The spectacular errors of economic cha-cha proponents

February 4, 2024

by Sonny Africa

Seven of the last eight presidents tried to change the Constitution. Two were successful but it took a Martial Law regime and a “revolutionary government” to produce the 1973 and 1987 Constitutions, respectively. Does Pres. Ferdinand Marcos Jr have similar political authority and sway today for his administration’s charter change (cha-cha) effort? The current DisUniteam saga is gripping but there isn’t the same kind of political tumult or show of political authoritativeness by the president yet.

All the efforts failed from the public easily seeing them as disguised schemes by the dominant political faction of the moment trying to, well, stay dominant beyond the moment. The political system is so elite-dominated that the electorate is given little to choose from. Yet people still cherish the pseudo-freedom to pick their leaders, even if the system is so rigged that elections stupendously fail to improve the lot of the majority.

Squid tactics

Which is why it has become cha-cha etiquette to always sugarcoat political changes with promises of a bright economic future once the charter’s economic provisions are fixed. This is for the people, politicians always say with a straight face.

The Senate’s Resolution of Both Houses (RBH) No. 6 spoke of “the demands of this increasingly globalized age”. In its verbose reply to express support, the leadership of the House of Representatives (HOR) basically said “[eliminating] the barriers that restrict potential growth [is] critical [to] facilitate the entry of foreign capital and direct investments.”

When Pres. Ferdinand Marcos Jr finally weighed in to confirm that the cha-cha effort is an administration priority, he led with “The 1987 constitution was not written for a globalized world” and that its economic provisions needed changing.

All these subscribe to the decades-old argument that the Philippine economy is restrictive, foreign ownership restrictions hinder foreign investment, and the lack of foreign investment hinders economic development. But this argument was wrong when it was first used in the 1990s, and is even more spectacularly wrong after everything that’s happened in the decades since.

Open doors

Let’s start with correcting the most basic factual error of most economic cha-cha proponents – the Philippine economy is actually already among the most open to foreign investment in the region. It isn’t the charter that needs updating but the grossly outdated proposition that the economy is closed to foreign capital.

A country’s openness is a function not just of its charter but also of prevailing laws and practice. After the 1987 Constitution was put in place, governments passed one liberalizing law after another in defiance of its nationalist and protectionist provisions. In effect, Congress is already doing what the proposed economic amendment of inserting “unless otherwise provided by law” wants to enable.

Laws have been passed to bypass the 40% Constitutional cap on foreign ownership. The earliest was the Mining Act of 1995 which allowed 100% foreign ownership of mining operations under cover of Financial or Technical Assistance Agreements (FTAA). The most recent are the amendment of the Public Services Act in 2022 to allow 100% foreign ownership of airports, railways, expressways, shipping and telecommunications, and a department circular similarly opening up renewable energy.

The cumulative effect of these and other laws on retail trade, MSMEs, banking and other sectors is that very few of the charter’s supposedly restrictive provisions are actually still restricting anything. (See Table) The only major restricted sectors left are electricity transmission and distribution, petroleum, water and wastewater pipelines, seaports, public utility vehicles, educational institutions, media and advertising. Natural resources are also nominally restricted.

As a result, Vietnam, Thailand, Indonesia, and Malaysia now have stricter foreign ownership restrictions in more sectors than the Philippines. They each still have caps ranging from around 20-80% in some or all of the vital areas of: telecommunications, power, mining, oil and gas, banking, insurance, airports, airlines, railways, construction, retail, tourism and health care.

There has been a deluge of foreign investment under the 1987 Constitution’s supposed restrictions, and even before recent liberalization. The US$2.8 billion in inward foreign direct investment (FDI) stock in 1987 grew 40 times to US$113 billion in 2022, according to the United Nations Conference on Trade and Development (UNCTAD). (See Chart) Measured as a share of GDP, it grew four-fold from 7.4% in 1987 to 28% in 2022.

The Philippines does have less FDI than in Singapore, Thailand, Indonesia or Vietnam but actually has more than Cambodia, Myanmar and Lao PDR combined. But why is the country still so underdeveloped?

Unmet expectations

The next correction will be jarring for those still captive to decades of free market propaganda – more foreign investment doesn’t necessarily mean more development.

Every foreign firm that comes in of course hires workers and increases economic activity. True believers seize on this to fallaciously claim that the economy as a whole is developing. The economy doesn’t work that way though and what holds for the part doesn’t hold for the whole.

One basic reason is simply that foreign manufacturers have the greatest interest in preventing Filipino firms from emerging. Their profits will be squeezed the more domestic competitors they have for scarce resources, productive labor, and markets.

The error of the government lies in its bending over backwards so much for foreign investors just to make them locate in the Philippines, in a race to the bottom with other countries in the region. This just makes foreign investors get away with making their profits without contributing anything to long-term domestic development.

For instance, Intel and Hanjin combined invested US$3.8 billion in the country and created some 36,000 jobs before packing up after 35 and 12 years, respectively. Shell and Chevron invested US$4.5 billion and sold Philippine natural gas to Filipinos for over 20 years. Yet there is conspicuously still no indigenous Filipino capacity in electronics, shipbuilding or natural gas industry – sectors in which the country remains import-dependent even after decades of FDI.

