Crossroads (Toward Philippine economic and social progress)
Philippine Star, 23 January 2013


There is now more unanimity that the Philippine route toward sustained growth could be happening in our future. Achieving a high growth rate – predicted to be at six percent though some optimists project a seven percent growth over last year’s economic output level – would help signal this important new direction.

How can this expectation be translated into meaningful reality? I have two answers. First, it is important that the current framework for growth continues to be supported. Second, that what we aim for should focus on “quality” of growth rather than be resigned to consumption-led expansion.

Growth performance likely. Surprises could happen in the world economy and domestic economic factors could be affected as a result. However, there is confidence that the following influences would hold up:

• Macroeconomic fundamentals are strong and resilient.

• Governance (daang matuwid) program of the government is pursued.

• Government priorities in the social programs, especially education, public health, and anti-poverty are actively supported.

The government has kept a tight lid on macroeconomic discipline, especially on government spending, and this has paid off well in gaining economic respect. A very favorable balance of payments position, strengthened by OFW remittances and export earnings, has made this possible.

These macro fundamentals have happened in the midst of international monetary policy favoring low interest rates because weak American recovery and the downcast Euro zone economy have made our country’s example look particularly good to outside observers.

Quality growth: investment and not simply consumption growth. A significant indicator of quality growth is that it is investment-led. Quality growth implies – to my mind – an expansion in output that raises the economy’s productive capacity for the future.

Investment growth is not enough though. New investments should represent economically efficient choices arrived at after weighing international sustainability and competitive considerations. In other words, the investments move toward making the country competitive in the international scene rather than merely support new investments.

Such quality economic growth means that the nation is more capable to provide sustained new employment to support new production and to raise it to higher productivity. New investments raise industrial and commercial capacity, including the modernizing of public utilities and infrastructure. Thus, the goal should be one of expanding investments and not simply raising consumption expenditure.

This is investment-led growth. We need to accumulate public and private capital structures to modernize and expand our productive capacity and support infrastructure. Achieving a high level of new demand through consumption only lifts our welfare only temporarily. But an investment-led growth increases the ability to reduce unemployment and raise the economy’s productive efficiency in the future.

Assuring robust economic growth. Reforms to complement the growth process are sorely needed contrary to the impression that all would be induced by an improvement in governance. Foremost among these reforms is the amendment of the restrictive provisions to foreign direct investments that are imbedded in the Philippine Constitution. I have written much on this issue. It needs repeating here.

(1) Restrictive economic provisions. The restrictive provisions in the Constitution were originally introduced in 1935 but they were further expanded in the Constitution of 1987. These provisions make it difficult for the country to attract FDIs and is a psychological barrier to a lot of future investors looking at us.

Initially intended to deal mainly with land, natural resource exploitation and public utilities, those provisions had influenced many aspects of economic policy making. It has deflected a good share of FDIs that have moved to many other countries in Southeast Asia. Their impact on our education as a nation has been to make us insular in outlook on economic policy. Many aspects of investment incentives in the Board of Investment (BOI) have followed the implied restrictions behind the constitutional provisions.

Just recently, in connection with the issue of “60-40” provisions of equity proportions in favor of nationals in companies engaged in public utilities (the PLDT case in particular), the Supreme Court ruled to prescribe the meaning of equity proportion to arise from the definition of common stock, and not on all forms of capital.

This decision has cast a pall of doubt on the role of foreign capital in many industries and on investments already operating within the country. The Supreme Court has given the Securities and Exchange Commission the opportunity to deal with the implications of pursuing the “final decision” on that particular case.

Past decisions of this court of law could be used as precedent for similar cases. Thus, the implications of this Supreme Court on the future attraction of FDIs are serious. Only an amendment of the Constitutional provisions could settle this legal issue.

The leaderships of both the Senate of the Philippines and the House of Representatives have spoken of the need to support the constitutional amendment. The missing part in this endorsement for change is direct support coming from President Aquino.

Much of the accomplishments of the present government in attracting a high level of FDIs could be threatened by the future implications of implementing the decision of the Supreme Court. Without an amendment of these provisions, the country will not be able to maximize and realize the benefits of FDIs.

(2) Watch out on the labor front. A great danger is to have the labor policies go out of line just when the country is about to reap the benefits of being the main supplier of labor for new FDI relocations in ASEAN among firms already migrating from China, Japan, South Korea and Taiwan. This had happened before in the 1980s and it could happen again.

The Philippine labor market advantage in ASEAN despite its relatively high wages is the relatively educated and skilled worker, with ability to communicate in English. But if we make any careless decisions on wage and other aspects of labor policies which at this point are already too advanced for the level of our problems with unemployment and underemployment, that advantage could be lost to the other countries.

In fact, I have suggested special incentives to attract FDIs in special labor economic zones to encourage greater employment creation in the country. Unemployment is a major cause of poverty in the country and should be matched by appropriate labor policies until we have eradicated it.