A crisis caused by corruption and exacerbated by protectionism
The Philippines has long exercised protectionist policies in respect of agricultural imports including rice. Rice is not only the staple ingredient of Philippine cuisine but much more crucially it serves as the primary daily sustenance of millions of the country’s poorest citizens. At present, the Philippines is in the midst of a rice shortage whose initial cause is rooted in a culture of corruption among the domestic oligarchs who control the Philippine rice trade. During his recent State of The Nation Address, President Rodrigo Duterte warned that if the rice barons do not amend their ways voluntarily, he would take action against them.
With emergency buffer stocks of rice stored by the National Food Authority (NFA) running low, it is now abundantly clear that the longstanding protectionist policies of The Philippines are hitting the poor incredibly hard. Even when one accounts for the Minimum Access Volume Country Specific Quota (MAV-CSQ) scheme which allows for a limited amount of imported white rice from trading partners, the fact that these imports are subject to a tariff (import tax) of 35% means that even when imports are allowed they are still taxed in such a way that what could and should be a source of relief for the poor is actually cost prohibitive because of severe protectionist measures that are being passed off as “import friendly”.
While President Duterte and House Speaker Gloria Macapagal-Arroyo have proposed decreasing restrictions on rice imports as a means to alleviate the current crisis, both have come under immense pressure from the domestic rice lobby to refrain from doing so. That being said, with Duterte’s administration remaining committed to “using the power of the government” against rice oligarchs who hoard supplies in order to create heightened demand and consequently overcharge Filipinos for the important foodstuff, a clear and irreversible solution is needed.
Nationalise and sell to any investor – including foreign investors
The only appropriate sentence for corrupt rice oligarchs is to have their industries nationalised by the government and then sold to a responsible bidder with a proven track record of efficiency and ethical business practices. Crucially, in order to get Philippine consumers the best deal, these industries once temporarily nationalised should be offered not just to domestic bidders but to foreign ones. Of course this would require much needed revisions of the 60-40 rule on Foreign Direct Investment which according to the 1987 Constitution prohibits a foreigner from owning more than a 40% stake in any Philippine business.
If such necessary amendments were made, it could transform the Philippine rice industry from one dominated by a small cartel that is currently free from scrutiny through the forces of global markets and allow for the best possible business arrangements to be made where the best foreign investors could inject their own investment into the Philippine rice industry in order for supplies to become more bountiful and consequently cheaper.
End tariffs – end quotas
Even forgetting the inherent flaws in protectionism, a temporary lifting of both quotas and tariffs on rice imports could be of vital importance in the short and medium terms. The poorest of the population run the very real risk of suffering from serious malnutrition unless sizeable supplies of rice are imported as rapidly as possible.
In its current state, the Philippine rice industry is simply not up to par, not because of some inherent national flaw but because of corrupt business practices which have been shielded from exposure, while being simultaneously resistant to reform due to decades of failed protectionist policies.
A history of deadly protectionism
Protectionism leading to serious incidents of famine is a historical trend that has been well documented. This was in fact the case when in the mid-19th century Britain’s protectionist Corn Laws exacerbated the infamous Irish famine. An equal and opposite situation happened in the Soviet Union when western businesses refused to accept gold from Moscow as a means of repaying sovereign debt and instead demanded that the USSR export grain, oil and timber as the only acceptable sources of repayment. This led to goods that could have been used domestically to be shipped out of the country resulting in the Soviet famine of 1932-1933.
oday in the Philippines, inflation has resulted from a combination of external factors including a strong US Dollar driving down the currencies of multiple growing and developing economies, while an increase in the global oil price due mainly to questions of political instability in the Middle East has also put pressure on consumers. Adding to this though are domestic factors including overly high tariffs on food imports and the hoarding of foodstuffs including and especially rice by oligarchs looking to extract unreasonably high prices from a population left with no alternative.
It is because of this last point in particular that tariff relief is so crucial in order to elevate the present crisis. Proponents of protectionism often argue that erecting tariff walls will help domestic industries to become more economically viable and that in so doing, employment rates with increase, thus stimulating the overall economy. In reality though, high tariffs often lead to the consecration of domestic monopolies among corrupt oligarchs that look to extract the highest prices possible from consumers who are held captive to the whims of a few local oligarchs due to a lack of competition from foreign imports.
The killer constitution
By allowing for the freer inflow of both goods and foreign direct investment (FDI), The Philippines can help to end the tyranny of callous domestic oligarchs and allow Filipinos to enjoy the prosperity which has been afforded to many of the country’s ASEAN partners. One of the root problems behind the current inflation difficulties in The Philippines is the overall lack of foreign capital injections which can help to relieve consumers and kick-start new sustainable businesses in which more and more people could partake.
