Economic cha-cha is no vaccine for recovery or development

January 13, 2021

by IBON Foundation

IBON Foundation statement for the House Committee on Constitutional Amendments on the Proposed Amendments to the 1987 Constitution

IBON Foundation opposes the proposed amendments to the economic provisions of the 1987 Constitution. Economic charter change will have zero efficacy for recovery, while having huge adverse side effects.

IBON’s position is to retain the economic provisions as they stand and not to open up the 1987 Constitution for any revisions or amendments. We have five major points – all together seeking to break the prevalent dogmatism and put foreign investment in its proper historical and development context.

First, if the objective is to help the economy recover from the COVID-19 shock then a meaningful fiscal stimulus is better and has more immediate effect. The leadership of the House of Representatives (HOR) has predictably justified the proposed charter change as helping the economy recover from the pandemic.

The amendments are supposedly targeted for ratification alongside the May 2022 national elections. This is however much too late for a pandemic-related measure. The economic damage from not having a real stimulus package today only means bigger problems for the economy in the years to come.

The economic growth in 2021 is akin to a dead cat bounce. We will rebound from the harsh lockdowns and protracted quarantines last year – but the economy will still be on a downtrend that started even before the pandemic. The Committee will recall that economic growth had already been slowing for three consecutive years – the 6.9% gross domestic product (GDP) growth in 2016 fell to 6.7% in 2017, 6.2% in 2018, and then 5.9% in 2019. Average annual employment growth of 1.2% in 2017-2019 was also the lowest in the post-Marcos era.

The COVID-19 shock only made this situation worse and the need for a real fiscal stimulus to boost aggregate demand even more urgent. Yet the Php4.5 trillion national government budget for 2021 is only 9.9% larger than the 2020 budget – or an increase below the historical annual average increase of 11.1% since 1987. It is also even smaller than previous budget increases of the Duterte administration in 2017 (23.6% increase) and 2020 (13.6%).

Addressing the lack of fiscal stimulus to help the economy recover is more urgent than charter change. A large stimulus package closer in magnitude to the projected Php1.74 trillion contraction in GDP in 2020 will immediately spur growth, raise employment, and improve the welfare of poor households compared to the distant and uncertain gains of merely speculated foreign investment years from now.

These gains are in any case grossly exaggerated and stem from a misunderstanding of the role and contribution of foreign investment to development. These are the subject of our other points.

The second point is that vastly growing foreign investment into the Philippines hasn’t contributed to national economic progress as promised. Despite the supposedly restrictive provisions of the 1987 Constitution, foreign direct investment (FDI) has grown substantially since the 1980s both in absolute amounts and as a share of GDP.

Annual foreign investment inflows are over thirty times larger than in the early 1980s – from an annual average of US$187 million (equivalent 0.5% of GDP) in 1980-1984 to US$6.3 billion (2% of GDP) in 2015-2019. The inward stock of FDI increased seventy-fold from US$1.3 billion in 1980 to US$88 billion in 2019, and seven-fold as a percentage of GDP from 3.6% to 24.1% over that same period.

However, the share of industry and agriculture in the Philippine economy has fallen continuously over that period of globalization and rising FDI. In the late 1990s, the economy became a service economy more than a producing economy with the share of services greater than of industry and agriculture combined. Deployments of overseas Filipino workers spiked in the 2000s after this which cemented our over-dependence on overseas work and remittances.

The largest share of foreign investment has historically gone to manufacturing. Yet domestic manufacturing is a smaller share of the economy now than in the 1970s and is down to its level in the 1950s. Most manufacturing in the Philippines is not even Filipino anymore with FDI accounting for as much as 70% of total approved manufacturing investments in the last 20 years.

This erosion of our economy is not an aberration. On a global scale, there has not been any breakout industrialization by any underdeveloped country in the last four decades of globalization. The last major examples were the newly industrialized countries (NICs) of South Korea and Taiwan in the 1970s and 1980s. None of the so-called NICs since then have reached developed country status.

Will more foreign investment necessarily make things better? This is unlikely without a rethinking of our foreign investment-obsessed development strategy.

