The unpleasant side of economic liberalization

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Ben D. Kritz

Ben D. Kritz

The news, which has come out in this paper in the last two weeks, that a large part of the Philippines’ critical electricity infrastructure is controlled by foreign interests evidently came as a very nasty surprise to many people, although it shouldn’t have; the control of the Manila Electric Co. (Meralco), at least indirectly, by Indonesian magnate Anthoni Salim and the even tighter hold the State Grid Corporation of China has over our own National Grid Corporation of the Philippines (NGCP) are not at all new developments, nor secrets being kept from the public.

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Be that as it may, the Meralco rate hike scandal pushed these alarming situations to the forefront, and rightly so. The nation’s electricity system is a strategic resource, and an unavoidable vulnerability. A historical example: At the beginning of May 1999, frustrated at the stubbornness of Yugoslavian President Slobodan Milosevic and his forces fighting to keep control of the breakaway republic of Kosovo, NATO air forces (mainly British and American) switched tactics from striking Serbian units in Kosovo to “hitting the head of the snake,” critical infrastructure in and around the Yugoslavian capital of Belgrade. By May 24, NATO bombers had wiped out 80 percent of Yugoslavia’s power grid. On June 3, Milosevic accepted NATO’s demands and capitulated.

We do not think—at least for now—that the diplomatic conflict caused by China’s ridiculous truculence in the West Philippine Sea would actually deteriorate to a Balkans-scale shooting war. Nevertheless, the clear inability of the Aquino administration to even conceive of, let alone pursue, an effective, productive response to China’s aggression does cause us to think that allowing two representatives of the state-owned electric distributor in China to serve as the NGCP’s Chief Technical Officer and Assistant Chief Technical Officer for Systems Operations is just a tad irresponsible. The Philippines might look on people like Wen Bo and Ma Ruoxin as “foreign technical experts”; China, on the other hand, could very well consider them “forward spotters.”

Even now, there are suspicions being raised in the mainstream and informal media that the current rate crisis may at least partly be the result of Chinese meddling. The NGCP, in precisely the ways that would fall to the responsibility of the Technical and System Operations offices, clearly did not handle its role during the period in which electric generation rates skyrocketed with noteworthy efficiency. The principle of Occam’s Razor suggests that the NGCP’s failure is probably due to causes that are more local in nature—simple complacency, and an occasional effort to take the least amount of action necessary in any situation—rather than part of a sophisticated strategy hatched in Beijing.

Nonetheless, the Chinese ownership and management influence in NGCP should be considered an unacceptable risk. The most favorable assumption that can be applied to the State Grid Corporation of China (SGCC) as a stakeholder—and one that has direct control over NGCP’s day-to-day operations—is that it will seek to maximize its return on investment (ROI). As SGCC is a state-owned utility imbued with public interest (in China), seeking to maximize its ROI is following its public-interest mandate. The NGCP, however, is also imbued with a public interest—that of the Philippines. By allowing SGCC to control the NGCP we are, in effect, assuming Chinese public interest includes looking out for Filipino public interest. I will leave it to the reader to decide whether that’s a sensible outlook or not.

The situation involving Anthoni Salim’s technical control of Meralco is different than that of the NGCP, but scarcely less worrisome. Salim does not represent Indonesian policy interests, and in any event Indonesia is merely an economic rather than a geopolitical rival. Much like the SGCC, however, Salim is first and foremost an investor who should and does prioritize his own interests. Most of those interests are in Indonesia, and therefore it is not to Salim’s benefit that the Philippine market and business environments are more favorable than those of his home country, but he doesn’t actually have to think that far—keeping the costs of power high here leads to profits that go straight to his pocket. If those high power costs help to drive investment and increased consumption in his home country, that is merely a bonus.

These kinds of situations are exactly why those who vehemently protest globalization do so, and why it is difficult, at times, to disagree with their point of view. In general, globalization has more benefits than drawbacks; it leads to more equitable distribution of resources, and introduces economic opportunities to places that would otherwise not see them for decades, if ever, through their own efforts. But when globalization goes wrong, it goes wrong in the worst possible way, exploiting rather than spreading benefits.

