversible.

Seeking global solutions to protect the atmosphere

Global warming has been on the international agenda since the 1970s. Initial concern was over depletion of the earth's Ozone Layer. This layer found at altitudes of 10–50km above the ground protects us from the harmful effects of certain wavelengths of ultra-violet (UV) radiation that can cause skin cancer and other diseases. Chlorofluorocarbons (CFCs) used in many aerosols; refrigeration and air-conditioning equipment as an industrial solvent were found to be the main culprit.

In 1977, the United Nations Environment Programme (UNEP) began addressing this issue. This led to the Vienna Convention on the Protection of the Ozone Layer in 1985. The 1985 Vienna Convention was followed by the 1987 Montreal Protocol which set clear targets for phasing out CFCs. Over the years, the list of substances to be phased out has increased to nearly one hundred including the hydrofluorocarbons, carbon tetrachloride, and methyl chloroform. The agreement, ratified by 191 countries, has helped cut production of ozone-depleting chemicals from more than 1.8 million metric tons in 1987 to 83,000 metric tons at the end of 2005.

Ozone depleting substances, the focus of early attention, are greenhouse gases (GHG) that contribute to climate change. Their radiative force is about 20 per cent that of carbon dioxide (CO₂). Carbon dioxide emissions were not addressed in these early international agreements but this early debate did provide a focus for addressing the broader problem of global warming.

The ozone debate directed world attention to the atmosphere as a finite resource. Aided by advances in meteorology and satellite mapping, during the 1980s, scientists were able to demonstrate not only that the earth's atmosphere was showing increased and unnatural signs of heating up but that climatic changes were occurring faster than had earlier been thought possible.

Established in 1988, The Intergovernmental Panel on Climate Change (IPCC) is an expert body appointed by the United Nations General Assembly to review and assess the scientific literature and make recommendations for broad action by the United Nations on climate change.

On the basis of the 1^st IPCC report in 1990, the United Nations Framework Convention on Climate Change (UNFCCC or simply FCCC) was adopted and opened for signature at the UN Conference on Environment and Development held in Rio de Janeiro in 1992. The UNFCCC commits all parties to combat global warming under the principle of "common but differentiated responsibilities" (see Box 2) and covers all greenhouse gases not controlled by the Montreal Protocol. The developed countries, which are collectively responsible for 75 per cent of global emissions, recognized that emissions from developing countries will continue to grow in the short term to accommodate their development needs. They also recognized the need for financial incentives as well as technology transfer that would encourage developing countries to reduce their greenhouse emissions. The Philippines became a party to this Convention in 1995.

The IPCC continues to issue regular reports which are noteworthy in the fact that as more data becomes available for analysis, even the worst-case scenarios of earlier reports are found to be overly optimistic and that change is occurring at a faster rate than earlier thought.

The IPCC Fourth Assessment Report issued in 2007 used a number of different emission scenarios to project the range of future climate change patterns throughout the world including in Southeast Asia. Under a continued high emission scenario (known as the A1FI scenario), the mean surface air temperature in the region is likely to increase by 0.87ºC in 2020 over year 2000 levels; by 2.01ºC in 2050; and by 3.77ºC in 2080. For the low emission pathway (referred to as the B1 scenario), the temperature increases will be smaller but still noticeable: projected at 0.75ºC increase in 2020, 1.32ºC by the mid century, and to around 1.96 ºC at the end of the century. Between these boundaries there are a number of other outcomes depending on the variants and parameters selected. The 2007 Special Report on Emission Scenarios points out:

For the next two decades, a warming of about 0.2°C per decade is projected for a range of SRES emission scenarios. Even if the concentrations of all greenhouse gases and aerosols had been kept constant at year 2000 levels, a further warming of about 0.1°C per decade would be expected.

