The Philippines Could be Promoting Foreign Direct Investment in Shanghai if Not For The 1987 Constitution

The Philippines eagerly participates in historic import conference in Shanghai 

Among the scores of nations participating at the first China International Import Expo in Shanghai is The Philippines. While The Philippines is a net importer of industrial goods, as the country braces for much needed constitutional reforms as part of the flagship federalist policies of President Rodrigo Duterte, Philippine representatives are looking to promote Philippine made goods at the historic expo. Prior to the first day of exhibitions, Mario C. Tani, the Commercial Vice Consul of The Philippine Consulate General in Shanghai delivered a special message to both potential Chinese customers of Philippine goods and services, as well as visitors in Shanghai from the wider world. Tani stated:

“The Philippine Pavilion is going to be a mix of modern and traditional design. It will showcase the best that The Philippines has to offer in terms of goods and services as well as the deepening relationship and the long and historical friendship between the Filipinos and the Chinese.

China is the number one trading partner of the Philippines now and our exports to China, although they have been increasing at a fast rate, we see that the exports this year have increased 18% versus last year – but it’s still not enough to close the trade imbalance we have with China. I believe the China International Import Expo is really the best tool we have this year in helping us to close the deficit.

We look forward to our very good and positive output from the China International Import Expo this November”.

The key to increasing Philippine exports not just to China but to the rest of the wider world lies in producing goods that are more internationally desirable and doing so at a price that is affordable by contemporary international standards. In order to do this, The Philippines must modernise its financial mechanisms and industrial infrastructure. Implicit in making such measures work is studying the economic success stories of Asian exporting powerhouses including post reform China, pre-reunification Hong Kong, South Korea, and the financial hub of Singapore.

The Philippines and FDI

The key to success in the majority of these Asian economic “tigers” was an openness to foreign direct investment (FDI) during initial stages of economic modernisation. In The Philippines, President Duterte is well aware of the importance of FDI which is why he recently signed executive order 64 in order to implement modernisation to current FDI restrictions. That not withstanding, the 1987 Constitution’s 60/40 rule still prohibits more than 40% foreign investor ownership of most major ventures and projects in The Philippines. Yet within the confines of the anti-FDI Constitution, Duterte has still managed to open up the country to more FDI than any of his predecessors ever had the courage or foresight to do.

According to executive order number 64, the following sectors will now allow for a 100% share of FDI:

— Internet businesses, excluded from mass media;

–Teaching at higher education levels provided the subject being taught is not a professional subject (i.e., included in a government board or bar examination);

–Training centres that are engaged in short-term high-level skills development that do not form part of the formal education system;

–Adjustment companies, lending companies, financing companies and investment houses; and

–Most wellness centres

Furthermore, while previous legislation limited FDI in the construction of locally funded public works as well as the repairs of public works to 20% and 25% respectively, according to the new executive order, construction and repairs of locally funded public works will now allow for a top level of 40% FDI in line with existing Constitutional restrictions.

From ‘Build, Build, Build’ to Invest, Invest, Invest

Chinese President Xi Jinping is weeks away from an historic visit to The Philippines which will take place after the APEC summit in Papua New Guinea. The visit will encapsulate the blossoming of what Xi called a “golden era in relations” between the two nations and one that has been characterised by Philippine President Rodrigo Duterte in the following way:

“I am into business. I am not going into war. We can postpone that war 100 years from now. In the meantime, I need the resources for my country to make the people comfortable and provide education for the children and food on the table.

It’s one-stem and China and the Philippines will bloom, and you and I are in the middle of the flower”

While Duterte’s rapprochement with China has already made a mark on Philippine history, his model of joint cooperation with China has now been adopted by ASEAN (the Association of South East Asian Nations) as the model for progress in future dialogue with Beijing over matters relating to territorial rights in the South China Sea.

For The Philippines itself, China looks to invest in up to eighteen separate infrastructure projects that will help to expand President Duterte’s ‘Build, Build, Build!’ strategy to modernise the nation in order to boost trade, create jobs and catch up with ASEAN partners whose domestic infrastructure is far ahead of The Philippines due to decades of political neglect prior to Duterte’s 2016 election.