With the Philippines serving as a live demonstration of liberalization gone horribly awry, one must wonder if those behind the calls for even greater liberalization have properly thought things through. Indeed, economic restrictions should not be part of the Constitution, because management of a globally connected economy—which is something that everyone in this country, regardless of their political orientation, is striving for—is an active, variable process in which objectives and rules change often. Apart from the expression of the basically sound goal to “de-constitutionalize” investment restrictions in the Philippines, however, virtually nothing has been offered concerning strengthening economic and regulatory institutions to properly support public interests, and that is most worrisome.

We have to wonder whether “Cha-cha” (Charter change) with respect to the Constitution’s protectionist provisions—a solution to the chronically -high cost of basic utilities which seems so obvious—will instead create more SGCCs and Anthoni Salims if no one is willing to do the much harder work of renovating the institutional and social framework upon which a fully liberalized economic policy would be unleashed. Liberalization can be a huge advantage for the Philippines, and it needs to happen sooner rather than later. But let’s remember, the cart goes behind the horse, not in front.

benkritz@outlook.com

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4 Comments

  1. “With the Philippines serving as a live demonstration of liberalization gone horribly awry, one must wonder if those behind the calls for even greater liberalization have properly thought things through.”

    – Clearly the blogger makes it appear the Philippines implemented economic liberalization. Do not confuse Corporatism with economic openness/liberalism. Well, North Korea also also foreign investors (e.g., China and Russia). The question is:

    1. What kind of foreign investors does the Philippines attract?

    2. Or: What kind of foreign investors does NK attract?

    I asked Mr. Tiglao the same question…

    Did you ever ask your self this question, Mr. Tiglao– What kind of foreign investors does our country attract?

    The answer is as follows (I gave this answer to one member of an FB group called “Government and Taxes, Liberty and Responsibility“):

    Since we protect our industries from foreigners thru our 60-40 law, foreign investors can only enter our economy thru:

    Joint venture with the government (e.g., the defunct and corruption-riddled National Broadband deal).
    partnership with Filipinos or Filipino companies who must own at least 60% of the company.
    Financing and technical schemes (e.g., oil industry)
    So, the question is: What kind of investors does RP attract?

    the Chinese government (NBN)

    the Chinese oligarchs who are willing to bribe politicians (the gambling tycoons from HK and China)

    foreign investors who are willing to bribe politicians (Piatco deal and the recent $30 million MRT extort under Aquino’s term)

    foreign investors who are willing to use dummies and exploit our foreign investment laws

    Yes, we attract foreign investors who are bold and crazy enough to use dummies and exploit our protectionist laws.

    Ergo, we don’t attract the best and most compassionate foreign corporations. Instead, we attract corrupt, stingy corporations who are willing to circumvent our laws and to bribe our politicians.

    http://vincenton.wordpress.com/2014/02/24/who-is-the-bigger-evil-the-salim-empire-or-rps-protectionism/

    • “Liberalized” in the context of “moved from state control to the private sector”. Let’s read things properly before making assumptions that undermine your subsequent argument. Of course, I realize some habits are hard to break.

      You probably should have waited until Mr. Tiglao’s Wednesday column was published, then you could have explained to us how foreign control of key Philippine industries, financed entirely with Philippine financial resources and not actually adding foreign capital to the economy, is a good thing. Perhaps you can take that issue up on your blog.

  2. Great piece. Liberalization benefits countries when there is sufficient competition to ensure that companies provide excellent service at the best possible price. In addition countries have been known to take measures to ensure that key, strategic industries remain within their control. With the cost of electricity being one of the factors of competitiveness in attracting investments, both foreign and local, the government should ensure that the Philippines’ public interest are served.

  3. How come our constitution allow private companies (virtually owned by rich foreigners and managed by Filipinos as dummies) to run our basic industries like one example electricity? I don’t think other countries approve this kind of policy which is totally adverse to common sense. Are our government not ashamed because of our ridiculous economic policies we are being laughed at?