Crossroads (Toward Philippine economic and social progress)
Philippine Star, 12 November 2014


In last week’s column, I posed the question, Are we ready for the Asean  Economic Community (AEC)? The concept of “readiness” implies the ability to take maximum advantage of the opportunities offered by the institution.

There will be gains, but are we maximizing them? Being part of the AEC will bring in some gains for us. But the important issue is how we can harness the greatest amount of gains from the opportunities that are being opened to us within Asean.

The Asean free trade expands the potentials of more trade among the member countries. It also enhances the competition among the traders and producers within the region, effectively bringing benefits to all its members.

But such benefits will not be uniform among them. Those countries with the freest and most flexible policy mechanisms will gain the most, while those burdened with domestic restrictions will be slowed down by those restrictions since they could prevent or cause investments from happening.

We must therefore face the question: How do we maximize the fulfilment of opportunities offered to us by the by the deepening trade and investments within Asean further?

It is a must to be especially mindful of this. In the past, we squandered many opportunities for trade and investment because we did not install the right policies. Let me illustrate.

Under the trade agreement with the US after independence (the so-called Laurel-Langley agreement), the national effort was too focused in securing advantages and support for our old industries like sugar and coconut.

Little effort was exerted to secure access to the US market for products of manufacturing. In fact, Philippine industrialization ignored the trade opportunities but instead built new industries under heavy protectionist barriers.

In contrast, countries without any preferential trade agreement during those times adopted policies built around their comparative advantage in trade and encouraged industries that exploited the market for consumer goods in the huge and high income US market. That was the story of how South Korea, Taiwan, Hong Kong and Singapore which took off early in their industrial developments and made them prosperous, self-sustaining growing economies.

Another example: the quotas given to Philippines exports of garments and textiles under the General System of Preferences under the UNCTAD (United Nations Conference on Trade and Development) before the creation of the WTO (World Trade Organization). Our quotas were under-utilized and quite poorly by our garment industries. At the same time, the countries just mentioned were exporting large quantities of these exports without the benefit of quotas.

These types of disconnect in opportunities available against the policies in effect continue to exist and reduce our ability to perform economically. Through the years we have moved our policies toward more openness as a result of our poor performance in the past. But our efforts at reforms have not been sufficient.

The main story of Philippine industrial development. This, in short, is the Philippine development story writ large over many decades. But in the public mind, (and especially because in satisfying the need for a comprehensible explanation, the general public is given alternative, simple, and seemingly more apt reasons for) we instead get the refrain that corruption, inadequate infrastructure, poor leadership, etc. are the sources of our failures and difficulties.

In my view, the presence of many types of restrictions in our economic policies (originating from the restrictive economic provisions in our Constitution) has given rise to the multifarious explanations for our problems in development. The root cause is often the hidden cause.

The myriad complications arising from the conduct of economic affairs in the midst of policy restrictions have induced the events that we see and therefore decry: rent-seeking, corruption, and poor investment results in public infrastructure and in other productive activities.

We were shackled by constitutional provisions that few suspected to have been that crippling at the time. In fact, even today, we are being made to believe by those against these measures, that these measures are only of second order.

PEZA firms and reforms of BOI policies. I further note the need for immediate reforms and how the problem goes deep to the structural problems of Philippine industrialization. Our government is again saying we must energize industry.

Total industrial output as a percent of GDP has retreated in value despite the country’s forward growth in recent decades. The premature decline of relative industrial output is due to BOI (Board of Investments) policies failing to strengthen the progress of industry over time. This led to the collapse of quite a few of industries promoted under the protectionist period of the past, causing many firms to close shop and give way to competition.

On the other hand, firms promoted under PEZA (Philippine Export Processing Authority) incentives have put the country in the world map of industry. PEZA firms have succeeded where BOI firms have remained essentially small and confined to serving the domestic market.

To do well, PEZA firms are allowed to import their raw materials from other countries. Hardly little internal trade exists between PEZA firms and BOI firms. As a result, PEZA firms contribute little value added, with their main raw materials imported from other countries.

While we will need to increase our trade with our Asean neighbors as a consequence of the free trade principle, our industries also need to create a deeper integration within the economy.

Our PEZA industries which export to the world, including other Asean countries, are essentially import dependent enterprises for their raw materials. There is little integration of their requirements with domestic supplies and even less integration of their manufacturing operations with domestic industries.

The obvious solution to this is to reform BOI policies to allow greater participation of foreign capital in the industries designed to serve the domestic market. This will create pressure on competition for domestic firms. It will further deepen the operations of PEZA firms with the local economy and raise the domestic value added of their exports.

To reform BOI policies much more effectively requires relaxation of many provisions of industrial policies regarding the economic restrictions to foreign capital as provided in the Constitution. The efforts we take to amend the Constitutional provisions can accelerate the participation of FDIs in domestic industry.