Lessons For The Philippines: Beijing Streamlines FDI Laws Even Though China is Already Top FDI Destination in World

China courts more foreign direct investment than ever before 

China’s model of economic openness is by no means a static one. Far from resting on the laurels of past reforms, China seeks to open its economy not only to historic levels of new imports from a wide variety of global trading partners, but China also intends to expand opportunities for foreign companies and individual investors to bring capital investment into the country by loosening already progressive laws regarding foreign direct investment (FDI).

China’s official Xinhua news agency descries the streamlining of FDI laws in the following way:

“China has adopted a foreign investment administration model of pre-establishment national treatment plus negative list. The move marks an institutional reform in response to new developments in economic globalization and changes in international rules for investment, according to a white paper, entitled China and the World Trade Organization, published in June.

As part of its efforts to further open up, the country unveiled a shortened negative list for foreign investment in June, cutting the number of items down to 48 from 63 and removing access restrictions in various sectors.

China adheres to its basic national policy of opening-up and welcomes foreign investment, the draft said.

China implements high-standard investment liberalisation and facilitation policies, builds and improves foreign investment facilitation systems, and creates a stable, transparent and predictable environment, the draft said.

Analysts said the foreign investment law is meant to promote and protect foreign investment, and ensure foreign businesses enjoy fair treatment, which will boost their confidence in the Chinese market.

Foreign investment has played a positive role in boosting China’s economic development and pushing reforms and will remain significant as the country seeks high-quality development, said associate professor Zhao Binghao with the China University of Political Science and Law.

The draft said local governments should rigorously fulfill their policy promises and all types of legal contracts with foreign-funded companies; otherwise, foreign companies should be compensated for their losses.

It underlined protection of intellectual property rights of foreign investors and foreign companies, and encouraged voluntary technological cooperation based on business rules.

It said conditions of technological cooperation concerning foreign investment should be decided by all parties of investment through negotiation, while government departments and officials cannot use administrative means for forced technology transfers.

At the end of November, a total of 950,000 foreign-funded companies became registered in China in line with current laws and brought in more than 2 trillion U.S. dollars, performing as a major driving force in China’s economic and social development”. 

The spirit of reform is the spirit of success in China as in Singapore 

It is in keeping with the spirit of China’s initial Opening and Reform of 1978 that the new pro-FDI laws are being implemented. One of the keys to China’s success after the initiation of Deng Xiaoping’s reformist measures was the creation of special economic zones (SEZs) throughout the country. These zones were unique at the time in so far as they allowed foreigners to invest hard currency in the Chinese economy while fully convertible assets could be taken out as dividends. This model helped China to rapidly industrialise and modernise its production sectors.

Within each special economic zone, regulations such as taxation were drastically cut while these zones also welcomed foreign direct investment on highly attractive terms. The zones also served as China’s first foray into the free trade that increasingly defines Chinese mentality to a modern multilateral approach to globalisation with Chinese characteristics. Finally, because China’s special economic zones were and remain bedrocks of export driven commerce, these zones helped to transform China into the world’s industrial powerhouse that it is today.

One of the inspirations for Deng’s creation of the first SEZs was the model implemented by Singapore’s national founder Lee Kuan Yew. Lee realised that the only way to transform a nation with few natural resources out of poverty was to welcome foreign direct investment in a business friendly environment that would create jobs and allow the profits to be invested into sustainable domestic wealth producing sectors.

The result is of the aforementioned methods was that Singapore became the first south east Asian nation to reach first world economic standards while China elevated the highest amount of people out of poverty at the most rapid rate in human history. To understand the immensity of this task, one must understand that when Deng came to power in 1978, 88% of all Chinese were living in poverty Today that number is 2% and is expected to fall to zero in just over a year. As this year marked the 40th anniversary of Deng’s Opening and Reform, Lee Kuan Yew was given a posthumous award by the Chinese government for the close personal relationship he enjoyed with Deng which benefited both China and Singapore simultaneously.

Just as sure as the SEZs of the Deng era helped to transform all of China into the industrial and innovation powerhouse it is today, the creation of new free trade zones (FTZs) throughout strategic regions of China will help to transition the country into its next economic phase a a nation that opens its national doors to a world of trade, capital exchange, technical exchange and human connectivity.

The Philippines has no excuse not to open up to Chinese and Singaporean levels of FDI

Philippine President Rodrigo 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.

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