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PACING UP:
ASSESSING THE PHILIPPINES’
PROGRESS ALONG WITH
THE ASEAN NEIGHBORS

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PACING UP:
ASSESSING THE
PHILIPPINES’ PROGRESS
ALONG WITH THE ASEAN
NEIGHBORS
The ASEAN Advantage
The Association of Southeast Asian Nations (ASEAN) was
established to accelerate economic growth, social progress,
and cultural development in the region. From the original five
founding countries, the community today consists of a 10-nation
bloc that includes Brunei, Cambodia, Indonesia, Laos, Malaysia,
Myanmar, Singapore, Thailand, Vietnam and the Philippines.1

The move toward integration began in 2003, when ASEAN
leaders resolved to form an ASEAN Community by 2020, mainly
driven by an ambitious economic agenda. In 2007, this commit-

ment to integration was accelerated with a vow to establish a European Union-style “ASEAN Economic Community” (AEC) by 2015.
The AEC is but one element of the proposed ASEAN Community,
along with the ASEAN Security Community and ASEAN Socio-Cultural
Community. However, the AEC has emerged as the top priority of
member-states because it leverages on the power of ASEAN as a
market, which, at over 600 million consumers, is equivalent to 9 per
cent of the world’s total population. The establishment of the ASEAN
Community also means significant regional influence2 vis-à-vis
its neighbors such as China, Japan, and South Korea, as well as the
United States and the EU.

The AEC Blueprint, signed during the 13th
ASEAN Summit in 2007, laid out a number of programs and activities, grouped into four major pillars: (1) a single market and production base, (2)
competitive economic region, (3) equitable economic development, and (4) integration into the
global economy. Under each pillar are economic
measures to further ASEAN’s goals. An AEC Scorecard was also developed to monitor gaps, challenges, progress, and, ultimately, implementation.

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First Pillar:

The ASEAN
Advantage. ASEAN leaders resolved
to form an ASEAN Community by
2020, this commitment to integration
was accelerated with a vow to
establish a European Union-style
“ASEAN Economic Community”
(AEC) by 2015.

SIngle Market and Production
Base. Notable progress has been
made on the first pillar—developing a
single market and production base.
Since 2007, tariffs have been substantially reduced.

June

CONTENTS
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Third Pillar:
Equitable Economic Development.
The Philippines’ is struggling to fulfill the
equitable economic development pillar,
with the level of inequality remaining
high compared to the rest of ASEAN.

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Taking Full
Advantage of AEC. The integration
of ASEAN member-countries has been
peddled as something that would
propel the region into a significant
economic bloc

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Second Pillar:
Competitive Economic Region.
The Philippines’ improved competitive
ranking may mean that it is more open
for business than it was before.

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Nowhere to Go
but Forward. The remaining
challenge for the Philippines is to
institutionalize and sustain the policy
reforms and good governance
practices that have been initiated by
the current president

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AEC: The Emerging Reality of a Borderless Community
First Pillar: Single Market and Production Base
Notable progress has been made on the first pillar—developing a single market and production
base. Since 2007, tariffs have been substantially reduced, with more than 70 per cent of intraregional trade in ASEAN enjoying zero tariffs, and less than 5 per cent of goods subjected more than
10 per cent. These reduced tariffs are meant to encourage intra-ASEAN trade in manufacturing and
agricultural goods.

The availability and quality of associated logistics services also remain largely insufficient (84th). These include
high costs or delays caused by domestic transportation,
access to imported inputs at competitive prices, non-compliance to technical requirements and standards abroad,
identifying potential markets and buyers, and difficulties in
meeting quality/quantity requirements of buyers.

Trade-enabling pillars such as market access, border administration, infrastructure and operating environment were recognized in the World Economic Forum’s (WEF) most recent Global Enabling Trade Report (GETR). The report built its assessment based on the extent to which economies
have in place terms of institutions, policies, infrastructures and services that facilitate the free flow
of goods over borders.

The Philippines also came in in the lower half of the index when it came to efficiency and transparency of border
administration (71st), due to corruption and red tape, two
factors that contribute to the weakening of the general operating environment (82nd).

