Limited FDI inflows show that the Philippines is uncompetitive

It’s crunch time. ASEAN integration is upon us. We have reasons to rejoice for the potentially large markets and higher investor interests that ASEAN economic integration offers. But the harsh reality is that the Philippines is the least attractive investment destination among the ASEAN-6 economies.

The Aquino administration, in its final year, and the next administration, has to move heaven and earth to drastically reform the Philippine economic landscape.

The World Bank defines Foreign Direct Investment (FDI) as “net inflows of investment to acquire a lasting management interest (10% or more of voting stock) in an enterprise operating in an economy other than that of the investor. It is the sum of equity capital, reinvestment of earnings, other long-term capital, and short-term capital as shown in the balance of payments.” Net FDI inflows are new investment less disinvestment.

In 2013, total FDIs as percentage of global output averaged 2.3% while FDIs in East Asia and the Pacific as percentage of their economic output averaged 3.6%. This much higher FDI-to-GDP ratio for Asia and the Pacific compared to the world average reflects the confidence of direct foreign investors on the region’s present and future growth.

Foreign direct investors have voted with their feet. They are attracted by the region’s high and sustained growth.

The Philippines belongs to this fast-growing region. It is part of the ASEAN region that will be integrated by the end of this year. Shouldn’t that be a cause for celebration? The answer should be yes and no.

Yes, the integration will bring about greater interest from direct foreign investors on ASEAN because of the much larger market and the region’s huge investment possibilities.

But no, since the Philippines suffers in comparison with its ASEAN-6 peers. It is the least attractive investment destination of foreign investors. FDIs would rather go to the other ASEAN-6 countries other than the Philippines in order to take advantage of the bigger market.

Past experiences have revealed the preferences of foreign investors. Among ASEAN-6 peers, Singapore is the top choice. In 2013, Singapore’s FDIs was a whopping 21.4% of its GDP.

But the newest member of the ASEAN-6 club, Vietnam, ranked second in terms of its ability to attract foreign direct investors. The Philippines, on the other hand, is stuck at the bottom, with FDIs as percentage of the island republic’s GDP at 1.3%. Foreign investors would rather invest in the other ASEAN-6 economies than in the Philippines. They must know something that the Philippine economic managers are not telling us.

Philippine authorities take pride in the triennial peak in the country’s economic performance, supported by the midterm and presidential elections. Why can’t the Philippine economy grow on a sustainable basis, even without the disruptive, consumption-based, election spending? Put differently, there has to be a more solid bases for sustained economic growth other than election spending every three years.

The moral of the story is clear: success in a competitive world requires hard work. We cannot leave it to chance. Yes, the Philippines is growing, but so are our competitors. And our competitors are many years, even decades, ahead of us. Yet, they don’t rely on national elections to boost their economies.

Let’s get real and fix our broken system. Let us fix our uncompetitive tax system. Part of Singapore’s success is its low corporate and personal income tax system. An ideal tax system is one that does not penalize corporate success and does not become a disincentive to hard work.

In the Philippines, the government takes away about one-third of the corporation’s net profit and one-third of personal income. The tax bases have been virtually untouched for the last 17 years.

Let’s get real and fix our crumbling public infrastructure. The country’s airports and seaports are the most decrepit in this part of the world. The frequent breakdowns of the MRT system are signs of an inept and uncaring administration.

The power system is not only extremely expensive, it is also unreliable. The regulatory framework ought to be revisited. The appropriate role of the government in noncompetitive industries has to be crafted with an eye both on the long-term profitability of the regulated firms and the welfare of the consuming public.

The general consuming public suffers when government regulators end up in the pockets of the regulated.

The restrictive economic provisions in the Philippine Constitution have become anachronistic in today’s fast-changing world. There are limits to foreign equity in the exploration, development and use of natural resources, public utilities, build-operate-transfer projects, operation of deep-sea commercial vessels, and others.

The Philippine Constitution disallows foreigners from owning land and equity in mass media and the practice of professions.

With ASEAN economic integration, these restrictive provisions in the Constitution magnify the Philippines’ unattractiveness as an investment destination.

We need a government that is effective and globally competitive. We need to streamline rules and procedures, making the task of doing business with the government swift, predictable and open. Most procedures should be rules-based rather than discretionary or at the whim and caprices of corrupt and indecisive bureaucrats and government decision-makers.

Realistically, all these needed reforms cannot be accomplished during the waning days of the current administration. This puts the burden on the next President, who should be forward-looking and more committed, adept and willing to undertake the needed reforms.