December 2006

A visitor to Zamboanga is immediately struck by its beauty. With surrounding lush mountains, palm-lined streets silhouetted by mosques and also Catholic shrines, leafy plazas and architectural gems dating to 17th century Spanish conquistadores, this bustling port city has long been dubbed Zamboanga Hermosa: beautiful Zamboanga. The very name suggests timeless romance. But it has also been the setting for centuries of violence pitting Christians against Muslims.

Across the Celebes Sea is the shadow of Basilan, the entry point to the deep waters surrounding the violence-plagued islands of the predominantly Muslim Sulu Archipelago. Fishermen, smugglers and assorted traders with their bancas have always plied the trade routes to nearby Malaysia and Indonesia, paying scant heed to national borders. Southern Thailand, another “high threat” area in the global war against terrorism, is just across the South China Sea. In the five years since September 11, the region’s national-security stakes have become increasingly important beyond Southeast Asia. Japan recently announced its participation, along with Brunei and Libya, in a Malaysian-led international monitoring team watching over a cease-fire agreement struck three years ago between Moro rebels and Philippine President Gloria Arroyo. China, which also has an interest in stability along sea lanes of crucial importance to international trade, is watching. And in this post-Cold War era, America’s traditional security interests in the Philippines, along with humanitarian concerns, increasingly run through Mindanao.

The good news is that while the issues that divide the Philippine government and the Moro Islamic Liberation Front remain difficult, they do not seem to be intractable. It is possible to imagine a peace deal being struck, despite recent headlines. The chief sticking point involves MILF demands for control of their “ancestral domain” lands. Although the MILF claims to have some 11,000 armed fighters on call, the 2003 ceasefire has held, despite sporadic violence that each side blames on the other. Both sides these days seem to prefer peace to fighting that has cost 100,000-plus lives since the 1970s, while uprooting more than a million villagers.

The bad news begins in Manila, with the fact that Ms. Arroyo’s government is widely regarded as corrupt and ineffective. Having survived several military coup attempts and two congressional impeachment attacks, the embattled president lurches from one political crisis to another. There seems to be little time for the serious business of economic reform, or negotiating peace. Moreover, the prospects are dim that even a successful peace accord would spark the kind of economic growth that the Philippines so desperately needs.

“If a peace deal is struck, Mindanao would still be in the same boat as the rest of the Philippines,” observes Steven Rood, the Asia Foundation’s top man in Manila. Sadly, this metaphorical boat is an extremely leaky economic and political vessel.

Mindanao is a natural Asian trading entrepot. “In the late 19th century, Sulu was the center of trade with China,” says Ishak Mastura, a 34-year-old rising Muslim lawyer from Cotabato City. “We Moros are not afraid of free trade and we are not afraid to compete.” In General Santos City, the tuna capital in the southernmost part of the island of Mindanao, I hear constant complaints that high American and European tariffs on canned tuna are holding Philippine tuna exports back. Tear down those tariff walls, we want trade, not just aid, the refrain goes. That’s certainly not true in Manila.

The Philippine economy, traditionally dominated by an insular business elite, is rife with protectionism and corruption. Ms. Arroyo’s priorities in international trade negotiations are not to lower tariff walls that hold Philippine exporters back, but to insulate the Philippines’ uncompetitive industries: chickens, rice, sugar, onions, and more. Senate majority leader Francis Pangilinan summed up the economic thinking in elite circles when he told reporters on Aug. 7, “We need to think long and hard before we liberalize further our economy and industry.”

One issue that unites Muslims and Christians in Mindanao is a mutual belief that the island’s economic development has long been hampered because of a neglectful “imperial Manila.” In the absence of the kind of major economic reforms that would allow Mindanao’s entrepreneurial energies to flourish, the Philippines’ southern island is still something of an economic hostage.

A Shipping Mess

Peace deal or no, it will still be cheaper to ship corn from Seattle to Manila than from Mindanao to Manila. One businessman from Mindanao, who ordered machinery from Japan, complains bitterly that the costs of shipping the machinery from Manila to Mindanao on a Philippine shipping line were double the costs of getting the machinery put on a Japanese ship from Tokyo to Manila. Because of the Philippines’ cabotage law, which prohibits foreign vessels from carrying goods from one domestic port to another, the machinery could not go to Mindanao from Manila on the Japanese ship it had arrived in.