Globally, Singapore scored the highest, followed by Hong Kong, the Netherlands, New Zealand,
Finland, United Kingdom, Switzerland, Chile, Sweden and Germany. The Philippines came in at
64th, which the report said was already a significant improvement considering its previous placements, 72nd in 2012 and 92nd in 2010. Even so, among ASEAN countries included in the index,
Singapore, Malaysia, Thailand, and Indonesia all ranked higher than the Philippines in the report.
(See table 1).
According to the report, while the Philippines did well on the domestic (19th out of 138) and
foreign (26th) market access pillars, improvements were needed in the other five pillars of the
index, in which the Philippines ranked in the bottom half.
Worst was its ranking on the availability and quality of transport infrastructure pillar (96th),
which rated the quality of railroad infrastructure (81st), paved roads (91st), air transport infrastructure (105th) and port infrastructure (107th), among other indicators.

Table 1: WEF Enabling Trade Index Rankings 2014

Source: World Economic Forum, Global Enabling Trade Report 2014

Second Pillar: Competitive Economic Region
Modest achievements were also made towards the development of a competitive economic region.
Among the highlights are the adoption of the ASEAN
Intellectual Property Rights Action Plan 2011–2015, which
strengthens intellectual property institutions in the region;
the adoption of the Master Plan on ASEAN Connectivity,
to enhance the region’s transport connectivity and energy
security; and the implementation of the ASEAN Strategic
Action Plan for Small and Medium-Sized Enterprise (SME)
Development, which aims to facilitate inclusive growth by

competitive
economic
region
giving guidance on the flagship projects and other SME initiatives in
the region.
The WEF’s Global Competitiveness Report emphasized on the
fundamental aspects of competitiveness measured macroeconomic
environment, institutions, good market efficiency, and innovation.
For the sixth straight year, Switzerland remained the most competitive in the world, followed by Singapore, the United States, Finland,
Germany, Japan, Hong Kong, the Netherlands, the United Kingdom
and Sweden.
Globally, the Philippines ranked 52nd out of 144 economies. While
among ASEAN countries Singapore (2nd) was the most competitive
in the region, followed by Malaysia (20th), Thailand (31st) and Indonesia (34th). Behind the Philippines were Vietnam (68th), Laos
(93rd), Cambodia (95th), and Myanmar (134th).

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The Philippines’ improved
competitive ranking may mean
that it is more open for business
than it was before. However,
compared to its ASEAN neighbors,
and, more significantly with
the rest of the world,

THERE IS MUCH
WORK TO BE DONE

Table 2: The Global Competitiveness Index and Rankings
(2013-2014 and 2014-2015)

Source: World Economic Forum, Global Competitiveness Report (2014-2015)

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infrastructure &
labor market

The report noted the Philippines’ improvements on several indicators. The Philippines made significant strides in terms technological
adoption, rising eight notches to 69th place, closely following Malaysia (60th) and Thailand (65th). It also improved in terms of ethics
and corruption, moving up from 135th in 2010 to 81st this year. It
also improved in government efficiency (69th) and the protection of
property rights (63rd).
The Philippines’ improved competitive ranking may mean that it is
more open for business than it was before. However, compared to its
ASEAN neighbors, and, more significantly with the rest of the world,
there is much work to be done.

Furthermore, the Philippines still lagged in infrastructure, categorized as “poor” (91st), with its airport and seaport
infrastructure ranked 108th and 101st, respectively.
The situation is just as worrisome in the labor market, as the country suffers from rigidities and inefficiencies. The
report shows that the Philippines ranks a mediocre 91st in this dimension with almost no progress since 2010.
As a whole, the Emerging Asian economies (Southeast Asia, China and India) are expected to grow at a robust pace of
6.9 per cent per year from 2014 to 2018. This development in the medium term is anchored on a steady rise in domestic
demand. (See Table 3). Real GDP growth in Emerging Asian economies is projected to be moderating gradually but
remains robust over the 2014-18 period.3

Table 3: Real GDP Growth of Southeast Asia, China and India
(Annual Percentage Change)

Source: OECD Development Centers Medium-Term Projection Framework (MPF 2014)

