First of two parts
PRESUMPTIVE President Rodrigo Duterte has been rather forthright about his intention to push for the creation of a federal system in the Philippines, an idea that has largely met with approval from the public and most political analysts.
On the face of things, the idea makes sense for the country. The Philippines is a physically divided nation, with distinct cultural and social differences from one area to another, and has a history of stagnation in areas (such as Mindanao) that are separated from the center of power in Manila.
Federalism is most often associated here with two other generally good ideas, a shift to a parliamentary form of government and the long called-for reduction or removal of constitutional restrictions against foreign investment, for which Duterte has expressed support, although not as forthrightly as he has in the case of federalism. All three ideas are likely to be improvements for the Philippines, but there seems to be very little critical thinking involved in their advocacy; the assumption of most who favor the package of grand reforms is that they can essentially be applied “off-the-shelf” and will result in rapid gains with little to no adverse consequences.
That is a dangerous perspective to adopt, and may explain why a couple of decades of occasional debate over the ideas have so far failed to result in any real change. No idea is perfect, and that axiom certainly applies to these. For the sake of encouraging a more thoughtful, substantial debate, the following is an updated summary of an analysis I first wrote back in November 2010, a time when the “charter change” debate was heating up as a result of the dawning horror of the terrible error the country had made in electing a simple-minded layabout as President. With the discussion again coming to the fore, it may be enlightening.
Inconvenient fact #1: Removing the protectionist provisions of the Constitution will not necessarily remove the barriers to foreign investment: Addressing the parts of the Constitution which restrict foreign investment in the Philippines can be done in two ways: the offending parts of the Constitution (specifically, Sections 2, 7, 10, 11, and 14 of Article XII, “National Economy and Patrimony,” Section 14 of Article XIV, and Section 11 of Article XVI) can either be removed, or amended to loosen the current restrictions, which in general proscribe foreign ownership of property, more than 40 percent of any business, or practice of any profession, except those permitted by law.
Simply removing the provisions actually does not remove the restrictions, because most of those are codified in the Foreign Investment Act of 1991 (RA 7042, amended by RA 8179 of 1996), and the two extensive “Exclusion Lists” appended to it. No longer having provisions in the Constitution addressing these issues leaves the matter in the hands of the Legislature, and potentially subject to the same various vested interests and ulterior motives that constitutionalized an autarky in the first place and have stubbornly maintained it ever since. By the same token, amending the provisions to define the limits of patrimony presents the same risks. Without being able to ensure that enough members of the Legislature or Convention are representatives with a foreign investment-friendly point of view and sufficiently resistant to protectionist lobbying pressure, the champions of economic liberalization risk defeat, or at least an incomplete victory.
The Philippines has one of the most restrictive investment environments among 87 countries assessed by the World Bank, and partly as a consequence of that, a moribund economy in comparison to its regional neighbors, particularly Malaysia, Indonesia, and Vietnam. The real benefit to foreign investment is the capital it provides to allow for domestic economic development. Which leads us to…
Inconvenient fact #2: Foreign investment need not be the critical component in developing the domestic economy. Foreign investment is a critical component for developing the economy, but by no means the only one, and if the others are overlooked, by itself it will represent, at best, a cashflow stream lost to consumption; if it were otherwise, then the vast amount of OFW remittances flowing into the country at a rate that represents about one-seventh of the Philippines’ GDP would be reflected in a more equitable economy. In a study published in the Southwestern Economic Review in 2009, Economists Dosse Toulaboe, Rory Terry, and Thomas Johansen of Fort Hays State University demonstrated that
“…FDI is a strong contributor to economic growth, that this (direct) contribution is about equal in both lower-income and middle-income countries, that FDI does interact with human capital formation to provide enhanced economic growth, and that this interaction term is more pronounced in more advanced countries. Our results lead to the conclusion that absorptive capacity in the host country is important for FDI to fully impact economic growth.” [emphasis added]
It is in the absorptive capacity of the Philippines where the root causes of the country’s economic morass lay. Core cultural dimensions that present obstacles to standard and universally-recognized modes of conducting business, a lack of respect for and enforcement of property rights, an extensive informal economy, an absence of a uniform credit risk assessment paradigm (and along with that, a general shortage of available credit), preference for casual and contract labor (and along with that, pervasive, institutionalized nepotism and discrimination), a poor educational system, poor infrastructure, appalling environmental management, and an inefficient and inherently unstable government structure are all individual factors that reduce the Philippines’ capacity to absorb FDI benefits, and are all native problems for which the absence of FDI cannot be blamed. Removing protectionist ‘safeguards’ only provides an opportunity to attract more foreign investment; without an investment environment that actually is attractive, there is no reason to assume foreign investors will not continue to go to the country’s formidable regional competitors.
All that, however, is a matter of management; improve the management structure, and the Philippines will be better able to absorb the benefits of foreign investment and develop its own economy.
Other studies (Klaus Meyer, et al., in the Strategic Management Journal in 2009; James Walsh and Jiangyan Yu for the International Monetary Fund in July, 2010; Bruce Blonigen and Jeremy Piger of the National Bureau of Economic Research in January, 2011) besides the one mentioned above, also back the assertion that it is the country’s absorptive capacity—which in turn is a function of its domestic potential for capital creation—that is the most important determinant of FDI attractive power; notably, “investment restrictions” are considered only a minor factor, if they are considered at all.
So does that mean that eliminating or easing investment restrictions is a bad idea? Certainly not. But what it does mean is that the goal is not nearly as critical for the country’s development as we might suppose, and this is where the issue of practicality (and where the advocacy’s stubborn insistence on full liberalization demonstrates a complete lack of it) comes into play. The investment environment certainly must be improved, but only those who have the flexibility that not surrendering to a dogmatic position provides will be able to find the avenues available to accomplish that. (Part 2 on Saturday)