Says Amina Rasul, a key mover in the Philippine Council for Islam and Democracy and a Manila Times columnist: “The costs attendant to shipping are so expensive, if you are a small businessman, you would die.” I heard practically the same words from Celso Lobregat, the mayor of Zamboanga City, and from General Santos’s mayor, Pedro Acharon Jr.—and also from well-placed members of the Arroyo administration. Everyone agrees there is a serious problem. But nobody seems to agree on even the root causes for the infamously high shipping costs, much less what to do about them.

Some observers charge that the domestic shipping lines are cartel-like oligopolies, controlled by a few politically powerful families. “I can’t prove they operate like a cartel, but when there is an increase in freight costs, all the companies follow in line,” one businessman from Mindanao told me. But shipping industry sources vehemently deny suggestions of collusion, insisting that they compete vigorously with one another. Still other observers say the blame is not with the shipping industry, but with the government-owned ports, which are notoriously corrupt and inefficient.

Plenty of economic problems have nothing to do with the shipping industry, such as the lack of decent roads. And while Philippine corn farmers hope to hide their inefficiencies behind high tariffs and quotas, they keep on loading their corn in individual containers, which is a very expensive mode of shipping. Apparently small farmers haven’t figured out how to band together and ship in bulk.

The high shipping costs ripple upwards, to the detriment of the national economy. Because it’s so expensive to ship corn feed, the chicken industry faces prohibitive costs—and, like the corn lobby, also tries to protect itself with trade barriers that limit import competition. This protectionist pecking order translates into expensive chickens that hold back Philippine restaurants and punish Filipino consumers.

Ms. Arroyo has begun to tinker at the edges of the mess with a program for a “nautical highway,” the idea being that cargo could roll-on and roll-off ferries at the most convenient available landing, thus avoiding the government’s own ports and high-stevedoring costs. Just to launch Ro-Ro, as it has been dubbed, the Philippine transportation department has had to coordinate with 18 of its subordinate agencies since 2003, plus coordinate efforts with at least five other major departments including the department of public works and the national economic development authority. Talk about a daunting bureaucratic challenge.

‘Super Maids’

The Philippine government is projecting economic growth of more than 5% for 2006, up a few notches from last year, and also points to 22 consecutive quarters of economic expansion. But savvy investors will not necessarily be reassured.

Philippine economic growth this year will be fueled by some $12 billion in remittances sent by an estimated eight million overseas Filipino workers—roughly 12 times the amount of foreign direct investment the Philippines attracts in a good year. The economic drivers are not the Philippine business elite. They are maids in Hong Kong and Singapore, mechanics in Saudi Arabia, and doctors and nurses in California.

A recent PulseAsia Inc. survey reported that three out of ten Filipinos “would now migrate if it were only possible.” The Philippines’ most successful export is the country’s own resourceful people. Rather than being shamed, President Arroyo has boasted of her administration’s intention to train even more “Super Maids.”

It also appears that the Manila authorities have little shame when it comes to discouraging foreign investment. The shells of failed construction projects are scattered around the capital city. One of the first things any visitor sees is the never-used Terminal Three at Ninoy Aquino International Airport. The building was to have been a shining example of how the Philippines could work with world-class German and Japanese firms. Then, with the terminal nearly completed, President Arroyo announced that the construction consortium’s contract was invalid, throwing it out of the terminal and launching expropriation proceedings. In August, a Singapore-based arbitration panel ordered the government to turn over the terminal to PIATCO. It still hasn’t, although Ms. Arroyo and her lawyers seem to be running out of legal maneuvering room.

The latest sneak attack against foreign investors came on Aug. 11, when President Arroyo issued an executive order designed to end a Malaysian firm’s development of oil deposits off western Palawan. Outraged officials with Malaysia’s Mitra Energy Ltd. complained that they had had spent more than $1 million so far in the preliminary stages of what was to have been a $700 million project. There was no explanation from the presidential palace.

To be sure, Ms. Arroyo didn’t invent crony capitalism and foreign-asset grabs. “What I think is new is they don’t care anymore about what foreigners think,” says Norbert Garrett, who runs the Philippine operations of Kroll Inc., the global risk consultancy. According to the American Chamber of Commerce, within ASEAN foreign direct investment was $38 billion last year, of which the Philippine share was $1.1 billion—only 3%.