Efforts to combat global warming take two forms: mitigation — whereby action is taken at a range of levels (from global to local) to change human activity to reduce carbon emissions as well as those of other GHGs, and adaptation — the modification of human activity patterns (such as changes to crops and crop cycles) in recognition that over the short to medium term, climate change is irreversible. Stabilising atmospheric temperatures and eventually reversing the warming cycle may take hundreds of years. Reputable scientists are already warning that the atmosphere may be close to a tipping point beyond which climate change becomes irreversible within a geological time-frame and that urgent and concerted global action is needed to keep global warming under the dangerous 2°C level relative to 1990 levels. This will require a global reduction of anthropogenic emissions by between 25 and 40 per cent below 1990 levels by 2020. In turn countries need to move to "low carbon" economies as quickly as possible.

While the UNFCCC established the framework and the principles, it is the Kyoto Protocol that provides the "regulatory" detail by which these principles are converted to action. The Kyoto Protocol is an international agreement linked to the UNFCCC. As of November 2009, 187 states had signed and ratified the Protocol including the Philippines.

Unlike the Convention which merely encourages industrialized countries (and the European Community) to stabilize GHG emissions, the Kyoto Protocol sets binding targets for 40 developed countries (known as the Annex I countries) to reduce their GHG emissions. These countries have agreed to put in place policies and measures to collectively reduce GHG emissions (as a first step) by 5.2 per cent of their emissions against 1990 levels during the period of 2008 to 2012.

Furthermore under Article 11, Para 3, the Protocol provides an additional option for Annex II countries of meeting their commitments through cooperation with developing country Parties:

"The developed country Parties and other developed Parties in Annex II to the Convention may also provide, and developing country Parties avail themselves of, financial resources for the implementation of Article 10, through bilateral, regional and other multilateral channels."

The Clean Development Mechanism

Under the UNFCCC, countries meet their emission reduction targets primarily through national measures. However, a key feature of the Kyoto Protocol is the creation of additional measures by way of three market-based mechanisms. These are (i) the Clean Development Mechanism (CDM), (ii) Joint implementation (JI), and (iii) International Emissions Trading (IET). Parties from Annex II countries which have ratified the Kyoto Protocol, regardless of emissions reductions commitments, are permitted to utilize one or more of these mechanisms in order to meet their Kyoto commitments.

These three mechanisms are all intended to provide market-based stimuli to green investment incentives that will encourage Parties to meet the emission targets.

It is the CDM that is of special interest to developing countries such as the Philippines. CDM allows emission reduction projects that assist developing countries in achieving sustainable development and generate "Certified Emission Reductions (CERs)" for use by the investing countries or companies (the Annex II Parties). Through qualified emission reduction projects, the CDM is able to stimulate international investment and provide the essential resources for cleaner economic growth in all parts of the world. The CDM assists developing countries in achieving sustainable development by promoting environmentally friendly investments from industrialized governments and businesses.

The CDM provides a business reason for Annex II countries to implement project activities that reduce anthropogenic emissions in non-Annex I Parties, principally the developing countries. The CERs generated by such projects can be used by the Annex II Party to help meet their own emissions targets under the Kyoto Protocol. International emissions trading can be linked to regional or domestic trading schemes, the most notable of which is the European Union Emissions Trading Scheme (EU ETS). These credits can then be sold to companies or governments to meet their own targets, enabling an economic interchange and transfer of technology to the seller and the host country, and a more cost effective method of meeting targets for the buyer. Many countries have established government bodies to promote and help with the development of CDM projects including the Philippines.

Building a green economy

As countries emerge from the Global Financial Crisis, there is widespread recognition that future development, to be sustainable, must also be green. This means a global shift towards low carbon economies. The Philippines stands to benefit from this shift over the short to medium term, in a number of ways:

• The CDM provides opportunities for the Philippines to participate in the global carbon trading market while at the same time gaining new technologies that can contribute to future economic development.
  
• The CDM also provides incentives for reforestation activities that can benefit local communities — as demonstrated through examples cited in this report.
  
• Greening produces new jobs and new skills that can be used as the basis for enhancing the Decent Work Agenda.
  
• Greening does not necessarily impose costs on companies but can also (depending on circumstance) bring rewards.
  

There are longer term benefits too provided the incoming administration of President Aquino can improve the domestic investment climate. In recent years, foreign direct investment into the Philippines has been among the lowest in Southeast Asia due to the high cost of doing business as well as perceptions of problems with governance and rule of law.

