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Charter Change plan draws cheers, jeers

July 20, 2016News

Part of the Duterte administration’s 10-point socioeconomic agenda, ultimately aimed at significantly reducing poverty, is the plan to ease the almost three-decades old restrictions on foreign investors. According to President Rodrigo R. Duterte’s economic managers, this administration will “pursue the relaxation of the constitutional restrictions on foreign ownership, except with regards land ownership, in order to attract foreign direct investments (FDI).”

In a speech on June 29 at a forum hosted by Yuchengco-led Rizal Commercial Banking Corp., Finance Secretary Carlos G. Dominguez also noted of the pros of shifting to a federal form of government, another reason why the Duterte administration wants Charter change.

“We will have to address the need for constitutional renovation. This will help facilitate growth dispersal by empowering governments. It will alter the system of representation, enabling our marginalized sectors to more meaningfully participate in policymaking. It will clear all the obsolete economic orthodoxies enshrined in the existing charter,” Dominguez said.

 

Calls for Amendments

 Multilateral institutions have long been advising the Philippine government to revisit the foreign investment restrictions enshrined in the 1987 Constitution.

For one, the Organization for Economic Cooperation and Development (OECD) last May urged a further easing of investment restrictions, as it noted that the Philippines had great potential to attract FDI, but has been hampered by the legacy of nationalist policies from the 1980s and earlier.

In its first investment policy review of the Philippines, the OECD grouping of developed countries pointed out that the country remained “one of the countries with the most statutory restrictions on foreign investment.”

“Nationalist provisions restricting investment arose in an era when the Philippine government was keen to assert its economic sovereignty. They are now considered by many as outdated and damaging protectionist measures that discourage foreign investments and facilitate rent-seeking by local oligopolists,” the OECD said.

“In a more conducive policy environment, the Philippines offers tremendous advantages to potential investors which are well-known: its location in East Asia, which is the world’s most dynamic region, a large and fast growing market, knowledge of English, abundant natural resources, a young population, and political stability,” it added.

The OECD hence recommended the lifting of major restrictions on FDI, which besides those in the Constitution, also include the high minimum capital requirement for foreign investors as contained in the Foreign Investment Act and the Retail Trade Liberalization Act.

However, the preceding administration of Benigno Aquino III did not dare touch the existing supreme law of the land, mostly in reverence to his mother Cory, under whose watch it was formed.

Most business leaders, especially from the Joint Foreign Chambers, whom the Inquirer sought to give their thoughts on the plan to tweak the economic provisions of the Constitution, welcomed such moves.

“Amending the economic provisions is super high on the agenda of local and foreign business groups. In other words: we are happy about these initiatives,” said Henry J. Schumacher, vice president for external affairs at the European Chamber of Commerce of the Philippines.

“AmCham has long favored making the FINL [foreign investment negative list] less negative by reducing restrictions on foreign investment. The US is a very open economy and the largest recipient of FDI in the world. Relaxing restrictions on services, for example, should attract more FDI in such businesses and result in more competition and benefits for consumers,” John D. Forbes, senior advisor at the American Chamber of Commerce of the Philippines, said.

 

Adapt or be left behind

 Even Filipino business leaders agree to Charter change.

“Yes, we are in favor of amending our Constitution. In today’s globalized situation, if we do not adapt then we will be left behind. FDI for sure will be dramatically improved if we relax the restrictions on foreign investments. We are already committed to Asean integration. No turning back. We have to be ready for Trans-Pacific Partnership [free trade agreement led by the US]. There is a plan even to join the China-led Asian Infrastructure Investment Bank,” noted Management Association of the Philippines president Perry L. Pe.

“The Makati Business Club (MBC) has been calling for the removal of economic restrictions in the Constitution to give the country more flexibility to join high level multilateral trade agreements since early in the past Aquino administration. We supported [former House speaker Feliciano] Belmonte’s formula of constitutional change by inserting the phrase ‘unless otherwise provided for by law’ in the specific constitutional restrictions to allow Congress to consider lifting of these restrictions,” MBC executive director Peter Angelo V. Perfecto said.

“Moving forward, under the new administration, we would like to pursue amendments to the economic restrictions and are open to studying other proposed changes like the shift to federalism. However, we hope that such additional amendments be carefully studied and be based on multistakeholder and multisectoral consultations. There are various ways to do this and we are confident that the executive and legislative branches can craft some proposals forward that the people can consider,” Perfecto said.