Philippine Budget Secretary Benjamin Diokno has spoken optimistically about the deals that are currently being “ironed out” prior to Xi’s visit. Among the substantial projects in The Philippines to be financed by Beijing include: “the New Centennial Water Source-Kaliwa Dam Project, the 581-km. Philippine National Railways (PNR) South Long Haul Project, the PNR South Commuter project from Manila to Los Baños, Laguna, and the Binondo-Intramuros and Estrella-Pantaleon Bridges Construction Projects”, according to an official statement from PTV.

Diokno also stated that when Xi visits there is a high likelihood that the Chinese President will offer further aid to redevelopment in The Philippines including for the city of Marawi in Mindanao which continues its recovery process after a sustained ambush from Daesh (ISIS) aligned terrorists.

This comes as both China and Japan look to be engaged in competition for the development of modern rail systems in The Philippines. According to reports, China will clinch the deal to invest in the construction of the $3.21-billion Philippine National Railways (PNR) South Long Haul Line while Japan will underwrite the construction of a much needed subway rail system for Metro Manila.

Duterte’s win-win for The Philippines 

President Duterte’s decision to inaugurate a new era of positive relations with the Chinese superpower has already paid dividends in terms of consecrating an important partnership that will help to ensure sustainable economic development in The Philippines as well as laying the framework for stronger pan-Asian security cooperation over serious matters including the narcotics trade, piracy and terrorism. Beyond this, while difficult to ascertain from simply walking near the locations of future megaprojects, Chinese investment in The Philippines will have a transformative effect on future generations in terms of living standards, quality of social life and job opportunities.

A frequent criticism about any megaproject is that the short term benefits are not forthcoming. Such a myopic analysis however negates the reality that even as long term projects are being constructed, the local economy benefits from growth in industries which naturally arise in order to provide for the presence of a  new large scale workforce. Thus, even before the final ribbons are cut on the new projects, the economy will benefit from not only cash injections that allow the projects to get off the ground, but will also see the medium term creation of new industries that flourish symbiotically with the megaprojects in question.

Furthermore, by balancing relations between China, Russia, the United States, Korea, Japan, Turkey, India and fellow ASEAN partners, Duterte’s win-win model of diplomacy means that more and more countries are now interested in being a part of the rapid development of national infrastructure in the country.

Taking advantage of Chinese economic openness 

At a time when China is taking measures to racially open up its substantial domestic market to foreign goods, now is the time to take advantage of a two-way street involving a new era of Philippine openness to FDI which will result in the country producing more goods that will be attractive to the Chinese market as well as to the Japanese, Indian, European and American markets and also to the markets of fellow ASEAN states and their mutual free trading partners.

If such measures are taken – measures which explicitly require changes to the 60/40 rule of the 1987 Constitution, it can be assured that the 18% growth in Philippine exports to China under Duterte could see an exponential rise in the coming years as Duterte’s reformist policies could be further unleashed in order to usher in a new era of Philippine industrial productivity that would be greeted by the millions of eager customers in China and other major target markets for future Philippine exports.

The final step 

Duterte has laid the stage for The Philippines to continue to bolster its sources of attraction to foreign investment. However, there remains one stumbling bloc to realising the full potential of Duterte’s drive for infrastructural modernisation. The constitutional restriction on FDI in The Philippines is holding back potential future investors from making the most of a modernising Philippine nation. Currently, the so called 60/40 rule as inscribed in the 1987 Constitution prohibits a foreign investor from controlling more than 40% of his or her Philippine based business or construction project.

To understand how the growth rates of a country can skyrocket in the aftermath of inviting copious amounts of FDI and embracing free trade, one needs to examine the statistics of the early years of Lee Kuan Yew’s independent Singapore. Between Singapore’s (forced) independence in 1965 and the world’s first modern energy crisis in 1973, Singapore’s growth rate averaged 12.7%. Even when the 1973 oil crisis put pressures on both developed and developing economies, Singapore still managed to maintain an illustrious 8.7% growth rate in the mid 1970s.

