• Sustainable reform requires a broader view

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    foto Ben Kritz

    I was fortunate enough to cross paths last week with former Ambassador to Italy and now Chairman of Abacus Holdings Jose V. Romero, and in the course of our brief conversation he made a most interesting point: The country and foreign investors have very different perceptions of their relationship. Government policy—which in turn informs management and market perceptions—carefully maintains the distinction between “foreign” and “domestic” capital, while the investors themselves, at least once they have gone beyond the entry phase, see their enterprises as a part of the economic landscape; a joint-venture or other sort of partnership by technical definition, certainly, but a Filipino business in most every other respect—located in the Philippines, making use of Philippine resources, subject to Philippine law, and in one way or another contributing to the Philippine market.

    The reason the good chairman’s observation is so important is that it succinctly explains a fundamental reason why the Philippines is unable to effectively attract or efficiently use foreign capital: “Excessive compartmentalization” might be a polite way to describe it, or to put it bluntly, “small-mindedness.” Policies and strategic decisions are not based on their wider and longer-term impacts, but on very close horizons—what might be accomplished or could be claimed by the end of a term in office, or within a year, or within a quarter, or before the newspapers’ next news deadlines.

    The lament of foreign investors about the mishandling—some would say institutionalized swindling—of promised value-added tax and customs exemptions for imported capital equipment in priority investment sectors (see the Times’ June 5 article, “PH playing field remains uneven, Euro exec bemoans”) is a good example of compartmentalized thinking. The Board of Investments, Department of Trade and Industry and other agencies charged with promoting investment stand behind the exemption as a valuable incentive, yet because the Bureau of Internal Revenue’s (BIR) institutional concern does not go beyond the collection of taxes, collect them it does, forcing investors to struggle through a thicket of bureaucratic and judicial red tape for years—at significant added cost and more often than not unsuccessfully—to have the “exempt” taxes refunded to them.

    Because the BIR is not directed to consider the larger implications of its “strict interpretation” of tax codes, it works at cross-purposes to efforts to grow the economy through increased foreign direct investment. At best, the potential investment is immediately reduced; after all, the amount of taxes that were presumed to be exempt and are now lost plus the costs of trying to recover them have to come from somewhere. If the balance is found by reducing the importation of capital equipment, that is a direct reduction of physical technology transfer. And reductions in either capital or technology transfer lead to a smaller scope of investment, which means, potentially, fewer jobs created, less investment and capital creation in secondary and tertiary sectors, and less long-term tax revenue. At worst, the ridiculously easy-to-fix problem (the BIR could literally be stopped with a stroke of the President’s or the BIR commissioner’s pen), discourages potential investors and drives them to one of the Philippines’ more aggressive and more goal-oriented competitors.

    The paradox is that while a detailed understanding of the “big picture” of the goals and full effects of strategic decisions and policies is critical to making “reform” actually mean something, the approach to achieving those goals still requires a short-term orientation—change too many things in a system at once, and there is a risk of chaos because changes rarely have linear effects. The short-term, incremental approach to reform also suits the Filipino cultural temperament; this is a society in which “grand projects” are an uncomfortable, if not altogether alien concept. Even the great Filipino writer Nick Joaquin in his seminal A Heritage of Smallness points out that the grandest monument to Filipino ingenuity and effort, the Banaue Rice Terraces, were built up bit by bit over generations. This is a large part of why the “grand formula” for reform—the trinity of full economic liberalization, a Parliamentary government and a Federal administrative organization of the country—that has been a popular topic in this column of late is fatally flawed; it is a set of goals inappropriately presented as a set of solutions, without a clear definition of the problems it is trying to solve.

    Nor is the current Aquino administration offering anything more productive at this point; “inclusive growth” and a “level playing field” are good sound bites but poor practical targets. Without defined goals, there is no way to determine if a course of action will actually be progress in the right direction, which leads to self-defeating policies and procedures—such as one agency’s collecting a tax that investors were promised by other agencies would not be applied. “Inclusive growth” is not a goal; “Increasing investment [regardless of the source, since once it lands here it is no longer ‘foreign’]and capital creation by X amount, with a corresponding decrease of Y percent in the unemployment and poverty rates and increase of Z percent in per capita GDP [gross domestic product]in N number of years” is a goal.

    If the country’s leadership can change its thinking to those kind of terms—a pattern of thought that is routine for good performers in the business world, an intellectual resource the administration would be wise to tap—then the steps needed to get from the “as-is” state to that preferred “to-be” condition would more readily reveal themselves. Despite nagging uncertainties and lingering frustrations, there is still a surprising number of potential investors both inside the country and beyond that are willing, even hoping, to take a chance on the Philippines, if only they could see clear signs of lasting progress and will. The business community that is already here is doing what it can; it’s time for someone within the political class to step up and lend a hand.

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    3 Comments

    1. Perry Chloride on

      Well, I am not against short-term solutions. However, we cannot always rely on it. We should strive to create a long-term solution to the major problems are country is facing. It also important to know that the government has done so many short-term solutions, but never done long-term solutions.

    2. The Banaue Rice Terraces, were built up bit by bit over generations.”
      So you are effectively suggesting we keep the BIR red tape, that we already know to be hindering foreign direct investors, and remove the bureaucracy, little by little, over several generations? Just how gradual a change do you think would be necessary?

      It took China just a decade, after opening up their country to be an economic powerhouse. That’s just ten years, and yet YOU suggest, we take GENERATIONS to effect similar changes in our economy? I’m sorry, but THAT is SMALL-MINDEDNESS.

    3. The Straight Path is the Road or the message way/medium. What is at the end of that road is the goal/ identifiable/specific process of getting there. It is substantially a paradox of which comes first: the cause or the effect. All of us are stakehollders in a discipline of applying wisdom or intelligence augmentation.IA, not artificial intelliigence)
      to make up our own minds of the right stuff of who we are and whar we want to organize and harness for an encompassing goal, specifically like perhaps: To Be A Rich Nation And A Strong Military.

      Robert F. Posadas, Philets61, JD, Founder: VlitzCast.com/ Media Match Portal-US Patent Method.