The Philippines has a number of advantages to exploit. Firstly of course there is the educated and available labour force. The availability of industrial land and the proximity to major Asian markets provide a second set of advantages. If the government can address negative investor perceptions and improve the investment climate then there is an ideal opportunity for the Philippines to benefit from a new wave of "green" industrialization that will reinvigorate the manufacturing sector and provide long term sustainability for the economy.

A necessary first step is to identify the skills available, those needed and the gaps in the market. This report seeks to do this and to recommend policy directions necessary to produce desirable outcomes in areas related to the environment, education and skills development.

This report, commissioned by the International Labour Organization as part of a global partnership with the European Centre for the Development of Vocational Training (CEDEFOP) and covering 21 countries is the first step towards identifying the skills needed to make the transition to a greener economy through policy applied research. The twenty one country reports together with the report of the technical validation workshop as well as the synthesis report are being published progressively on the ILO website at http://www.ilo.org/skills/what/projects/lang--en/WCMS_115959/index.htm. A summary version of this report will also be contained within another ILO report Overcoming the Jobs Crisis and Shaping an Inclusive Recovery: The Philippines in the aftermath of the global economic turmoil, to be published by the ILO Country Office for the Philippines in Manila, Philippines.

The deal is done

Taipei, July 24^th 2010: The much talked about Economic Framework Cooperation Agreement (ECFA) between Taiwan and China is now a fait accompli. The agreement was signed June 29 during the fifth round of cross-straits negotiations held in Chongqing, China between Taiwan's semi-official Straits Exchange Foundation (SEF) and its Chinese counterpart, the Association for Relations Across the Taiwan Straits (ARATS). A copyright protection agreement establishing a mechanism to reinforce anti-piracy laws was signed at the same time although an investment protection pact and a proposed cross-straits medical cooperation pact have been held over until the sixth round of talks scheduled for later in the year.

Only following signature were the contents of the ECFA revealed and Taiwan's KMT-dominated legislature will only be able to accept or reject the agreement in toto. The government has ruled out any opportunity to review individual clauses. The status of the accord has already come into question as in law it is an agreement signed between two private organizations. Critics have pointed out that this may cause some problems if the agreement is lodged with the World Trade Organization (WTO) (which Taiwan has said it would do) and could be used by China to further erode Taiwan's status by claiming it to be a domestic agreement rather than an FTA, but this has been brushed aside by supporters as a mere technicality. The agreement does provide for establishment of a cross-straits economic commission to be responsible for follow-up negotiations and overall supervision of the agreement and this may go some way towards mitigating concern over this aspect.

In many respects the ECFA follows the Closer Economic Partnership Agreement (CEPA) signed between China and Hong Kong back in 2003. However, one key clause — that pertaining to safeguards, contained in the CEPA, appears to be missing from this latest document. Article 9 of the CEPA states that either side can temporarily suspend tariff reductions in the event that "the implementation of the CEPA causes a sharp increase in the import of [certain] products originating from the other side which has caused or threatened to cause serious injury to the affected side's domestic industry." There is no such clause in the ECFA and therefore no feasible means for Taiwan to suspend imports from China that threaten domestic industries. Taiwan's only recourse would be to the termination clause whereby either side could give written notice of termination of the entire agreement. Only after such notice had been given would Taiwan and China hold negotiations within 30 days to resolve differences and if the parties failed to reach consensus, termination would occur after 180 days. The problem is that such termination would be seen as a political act with dramatic consequences; the reality is that Taiwan must rely on China's goodwill not to undertake dumping or other actions that would damage Taiwan's manufacturing base.

Supporters of the pact are placing much emphasis on the "early harvest" provisions which will be implemented in three phases over the next two years. When the ECFA takes effect, which is expected to be towards the end of this year once both sides have completed their internal procedures, the early harvest lists will allow the 539 items on Taiwan's list, amounting to around US$13.8 billion in exports per year, to receive zero tariff treatment within the next two years, while Chinese exporters will get a reciprocal deal on 267 items representing some US$2.9 billion in exports per year. The real value has yet to be determined. While heavy industrial items such as iron and steel from Taiwan will have easier access to China's market, these are industries which are now being downsized in China and so it suits Beijing to allow entry of these items. On the other hand, high tech items such as flat panels, machine tools and inputs to solar power generation have not been included. China has embarked on an industrial upgrading strategy which will see it in the future competing with Taiwan in these high-end items and their exclusion from the early-harvest list will force Taiwanese companies to shift some of their production to the mainland of China. In short, at first sight it appears that the immediate benefits are slanted in Taiwan's favour while the longer-term benefits accrue to China.

