As one of the members of the Constitutional Commission that drafted the 1987 Constitution, I am lending my voice to the clamor of some sectors led by House Speaker Lord Allan Q. Velasco to amend the restrictive economic provisions of this fundamental law of the land. Over these last 33 years since the Filipino people ratified the Philippine Constitution, I have witnessed significant changes in the global, regional, and domestic economies which convince me that removing restrictions against foreign direct investments in public utilities, infrastructures, media, education, and even in real estate can help the Philippine economy recover faster from the pandemic, especially as regards generating more employment and reducing the poverty incidence. We badly need foreign equity to supplement our very scarce domestic long-term capital as we struggle to improve our pitifully inadequate public utilities (especially telecommunications), infrastructures (such as tollways, railroads, and airports), and quality higher education institutions.
In 1986 when the Constitutional Commission was deliberating on the draft of the Constitution which was to replace the so-called Marcos Constitution, the Philippine economy was still notoriously known as the sick man of Asia, the worst performing in the East Asian region as a result of the mismanagement of the economy and rampant corruption during the last ten years of martial law. The Philippine economy was far from being an attractive destination for foreign direct investments. Our status as the “sick man of Asia” lasted for at least a decade after the EDSA revolution of 1986. When the majority of the members of the Constitutional Commission decided to take a protectionist and inward-looking stance against FDIs, the few of us who wanted to take a more liberal view about foreign investments took the majority decision in stride since the circumstances then were such that most foreign investors considered the Philippines as an unattractive place to invest. We also realized that it was not an appropriate time to take a completely rational approach to formulating the appropriate policies as regards long-term economic development of the Philippine economy. Practically all of us were so traumatized by the events of the EDSA revolution and the need to make sure that we would never again be subjugated by a dictator that it seemed that foremost in the minds of the commissioners was to make sure that we included provisions in the Constitution that were the opposite of what the former dictator adopted. For example, since President Marcos was very liberal in his view towards FDIs, the majority of the commissioners voted to incorporate provisions in the new Constitution that would be opposite to the martial law policies. The issues on foreign investments provoked so much controversy that, as can be read in the deliberations of the Committee on the National Economy (which I chaired), there were occasions of otherwise respectable commissioners throwing ash trays at one another in the heat of debate. Although I realize that there was an urgent need to come out with a new Constitution after the EDSA revolution, still the months following that politically turbulent period were not the most propitious time for calm and rational discussion that would consider the long-term common good for the Philippine nation. There was still too much emotion in the air.
Now, 33 years later, the global, regional, and domestic economic environment is vastly different from what it was in 1986-1987. The Philippines is no longer the sick man of Asia. For the last ten years, before the pandemic, the Philippines had one of the fastest growing economies, not only in the Indo-Pacific region but in the whole world. Registering an average of 6 percent annual GDP growth from 2010 to 2019, the Philippines was at the cusp of becoming an upper-middle income emerging market by reaching the threshold of $4,000 of per capita GDP income. The pandemic just postponed this important transition by some two to three years. The Philippine GDP is expected to decline by about 10 percent in GDP in 2019 and slowly recover in 2021 at 4 percent.
The bounce back is expected in 2022 at anywhere from 6 to 8 percent. With its strong fundamentals of a young, growing and English-speaking population, well managed monetary and fiscal sectors, a large domestic market that is the primary engine of growth, and rich natural resources, the Philippines has been high in the lists of independent think tanks and financial institutions as among the most attractive emerging markets over the next decade or so. Just as a sample of these very positive assessments of the long-term prospects of the Philippine economy, Oxford Economics recently ranked the Philippines Number 2 among the leading emerging markets for the next decade or so, with India as Number 1, Indonesia Number 3, and China Number 4. The Economist Publication ranked the Philippine economy Number 6 in Financial Strength, besting other ASEAN countries like Indonesia, Thailand, and Vietnam. The UK-based think tank Centre for Business Economic Research in a long-term projection to 2035 for 193 countries saw the Philippines as one of the most improved by jumping from rank 32 in 2020 to rank 22 in 2035. The Japan Credit Rating Agency upgraded the credit rating of the Philippines from Triple B+ to A-, giving the signal to creditors to continue lending the Philippines billions of dollars needed to combat the ill effects of the pandemic because its debt-to-GDP ratio has been prudently kept at 30 percent pre-pandemic. These independent views about the Philippine economy make it clear that, unlike in 1987, the Philippines is in the best condition today to attract foreign direct investments if we are able to remove some of the remaining restrictions that discourage foreign investors to pour in large long-term capital into our capital-intensive industries, especially in telecommunications, infrastructures and the digital industry which includes media.