Economist and Foundation for Economic Freedom (FEF) vice chair Romeo L. Bernardo said easing constitutional restrictions on foreign businesses would bring in more foreign investors in public utilities and other infrastructure that require huge capital investments.

“I hope Congress finds a way to upfront the Charter change to open up to FDI in advance of the more sweeping Charter amendments like shifting to a federal system,” Bernardo said.

“The importance of relaxing the foreign ownership restrictions is in attracting foreign investments in strategic industries, where they are now presently barred from entering and providing competition,” FEF president Calixto V. Chikiamco said.

Chikiamco cited the more practical reasons, as reflected in recent developments, why there was a need to open up the economy to more foreign participation.

“I believe that if there were no 60-40 rule, Telstra would have come in without San Miguel Corp. to provide competition,” Chikiamco said, referring to the Australian telecommunications giant whose talks with the Philippine diversified conglomerate for a joint venture to form a third force in the local telco industry fell through.

 

Relaxing restrictions

 “Also, in PPP, we should see more competition, rather than the same ‘Philippine’ conglomerates, which sometimes partner with each other,” he added, citing that foreigners are barred from operating airports and seaports because at present, they are classified as public utilities.

Adoracion M. Navarro, senior research fellow at state-run think tank Philippine Institute for Development Studies, said she believes that relaxing restrictions on foreign investments will help us catch up in FDI generation. “

Regional economic integration is increasing, such as in the Asean, and one of the ways we benefit from that is through participation in global production networks. Relaxing restrictions on foreign ownership of corporations can help attract investors who are looking at global markets for goods and services,” Navarro noted.

“With respect to local markets, clarifications on what are public utilities and relaxing foreign ownership restrictions on physical infrastructure assets would help us achieve our goal to improve the quantity and quality of our infrastructure,” she added.

For political analyst Victor Andres C. Manhit, a review of the Constitution is needed to make it attuned to the changes in the past three decades and the challenges to be faced by the nation moving forward, amid globalization.

“One of the biggest challenges is to create more jobs. What we have now is jobless economic growth, because the investment climate is not as good as that of our neighbors due to the restrictive Constitution,” said Manhit, president at think-tank ADR Institute.

Manhit also noted the few investments in manufacturing, where high capitalization requirements will entail foreign money.

Trinh D. Nguyen, economist at French corporate and investment bank Natixis, said that “should Duterte become successful at repealing the 40-percent ownership limit on foreign investors, the Philippines may attract a lot of necessary funding to build infrastructure and more FDI inflows.”

 

Not enough jobs

 “The Philippines may have plenty of domestic demand but not enough jobs. While overall economic growth and external balances have improved, the poverty rate actually worsened. The incidence of poverty was 21.1 percent of the population in 2009. And by 2015, it rose to 22.9 percent. This divergence between economic growth and poverty incidence reflects a worsening labor market for the poor. While educated Filipinos have options to work in the business process outsourcing (BPO) sector or leave the country for foreign work, the unskilled are left to fend for themselves. Social programs such as cash conditional transfers address the symptom but not the disease—the Philippines is seeing its manufacturing sector declining. And this is a sector that provides steady wages for the unskilled,” Nguyen noted.

“Both total exports and manufacturing exports have declined in the past two years. This is partly explained by declining structural competitiveness, exacerbated by weak infrastructure and wage rigidity. While total population and the increase of working age population rose, what’s interesting is that the labor force remains stagnant. This will need to change. Under [former President] Aquino, the labor force actually stagnated due to weak low-skill job growth.”

“While Aquino stated that he will liberalize FDI, a few actually thought he would repeal the very limit his mother imposed, (although he did liberalize banking from 40 percent to 100 percent ownership allowable).

 

Investment flows

 The sectors that the Philippines need and underperform are also the ones that are restricted to only 40 percent. The global ranking of Philippine infrastructure is not great. Of the 144 countries, the Philippines ranked 108 for air transport. And considering that it is an archipelago, boosting tourism is about improving air infrastructure,” Nguyen pointed out.

Kevin Sanker, Asia-Pacific associate economist at Washington-based Institute of International Finance, agreed that “relaxing restrictions on foreign ownership should benefit FDI inflows, which have risen in recent years but still lag regional peers as a percent of the gross domestic product (GDP).

“A weak infrastructure system has also been a headwind for foreign investment. The new administration’s plan to increase infrastructure spending and speed up the public-private partnership (PPP) process should help ease some foreign investors’ concerns on policy continuity in these areas,” Sanker said.

