Philippine President Rodrigo Duterte has announced a suspension on rice tariffs in an effort to fight artificially inflated rice prices that have harmed some of the country’s poorest families. The President’s move should be widely applauded as it helps to resolve the problem of local rice hoarding oligarchs from exploiting the people at a time of global inflationary trends.
The issue that the country ought to discuss now is making free trade in rice and beyond the rule rather than the exception for the Philippine economy. Some of ASEAN’s most profound economic success stories have developed as a result of an embrace of free trade and economic openness. While Singapore continues to be an example of such a success story, even Vietnam which legally speaking is still a command economy, saw a domestic economic boom when beginning in the 1990s Hanoi opened up to freer trade and welcomed foreign direct investment on favourable terms. The result is that Vietnam’s economy has flourished while living standards have skyrocketed compared to just 25 years ago.
While protectionist measures are supposed to safeguard local businesses and local jobs against regional or global competition, in actual fact, protectionist measures serve only to foster a class of national business oligarchs who are able to exploit the poorest consumers who are necessarily held captive by draconian tariff regimes. This not only pushes up the price of goods but it retards economic development that is otherwise made possible through free trade. For an example, if a nation is able to buy cheap agricultural goods from abroad, such a nation can therefore invest in dynamic sectors of the economy and help to diversify one’s overall economic output.
Furthermore, at a time when the Peso’s value is taking a hit, The Philippines could take advantage of this by producing more exports. However, as free trade is typically a two-way street, protectionist measures at home actually prohibit Philippine companies from doing more business abroad. Just as sure as Japan in the middle of the 20th century and China in the late 20th century used weak currencies to boost exports, if The Philippines were to embrace free trade in full, there is no reason why The Philippines couldn’t gradually grow into a major regional and ultimately a global exporter.
Turning back to the contemporary rice crisis, it is essential to remember that protectionism has led to serious incidents of famine throughout modern history. 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.
Today 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.
In line with opening up to freer trade, The Philippines must also abolish the so-called 60/40 rule in the present 1987 Constitution which prohibits foreign direct investment (FDI) by disallowing foreigners from owning more than 40% of the Philippines based businesses they invested in.
In an age where the economic superpower of 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.
For a longterm solution to the economic woes of The Philippines which stem from both the letter and spirit of the 1987 Constitution, reforms to foster free trade and attract the easy, red-tape free inflow of FDI are utterly essential for the future of The Philippines.