Attracting foreign direct investments: 2019 vs 1970s

Philippine economic managers recently went to Osaka to explain the country’s foreign direct investment program to attract and gain the attention of potential investors from Japan.

FDIs (foreign direct investments) could add further dynamism to the economy’s capacity for growth. It is worthwhile to compare the climate of foreign direct investment attraction today and those that took place in the 1970s.

Today is a hopeful time for attracting more FDIs into the economy. The 1970s was also a hopeful period when foreign investments were being promoted. During both, public policies were being designed to expand the level of FDI flows into the country.

Today, recent years of sustained economic growth has strengthened confidence in the economy’s future. A further element of strength that growth would continue is the government’s push for infrastructure investments. Moreover, the reforms to raise the level of tax to help finance the infrastructure investments has further reinforced the economy’s prospects for further growth.

In the 1970s, especially the early years of martial law after 1973, the same optimism was in place concerning the economy’s future. Heightened public investments were also being matched by efforts to undertake a wide range of reforms.

Difference in investment climates. Compared to those in the 1970s , the conditions are quite different today.

Today, the potentials for future growth appear substantially encouraging. The economy has been growing at a high level over a sustained period of time. Essentially, that means a crisis-free period of economic expansion, with the macroeconomic situation in steady balance.

In contrast, during the 1970s, the energy crisis darkened the horizon, for it introduced persistent fiscal and balance of payments shocks to the economy. Each rise in suddenly elevated oil prices strengthened the forces of uncertainty that disheveled macroeconomic relationships.

Moreover, the policy debate on industrial development was heavily dominated by import substitution as the main industrial strategy. Import substitution as a major element of industrial policy was not necessarily misdirected. Through the legacy of import and exchange controls and the inward-looking economic policies of previous years, established industries were fully invested in high-cost and uncompetitive activities. The opposition to foreign investment reform then was strongest in the area of industrial and trade policies.

The bastions of economic opposition to foreign direct investments were fully in place. Virulent forms of exclusive nationalism were being served on the altar of reserving for Filipino enterprise the development of the domestic market.

This was the result of an unholy alliance among politicians and businesses and by academic intelligentsia. In general, the public advocacy groups in the media and the rebels in the streets and in the mountains were united in their opposition to reforms to broaden investment opportunities.

Moreover, the country faced the greatest of all challenges: the energy crisis of that period hampered the country’s ability to escape from balance of payments pressures. Domestic price instability produced fiscal pressures on the government’s budget.

Favorable foreign direct investment climate. Today, many of the nationalistic objections to foreign direct investments have essentially been smashed.

Years of economic crises, booms and crashes, and the outstanding economic progress of East Asian and Southeast Asian neighbors have become convincing arguments for changing the outlook.

In general, foreign direct investments are now considered welcome and essential in pushing further growth. This attitude permeates within the national economy. It is present strongly even within the business community.

Yet, the Constitutional economic restrictions on foreign capital are still very much written in a strict legal framework. There is almost a consensual agreement within the political leadership to clarify as much as possible to enable a more liberal definition of what is meant by these restrictions.

Hence, the remedies being sought are clarificatory legislation that help to define and broaden the scope for foreign direct investments.

In his Osaka presentation, NEDA Secretary Ernesto Pernia emphasized the steady line of reforms being pursued by the government. Three key reforms designed to encourage foreign direct investments are in late stages of adoption by the Congress.

They deal with amendments designed to the existing laws dealing directly with (1) the retail trade; (2) foreign investments; and (3) public utilities.

The amendments to the retail trade law and to the foreign investment law seek to ease the equity and capitalization requirements of foreign investors. These would improve the attraction of small and medium-sized enterprises to foreign investors into the country. The practice of professions is also being proposed to be excluded from the coverage of the Foreign Investment Act.

The amendment to the public utilities act is designed to confine the definition of public utilities. This would remove ambiguities on the meaning of public utilities. The amendment limits the definition of public utilities to industries that generate produce and distribute electricity, and the provision of waterworks and sewerage systems. In doing so, the fields that would be open to the participation of foreign direct investments are broadened rather than confined.

The government expects the passage of these reforms which are likely to expand the participation of foreign direct investments in the economy.

The 1970s foreign investment climate was very complicated and restrictive. I was at the helm of NEDA during the 1970s (and ended that tenure by mid-1981). It was most desirable to open up the economy toward greater import competition, but the nature of the economic crises that visited the country limited such opening.

Moreover, the Constitutional restrictions were strictly complemented by a highly import-substitution mentality concerning the development of the domestic market.

The climate for outward-looking reforms was difficult to pursue. Vested interests were entrenched in economic power. They had leeway to alter the dialogue within the leadership and in the bureaucracy. The alliances within the political system made impasse and inaction on true reforms permeate.

The work-around solution was to device means of improving the milieu for intelligent discussion of issues. One leeway was to encourage research to help to produce evidence-based studies that would require broad public dissemination.

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