Nevertheless despite the reservations in some quarters, the general mood among economic analysts is upbeat. A number of institutions and think tanks have once again upgraded their economic outlook for Taiwan over the immediate term. The International Monetary Fund (IMF) is now forecasting GDP to grow by 7.7 percent this year (up from the April estimate of 6.5 percent). The local Chung-Hua Institute of Economic Research is now forecasting 6.94 percent (up from 4.99 percent). With early harvest provisions not expected to kick-in until 2011, the immediate reason for better than expected GDP growth is attributed to better than expected export orders (Export orders for June totalled US$34.22 billion and analysts predict orders could reach a record-breaking US$400 billion for the whole year) and improved domestic consumption.

Domestic investment is also recovering. CIER expects domestic investment to increase 15.79 percent for the full year, its highest level since 1992, with private investment expanding 22 percent, compared with a contraction of 19.38 percent last year. 

Unemployment, inched up slightly in June to 5.16 percent (seasonally adjusted 5.2 percent) on the strength of new graduates entering the workforce. For the first half of 2010, unemployment averaged 5.47 percent, down 0.26 percentage points compared with the same period last year. Most analysts are forecasting a steady drop in the unemployment rate as the employment generation effects from closer cross-strait ties and the government's various initiatives to attract foreign investment. take hold. The general consensus among the various agencies is that the jobless rate will fall below five percent by the end of the year.

Barring unforeseen events, the general expectation is that now that China has the deal it has been wanting with Taiwan, the pressure will be lifted for a period to win over Taiwanese hearts and minds and ensure the re-election of President Ma Ying-jeou and his KMT administration in 2012. While both sides have emphasized that the EFCA is an economic agreement, the political ramifications are evident for all to see. Taiwanese vote for the most part with their hip pockets and just as President Ma's popularity plummeted with the onset of the global financial and economic crisis, it could just as easily rebound as the economy recovers – and that appears to be precisely what is happening. Recent telephone polls conducted by the Cabinet Research Office have shown that Ma's overall approval rating now stands at 46.8 percent and that 68.3 percent of voters approve of his efforts to approve cross-straits ties. These numbers need to be seen against the backdrop of another independent survey which showed that 69.9 percent remained against unification with China notwithstanding the signing of the ECFA. This was the highest figure recorded since February 2006. Tellingly, even among government supporters, 60 percent were opposed to unification with China and only 30.6 percent supported unification.

Clearly Mr. Ma and his team remain where they have been for some time now – between a rock and a hard place.

The different faces of corruption

Manila, 23 July 2010: An opinion survey conducted in late June by Philippine pollster, Social Weather Stations, shortly before the inauguration of President Beningno Aquino (on 30 June) showed an approval rating of no less that 88 percent. Clearly the country has high expectations of his presidency. What surprised many was that the incoming vice-president, former Makati City mayor, Jejomar Binay scored almost as high at 77 per cent. Binay, it may be recalled was running on a separate ticket and was allied with former president, Josef Estrada.

Binay is a controversial figure in many quarters, while successfully running the premier business hub in the Philippines for many years, he and his family has in the past been accused of corruption, of rigging votes and stealing taxpayer funds (not to mention the alleged mistress). For a period, and in order to keep control of Makati within the family; his wife replaced him as the mayor after his initial two terms had expired. Other family members run a development company that has an uncanny habit of bagging many Makati construction projects. Yet none of this appeared to matter in the eyes of voters.