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The GDP growth projections for individual countries
reflect their different stages of development and medium-term growth drivers. Indonesia is projected to be the
fastest-growing economy in the ASEAN-6, at an average
annual growth rate of 6.0 per cent in 2014-18, followed by
the Philippines, at 5.8 per cent.4
Labor markets in Emerging Asia are also expected to remain relatively tight, which is seen to continue supporting
growth in wages and private consumption.
These are very encouraging signs that the Philippines
and the rest of ASEAN are starting to move in the right direction.
Third Pillar: Equitable Economic Development
The Philippines’ is struggling to fulfill the equitable
economic development pillar, with the level of inequality
remaining high compared to the rest of ASEAN.
According to reports, the level of inequality in the Philippines hardly changed for more than 20 years. According
to the Asian Development Bank (ADB)5, persistent levels
of inequality remain in terms of income, land distribution,
welfare, and human development.

According to reports, the level of
inequality in the Philippines

hardly changed
for more than
20 years

According to the Asian
Development Bank (ADB),
persistent levels of inequality
remain in terms of income, land
distribution, welfare, and
human development.

Many credit the Aquino administration’s thrust for good
governance as one of the reasons behind the country’s recent economic growth. Yet while the country posts laudable
macroeconomic numbers year after year under Aquino’s
watch, the benefits seem to accrue to only a narrow segment of society, and by some measures inequality has even
worsened.
According to the ADB report, “Even if the Philippines
continue to receive billion-dollar remittances from OFWs,
income distribution remains to be a prevalent issue.” 6 It
goes on to conclude that despite remittances, more than a
third of the country’s total income goes to the richest 10 per
cent of Filipino families.
Without proper policies in place, inequality and marginalization will surely worsen. This was emphasized in a
Stratbase Albert Del Rosario Institute (ARDi) publication,
which predicts “the polarization of society and the creation
of social tensions that would eventually undermine the process of growth and development.”
For so long as economic growth fails to reach the countryside and the people, any figure heralding economic

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achievement would be half-truth at best.
Fourth Pillar: Integration into a Global Economy
There is slow yet steady progress in terms of integration
to the global economy, with incremental advancements
towards liberalizing investment and capital flows in the
Philippines.
ASEAN has emerged as the hub of free trade agreement (FTA) activity in Asia and plays a leadership role in
negotiating trade rules for connecting Asia. FTAs have been
concluded with ASEAN’s six dialogue partners: Australia,
the People’s Republic of China, India, Japan, the Republic
of Korea, and New Zealand.
However, if the Philippines is to take full advantage of
the opportunities of an integrated AEC, it must first align its
domestic laws and regulations with ASEAN commitments.
To promote the Philippines as an investment destination
and facilitate the entry of Foreign Direct Investments (FDI),
the country must bring its policy on foreign ownership to
global standards.
In a speech, Foreign Affairs Secretary Albert del Rosario
said that the Philippines opened its doors to international
investors but has kept a restrictive business climate. Citing a provision in the 1987 Constitution limiting foreign
ownership of companies in the Philippines to 40 per cent,
Sec. del Rosario said that the “Philippines is constrained by
Constitutional and statutory economic restrictions on foreign ownership and has maintained a conservatively open
investment milieu.” He added that “there may be a need to
evaluate existing statutory economic parameters as the
Philippines further redefines its international economic
policy.” 7

Taking Full Advantage of AEC
The integration of ASEAN member-countries has been
peddled as something that would propel the region into a
significant economic bloc—a vehicle of growth that would
help each market achieve its own development goals. Conversely, many of the remaining challenges to realizing the
AEC goals are tied to ASEAN’s ability to harness cooperation and commitment, and address the development divide
among its members in time for its December 2015 deadline.
The AEC project has been crucial in moving ASEAN from
its beginnings as a political grouping in 1967 to becoming
one of the most dynamic regional economic blocs in the
developing world. The solidarity and enthusiasm shown
by ASEAN members in trying to meet the AEC goals are
notable.
The Philippines is already primed to offer a robust investment climate. It has a large market, skilled human capital,
youthful population, and strategic location that connects
population centers across Asia. Yet FDI remains low relative
to its ASEAN neighbors. One of the steps it could take is to
harness existing trade agreements.
Harness Trade Agreements
The ASEAN free trade expands the potentials for more
trade among member countries. It also enhances the
competition among the traders and producers within the
region, effectively bringing benefits to all its members;
however such benefits will not be uniform among them.