The ‘domestic’ manufacturing sector which is 100% open to foreign ownership is another case in point. The largest part of FDI has historically gone to manufacturing which accounts for over 36% of sectorally identifiable foreign investment. Yet the deindustrialization despite all this is stark – in 2023, the sector is down to its smallest share of the economy (17.9%) in 75 years, and to its smallest share of employment (7.3%) in the country’s history. Most of this isn’t even Filipino and some 60-70% of the sector is foreign-owned.

There’s also insight from comparing the Philippine experience with that of manufacturing superpower China and of South Korea and Taiwan, the last two breakout industrializers before the globalization era choked development. Whether measured in nominal terms or as share of GDP, the Philippines has more foreign investment today than any of those East Asian industrial powers did during their respective periods of economic take-off in the 1970s and 1980s.

Actually, not just more but so much more. The Philippines’ US$113 billion in inward FDI stock in 2022 is more than China (US$4.1 billion), South Korea (US$1.6 billion) and Taiwan (US$3 billion) had in the early 1980s. (See Table) This is equivalent to 28.3% of GDP for the Philippines in 2022 compared to so much less in China (0.7%), South Korea (1.7%) and Taiwan (5%) in the early 1980s. Actually, by the same measure, the Philippines (28.3%) still has more FDI stock relative to GDP today than China (18.2%), South Korea (15.9%) and Taiwan (17%).

We have much more foreign investment, but much less development – because our problem is not that we lack foreign investment, but that we lack a vision for national industrialization that is unfettered by obsolete free market globalization dogma.

So much foreign investment that comes in actually contributes so little to real national progress. When they leave for more profitable locations, as profit-seeking capital is wont to do, they leave nothing behind in terms of a stronger Filipino industrial base that substantially creates jobs, raises incomes and increases productivity.

Wishful thinking

Even the seemingly common-sensical assertion that restrictiveness dissuades investment dissolves when confronted with facts – lowering restrictions may not really even increase foreign investment.

Plotting the Organisation for Economic Co-operation and Development’s (OECD) FDI restrictiveness index against FDI inward inflows in 83 countries shows that foreign investment restrictions are actually weakly correlated with foreign investment flows.

Despite extremely wide variations in terms of assessed restrictiveness, FDI inflows were more or less evenly spread in the 1-5% of GDP range in 2019. (See Chart) The inverse relationship that should be there if supposed restrictiveness is so restricting just isn’t there. Even the twelve countries outside this range – which includes the always peculiarly unique case of Singapore that shouldn’t be compared with anything else – don’t show such a trend.

Economic cha-cha proponents like to give the impression that the world is “globalizing” (aka opening up) and that the Philippines has to keep up or be left behind. This was certainly the case in the 1980s and 1990s when the political ebbing of the Socialist bloc triggered undeserved neoliberal triumphalism.

But that was a generation ago when fax machines were still in vogue and, like so many things from that time, the notion is a relic from an ancient era. Even the World Bank which was among the cheerleaders of neoliberalism has expressed its fears about deglobalization today.

Saving skin

The advanced industrial powers will not retreat on their global production lines whose cold efficiency increases their profitability. However, they also saw the damage of having too much of their industrial base spread abroad especially amid ever-present and now growing contests for global geopolitical domination.

The United States (US) is at the forefront of strategic protectionism to advance its imperialist agenda – particularly against China whose systematic state intervention has always been at the core of its economic policy. This, while the European Union (EU) and Japan are also doing their part to usher in the new age of protectionism.

But it isn’t just them. In that giddy earlier era of ‘globalization,’ international investment agreements (IIA) were a popular way of liberalizing foreign investment regimes. In the 15 years since the global financial crisis of 2008 made the folly of globalization sink in, over 60 countries have terminated over 400 IIAs including 178 that were unilaterally denounced, according to UNCTAD. A true believer of IIAs, the Philippines on the other hand signed three new ones since 2008 and now has 41 in force.

Investment restrictions and regulations have also been on the rise. Among new state interventions monitored by UNCTAD, the share of restrictive policies increased from an average of less than 16% in the 2003-2007 period to over 42% in 2021, moderating slightly in 2022.

So many countries rolling back on liberalization and becoming more protectionist – including, particularly, very developed and industrial countries – points to how important asserting economic sovereignty is to attain real economic success. Philippine policymakers can also stop being so deferential to the World Trade Organization (WTO). The US blocking appointments to its Appellate Body has disabled its enforcement mechanisms and, in effect, has made WTO rules legally unenforceable.

Excuses excuses

Politicians and technocrats like to point to the charter’s economic provisions and blame these for the economy remaining so backward and the majority of Filipinos staying poor and vulnerable. As the saying goes, there are three more fingers pointing back.

The charter doesn’t need to be changed for the government to distribute land for free and to support farmers and fisherfolk so that they’re more productive. The charter doesn’t need to be changed to build more schools and hospitals and to hire more teachers and health workers. The charter doesn’t need to be changed to subsidize, finance and protect fledgling Filipino enterprises or to improve public transport and other utilities.

The charter doesn’t need to be changed to give family living wages, provide social protection, restrain profiteering, and do countless other things to immediately help tens of millions of Filipinos. If politicians and technocrats aren’t doing any of these now, they still won’t do it even if the charter is changed.

If anything, there’s a very strong chance that many of the nationalist, protectionist and social justice provisions in the current charter that potentially give the legal basis to do all these things aggressively will be taken out. The 36-year-old charter isn’t perfect but it recognized the need for active government intervention to transform the economy’s structures and make it more industrialized, equitable and sustainable.

On the other hand, how can we trust the motives of politicians who are so eager to change the charter that they’re buying signatures?