Disincentive

This is an article repost.

For many years now, we have been trying to amend the 1987 Constitution principally to remove the restrictive economic provisions that have fallen out of date and threaten to plunge our economy to the bottom of the economic ladder. Petty partisan interests have prevented urgent constitutional reforms from happening.

In the modern global economy, investments are highly mobile. They choose to flow into economies where there is greater economic freedom and away from economies that have high costs of doing business, volatile policy frameworks and inane nationality requirements.

Our economy is vulnerable on all three counts, explaining why investments have bypassed us, why our industrial base is contracting and why so many Filipinos are poor. The cost of doing business in the Philippines — counting in power costs, corruption, poor infrastructure and politicized unions — is patently uncompetitive. The policy environment is always uncertain and prone to our personality-centered politics. The 1987 Constitution, in the vaguest and most contestable terms, imposes nationality requirements on a wide swath of business activities.

According to a World Bank study, the Philippines has the second most stringent nationality requirements after Ethiopia. See where Ethiopia stands on the development ladder. See where we stand relative to comparable economies in the region.

Another study surveying investment activities among the Asean economies places the Philippines second from the bottom in terms of foreign direct investments. Only Cambodia fares worse than us.

In 2010, the Philippines received a total of $2 billion in foreign direct investments. Vietnam received $7.6 billion, Malaysia $7 billion and Thailand, for all its political problems, $6.4 billion. Indonesia, which only recently started modernizing its economic policies received $5.4 billion.

Singapore is way ahead of the game, having liberalized its investment policies much earlier than the rest of the region. The city-state competes with Hong Kong for top place in the list of the most economically free economies year after year. See what that did to Singapore’s per capita income, now among the highest in the world.

In the mid-nineties, I joined the delegation accompanying President Fidel Ramos on a state visit to Vietnam. I recall FVR asking me when Vietnam might overtake the Philippines in the race to development. My response to that question then is an embarrassment today. I said: that will never happen, the country had no banking system to speak of. I was wrong; FVR’s insightful question haunts me to this day as Vietnam emerges as a dragon economy.

Today, Vietnam attracts more than double the number of tourists we do. As we see from the numbers quoted above, Vietnam, a smaller and war-ravaged economy, attracts nearly four times as much foreign direct investment as we do. In the nineties, Vietnam has to import corporate lawyers from Manila to draw up business contracts. Today, they are attracting business away from us. They are simply more nimble, more flexible and more adaptive to the realities of a new global economy.

Year after year, hampered by the obsolete economic provisions in the Constitution, we lag farther behind our neighbors. Just a decade ago, the Philippine peso and the Thai baht were at parity. Today, the baht is 50 percent stronger than the peso relative to the dollar — despite all the political turbulence of the past few years.

Given the infirmities presented by the Constitution, and our lack of foresight to correct that early enough, we hoped that the Supreme Court might, by way of its rulings, create a little more elbow room to allow our economy to become more competitive. That has not happened.

By declaring perfected contracts void (although perhaps with some reason), the Court’s rulings undermined investor confidence in the sanctity of contracts in our economy. In the infamous Manila Hotel case, the Court expanded the judicial meaning of “national patrimony”, undermining investor confidence in our economy.

In its recent ruling in the Gamboa v. PLDT case, the Supreme Court continued that restrictive trend.

In that particular ruling, the Court stepped over what was heretofore an administrative issue well within the competence of the SEC. The Court went on to redefine the meaning of “capital” for purposes of meeting the Constitutional limit on foreign ownership of utilities.

The working definition of “capital” before the recent Court ruling fused both preferred and common shares in a corporation for purposes of computing the 40 percent foreign ownership limit. The recent ruling, the Court now says that only the common shares will be considered in calculating the nationality requirement prescribed by the Constitution.

That ruling sent a shock wave through the business community. It will require drastic re-ordering of investments. Very likely, foreign investors will be forced to sell down their shares and flee. Many of our largest corporations will suffer dislocation, disinvestment and great uncertainty.

One more disincentive has been added to investments flowing into our economy. The rules are complex as they are. The costs of doing business has not been diminished. The infrastructure gap shows no sign of being closed soon, what with all the dilly-dallying of the national leadership. Now the drastic judicial redefinition of the operative meaning of “capital” closes more doors to foreign direct investment.

Those still enamored with 19th century vintage economic nationalism might celebrate this ruling. However, those realistically fretting over our economic future feel distressed about this development.

Our economic freedom ranking will likely fall even more if this ruling is upheld. Our share of the global investment pie will shrink even more. Our effort to boost our growth as the only means to reduce poverty is jeopardized.

Might the Court give this ruling a serious rethink?

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By Alex Magno
Source: The Philippine Star, July 21, 2011
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