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While we will need to increase our trade with our ASEAN
neighbours as a consequence of the free trade principle, our
industries also need to create a deeper integration within
the economy.

Table 4:Foreign Direct Investments 2010-2014
(in US Dollars)

Our Philippine Export Processing Authority (PEZA) industries which export to the world, including other ASEAN
countries, are essentially import dependent enterprises for
their raw materials. There is little integration of their requirements with domestic supplies and even less integration of
their manufacturing operations with domestic industries.
According to economist Gerardo Sicat,”The obvious solution to this is to reform Board of Investments (BOI) policies
to allow greater participation of foreign capital in the industries designed to serve the domestic market.” He believes
that this will create pressure on competition for domestic
firms. It will further deepen the operations of PEZA firms
with the local economy and raise the domestic value added
of their exports.
To reform BOI policies much more effectively requires the
relaxation of many provisions of industrial policies regarding
the economic restrictions to foreign capital, including those
provided in the Constitution.
Amend the Constitutional Limit on Foreign Ownership
The Philippine Constitution restricts foreign ownership in
some industries and of property to 40 percent. By imposing
restrictions on foreign ownership, the framers of the Constitution believed that they were protecting the country’s
sovereignty from foreign encroachment. To them, imposing
barriers on foreign trade and investments and prohibiting
controlling property rights of foreign nationals would translate to domestic economic strength and independence
Despite good intent, an inherent flaw in the 1987 Philippine Constitution is in the integration of economic policies
into its provisions. While the constitution embodies the
fundamental law of the land and lays down principles and
general guidelines, economic policy must be more specific, changeable, and consists of programs that cater to the
changing needs and challenges of market fluctuations.
In addition to constitutional restrictions, the Joint Foreign Chambers of Commerce of the Philippines (JFC) is also
calling for a review of dozens of other restrictions on foreign
equity and foreign professionals, as well as discriminatory
taxes and fees, from which Filipinos but not foreigners are
exempt. Reforming these policies would lead to more FDIs

Source: World Bank, World Development Indicators (2014)

and to the creation of much-needed jobs. FDI also assists
the integration into global supply chains, improves export
competitiveness by exposing local firms to foreign technologies, and increases economic growth.8
Additionally, the lack of a central body to coordinate
investment promotion agencies creates confusion for prospective investors. Existing enterprises also face high costs
of doing business owing to poor infrastructure, high cost
and irregular supply of power, insecure property rights,
inconsistent tariff and nontariff barriers, and policy inconsistency.9
Of course foreign ownership restrictions are not solely
the cause of low FDI into the Philippines. The worsening
port and road congestion and looming power shortages
in 2015 underscore the need to urgently raise investments.
Due in part to these factors, the Philippine has lagged
behind Indonesia, Malaysia, Thailand, Singapore, and Vietnam in terms of FDI. (See Table 4).
Essential reforms include crafting and implementing
a clear competition policy, liberalizing key sectors of the
economy to directly benefit poor Filipinos, and opening up
the economy to more foreign competition.10
Countries seek to attract FDI because of the potential
benefits it brings: financial resources, technology transfer,
employment creation, and increased competition. These
factors lead to improved goods and services, export markets, and networks for sales, procurement, and informa-

tion. In short, FDI promotes economic growth by increasing the volume of investment and the efficiency of recipient
countries.
However, Sicat believes that “those countries with the
freest and most flexible policy mechanisms will gain the
most, while those burdened with domestic restrictions
will be slowed down by those restrictions since they could
prevent or cause investments from happening.” Unless the
limits on foreign ownership are relaxed the Philippines
could still find itself left out of the lion’s share of FDI in region, despite everything else being in place.
Recognizing the Comparative Advantage
Having competent labor force and favorable macroeconomic fundamentals, the country could entice more investments when these could freely flow across countries in the
region, particularly in the services sector, which enjoys
continually growing foreign investments because of the
skills of the country’s labor force and appropriate information and communication technology infrastructure.
The current growth drivers of the Philippines are the
outsourcing industry and the strong and stable remittances of the OFWs. The positive demographic structure of
the country will be an advantage. By next year, more than
50 per cent of our population will be within the working
ages and more FDI inflows will surely boost employment
opportunities for Filipinos.