Respected Filipino columnist, Conrad de Quiros, writing in one of the country's leading newspapers recently gave an interesting interpretation of the high marks given both Aquino and Binay. He noted that the public view of corruption had less to do with stealing money which has been a common feature of politicians across several presidencies and is certainly not confined to the Philippines; rather it had to do with public revulsion at the manner in which former President Arroyo and her clique stole not only the vote, but debased society's democratic values and its institutions, destroyed lives (often through summary execution of journalists and those opposed to her) and, in his words "the theft of decency." He went on to note that, aside from the Arroyo presidency, that kind of corruption was evident only during the Marcos years:

They trust, and expect, the two leaders who have fought GMA to undo her rule, bring justice to this country, and stand the world back on its feet by punishing the guilty and rewarding the innocent. They trust and expect the two leaders who have fought GMA to run after those who helped her trash everything this country holds sacred, wrench this country from its moral moorings, plunge this country into a pit beyond the pale of the very word "corruption."

Those are strong words but represent as good a summation of the Arroyo legacy as any. People do not expect President Aquino to be a miracle worker; they do expect him and his government to restore a semblance of order in society. Binay is trusted and respected because as mayor of Makati he stood firm against Arroyo and because – despite the allegations made against him – Makati was a modern, efficient and well-run city.

Yet Gloria Arroyo and her ilk refuse to fade into history. Rather, with the Filipino Congress due to reconvene in late July, the former president appears to be engineering a new power base there. Now the representative of the electorate district of Pampanga she has already announced she will seek the speakership and a move to change the system of government from a presidential to a parliamentary system – which would effectively put her back in control. She has entered Congress by winning the seat formerly held by her son Mikey Arroyo. Yet Mikey remains in Congress as a representative of the party-list group Ang Galing Pinoy, which supposedly represents the marginalized group of security guards and tricycle drivers. It appears that COMELEC has issued contradictory decisions regarding who can represent such groups.

Introduced in 1995 through Republic Act, 7941, the party-list introduced a system of proportionate representation whereby voters are given two votes for their congressional representatives; the first vote is for a district representative. The second vote is for a national party-list representative in which the voter selects a party rather than an individual and on a nationwide basis. Twenty percent of all Congressional seats are reserved for party list candidates as a means of providing representation to marginalized and under-represented sections of society. However, unsurprisingly under the Arroyo watch, even this system became debased with wealthy friends of the former president nominating themselves to represent marginalized voters. And with others from this group making the decisions in COMELEC as to who is in and who is out, and with a tame High Court (all members of which were personally selected by Arroyo), even this system has been totally debased.

Prosecuting those who corrupted the entire system is not going to be easy in such an environment and while Filipinos expect the former administration to be held to account for its excesses, the danger is that the country may once again be plunged into political turmoil as a result. Philippine ombudsman, Merciditas Gutierrez, a friend of the former First Gentleman who was roundly criticized for shielding friends and relatives of the Arroyo family from investigation during the former administration has let it be known publicly that she has no intention of standing down. Arroyo it seems has covered all bases.

And so while the focus of the incoming administration needs to be on reforming the economy, creating investment and jobs that will finally bring down the appalling rate of poverty in the country, much of the focus will be on the fancy footwork needed to thwart Arroyo's plans of returning to "business as usual."

The economy is expected to do relatively well this year as the worst of the recent global financial and economic crisis recedes. The Manila-based Asian Development Bank has raised its growth forecast for the Philippines for 2010 to 5 percent from an earlier 3.8 percent. While raising the 2010 outlook it has kept the 2011 forecast steady at 4.6 percent. For the entire Developing Asia, ADB now forecasts a 7.9 percent rise this year (earlier 7.5 percent) and for Emerging East Asia, 8.1 percent (7.7 percent).

While at face value this appears to be a pleasing result, the macroeconomic number hides some serious problems that need to be addressed as a matter of urgency. First among these is the budget deficit which since its low of PhP12 billion in 2007 has been creeping up again. The deficit rose to PhP68 billion in 2008 and to PhP299 billion in 2009 due in part to the stimulus package introduced by the government at the time of the financial and economic crisis (and to counter the impact of two strong typhoons, Ondoy and Pepeng, that wreaked havoc in Luzon in September/October of that year). But the real worry is that for the first half of this present year, largely as a result of overspending ahead of the election, the deficit has climbed to PhP196.7 billion. This is 35.5 percent higher than the target of PhP145.2 billion for the period. As a result the target deficit for the year as a whole has been increased to PhP340 billion. This represents around four percent of GDP. It has also been revealed that ahead of the May elections, the Arroyo administration realigned a French government loan of 150 million euros or roughly PhP8.9 billion intended for climate change mitigation, to plug the budget deficit.