The primary problem at hand is derived from clauses in the 1987 Constitution of The Philippines which prohibit non-Filipinos from owning more than 40% in a company or property in The Philippines. The so-called 60-40 rule restricting foreign direct investment (FDI) which was intended as a protectionist measure to prevent too much foreign speculation in the domestic market has resulted in the country lagging behind many of its fellow ASEAN partners including Singapore, Malaysia and Vietnam.
Singapore in particular was an early pioneer in courting copious amounts of foreign investment which helped the country’s founder Lee Kuan Yew to transform a backward swampland into one of the leading economies and most safe and peaceful societies in the modern world. China’s opening up of its economy which began in 1978 under the reforms of Deng Xiaoping is currently being celebrated throughout China as 2018 marks the 40th anniversary of a reformist drive that helped China to reduce poverty rates from a staggering 88% in the early 1980s to just under 2% today while the country looks to eliminate poverty completely in under two years.
As China looks to open up its markets further to both direct capital investment and trade from both developing and developing economies, Beijing’s leaders have proved that confidence in one’s domestic strengths and optimism in a more inter-connected future go hand in hand as an increasingly open China is set to shortly become the world’s overall leading economy – overtaking the neo-protectionist United States.
While Duterte’s reforms have encouraged both individual investment from throughout the world while attracting further investment from China, South Korea and Japan, if The Philippines is to truly become economically self-sufficient, it must unleash the creative genius of both local entrepreneurs and foreign investors and utilise this to maximum effect just as Lee Kuan Yew did in Singapore and as the current Malaysian Premier Mahathir Mohammad began doing in the 1980s during his first history making period in power. Ironically, the importance of trashing the 60-40 rule was even once picked up by the stridently anti-Duterte publication Rappler which in 2012, prior to the arrival of ‘Duterte Derangement Syndrome‘ actually ran a piece sympathetic to reforming the 60-40 clause of the 1987 Constitution that Liberal publications today rally around as if it were The Bible. In reality the only thing the 60-40 rule has done is to make the domestic economy overly reliant on a small and corrupt class of business oligarchs who would be instantly swept away is serious foreign investors were allowed to do in The Philippines what they were able to do in Singapore.
Logic dictates that a foreign investor looking to inject significant amounts of cash into a growing economy is not going to want anything less than a 50% stake in his or her investment. In reality, the more serious the investor, the more likely such a person is to want a share that vastly exceeds 50%. And yet by prohibiting those looking to inject FDI into the Philippine economy from having control over their own investment, the 1987 Constitution is automatically frightening away fresh investments into the economy and thus prohibiting a 1970s style Singaporean economic revolution or a 1980s style Malaysian economic revolution from occurring in The Philippines.
When the economic conditions are suitable, investors will come to nations in the midst of civil conflict, nations run by actual dictators and nations with severe sectarian problems. If any Filipino actually believes that the democratically elected, reform minded and highly popular Duterte is frightening any foreign investors except those interested in the black market rather than clean money, they are clearly deluding themselves.
The 60-40 FDI rule is the only thing prohibiting The Philippines from transforming itself into a place where meaningful foreign investment is able to change the economic reality of the nation and in so doing transform the material condition of the people. There is a clear reason why Singapore, China, Malaysia and Vietnam continue to move forward as The Philippine economy while growing, nevertheless remains in need of a fresh start. This fresh start that people today and future generations require can only come from casting out the obsolete 1987 Constitution and creating a new reality that says plainly and clearly that The Philippines is open to virtually unlimited amounts of FDI.
Not only are artificial restrictions on FDI holding back the medium and small business community in their desire to break the hold of a small gangster like band of oligarchs over the national economy, but tariffs on vital products further feed the power of these oligarchs to engage in tyrannical business practices against ordinary Filipinos.
The current system which is directly related to the letter and spirit of the 1987 Constitution is broken. A clear alternative is opening up the economy just as Singapore and Malaysia did and as China is doing at a more rapid rate than at any time in its history. Protectionists argue that their old fashioned policies help ordinary people but in reality, they only serve to feed a corrupt system where there is no opportunity for entrepreneurs to advance and fewer options for the most vulnerable consumers of basic goods. What is needed is a root and branch re-imagining of the entire structure of the Philippine economy. This can only be accomplished by a total revision of the current constitution in favour of free trade, an open door to FDI and a further push towards more Duterte style tax reforms that put small and medium sized business in charge of their own destinies while forcing corrupt oligarchs to either pay their fair share of taxation or face major consequences.
The cycle of protectionism as enshrined in The Philippines has precipitated the retardation of the Philippine economy when contrasted with many of its more successful ASEAN partners. Likewise, it has caused the national embarrassment of a country with great potential wealth to ask for charity from abroad when a free trading policy could allow The Philippines to help itself with the win-win cooperation of multiple international partners. Finally, the current rice crisis shows not only that protectionism has allowed domestic corruption to flourish but if drastic measures are not taken soon, it could lead to the poor going hungry in a nation that has ever potential to be one of the most prosperous in Asia as it once was in the middle of the 20th century.