AEC - the need for the PHL to open the door wider for competition

July 30, 2015 News

It is important to get ready for the Asean Economic Community (AEC) which is scheduled to start on January 1, 2016. Association of Southeast Asian Nations (Asean) has achieved worldwide recognition for being one of the most dynamic and integrated regions. The growing purchasing power of the 600 million consumer market, and the ongoing progress of the regional community offer an integrated market and production base for both business and consumers.

Foreign direct investment (FDI) is a key component of resource flows to Asean countries. Over the last decade, FDI flows into Asean members grew at an annual average rate of 19 percent.

While the Philippines is debating whether fiscal incentives should be offered to investors, Vietnam is taking a much more aggressive approach.

The release of the 10th Foreign Investments Negative List (FINL) in May went some ways toward moderating the Philippines’s less than flattering reputation as one of the countries most unwelcoming to FDI in Asia. But the most formidable impediment to sustained, investment-based growth—the 1987 Constitution—remains unaltered.

The new FINL replaced Executive Order 98, or the Ninth FINL issued in 2013, that dismayed foreign investors by expanding the list of investment areas and economic activities reserved for Filipinos. In response to this expanded list, the Joint Foreign Chambers (JFC) urged the government to review the Ninth FINL to make it less negative for foreign investors. That request has now been granted to some degree.

JFC, however, initially asked the entire practice of professions be removed from the FINL, because professions have nothing to do with investments.

JFC and many leaders in the local business community have long urged the government to remove legal and Constitutional impediments that discourage the entry of FDI and hinder beneficial competition. Their arguments make sense, both from the aspect of sustaining economic growth and mitigating poverty.

A key aim of moves to amend the restrictive provisions of the Constitution, especially Article XII, is to create jobs in abundance and reignite competition in protected industries. A burst in job creation that will result from the entry of foreign firms should significantly reduce the persistent labor surplus that contributes to the country’s stubborn poverty.

Economist Bernardo Villegas, chairman of the Center for Research and Communication, noted the concept of “Filipinization” (a.k.a. economic nationalism), reinforced in both the 1972 and 1987 Constitutions, “has just worsened the feudal and monopolistic character of our society.”

“Unwittingly, well-intentioned ‘nationalists’ and ‘activists’ have handed the control of the national economy to an elite in whose hands the wealth of the country is concentrated. There has been very little evidence that Filipinization has liberated the masses from poverty,” he wrote. He also pointed out “the idea of having Filipinos control the vital sectors of the economy has worked against the majority of the Filipinos who belong to the lower income groups.”

“There has been very little evidence that the Filipino nationals, who have managed to control the economy have a greater interest in the common good, especially of the underprivileged, than individuals who are not citizens of the Philippines.”

Villegas reasoned “…the Philippine Constitution that was ratified in 1987 was riddled through and through with provisions that make it very difficult for foreigners to freely invest in public utilities and other strategic sectors of the economy, which are the most capital intensive and in direct need for long-term capital, which can come only from FDI.”

Instead of economic nationalism, the focus today should be on “economic patriotism,” Villegas said. He defined economic patriotism as “a true love of country whose main concern is…‘inclusive growth,’ i.e., economic growth that liberates the masses from the bondage of poverty, a growth that truly trickles down to the poorest of the poor.”

“With an honest and efficient government, the nationality of private investments should not matter,” Villegas said.

While more jobs won’t be the magic bullet that erases poverty, it should go a long way toward entrenching inclusive growth and effectively combating poverty. Gerardo Sicat, who in 1973 was the first National Economic and Development Authority director general, now repeatedly argues Philippine growth is a long-standing story of sustained labor surplus that creates a high incidence of income inequality.

Sicat believes “misguided economic nationalism gave rise to rent-seeking, corruption, cronyism and uncompetitive behavior dependent on state patronage.”

The government policy of import substitution and protection also corrupted the process of industrialization because it was based on patronage. And Sicat concludes that “all these outcomes are inherently linked to the restrictive provisions of the Constitution.”

The continuing drag imposed on the economy by the FDI trickle was the object of serious concern by foreign businessmen, who urged the government to make the changes necessary to improve FDI inflows.

This concern was sparked by the sharp 48-percent plunge in FDI to only $1.2 billion from January to April. In contrast, FDI in 2014 grew to $6 billion, a total unlikely to be surpassed this year.

The European Chamber of Commerce of the Philippines (ECCP) again renewed its call to further open the economy to boost FDI. ECCP is optimistic of the passage of House Resolution 1 that seeks to ease the economic restrictions in the Constitution before the end of the Aquino administration. It noted the principal author of the bill, House Speaker Feliciano Belmonte Jr., remains intent on getting the bill passed. 

Source: Business Mirror