The attractiveness of any country to foreign investors is a result of a combination of several factors, i.e., the quantity and quality of its human resources, the ease of doing business, the size of its domestic market, the quality of its institutions such as the judiciary and regulatory bodies, and its tax policies. The Philippines ranks high in the quantity and quality of human resources among emerging markets. Despite repeated efforts to improve the ease of doing business through such legislation as ARCA, the country still ranks low in the ease of doing business in the East Asian region. ARCA, also known as R.A.9485, was an act to improve efficiency in the delivery of government service to the public by reducing bureaucratic red tape, preventing graft and corruption, and providing penalties therefor. Nothing much has happened after the law was passed. In 2019, Stastistica still ranked the Philippines very low in ease of doing business among Southeast Asian countries, besting only Cambodia, Laos, and Myanmar.
Among the institutions that investors monitor very closely are those affecting the financial sector. In this regard, the Philippines ranks high as mentioned above when The Economist placed the Philippines at sixth place in financial strength, thanks to our very competent and effective central bankers and fiscal managers. Investors still complain about the unpredictability of the judiciary system, especially in the lower courts. With the imminent passing of the CREATE bill, there are prospects of improving the investment climate through the lowering of the corporate income taxes and the rationalisation of investment incentives. These are the pluses and minuses of the Philippine investment climate.
There are those who argue that opening up the sectors in which foreign equity is limited may not be necessary if we can just focus on such areas as improving the ease of doing business, reforming the judiciary system and getting rid of corrupt judges, electing better local government officials who will not pose all sorts of obstacles to investments in their respective localities, and in general improving governance at all levels of the public sector. I agree that all these reforms can improve the level of FDIs over the long run. We should be realistic, though, in accepting the fact that these reforms can be achieved only over the long run in an imperfect democracy like the Philippines.
Meanwhile, we need long-term capital very badly in public utilities, infrastructures, the components of Industrial Revolution 4.0 (which includes media that is intricately integrated with telecom and the IT sector) and higher education. I contend that even if in the next five to ten years, we are still unable to significantly remove red tape, corruption, poor governance, and other institutional and cultural obstacles to foreign investments, by removing the foreign equity restrictions in these vital sectors, we will be able to attract larger amounts of foreign direct investments because these are sectors that offer very attractive rates of return in the Philippine economy over the next decade or so. The larger the equity participation of the foreign investors, the greater their incentive to invest in the Philippines, even if they still have to face an imperfect investment climate due to the other negative factors cited above
The timing is very important. As mentioned above, the next decade or so will be the moment for the Philippines to shine as one of the most attractive emerging markets in the world. We must strike while the iron is hot. If we procrastinate, there will be other emerging markets in the Indo-Pacific region and elsewhere that may surpass us in attractiveness as Vietnam was able to do in 2020 when its GDP per capita reached a level higher than ours for the first time. The timing is also right because these strategic sectors can do much to increase employment opportunities and reduce poverty incidence in the medium term.
The pandemic has worsened both unemployment (which has doubled) and poverty incidence (that has grown from 16.5 percent to 20 percent or more once the smoke clears after the pandemic is put under control). These considerations highlight the fact that issues like a more liberal view towards FDIs should be tackled not forever by constitutionalizing the provision but by legislation that takes into account the circumstances prevailing in any given period.
To be continued.