Incoming Finance Secretary, Cesar Purisima, has vowed to halve the budget deficit by 2013. This will be done by targeting tax evaders rather than increasing the burden on existing tax payers.

To this effort might be added that of enticing greater direct foreign investment into the country. In recent years, FDI into the Philippines has been among the lowest in Asia, especially when considered on a per capita basis. According to the Central Bank, net equity infusion in the first four months of 2010 amounted to a paltry $57 million which was 91 percent lower year-on-year than in 2009. Admittedly the 2009 base year was high because of a foreign acquisition.

Foreign investment is desperately needed to create new jobs. While unemployment dipped slightly in 2009 on the strength of government stimulus spending, as that runs its course unemployment is again creeping upward. The employment data shows that much of the job creation in recent years has been in intermittent or part-time employment rather than full-time wage earning opportunities. This has taken the edge off claims that the (previous) government had brought down unemployment. Even the business process outsourcing sector claims that the talent pool has been all but exhausted.

Underemployment of course remains at around the 20 percent mark and there has been a continued drift to the informal sector as jobs in manufacturing have dried up. Informal employment – much of it self-employment – now accounts for more than 70 percent of the workforce; after all the very poor cannot afford to be without some form of work. The middle class – that sector that can afford it – sends family members overseas. For the very poor, the option is street vending or household service – or a drift into illicit occupations such as the sex trade.

The picture is not a pleasant one. The saving feature is that the Philippines now has an administration that cares.

The marginalisation of Taiwan

Taiwan's economy continues its rebound with a number of research agencies upgrading their economic forecasts. Trade has returned as the driver of growth. While the trade figures look particularly good thanks to the low base effect, the fact that exports have reached record high levels underscores the positive sentiment. Despite the good macroeconomic picture, unemployment continues to be a major problem with job vacancies, particularly unskilled jobs, in short supply. Government debt also appears to be a looming problem. President Ma Ying-jeou, continues to insist that Taiwan has to tie itself in with China to secure its future; many others remain unconvinced of the wisdom of this approach.

June 24 2010: Taiwan's exports in May rose to US$25.54 billion or by US$9.4 billion from the same time last year—a year-on-year increase of 58 percent. While the percentage growth was influenced by the low base effect, this amount represents a record high. Imports reached $22.3 billion, the highest amount since September 2008 when the global financial crisis first hit. Year-on-year the increase was 71.4 percent. Demand came from Asia; exports to China, Hong Kong, the ASEAN-six and the Republic of Korea were all at historic levels.

Exports to ASEAN showed the largest increase rising more than 67 percent from a year earlier, followed closely by China (including Hong Kong) which rose by nearly 66 percent. For the first five months of the year, Taiwan's exports totalled US$109.2 billion, an increase of 52.7 percent year-on-year, while in the same period imports rose 71.4 percent to US$98.55 billion. The trade surplus reached US$10.7 billion, down by 23.1 percent from the previous year.

The pleasing trade numbers plus suggestions of recovering domestic demand have enabled a number of Taiwan's economic research agencies to again revise upwards their growth forecasts for 2010. Polaris Research institute is now forecasting 6.82 percent GDP growth for this year—up from 4.65 percent in March. Cathay Financial Holdings is punting on seven percent growth which could increase to eight percent should Taiwan conclude an economic framework cooperation agreement with China. Provided global recovery continues and exports remain robust, Citibank Taiwan concurs that eight percent growth is achievable.

There are downside risks of course. Globally, the primary risk is that recovery will not be sustained and that export growth will falter should the present crisis in Europe worsen and flow on to other markets. The state of the US economy also gives cause for concern. While Taiwan's economy is recovering slowly, much uncertainty remains and latest data suggests that companies are remaining cautious about hiring new workers – preferring instead to extend the working hours of their existing workforce.