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Economist Cielcito Habito believes that our labor pool has always driven the spectacular recent success of the BPO industry, where the initial moves began with the establishment of call centers. In this sector, fully-owned FDIs were encouraged
to set up call centers and other BPO operations. Today, the country is at the forefront of the international BPO industry.
While there were more than a million jobs created last year, the quality of these jobs remains a challenge. Since AEC will
pave the way for the free flow of skilled labor in certain profession, economist Epictetus Patalinghug believes that academeindustry collaboration in workforce development is still the key to be globally competitive and achieve economic gains.
Structuring the country’s manpower will prepare the middle-income type of industries because in the long run, these
labor-intensive industries will eventually mature. Through this, an access to the global supply chain connectivity can also
be developed.

Inequality and tragic marginalization can worsen without the
proper policies in place. Elected leaders must firmly hold the line
against vested interests and political machinery that are poised to
advance their position to the grave detriment of the majority.
A strong state, after all, requires strong leadership that upholds
national interest and development above anything else. Policymakers should need to develop policies for risk management such
as adequate social insurance and social protection coverage. It is
also important to monitor and evaluate the effectiveness of these
programs because if left unaddressed, income shocks may hamper
the thrust for inclusive growth and for sustained prospects of the
country’s development.11

Boost Government Public Spending
It is not only lack of capital that is determining foreign investments but it is also about the complimentary factors that
would make that capital productive: infrastructure, institution, bureaucracy, labor policies. At the end of the day, it is about
the ease and cost of doing business in the country.
Economic growth slowed down to 5.3 per cent in the first quarter of 2015 due to weak government spending on the
demand side and agricultural production on the supply side.
Government consumption contracted by 2.6 per cent while infrastructure spending fell by 6.2 per cent. Contributing to
weak government spending are the Supreme Court decision which found some provisions of the Disbursement Acceleration Program unconstitutional, budget execution bottlenecks, and slow disbursement for Typhoon Yolanda reconstruction.
“Investment in infrastructure will be crucial if Southeast Asia wants to capitalize on the imminent economic integration
of the region,” Finance Secretary Cesar Purisima said. Without sustained investment in needed infrastructure, it is unlikely
that the region would achieve its full potential and realize the opportunities of AEC.
The Philippines has much to gain by boosting spending on infrastructure. The lack of efficient infrastructure such as
seaports and airports deprives the country in terms of physical connectivity among its ASEAN neighbors.
Even so, Sec. Purisima believes that the Philippines’ strong macroeconomic fundamentals and reform trajectory will allow the country to reap its demographic dividend, to become a major player in an integrated ASEAN economy.
The ASEAN population is expected to expand and grow from 600 million to 700 million in 2030. The government has
committed to bolster public infrastructure spending to 4 per cent of the country’s total economic output for this year in a bid
to sustain economic growth. It intends to increase this figure further to 5 per cent by 2016.
Strengthen Governance
Governance, identified as one the Philippines’ weaknesses, plays an important role in the ASEAN Integration. Compared
to previous administrations that have been associated with corruption and inept bureaucracies, the Aquino government has
had relatively high satisfaction, performance and trust ratings.
Under Aquino’s watch, there has been a significantly changed perception of a more transparent government. The Philippines improved by 24 points in the most recent Transparency International Corruption Perception Index. However, Aquino’s
term as President will be coming to an end in 2016, after which a new administration will commence carrying its own
policies.