Because, third, foreign investment has to be strictly regulated to contribute to national development. The potential benefits from foreign investment are well-known and real. They are however neither intrinsic nor spontaneous and will only materialize in the right policy context. It’s also a myth that the developed countries developed because they liberalized – they liberalized because they first developed.

This is the clear historical lesson from an honest view of the experience of South Korea and Taiwan until the 1980s. They were protectionist- and development state-driven economies that regulated foreign investment. Likewise with the United States (US) and Europe in the 19th and early 20th century, and Japan until at least the 1950s. And, of course, with Russia and China from their respective periods of Socialist revolution in 1917 and 1949 stretching until today.

The policy question is not so much how to attract foreign investment per se but rather what needs to be done for foreign capital to contribute to real long-term national development. FDI will operate according to its narrow rational self-interest unless regulated and directed to serve the country’s development needs. Foreign investors seek to profit from the Philippines – not develop it – and they will consistently use their accumulated capital and other capabilities to their individual corporate advantage.

Recall for instance our experience with Intel, Hanjin and the Malampaya gas investments. In their time, they all invested billions of dollars, booked billions of dollars in exports, and employed thousands of Filipinos. Yet because of our overly liberal approach there is little beyond these short-term gains. After decades of operation the Philippines has yet to develop any semblance of indigenous electronics, shipbuilding, or natural gas industries indicating strategic national development.

This is aside from how our scarce mineral, forestry and fishery resources will be exploited with scant benefits for the local economy and in many cases even lost forever. Foreign investor interest in land will tend to drive land prices up as well as dislocate communities. Monopoly pricing of utilities will worsen.

Fourth, foreign equity restrictions can be an important tool for development. They are not binding constraints. Indeed, after decades of liberalization, they are among the last remaining regulatory tools to build national industrialization policy on. It would have been better to have a bigger basket of policy measures at hand but we are forced to make do with what we have left.

They are effective measures for exercising control over foreign capital, learning production advantages, and capturing economic surpluses. Constitutional compulsion is a powerful point of policy leverage so the economic provisions are an advantage that we can use to the country’s benefit. The Constitutional right and authority to regulate foreign investment is a powerful policy instrument that we can use more.

We will actually lose policy flexibility by removing the restrictions particularly if foreign capital increases their presence in the country. More than ever, policymaking will become bounded by what is acceptable to foreign investors in the country. We will become even less able to pursue historically effective measures to build national industry – e.g. ownership limits or requiring joint ventures in strategic industries, local content, technology transfer, performance requirements, and others.

Fifth, current global conditions of growing protectionism, investment controls, and eroding multilateralism make relaxing foreign equity restrictions even more inappropriate. The most powerful capitalist economies in the world have been at the forefront of thousands of protectionist measures since the onset of the protracted global crisis in 2008.

The trade war between the US and China grabs headlines but protectionism is also on the rise across Europe, Russia, India and elsewhere. Global FDI flows have also been falling since 2016 and especially in 2020 upon COVID-19. The next few years will be uncertain depending on the direction of the pandemic, the impact of policies to deal with the economic shock, as well as geopolitical tensions.

The United Nations Conference on Trade and Development (UNCTAD) has also been reporting the declining trend in investment liberalization and, on the other hand, growing investment restrictions since the mid-2000s. A slight reversal in 2019 has not been enough to change the overall trend. Even the World Economic Forum (WEF) points out increasing restrictiveness of FDI rules and regulations since 2008.

More and more countries are also terminating international investment agreements seen as disadvantaging national development. This includes countries as near as Indonesia, or further such as India, Ecuador, Venezuela and Bolivia, to as far away as South Africa.

Taking all these into consideration, IBON’s position is categorically to retain the economic provisions as they stand. The economy’s development lies in using the protections in the Constitution to gain from foreign investment, not in taking away the protections and giving self-interested foreign investment free rein over the domestic economy.

Foreign capital can contribute to development but we are of the view that responsible government intervention and regulation is needed to create meaningful linkages and long-term benefits for the economy. ###