Crossroads (Toward Philippine economic and social progress)
Philippine Star, 25 January 2012


Seven foreign chambers of commerce have joined to offer their views on how the country can accelerate economic growth. Left behind by high growth neighbors that have benefitted from the remarkable inflows of foreign direct investment, the joint chambers offer their advice on how to accelerate the country’s growth rate.

The analysis is found in the study, Arangkada Philippines 2010: A Business Perspective, published last year at about this time. This week they will stage a review of progress on their recommendations. They have the nation’s public and private policy-makers to help them in this review, with President Aquino himself setting the keynote.

Growing twice as fast. Using a local term for acceleration of motion, the Arangkada document contains a diagnosis of ills and proposes specific actions to overcome them.

In a marathon, the runners who arrive at the finish line first do so at half the time it takes the mid-pack participants. To be in this position, winners devote enormous time to training (education and strategy), forego excess fat (waste), and execute their actions with the least amount of effort (efficiency).

Countries with higher growth rates raise the living standards of their citizens much faster. The poor escape from poverty sooner. The citizenry achieve their goals quicker to graduate toward higher goals. The best evidence is found in our East Asian neighbors.

Diagnosis: growing too slow. The diagnosis of the Arangkada document is not anything new. High domestic investment is needed, including foreign investment flows, to achieve remarkable growth. But to get this going right, the country has to rise in competitiveness.

The Arangkada document assimilated the ideas of nine major focus groups of private sector movers and foreign experts and businessmen to examine what ails the country.

What they found out was not surprising. Many economists and development experts have said as much before. What is striking about this document however is that it is the private sector advising the government. The advice comes from private action groups rather than from think tanks and gurus whose work often fall on deaf ears.

 Seven big winners: sectors to push. The Arangkada document is especially valuable in identifying seven winners that it recommends should be the push of the government. Some of these are already leading growth sectors of the economy. But their present scale has the potential to expand more.

The seven sectors are: (1) agribusiness enterprises; (2) business processing outsourcing (BPOs); (3) creative industries (design, arts, etc.); (4) infrastructure (airports, power, roads and rail; seaports, telecommunications, water); (5) manufacturing and logistics; (6) mining; and (7) tourism (medical, travel, retirement).

Too polite. The foreign chambers of investors are stakeholders in the country’s progress. Promoting their own business prospects is good for them as investors. But the benefits that they bring to the nation could be immense.

A number of these are on the improvement of the general business climate. They deal with the reduction of corruption, cutting red tape, streamlining or dealing with strategic issues of investment regulations, and of course promoting the seven sectors they emphasize in which they provide enormous insight.

As guests in the country, the chambers politely try to avoid sensitive political issues. Most specifically, they avoid the topic of the restrictive economic provisions of the Constitution. I think they are held on tenterhooks by this issue. But as guests, they cannot show excessive interest.

The heart of the issue. The critical linchpin needed to improve domestic and international competitiveness is found in the correction of the restrictive economic provisions that are imbedded in the nation’s Constitution. These are along the constitutional initiatives that Speaker Feliciano Belmonte and Senate President Juan Ponce Enrile have proposed sometime last year.

As I have mentioned before, these provisions represent the “original sin” of our economic development policies. By amending these provisions so that they are sufficiently liberalized, the economy’s internal costs can get reduced through broader investments to develop critical sectors thereby expanding their supply.

Decades of dominance of these restrictive provisions have entrenched domestic business groups to dominate the critical areas of the economy. These are the sectors that provide basic services from the national level to the local communities. It is no wonder it is difficult to get reforms undertaken except under exceptional economic statesmanship.

National economy: one part world class, the main bulk is uncompetitive. The Philippine economy is made up of two parts. One part is world class but the main bulk of it is uncompetitive.

Let’s first take the bulk of the nation’s economy. Four-fifths of it is burdened by high costs. In general, public utility services are sold at high unit costs. Public infrastructures are inadequate, overstressed and underinvested. The business regulatory framework is impeded by corruption, rent-seeking, and involves multiple steps that jack up production costs. All these make operating enterprises weighed by high costs.

One-fifths of the economy is world class. Here, firms are generally profitable, workers have high productivity and raw material inputs are available at world prices. As a result, the enterprises operating in them are lean, mean, and highly competitive. These enterprises are located in special economic zones.

But this world class segment is also burdened by the inadequacies of the larger component of the economy. Infrastructure services and other non-traded goods add to the burdens of these world class components and chip away partly on their performance.

Reforms at the margin. Let’s listen carefully to leading local business groups. Makati Business Club and the dominant domestic business chambers – their officers and significant members – talk mainly about improving regulations and governance.

They politely beg the question of the restrictive provisions of the constitution. They will downplay this issue, emphasizing other factors. I suspect that the reticence of the President to act on this issue is precisely the influence of elite groups who supported his election.

The restrictive constitutional issues constitute a divisive question among entrenched domestic business groups. The progressives among them are stifled by those who want most of the monopolistic rights preserved for the few. There is competition among them and although they are moneyed and they compete among themselves, there are not enough resources to bring the economy sufficiently forward.

But that position will not unleash a great deal of new foreign direct investments essential for arangkada to work in supplementation of domestic resources! Certain amendments to the strictures of capital participation in critical industries must be allowed. The prospects for large inflows of foreign investments in PPPs (public-private-partnerships) as in other direct foreign investments are likely to be low until the constitutional reform issue is settled.

President Aquino is a guest speaker. But if the past is prologue, the presidential keynote will deal with such issues as credit rating upgrades, governance, improved survey ratings, and so on. He will not speak about the need to revise the restrictive economic provisions of the Constitution. He will say that other policies are sufficient.

If that is the case, then another year or more will be wasted in advancing economic policy on foreign investments encouragement in this country. And our neighbors will press their advantage over us! (I hope I am wrong.)