Abstract
The economic record of the Philippines since the Second World War has been patchy, making it one of the laggards in South-East Asia. The major reason for the Philippines trailing many of its neighbours in South-East Asia is its inability to participate extensively in regional production networks. Its manufacturing sector, therefore, has declined and employment in manufacturing has also stagnated. The inability to provide medium-skill, high-productivity jobs has much to do with the county’s relatively high poverty incidence. The establishment of the ASEAN Economic Community (AEC) in 2015 has the potential to attract more foreign direct investment to the Philippines. This will be an opportunity to revive the manufacturing sector, but only if there is bias towards small and medium-sized enterprise development, which will help overcome the sector’s low employment elasticity. Additionally, the AEC will provide added leverage to policy-makers to counter the vested interests of the oligarchy. The AEC will create more regional public goods, especially in terms of physical infrastructure. This is required to increase connectivity in the region, which is necessary to generate more investment. The Philippines stands to benefit immensely, given the existing poor quality of its overall infrastructure. However, policy-makers must be aware of the potential drawbacks, in particular greater involvement in regional production networks or global value chains. These include limited value- added by domestic firms, possible transfer pricing because global value chains are mostly run by multinational companies, and a race to the bottom in terms of working conditions and environmental standards. Policy-makers must be prepared to intervene to minimize the adjustment costs that will result from deeper regional economic integration. Measures include social safety nets and assisting workers in obtaining more appropriate skills.