(STAR) Political instability, high taxes and mediocre infrastructure have left the Philippines lagging far behind its Southeast Asian neighbors, the Japanese Chamber of Commerce and Industry of the Philippines said yesterday.

A study commissioned by the chamber on the investment environment in Thailand and the Philippines noted that Manila was a "leading economic power of Southeast Asia" in the 1970s before being dramatically overtaken by Bangkok over the past 30 years.

Malacañang conceded the Philippines has much work to do in order to catch up with its Southeast Asian neighbors.

However, Press Secretary Ignacio Bunye said the Arroyo administration is not wavering in its push for economic and political reforms to enable the country to have a stable and secure future.

The study concluded that "those managing Japanese corporations in both countries voiced their general evaluation that Thailand is solidly ahead of the Philippines. Political stability and a secure peace and order situation are vitally important and an integral part of an overall evaluation of whether a country is investor-friendly or not.

"We have seen in the Philippines that political instability has been a major obstacle in implementing consistent industrial development policy over a long period of time.

"This has been particularly true in the development of local supporting industries, which are very important for foreign direct investment in the manufacturing sector," the study said.

The survey was released amid political troubles faced by both Thai Prime Minister Thaksin Shinawatra and President Arroyo.

Mrs. Arroyo survived an impeachment vote in Congress in September over opposition allegations that she stole the May 2004 elections.

But she remains massively unpopular, threatening her economic reform agenda as well as her efforts to amend the constitution to make the Philippines more investor-friendly.

Aside from law and order and political bickering, the Japanese chamber of commerce urged Manila to attend to specific issues on labor, investment incentives, the tax system, and infrastructure.

Labor costs in the Philippines were "equally competitive with that of Thailand" and Filipino workers have a "clear and apparent edge over Thai workers" in English-language proficiency, the study said.

But it complained about a minimum wage that is "prone to increase every year," the "presence of radical unionism," and Mrs. Arroyo’s tendency to abruptly declare public holidays, disrupting factory work.

The study also cited Philippine constitutional constraints on foreign ownership of land and foreign equity participation.

While Manila was successful in attracting foreign investment in export-oriented industries, unlike Bangkok it "has not been successful in developing a sustainable domestic industrial policy."

It said the Philippines’ corporate tax of 35 percent was the highest in Southeast Asia, putting it "at risk of being considered an ‘investor-unfriendly’ country."

Thailand was much ahead of the Philippines in almost all areas of infrastructure, and Manila should concentrate on the development of the main logistic corridor in the provinces around the capital, it said.

Manila should crack the whip and take over private infrastructure projects when they fall behind schedule, and ensure that state-funded projects have sufficient funding, it added.

Bunye, however, said the taxes are necessary to help reduce the country’s dependence on foreign and local borrowing to fund government operations as well as to allow for more infrastructure and social spending for the people, especially the poor.

He noted that since the President implemented her "painful" fiscal reforms, including the 12-percent value-added tax last February, the country’s credit ratings have improved, its debt instruments are enjoying better rates, and overall debt has been reduced.

"That is precisely why President Arroyo is pushing for political reform through Charter change, to flush out poison politics from our system," Bunye said. "Our economy has started to rev up as a result of fiscal reforms. Just imagine what more we can do with less politics."

The fiscal reform measures, to include the drive for better revenue collection and eradication of corruption and smuggling, have also increased investor confidence in the country, he said.

Bunye said the World Bank recently noted the country’s reforms that helped it overcome a fiscal crisis as the country has achieved a lower-than-projected deficit last year.

He said the Bureau of Internal Revenue (BIR) projects it will achieve its revenue targets in March. Because of its improved fiscal performance, Finance Secretary Margarito Teves said the country might be able to balance its budget by 2008 or two years ahead of schedule.

Bunye said the improving fiscal position has allowed the government to undertake a massive pump-priming drive this year amounting to at least P35 billion to fund education, health, agriculture and security programs. — AFP, Paolo Romero

Chief News Editor: Sol Jose Vanzi

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