Economic freedom

Once again we find our government spokesmen quarreling with an international rating of our economic performance. We are one of very few countries that bother to dispute expert comparative ratings rather than take these as signals for where our reform agenda ought to go.

The annual Index of Economic Freedom has just been released. News reports on the Index carried a commentary prepared by The Heritage Foundation. Immediately, the Philippines’ ranking is being disputed by government spokesmen.

The Index ranks nearly all the economies of the world according to several measures of economic freedom, including the extent of government intervention in the economy, the reliability of market policies, the quality of fiscal management, protection of intellectual property rights and restrictions on trade. The greater governments intervene in the operation of market forces, the lower the ranking of the economy.

The Index "grades" economies pretty much like the grading system we have at the UP. A grade of 5 indicates total lack of economic freedom while a grade of 1 indicates perfect economic freedom.

A large volume of current economic data goes into the preparation of the Index. The data is collected by dozens of collaborating institutions and hundreds of economists who constitute the Economic Freedom Network.

This Index was used as the main instrument for that excellent end-of-the-millennium assessment of the state of the world done by The Economist at the end of 1999.

The Foundation for Economic Freedom, which I head, is one of the collaborating institutions of the Economic Freedom Network. I have attended several meetings of the Network the past few years and participated in the methodological debates meant to improve the Index and ensure the best comparability of economic information.

In the last Index, the Philippines actually improved its rating to 3.23 from the previous year’s rating of 3.30. However, the Philippines’ ranking declined 8 places to 98th among 161 economies compared.

This means that while we are making some progress in improving our economic freedom, other economies are making progress faster than we are. In which case, our problem in not one of direction but of pace.

The commentary regarding our standing in the Index provided by The Heritage Foundation is stinging. But it is hard to dispute.

The Heritage commentary relies on the assessment of the US Department of Commerce and points to "high levels of corruption; failure to reform the judicial system; ineffective protection of intellectual property rights; the slow pace of energy sector reform, price liberalization and privatization; delays in passing key economic and fiscal reform legislation; and political uncertainties" as factors that constrain our ability to attract foreign direct investment.

That assessment is not news. We have identified these problems long before. It is the urgency with which we have moved to address these concerns that is the matter.

Comparative numbers are striking. Direct foreign investments in our economy last year is estimated at $1 billion. Average foreign investments in the smaller economies of Southeast Asia is at $4 billion. Foreign direct investments to the country is pitiful compared to China’s $60 billion or so intake.

Last year, we are proud to say, the Philippines attracted 2 million tourists. That seems impressive until we compare it with Thailand’s 16 million annual tourist arrivals.

Our inability to attract investments is due to a complex galaxy of factors.

We have a confused Constitution that preempts economic policy-making, conserved outmoded economic orthodoxies and is riddled with incoherent prescriptions. Our legal system, which is important for ensuring property rights, the sanctity of contracts and the facility of transaction is made permeable by an interventionist, mediocre and corrupt judicial system.

Our bureaucracy tends to be trapped in an old, gatekeeper understanding of its role. It has yet to adjust its practices to the demands of a quicksilver global economy where opportunities pop up and then just as quickly disappear.

Just the other day, I played a round of golf with a really hardworking high school chum. He has worked his way to become a major processor and distributor of fisheries products. Through the length of the game and long after it, he recounted all sorts of horrors of doing business in the country.

For instance, he wanted to bring in fresh fisheries products from China, process these by flavoring, de-boning and cutting them into fillets, and then sell them back to the Chinese market vacuum-packed. That would have created numerous jobs for Filipinos. But the Bureau of Fisheries, against the grain of our WTO commitments and our free trade arrangement with China, would not allow him to do this.

There is a serious eel shortage in Japan, he says. But for over two years, he could not cut through the bureaucracy, convince enough fisheries entrepreneurs nor find the technical expertise to culture eel in the country and capture a lucrative market. In the meantime, China captured that market.

It is opportunities like these that come and pass us because our bureaucratic culture is regulatory rather than facilitative, because old economic orthodoxies continue to haunt our thinking and because our messy politics fails to bring clarity to our national goals.

We know what our problems are. Until we act on them with a little more urgency, comparative ratings will continue to call attention to the things we neglect to do.

So, instead of wasting official energy whining about how we are ranked in such painstakingly prepared comparative studies as the Index of Economic Freedom, we might be better off using that energy to push our reforms forward.

All the most recent Index tells us is that other economies are moving much faster than we are in a more intensely competitive world.