For DBS Bank Ltd. economist Gundy Cahyadi, a more open economy would complement the increasing interest in the Philippines as an investment destination. “Interest from foreign investors has been on the rise in recent years and I wouldn’t be surprised if more will be keen to expand their foothold in the economy,” Cahyadi said.

In a recent report titled “Philippines: Duterte’s game plan,” Cahyadi lauded the Duterte administration’s earlier announcement that it planned to further liberalize the economy by raising the cap on foreign ownership of local firms to up to 70 percent from about 40 percent at present, while also lifting limits on land lease to 40 years from 25 years.

“This is potentially significant. While FDI increased several-fold during Aquino’s term, it remains low compared to the rest of the
region. Easing restrictions on foreign ownership is likely to encourage more inflows in the medium-term. About 60 percent of FDI applications over the past five years have been directed in the manufacturing sector. We reckon this high interest in the sector will continue.

Manufacturing is a key sector that the Duterte administration will focus on to absorb the growth in labor force. It would also fulfill the ambition to diversify the economy from an over-dependency on services,” Cahyadi noted.

 

Corruption, red tape

 University of the Philippines political science professor Clarita R. Carlos, however, also pointed out that even if the economy will be opened further to foreigners, the country would still not attract as much FDI inflows if corruption and concerns of the ease of doing business persist.

“Per survey after survey, businesses—both domestic and foreign—have indicated that it is the corruption and the bureaucratic maze that deter them from doing business here,” noted Carlos, who is also the executive director of the Center for Scientific Research and Strategic Development.

“Even allowing foreign ownership and not lease is not desired by foreign investors,” she added.

Carlos nonetheless said “opening up restricted industries like telecommunications and power may be done through constitutional changes,” referring to two sectors plagued by the existence of very few players that leave consumers with no choice but deal with poor services at high costs.

Rajiv Biswas, Asia-Pacific chief economist at IHS Global Insight, agreed that wider access for foreign investors need to be coupled with reforms in the ease of doing business.

 

Liberalization

 “While liberalization of foreign direct investment rules will be an important factor that will help to boost long-term FDI flows to Philippines, there are also other important reforms needed to improve foreign investment inflows. A key area where further reforms are needed is to improve the business climate for investment, with Philippines currently ranked 103 out of 189 countries in the world in terms of the World Bank’s Ease of Doing Business Index. This is far below the ranking for some other Asean countries, notably Singapore, Malaysia and Thailand,” he noted.

“Some key areas where the Philippines needs to improve are in reducing red tape for starting a business, processes for registering a property, complexity of tax bureaucracy and improving legal systems for contract enforcement. Another important reform that is needed to encourage foreign investment is to significantly boost infrastructure investment in key areas such as power, roads, ports and airports over the medium term, to boost industrial productivity and efficiency and lower industrial costs,” Biswas added.

Jose Enrique A. Africa, executive director at IBON Foundation, said the think tank “has long had a position
on relaxing the constitutional restrictions on foreign ownership including through the subterfuge of supposedly merely inserting the phrase ‘unless otherwise provided by law."

But for Africa, it is not FDI generation that’s more important, but a less liberalized economy protecting domestic industries.

“Foreign investors like to say that they will invest more without the restrictions so we can take their word on this. The more important question though is if more foreign investment is necessarily a good thing,” Africa said.

“For instance, domestic manufacturing in the sense of real Filipino industry continues to decline despite quite a lot of FDI especially in manufacturing. After decades of FDI, the share of manufacturing employment continues to fall and we’re not developing the indigenous manufacturing science and technology needed for a modern economy,” he noted.


“This is because the government gives everything to attract foreign investors and doesn’t require more solid contributions to the local economy beyond the few direct jobs generated. Removing the nationality restrictions takes away the last bit of leverage we have over foreign capital to ensure that they contribute to national development. The Duterte administration should protect this and use it as leverage against investors. For instance, they can be attracted to come here to sell to a domestic market made bigger by a more equitable distribution of wealth,” according to Africa.

“Nearly four decades of trade and investment liberalization has weakened local agriculture and Filipino industry, limited job creation, repressed incomes, and worsened poverty. It’s about time to make a break from this,” Africa said.

As for the plan to shift into a federal form of government, most business leaders were amenable, as long as the government will thoroughly prepare for the process.

“The Philippine Chamber of Commerce and Industry (PCCI) last month invited former constitutional convention members headed by Dr. Jose V. Abueva and other Constitution experts to discuss the issue to gain insight regarding this serious issue. We have no objections to federalism of government but must be structured with objectivity and prudence,” said PCCI president George T. Barcelon.

