The silver bullet for our weakened economy

By his own admission, Finance Secretary Sonny Dominguez concedes that the next administration must deal with a huge foreign debt burden, widening income inequality, high inflation and climate risks.

Indeed, the next administration will inherit a fundamentally weaker economy. Sure, the pandemic exacerbated the situation but GDP growth rates, foreign direct investments and manufacturing have all started to decelerate following its peak in 2017. Along with the deceleration came a widening budget deficit which already stood at 3.55 percent before the pandemic struck. The deficit was at 7.5 percent by the end of 2020. Alarming numbers.

How do we manage our ballooning debt without cutting on spending and curtailing economic growth? How do we balance the budget? How do we create jobs for the 6.6 million unemployed Filipinos? How do we improve income inequality? How do we placate 18.3 million Filipinos out of poverty?

Rarely do we have a silver bullet for complex economic problems, but in this case, there is one. That silver bullet is foreign direct investments (FDIs).

FDIs provide capital accumulation which helps reduce the budget deficit. A reduced budget deficit gives government the elbow room to spend on infrastructure and social services. FDIs provide high paying jobs with security of tenure where those in subsistence agriculture can migrate to. FDIs increase economic activity and exports revenues, which ease budgetary pressures and allow government to better cope with its foreign debt burden. FDIs bring in new technologies and best manufacturing practices from abroad. FDIs provide competition to local firms, which encourages them to level up.

Unfortunately, the Philippines is rated the most restrictive in the whole of ASEAN as far as accepting foreign capital is concerned. No surprise, our FDI to GDP ratio is the second lowest among the region’s ten economies. From our peak intake of $10.256 billion in 2017, FDIs declined to $9.9 billion in 2018, $8.7 billion in 2019 and $6.4 billion in 2020. Our FDI intake is only half of that of Vietnam and a third of Indonesia’s.

The main impediments to the flow of FDIs in the country are the economic provisions of the 1987 Constitution. The Constitution was written to protect industries for Filipinos, but it backfired. It has instead starved us of capital, jobs, export revenues and taxes. It created oligopolies made up of conglomerates owned by just a handful of families. These conglomerates control every aspect of the economy – from infrastructure to public utilities to retail. The few families that own these conglomerates earn scandalous profits even though they are inefficient.

Simply put, the 1987 Constitution is the reason why we have become the economic laggard in the region and why our income inequality is the worst among ASEAN’s major economies.

The economic provisions of the Constitution must be amended to open up the economy and restore Philippine competitiveness in attracting FDIs. I cannot overstate its importance. No more tentativeness such as adding “unless otherwise provided by the law” in the Charter’s economic provisions. The full amendment of the economic provisions is what will put us on equal footing with Vietnam and Indonesia.

What provisions, in particular, need amending?

First and foremost is the ill conceived 60-40 equity rule. This applies to all companies, including those that enter into government contracts, those that engage in public utilities, education and regular corporations.

The 60-40 rule also applies to mass media (which is basic if we are to compete in knowledge-based industries). There is also a 70-30 rule on the advertising industry.

Other restrictions that need to be lifted are those that prohibit foreign nationals to work and be represented in the board of directors. The prohibition of foreigners engaging in professional practice must also be relaxed.

Again, I emphasize, our economic woes today can be solved if only we had a strong influx of FDIs. That said, we should support the presidential candidate whose agenda includes making the country more conducive for doing business, both for Filipinos and foreigners. In other words, the candidate that supports reform and good governance.

In the meantime, the passage of three laws can minimize the damage of the flawed Constitution.

The first is the Public Services Act. This law limits the constitutional restriction of foreign ownership of public utilities to just transmission and distribution of electricity and the distribution of water. The second is the Foreign Investment Act. This law allows easier adjustment to the foreign investment negative list (industries where foreigners are precluded) and liberalizes professional practice (eg. engineers, scientists, etc.) of foreigners in the country. The third is the Retail Trade Liberalization Act. This law lowers the minimum paid up capital of foreign retailers from P125 million to just P25 million and the removal of net worth and other frivolous requirements.

There are other stumbling blocks that must be eliminated if we are to be truly competitive in attracting FDIs.

Honoring the sanctity of contracts is top of the list. The Duterte government’s practice of bullying investors and cancelling contracts so it can award the same to its cronies must stop. We have seen this in the case of Panay Electric Company, the privatization of NAIA, the Benguet Electric Cooperative and currently, in the case of the Cebu Mactan International Airport.

In finance, there is a prevailing sentiment of uncertainty as to whether investors can get their withholding tax and VAT refunds. The inconsistent and unpredictable treatment of investors by the tax authorities is a turn off, not to mention the bureaucratic red tape and corruption that goes with it. We must have a better organized tax management system.

Finally, there are the usual stumbling blocks such as (un)ease in doing business, lack of infrastructure, poor technical skills of the workforce, corruption and fragmented supply chains to contend with. Complex administrative procedures for corporations must be addressed too.

Most importantly, discretionary aspects of administrative rules, specially in granting government licenses, permits and franchises, must be outlawed. Politicians must not interfere in granting government licenses, awards and concessions.

So you see, although there is one silver bullet to advance the economy, harnessing it requires a whole web of parallel reforms. The next president must enter office with the intention of effecting constitutional amendments and enact parallel reforms within his/her first year in office. Only then can we dodge the bullet of a debt crunch, budget cuts, a peso depreciation and worsening income inequality.

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Email: [email protected]. Follow him on Facebook @Andrew J. Masigan and Twitter @aj_masigan