Meanwhile, the Philippines’ longstanding “red tape” problem isn’t getting any better. The World Bank’s most recent report ranking governments on the ease of doing business shows Singapore as No. 1, followed closely by other Asian star performers Hong Kong (5), Thailand (18), Korea (23), and Malaysia (25). The Philippines was 126, down five notches from last year, and behind even Bangladesh (88) and Vietnam (104.) This year, Ms. Arroyo vowed to make a campaign against red tape a top priority. She has said much the same each year since 2001. Lately, the president has fallen back on spin, boasting that a survey by the respected Social Weather Stations turned up evidence that bribery to win government contracts in Manila has fallen to “only” 46% from 57% in 2003. Ms. Arroyo doesn’t add that the same survey showed that confidence in the presidential office has plummeted.

Misperceptions and Neglect

Appreciating the difficulties that divide “Muslim” Mindanao from “Catholic” Manila basically comes down to differences in attitudes between the two that have nothing to do with religion. The first misperception begins with demographics. Although few Filipinos one meets in Manila seem to be aware of it, Mindanao isn’t predominantly Muslim. Of the 85-plus million people in the Philippines’ 7,100 islands, 81% are Catholics and 12% belong to other Christian denominations. Maybe 5% of all Filipinos are Muslims. And of the estimated 16 to 20 million residents of Mindanao, perhaps four or five million are Muslims.

In 1996, then President Fidel Ramos negotiated what was to be a “final” peace deal with another Muslim rebel group, the Moro National Liberation Front. A so-called Autonomous Region of Muslim Mindanao was created. Nearly 2.5 million Filipinos live in the ARMM, in the islands along the Sulu archipelago from Basilan to Sulu and Tawi-Tawi, and in central Mindanao in places like Cotabato, Marawi City, and Maguindanao. Ninety percent of ARMM residents are Muslim. More than three-fourths of these are desperately poor people without clean water and other necessities.

While many of the Muslims’ problems traditionally have been self-inflicted—corrupt leadership, feuding warlords—probably the more important point involves a tradition of neglect from Manila. Neglect, and domination. The background is detailed in a secret 37-page cable sent in August 1974 by U.S. Ambassador William Sullivan to the State Department in Washington, D.C. tracing the root causes of the Muslim rebellion. The cable was drafted by John Forbes, a young foreign service officer who had traveled extensively in the region. It was recently declassified, and remains relevant to the situation today.

While “weak and discredited” Muslim leadership certainly played a role leading to the fighting, the cable noted, so did “thirty years of neglect of the Muslim community by the central government.” “As the population of the Maguindano area grew to more than one million, questions of land ownership became acute, with many parcels of rice and corn lands owned communally by Maguindano clans being transferred to Christian hands,” the Forbes-Sullivan document continued. “Slowly, the Maguindano saw themselves being pushed back onto inferior lands and becoming economically and politically disadvantaged vis-a-vis the Christians, who they felt had at least the tacit support of the central government.” As for U.S. policy, the cable concluded that America “would have everything to gain from a rapid and peaceful solution to the problem.”

Fast-forward to today, and that cable still describes American policy. U.S. Special Forces, operating out of Camp Navarro in Zamboanga City, win praise from many Muslims for helping the Philippine military bring peace and order to places like Basilan, formerly the playground of the al Qaeda-linked Abu Sayaff kidnap-for-profit gang. When the Special Forces go into an area to help create a secure environment, they work closely with U.S. foreign aid official

“If America is able to help address the underlying historical grievances of the Muslim people of the southern Philippines, it would be another indication that we are willing to go to bat for people who have legitimate grievances,” says retired U.S. diplomat Eugene Martin, a former deputy chief of mission in Manila. Mr. Martin is now associated with the congressionally funded U.S. Institute of Peace, where he heads a Philippine “facilitation” project at the request of the State Department. The unstated idea is that the USIP’s independent status allows Mr. Martin more freedom to take up legitimate Moro complaints than American diplomats in Manila, who operate under the constraints of being formally accredited by the Philippine government.

However, in the meantime the string of broken promises from Manila continues uninterrupted. The ARMM is supposed to be autonomous, but it isn’t. The Muslim areas are without their own regional security forces. They cannot collect taxes for their local schools, and don’t even control their own budgets. The money comes from Manila. And what a pittance it is. “Funds appropriated by the national government to the Autonomous Region in Muslim Mindanao comprise 3% of the total national budget for the past 10 years—the second lowest allocation among the 15 regions in the country,” the Moro Times reported recently. And so the centuries of conflict in Mindanao keep rolling along.

(c) 2006 Dow Jones & Company, Inc.

Mr. Rushford is editor and publisher of the Rushford Report, a Washington-based newsletter that specializes in the politics of international trade