In Malaysia under Mahathir, an opening up to FDI saw an average growth rate of 8% between 1986 and 1996. Focusing on the early 1990s, specifically the period between 1991 and and 1995, China’s economic growth rate was 11.8% while Singapore held steady at an average of 8.6% while Malaysia was just .1 percentage point behind its island neighbour. And yet during this period when Cory Aquino was “supposed to” modernise the economy of The Philippines, economic growth was a mere 2.4%, just .4 percentage points higher than the 1st world American economy that itself was going through a recession for much of the early 1990s.

Likewise, while China is the world’s top industrial producer, the country is also the global leader when it comes to receiving FDI. This reality helps to crush the myth that industrial development and the receiving of FDI are somehow contradictory. The opposite is in fact true.

Although Duterte has achieved sustained economic growth that alluded many of his predecessors, it is important to remember that not long ago The Philippines impeached pro-FDI president Joseph Estrada while former President Gloria Macapagal-Arroyo’s economic openness drive was ultimately crushed under the weight of an entangled political system. As The Philippines was besot with the political stagnation of the 1990s and early 2000s, Malaysia, Singapore, China, Thailand, Indonesia and Vietnam continued to forge ahead both prior to and in the gradual aftermath of the 1997 Asian economic crisis.

The reasons for this are clear enough. While Singapore and later China, Malaysia and Vietnam opened up to ever more FDI, in 1987 The Philippines adopted a new constitution which specifically restricted foreign direct investors from having control over more than 40% of their investment (the so called 60/40 rule). By restricting foreign investors to minority ownership, The Philippines became automatically less attractive than its faster growing neighbours.

Making matters worse, when two post-Marcos Presidents did try and open up the economy along the lines of The Philippines’ closest ASEAN neighbours, a convoluted presidential/congressional political system conspired to stop such proposed reforms dead in their tracks. By contrast, the parliamentary democracies in Singapore and Malaysia allowed Lee Kuan Yew and Mahathir to respectively pass reforms for economic openness through a simple series of majority votes in a traditional parliamentary system that is directly related to the majority democratic consensus of the voting public.

While to Duterte’s great credit, he has managed to manoeuvre through the convoluted political system established by the 1987 constitution more ably than any of his more reform minded predecessors, this simply is not good enough. A country like The Philippines today should not be measured against Singapore and Malaysia’s growth rates decades after initial reforms were made but should instead be in a position to aspire to the kinds of mega-growth numbers of Singapore in the late 1960s and early 1970s as well as those of Malaysia in the first fifteen years of Mahathir’s time as Prime Minister.

The reason for this is that while growth tends to stabilise in economies that have matured into their new reformist realities, The Philippines has yet to make such reforms. In this sense, from a point of view of economic policy, The Philippines today is 53 years behind Malaysia, 40 years behind China and 37 years behind Malaysia.

Because of this, if a Philippine government managed by Duterte or someone sharing his policies and goals were to preside over a constitution with few restrictions on FDI and likewise if Duterte was leading his government from a unicameral parliament rather than a presidential administration at odds with two bodies of a legislature, the numbers that The Philippines could see today might well be closer to the double digits of growth that Singapore had after its reforms while it would almost certainly break the all important 8% threshold as Malaysia repeatedly did during the reformist drive of Mahathir.

This is why while it is impressive that The Philippines is even breaking the 6% threshold under an outdated and reactionary constitution – this is simply not good enough. President Duterte is doing all he can within the constraints of the 1987 constitution. If these shackles were lifted, there is no doubt that The Philippines would go from a country trying to catch up with itself to one that could replicate the economic miracles of Singapore and Malaysia within the framework of Filipino aspirations and cultural characteristics.

Conclusion 

Duterte and Xi stand on the cusp of making the most out of a long overdue flowering of Sino-Philippine relations. While other nations now excited about the prospects of further investment in The Philippines, the time is now right to abolish the crippling 60/40 rule in order to make the most out of the spirit of economic modernisation that Duterte has brought to the nation.

Duterte’s new executive order is certainly taking the country in the correct direction, yet until the 60/40 rule is fully abolished, the economic opening of The Philippines will remain a work in progress.

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