“We’re hoping this will bring equitable sharing of revenues and with clear responsibility and accountability of the
states formed. It’s not an easy task as we already have local autonomy law and the BBL [Bangsamoro Basic Law] proposal. It must be able to bring about political stability and clear rule of engagements. As such, business confidence will definitely improve to attract more investments from both local and foreign,” Barcelon said.

“Ultimately, we hope that this will propel a well-balanced national growth, in particular for the micro, small and medium enterprises (MSMEs) to create more jobs and bolster inclusive growth,” he added.

 

Region-based federalism

 For Pe, “federalism is feasible and desirable for us” as such “will spur growth in the countryside and take away business concentration in Metro Manila which is already choking.”

“The best is a region-based federal system,” the MAP executive said.

“Moving to federalism is a major political change, with a number of intermediate steps and the creation of a policy framework that will achieve what President Duterte has in mind. Business will have to assess the effect of federalism carefully,” Schumacher, for his part, said.

Among political observers, Carlos agreed that “federalism is the way to go, as highly centralized systems even with the Local Government Code were a throwback to colonialism where the central government controls the sub-national
units.”

“Federalism may be feasible so long as we design it to respond to our specific culture, geography and resources,” she said.

For Biswas, “the proposals for greater federalism in the Philippines have the potential to improve regional political and economic stability, and therefore this is an important and potentially positive new initiative from the Duterte administration.”

But for Neri, “while the long-overdue easing of foreign ownership restrictions will clearly help boost FDI, we’re not too sure about the benefits of federalism.”

“Evidence on the effectiveness of decentralization and devolution both here and abroad is mixed. The United Kingdom is the most recent example of the cons and complexities of federalism,” Neri pointed out.

Bernardo said the shift to federalism “needs to be studied in greater depth to ascertain impact on fiscal self-reliance and sustainability of the regions, considering that likely only three or four regions can stand on their own without receiving large transfers from the national government.”

 

Complexity

 Also should be carefully considered is whether federalism “may lead to even greater unevenness in development as the central government powers are weakened in their redistributive role and providing basic services evenly (like education and health) and provision of strategic infrastructure,” Bernardo added.“

Also, federalism introduces greater unease of doing business with multiplicity and greater complexity in rules, and thus discourages investment to the Philippines as a whole at a time when we are already FDI cellar dwellers,” according to Bernardo.

Chikiamco said he was “agnostic at this stage” about federalism, citing some problems about such type of government.

“How will ‘states’ be delineated? Will we follow the same ‘region’ classification? However, Ilocos Sur and Ilocos Norte are different in many respects. Will they be able to live together in one ‘state’? The same with Negros Occidental and Negros Oriental,” Chikiamco noted.

“Former Senator [Sergio] Osmena pointed out that Region 7 encompasses Cebu, Siquijor and Bohol. If Cebu City is the capital of the ‘state,’ legislators coming from Siquijor and Bohol may have more difficulty traveling from their respective places to the state capital of Cebu City. In other words, the infrastructure must be present to allow for states to function properly,” Chikiamco added.

Also, since “most of the country’s GDP is concentrated in Metro Manila and Regions 3 and 4A,” Chikiamco asked: “How will tax revenues be divided and shared?”

“Federalism might exacerbate the problem of regional inequality,” he said.

‘Expand the provinces’

“In other countries, states were already existing when they decided to federalize. Here, we are going in the opposite direction—dividing a unitary state into states, which had not been functioning as state governments before. It might be better to expand the provinces and municipalities’ existing powers under the Local Government Code rather than experimenting with new and untested political forms,” according to Chikiamco.

“We can address some of the inequalities in political representation without resorting to a federalist system, say allowing senators to be elected by regions rather than nationwide,” he said.

Africa said IBON was “concerned about the possible centrifugal effect of fiscal resources going to local political dynasties and of greater discretion over local economic activity.”

“[Federalism] may just worsen divisions between regions and compromise the national-level development planning we need. Regional discrepancies have to be addressed but we’re not sure if greater regionalism is the solution to national underdevelopment,” Africa said.

For its part, The Economist Intelligence Unit (EIU) noted that among the reasons why Duterte won over the Filipino electorate was his pledge to amend the Constitution to devolve more power and funds to local governments through federalism.

“However, constitutional reforms are notoriously difficult to pass in the Philippines. Whether Duterte will make real progress on this front remains to be seen,” the EIU said in its recent report titled “Strongman rising: What a Rodrigo Duterte presidency will mean for the Philippines.”

 

 

 

 

 

 

 

 

Source: Philippine Daily Inquirer