Unemployment fell by 0.25 percentage points in May to 5.14 percent of the workforce and the lowest level in 17 months. The ranks of the unemployed now numbers 567,000. Despite the improvement, Taiwan's unemployment rate is still the highest among comparable Asian economies, outstripping Japan at 5.1 percent, Hong Kong at 4.6 percent, the Republic of Korea at 3.2 percent and Singapore at 2.2 percent. The government's stated objective of lowering the unemployment rate this year to below three percent seems a forlorn hope. Most expect unemployment to remain above the five percent mark until next year.

The government is still banking on an economic cooperation framework agreement (ECFA) with China to boost growth and employment but many remain sceptical. A third round of talks on the ECFA was held in Beijing on 13 and 14 June and while progress appears to have been made, no consensus was reached on the so-called "early harvest list" or those items that would be marked for immediate tariff reduction or elimination. According to reports there are around 500 items from Taiwan including petrochemicals, machinery, auto parts and textile products. Tariff reductions will likely be around 60 percent for petrochemicals and 80 percent for textiles. China has around 250 products on its own list. However, neither list has yet been finalized.

President Ma claims that without a trade and investment agreement, Taiwan will be marginalized. He has sought to sell the ECFA on the basis that with China set to become the world's second largest economy, Taiwan can be transformed into a global innovation centre and regional trade hub as well as a global operation headquarter for Taiwanese businesspeople and a regional operation centre for foreign investors.

This concept was fashionable during the last KMT administration during the 1990s but time has moved on. It may be an overly optimistic ambition nowadays since Shanghai has already become the regional trade hub as well as the regional operational centre for many foreign investors—as the hollowing out of Taiwan's international business community over the past decade clearly attests.

Fearful that Ma may be a single-term president, China is placed in a dilemma. On the one hand it wishes to lock down its pre-eminence over Taiwan as early as possible so as to reduce any future government's freedom to manoeuvre while at the same time it wishes to avoid forcing Ma into accepting unpopular terms that move ahead of public opinion in Taiwan. The sticking point at the present time appears to be the issue of whether Taiwan, under an ECFA, will be allowed to enter into bilateral trade agreements with other countries which, in the absence of a successful Doha round of WTO negotiations, have now become fashionable.

Here much ambiguity abounds. Ma Ying-jeou appears to have changed positions several times claiming on different occasions that an ECFA must be a precondition to Taiwan being able to negotiate bilateral trade agreements with other countries; then the conditional tense was introduced with the statement that "an ECFA should lead to…" and then further doubt was introduced when he said that it "might lead to…".

China has been less equivocal. According to a Chinese spokesperson the idea that an ECFA would lead to other FTAs for Taiwan was not even on the table. A Chinese Foreign ministry spokesperson went further during a routine press briefing in saying that China "strongly opposes any official ties in any format that Taiwan might develop [with other countries] although it was not against any unofficial trade ties between Taiwan and China's diplomatic allies.

One newspaper editorial (admittedly pro-Taiwanese) has claimed that Taiwan's "worst nightmare" will be realized if China blocks Taiwan from concluding FTAs with other countries. The press has also pointed out that for many years, Taiwan's economy prospered without China. During the martial law years when Taiwan was run by former presidents Chiang Kai-shek and his son Chiang Ching-kuo Taiwan often posted double-digit economic growth. The mantra at that time was that Taiwan had to open up a wide range of markets in order to minimize the risk to its economy. Of course, that was in a different age and before China embarked on economic reform but the fact remains that it is only in recent years that Taiwan's investments into mainland China have skyrocketed and that investment, some of it quite high risk, correlates strongly with a drop in domestic investment. This goes some way to accounting for the historic high levels of unemployment now being experienced in Taiwan.

Given this constant increase in investment—more than $1 billion since Ma came to power in 2008, China accounts for an increasing share of Taiwan's GDP that may be difficult to reverse. According to this line of reasoning, this shows that Taiwan itself is embarked on a high risk gamble in getting too close to China instead of using the opportunities of globalization to adopt policies that would involve diversifying investments and risks around the globe. When it comes to the marginalisation of Taiwan, perhaps that has already happened; the only question is which is the best road back?