Charter Change Proponents Are Misinformed*

February 14, 2014

by superadmin

IBON Features | COMMENTARY | By Sonny Africa | There is nothing to indicate that rising foreign investment and greater globalization policies have created a strong domestic economy that creates jobs and expands domestic capital on a sustainable basis

IBON Features–The House of Representatives has started hearings on House Joint Resolution No. 1 to amend certain economic provisions of the 1987 Constitution. This latest effort innovatively uses the route of normal legislation by inserting the phrase “unless otherwise provided by law” in the Charter’s pertinent sections on natural resources, land ownership, strategic enterprises, public utilities, education, mass media and advertising. Foreign chambers of commerce, local big business groups partnering with foreign investors, and some academics and public intellectuals have already expressed support.

Their underlying argument is straightforward: The Philippine economy is backward because of insufficient capital. Foreign investors are deterred from bringing more capital into the country because of restrictive Constitutional provisions on foreign ownership. Removing these will increase foreign investment, drive economic activity, create jobs, and bring about long-awaited growth and development. Resulting competitive pressures would even spur efficiency and make Filipino producers more dynamic.

The argument is however wrong and misinformed on at least three major points.

First, more foreign investment does not necessarily lead to development. The Philippines is suffering exclusionary growth, growing unemployment and poverty, and economic backwardness even after three decades of rising foreign investment. Successive administrations have given liberal privileges and generous incentives since at least the 1980s.

Despite lamentations that the country is a regional laggard, foreign direct investment (FDI) has increased by every possible measure. Annual FDI inflows increased fifteen-fold and the cumulative stock twenty-fold between 1981 and 2013. Inflows have tripled as a percentage of gross domestic product (GDP) and doubled as a percentage of gross fixed capital formation.

Yet the absolute number of unemployed Filipinos has more than doubled since the 1980s and the unemployment rate – at around 10-11% for well over a decade now (correcting for government underestimation since 2005) – is at its highest sustained level in the country’s history. There are also historic numbers of poor Filipinos and poverty incidence is virtually unchanged since at least 1997 (abstracting from changes in poverty methodologies which have lowered official estimates).

Nearly half of all foreign investment has gone to manufacturing yet the manufacturing sector’s share in the GDP and total employment was as small as it was in the 1950s, or over half a century ago. Gross fixed capital formation has declined from being equivalent to one-fourth of GDP in the early 1980s to less than a fifth today. The economy is still disproportionately dependent on foreign capital which accounted for nearly half of total approved investments since the 2000s.

In short, there is nothing to indicate that rising FDI and greater globalization policies have created a strong domestic economy that creates jobs and expands domestic capital on a sustainable basis. The Philippine economy has not developed despite rising foreign investment because domestic economic policy has been biased for foreign investors at the expense of long-run national development.

Which raises the second point: foreign investment is not pro-development by nature. It closely guards its technologies, opposes the emergence of domestic competitors, employs on terms mainly beneficial to it, and is relentlessly out to make as much profits as possible. Foreign investors do not seek to develop the Philippines but rather to profit from its markets, labor power, and natural resources. This motivation is only natural which is why it needs to be considered in economic policy-making rather than ignored or, worse, pandered to.

Contributions to domestic development will not emerge spontaneously and the government has to intervene for development gains to materialize. This includes regulating the entry, establishment and operations of foreign capital through equity and ownership restrictions, joint ventures, local content requirements, urging domestic reinvestment, compulsory technology transfer, and other performance requirements. Foreign corporations and their domestic partners will complain but these are vital policy tools to create meaningful linkages and benefits for the domestic economy.

Textbook economics argues for unregulated and unrestricted foreign capital. The long historical experience of countries as diverse as the advanced capitalist countries, so-called newly-industrialized countries, and even the erstwhile socialist giants is however a weightier argument.

The examples of the United States (US), Japan, Germany, South Korea, Taiwan, China, Russia and indeed of every country that has attained any meaningful level of industrial or agricultural progress is illustrative. They all first built themselves up in their early stages of development through decades of trade protection, investment regulation and domestic support. These prior foundations were essential for them to make any gains from eventual liberalization.

In contrast there are economies like that of the Philippines which followed textbook advice and opened up prematurely. This resulted in mere pockets of seeming modernity amid greater economic backwardness and compromised prospects for development.

Many countries still regulate foreign investment including those in Asia which host far more foreign capital than the Philippines. Vietnam, Thailand, Malaysia, Indonesia and China for instance still have economic sectors that are even more closed than in the Philippines. These countries also use their bureaucracies, regulations, policies and processes in various ways to direct the operations of foreign capital. Foreigners also cannot own land in Indonesia, Vietnam and China.

Third, the global trend is not increasing globalization but greater investment regulation and trade protection. There is a stubborn myth that globalization and market openness are relentless. While this may have seemed truest in the 1980s and 1990s it is much less so today especially after the intensification of the global crisis in late 2008.

The United Nations Conference on Trade and Development’s (UNCTAD) most recent World Investment Report (WIR) for instance noted that global regulatory changes are less and less towards liberalization/promotion and more and more towards regulations/restrictions. The Centre for Economic Policy Research (CEPR) similarly observes rising protectionism. Its 12th Global Trade Alert (GTA) Report on Protectionism monitored thousands of protectionist measures implemented since November 2008 especially by the US, European Union (EU), Germany, Russia, China, India, Indonesia and Vietnam. The Philippines can do no less and should take careful heed of a trend which can only intensify as the world economic crisis drags on.

The president was recently reported as wondering out loud why the country’s development performance has been so poor despite supposed economic gains. The answer is easily found in the Philippines’ negative experience with ‘free market’ policies and other countries’ positive experience with responsible government regulation, protection and support. The 1987 Constitution is not perfect but it already provides the legal basis for better socioeconomic development policy. The proposed amendments will only make things worse. What will be more productive, for instance, is a code of conduct on transnational corporations (TNCs) ensuring development benefits for the country. IBON Features

* This article draws from the position paper submitted by IBON to the House of Representatives Committee on Constitutional Amendments on February 19, 2014.