Pressure the Sectors
The country has big investment opportunities in industries
like retail trade, mining, and tourism – areas of investment that
are largely untapped given the quantity of FDI seeking attractive
international opportunities.
The Philippine economy is fuelled far more by domestic consumption than many of its ASEAN peers.12 In the first half of 2014,
household consumption expenditure accounted for 73 percent
of the country’s GDP, with the economy expanding by 6 per cent
year-on-year. Cash remittances from OFWs and a booming BPO industry support robust domestic consumption and a fast-expanding
economy
The Mining industry is another area that promises to yield high
investment returns. The Philippines is considered “to be the 5th
most mineral-rich country in the world for gold, nickel, copper and
chromite worth over $840 billion.” 13 Yet, due to a restrictive mining
policy of the Aquino administration, the fate of the large scale mining industry is in limbo, while up to 90 percent of the country’s gold
production is being illegally smuggled out by small scale miners.
The Philippines has a natural advantage in tourism as it sits at
the center of the coral triangle endowed with the world’s most biodiverse ecosystems. Since President Aquino’s administration, the
Philippines has more than doubled tourist arrivals in the country.
While this is a vast improvement, the Philippines (72nd) remains
in the lower half of the WEF Travel and Tourism Competitiveness
Report, with ASEAN neighbours Singapore, Malaysia, Thailand and
Indonesia all ranked higher than the Philippines. The report cited
the Philippines inferior infrastructure (82nd) and “enabling environment” (90th) – within which health and hygiene, as well as,
safety and security fall under- were its worst performing indices.

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Nowhere to Go but Forward

tween the government and the private sector, challenges can be managed and opportunities can be exploited, specifically in
the areas of cross-border trade, manufacturing linkages with regional production networks, supply chain connectivity, and
people-to-people connectivity. These will help to increase competitiveness, promote international economic and security
cooperation, enhance growth prospects with inclusiveness, attract investments, increase employment, and alleviate poverty. Through relevant economic and governance reforms the long stymied potential of the country can finally be released.
But to do this the leadership must unite the country and start a new culture of achievement and competitiveness, a new
culture that desires to move forward.

The remaining challenge for the Philippines is to institutionalize
and sustain the policy reforms and good governance practices that
have been initiated by the current president. The realization of the
AEC will provide both opportunities and challenges for the Philippines. But with the right policy stance and better coordination be-

endnotes
1

Cebu Declaration on the Acceleration of
the Establishment of an ASEAN Community by 2015.
2

Narine, Shaun. “ASEAN in the 21st Century:askepticalreview” in Cambridge Review of International Affairs, Vol. 22, No.3,September2009,pp369370.,
as cited in the Working Paper No. 13, April 2013, entitled How should ASEAN engage the EU? Reflections
on ASEAN”s external relations by Dr. Yeo Lay Hwee
(EU Centre in Singapore). Retrieved from: http://www.
eucentre.sg/wp-content/uploads/2013/06/WP13ASEANEU.pdf
3

OECD Development Centre’s MediumTerm Projection Framework (MPF-2014) : the Economic Outlook for Southeast Asia, China and India 2014.
Retrieved from: www.oecd.org/site/seao/Pocket%20
Edition%20SAEO2014.pdf

Ibid.

4

5

Asian Development Bank (2009). Poverty
in the Philippines: Causes, constrains and opportunities. Retrieved from: http://www.cebe.anu.edu.au/
staff/info/mccaig/BBM_Vietnam_Inequality_October_2009.pdf

6

Asian Development Bank. (2004). Income
poverty and inequality in the Philippines. Retrieved
from: www.adb.org

60-40 rule to blame for low foreign investments? (2012). Retrieved from: http://www.rappler.
com/business/9774-60-40-rule-to-blame-for-lowforeign-investments

12

Philippine Retailer Plans $800 Million IPO.
(2013). Wall Street Journal. Retrieved from: http://
www.wsj.com/articles/SB1000142412788732465940
4578498282736286500.

7

Page 70, East Asia and Pacific Economic
Update, April 2014, World Bank Publications published on May 13, 2014. Retrieved from: http://www.
worldbank.org/en/region/eap/publication/east-asiapacific-economic-update
8

Ibid.

9

10

Philippine Economic Update - January,
2015 Edition. Retrieved from: http://www.worldbank.
org/en/country/philippines/publication/philippineeconomic-update-january-2015
11

SRI SPARK: Generating Investment and
“Right Governance” Volume 4, 4th Quarter

13

Mines and Geosciences Bureau. Retrieved
from: www.mgb.gov.ph.

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