Protectionism has failed the Filipino people. So why not end it?

An unidentified homeless woman sleeps on a bench in Manila. Over 12 million Filipinos live in extreme poverty in the Philippines, according to 2015 estimates. Source: Shutterstock

By Kent Primor | 31st August 2018 | @KentPrimor

A GENUINE attempt to boost economic growth in the Philippines through the creation of federated regions may lead to disappointment if old methods are adopted with the expectation of new outcomes.

President Rodrigo Duterte’s consultative committee (ConCom) tasked with reviewing the 1987 Constitution submitted its final report on July 9.

ConCom made significant changes to the structures and powers of government and local governance. However, its report seems to ignore Duterte’s liberal economic view that easing foreign ownership restrictions should be stripped out in the new Constitution.

Cory Aquino’s 1987 Constitution adopted as state policy, “a self-reliant and independent national economy effectively controlled by Filipinos”.

Under Article 12, the Constitution includes discriminatory provisions in the formation of enterprises, preferences for Filipinos in granting of rights and privileges, regulation of foreign investments, preferential use of Philippine labour, and a 60/40 rule in public utilities – allowing foreign investors to own at most 40 per cent of any business in the country.

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What did this mean for the Philippines? The 1987 Constitution bred strings of statutory laws and regulations that were not only anti-competitive but anti-development.

Manila, the Philippines’ capital, is a city of contrasts. Image shows a visual depiction of the country’s rich and poor divide. Source: Shutterstock

Examples of this can be seen in the earlier versions of the build-operate-transfer law, which failed to institutionalise public-private-partnerships in government infrastructure programs; the cabotage law, which failed to address increasing transportation and logistics costs; the government procurement law, which expressed preference for Filipino contractors; and the foreign investment negative list, which limited foreign investors in certain industries.

A frequent frustration for foreign investors is the absence of an intrinsic definition of public utilities.

Anyone who thinks a foreign company is providing substantial services to the ‘public’ can challenge the investor to prove they are not violating the 60/40 rule. However, what constitutes the ‘public’ is a contested domain in policy literature.

Without clarity and consistency, why would any investor risk losing their money?

On foreign direct investment (FDI), the 1987 Constitution made the country fall behind its ASEAN peers.

While Thailand and Indonesia have each managed to generate a more than six-fold increase in FDI over a span of 30 years, the Philippines gained only dismal increments over a similar period of time. In fact, even Vietnam has overtaken the country despite being a latecomer in the region’s economic powerhouse.

In 2010, the World Bank flagged the Philippines as the most restrictive country in mining, agriculture and forestry, media, and transportation in ASEAN-6. Global competitive rankings usually place the Philippines as next-to-last in this group, behind Vietnam.

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On domestic fronts, these restrictive economic provisions have resulted in high poverty incidence in areas far from the National Capital Region, such as in Caraga, Eastern Samar, Maguindanao, Sultan Kudarat and Lanao del Sur. The majority of these areas are conflict-stricken provinces, which suggest a direct correlation between poverty and security.

Most strikingly, where a quarter of the population is poor, traditional elites amass wealth estimated to be a fourth of the country’s gross domestic product. Hence, the gap between rich and poor Filipinos is widening.

By preventing foreign competitors, the same elites continue to take advantage of ‘constitutional preference’, and the country’s economic growth continues to exclude the poor.

The extreme poor in the Philippines number to more than 12 million, which is nearly half the total population of poor. Source: Shutterstock

In a bid to offset the constitutional restrictions, previous administrations have tried to find unique ways of attracting foreign investors.

In 2000, Joseph Estrada dismantled the 40-year state protectionism of retail and provided incentives to multinational firms for establishing regional hubs in the Philippines.

In 2001, Gloria Arroyo signed the Electric Power Industry Reform Act, which deregulated the energy sector into four subsectors, unequivocally defining power generation as not public utility, hence escaping the 60/40 limitation.

Benigno Aquino III managed to pass at least 29 business and economic reform laws from 2010-16. Around the same time, the 16th Congress sponsored Resolution of Both Houses 01, introducing minor yet powerful constitutional amendments to provide flexibility to lawmakers as to which sectors needed regulation.

Tired of piecemeal structural economic reforms spanning decades, Duterte’s approach is to overhaul the 1987 Constitution.

Unfortunately, ConCom’s present Federal Constitution is substantially similar when it comes to discriminatory investment restrictions. It entrenches the same killer provisions that have held the country’s economic potential hostage, widened poverty gaps, and further enriched local elites.

As proposed, the Federal Republic aspires to “develop an independent and competitive national economy, actually and effectively controlled by Filipinos”. The remnants of discriminatory policies are broadened in Article 10 by creating an unwarranted impression that foreign firms harm domestic enterprises.

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The new draft Constitution also retains the 60/40 rule across a number of areas, including land leasing, utilisation of natural resources, granting of franchises for public utilities, and regulation of educational institutions.

Moreover, it maintains zero foreign equity participation in media, and only allows foreign professionals to practice in the Philippines if their home countries reciprocate for Filipinos.

ConCom’s proposal largely ignores how Filipinos have suffered from the unintended consequences of the current Constitution. The proposal runs contrary to the tenets of economic integration enshrined in the formation of the Asean Economic Community, which the Philippines is bound to implement as a state signatory.

In addition, the shift towards federalism under Duterte is premised on creating greater local governance for maximum equitable economic outcomes. Addressing problems using the same tools, yet expecting different results, simply does not work.

The establishment of federal governments won’t eliminate poverty. Getting rid of restrictive economic provisions in the Constitution might.

This article was republished from Policy Forum, Asia and the Pacific’s platform for public policy analysis and opinion. It was published in partnership with The Monsoon Project, a student-run academic blog based at Crawford School of Public Policy.