Prior to this week, The Philippines maintained an archaic law which effectively banned corporation soles (sometimes called sole traderships) from operating in the country. The old restrictions negatively impacted those wanting to start small businesses by requiring five or more private shareholders before one could register a corporation in The Philippines. These restrictions had a stifling effect on innovation, as many talented individuals who end up running large corporations, begin their business alone or with a duel partnership.
For instance, due to pro-enterprise laws in the US, in 1975, Bill Gates and Paul Allen founded Microsoft, where the dynamic duo went on to revolutionise modern computer operating systems. Likewise, when the industry leading Apple Computer was founded in 1976, three men were involved in the initial partnership, Steve Jobs, Steve Wozniak and Ronald Wayne. Thus, if globally recognised brands like Microsoft and Apple were governed by the five person corporation rule of The Philippines, they would have had a difficult time getting off the ground.
While Microsoft and Apple are two famous examples of very small business from the 1970s which later grew into two the world’s top corporations, in the 21st century, thanks in part to the technologies of Apple and Microsoft, even more innovators start corporations that have a single shareholder. From app designers, to e-commerce pioneers and coders, few such endeavours begin as a business partnership of five or more, even though the successful ones often become major publicly traded companies after a small start.
This is why Philippine President Rodrigo Duterte’s signing of a new rule which allows for single person corporations to be registered in The Philippines is a move in a highly positive direction. While small businessmen typically start their businesses in their home country before considering the prospect of relocating abroad, a dynamic pro-business country like Singapore attracts both large and small business operations to its shores, due to the ease of doing business and pro-enterprise taxation system of the country.
Thus, Duterte’s new law will open up many new opportunities for talented and innovative Filipinos who want to start their first company at home, whilst it also holds the future potential to attract future global innovators to The Philippines by creating a more flexible, pro-enterprise environment. There is however one piece of the puzzle missing and that is a modernised set of foreign direct investment (FDI) regulations.
President Duterte has recently reaffirmed that one of his main goals for national reform is removing what he calls the “anti-business” elements of the 1987 Constitution. This is certainly a reference to the infamous 60/40 rule prohibiting foreign direct investors from owning a controlling share in their own investments in The Philippines across multiple sectors.
Although the pro-reform, pro-economic growth President Duterte has wisely stretched the limits of the 1987 Constitution’s anti-FDI clauses, there is only so much he can do without pushing through meaningful constitutional reform which will open up a new era of foreign investment coming into The Philippines – the same way that welcoming FDI provisions resulted in economic miracles in Hong Kong, Singapore, Malaysia and after 1978, in mainland China.
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.
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.
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.
Duterte is clearly a pro-reform, pro-enterprise, and pro-people leader. His single-shareholder corporation rule will certainly help to modernise the economy, but without substantial constitutional revisions to restrictive anti-FDI laws, the maximum potential of a liberated Philippine economy simply cannot be reached.