Embrace the ‘Blue Economy’

In this corner last week, I wrote about the reasons why Vietnam will surpass the Philippines in per capita income by the end of this year. To sum it up quickly, the Philippines’ failure to industrialize is why we will be overtaken by our dynamic neighbor even if it had only become a market-driven economy 35 years ago.

While the Philippines took the easy road to economic development, relying on its population to drive growth (eg OFW remittances and consumer spending), Vietnam embraced industrialization with gusto. They did so by instituting sweeping reforms to make their working environment ideal for manufacturing, by aggressively pursuing foreign direct investments, by developing its manufacturing competencies and by exporting its way to prosperity. In just 35 years, the socialist republic has become the region’s preferred destination for multi-national manufacturing companies and one of its more prolific exporters. On the back of rapid industrialization, the Vietnamese people are now more affluent than the Filipino.

There is no escaping it. To develop in step with our neighbors, our next generation of leaders must make rapid industrialization a national priority. To compliment industrialization, we must also generate wealth in the fields where we have a natural competitive advantage. One such field is the “Blue Economy.”

For those unaware, the Blue Economy is a development model that focuses on the maritime sector. It encompasses the shipping industry, ship building and repair, ports and shipyards, logistics services, maritime equipment, seafarers and crewing, maritime insurance, fisheries and aquaculture; recreation and tourism; offshore energy exploration, among others. Taken collectively, the Blue Economy is large enough to fast track the country’s economic development.

Denmark is the leading nation in the Blue Economy and it derived some $96 billion in revenues from it last year. Singapore is another country that has greatly benefited from the Blue Economy. It is the world’s second largest transshipment hub and the global leader in bunkering. In 2019, the Lion State generated some $25 billion in revenues from its maritime industries.

The Philippines is in a prime position to be a key player in the Blue Economy. We have the fifth largest coastline at 36,289 kilometers. Our maritime domain is massive at 2.2 million square kilometers. We are the world’s second largest provider of shipping crew and officers. We are (were) the fourth largest global shipbuilder (counting Hanjin). The Philippine Rise (Benham Rise) has an estimated reserve of 55.1 trillion cubic feet of natural gas and 5.4 billion barrels of oil. Plus, we are in the center of the world richest fishing grounds which has enabled us to be the world’s 3rd largest tuna producer and 5th largest aquaculture producer.

Despite our vast maritime resources, however, revenue raised from the maritime sector stood at only $18 billion last year, mostly derived from fisheries and ship building.

Although the Maritime Industry Authority (MARINA) and NEDA have been talking about the Blue Economy for sometime now, the Philippines remains bereft of an overarching development plan to fully maximize its maritime potential. Our maritime polices are painfully uncoordinated and fragmented.

Our next leaders will do well by aggressively developing our Blue Economy. Apart from fueling economic development, the nation will benefit by way of food security, energy security and border security. On the fiscal front, we can potentially realize an influx of maritime investments and business taxes on top of the creation of thousands of jobs. The development of our Blue Economy is an endeavor that promises a tidal wave of benefits.

An overarching development must include certain critical reforms. First among them is that Philippine-registered shipping lines must be allowed to call on international ports without being disqualified from calling on domestic shipping ports in deference to the Cabotage Law. We must break the monopoly of foreign shipping lines in international cargo. The monopolistic structure has allowed them to levy abusive “destination charges” for imported goods. This is among the reasons why the costs of imported products are more expensive in the Philippines than they are in other parts of the region. Breaking the monopoly will result in a drastic drop in prices.

Other necessary reforms include the establishment of a tonnage tax regime in place of income tax, bareboat tax, common carrier’s tax, etc. This will align our maritime tax system with those of other countries, thus increasing competitiveness. The clearance requirements for the entry and exit of shipping vessels must be simplified. A program to modernize and expand the capacities of our ports must be put in place (the World Economic Forum puts our maritime infrastructure at a lowly 88th place out of 141 countries). Philippine shipping lines should be given incentives to modernize and expand their fleets. The Ship Mortgage Law should be amended to allow shipping lines to source foreign financing both from local and foreign sources.

On the domestic front, the Cabotage Law must be rationalized to improve domestic shipping efficiency. Believe it or not, the average cost of domestic shipping across our islands is $1.47 per nautical mile while it is only $0.77 in Indonesia. It is more expensive to ship goods between Manila and Bacolod than it is to ship between two domestic points via an international point (e.g., Manila- Kaoshiung-Bacolod). Logistics cost account for 24 percent to 53 percent of wholesale prices, compared to just 20 percent in other parts of Asia. This is why food and raw materials originating from our sea-separated islands are more expensive than imported goods. Making matters worse is the bad service and poor safety record of local shipping lines.

Reforms should be put in place to break the oligopolistic structure of the local shipping industry. We should also rationalize conflict of interest of the Philippine Ports Authority since it acts as both a regulator and operator of ports.

The Philippines is in no shortage of resources or talent to usher in an age of rapid industrialization and to be world leader in the Blue Economy. What it is in shortage of is a vision, a plan, the political will and leadership to realize it. Let’s hope that our leaders in 2022 are more astute than their predecessors.