Part 1
The State of the Nation Address (SONA) delivered by President Ferdinand R. Marcos Jr. last July 25, 2022 was impressive both in substance and the way it was delivered. I was especially glad that it was succinct and concrete, avoiding the ramblings and adlibs (not to mention the foul language) of his immediate predecessor. Limiting the time to just a little over an hour, it was understandable that he could have not covered all the issues challenges faced by Philippine society today. Admittedly, my professional bias is that of an economist. The address covered the major economic issues that Philippine society faces today, both in the short run and in the medium term. It is understandable that the President could not get into more details within the limited time he had. It is my intention here to elaborate and expound on some of his key statements as he described the state of the economy, as part of the state of the nation.
Let me start with his opening lines: “We live in difficult times brought about by some forces of our own making…” What are these forces of our making that brought about our having been the “sick man of Asia” during the last quarter of the twentieth century and at least the first decade of the present millennium? There are at least three major economic policy errors that our leaders committed since we obtained our independence in 1945. The first was our having taken the wrong route of inward-looking, import-substitution industrialization by raising very tariff walls to protect our so-called “infant industries”, pampering them with subsidized credit and a highly overvalued peso. At the same time, we sorely neglected the agricultural sector and the countryside by failing to build farm-to-market roads, irrigation systems, post-harvest facilities and depriving the small farmers of the needed services to enable them to make a decent living on the land which they obtained through agrarian reform.
These policy errors, which President Marcos Jr. wants to continue correcting under his Administration, are especially highlighted when we compare the Philippines with its closest competitor in the Southeast race to become a high-income economy, i.e., Vietnam, which just surpassed us in per capita income in 2020 during the height of the pandemic. Almost immediately after the country’s military won the war against the United States, the Vietnamese State started endowing their rural areas with the appropriate infrastructures to help farmers achieve higher agricultural productivity. Let me illustrate this with the most recent outstanding success of Vietnam in agricultural development. Just a decade ago, the country was not an important exporter of coffee to the world market. Because their Government did everything possible to help their small coffee farmers to improve their productivity and incomes, today Vietnam is the second largest exporter in the world, next only to Brazil, having surpassed Colombia.
Anyone who visits Ho Chi Minh would notice that it does not have the equivalents of a Makati, a Fort Bonifacio or a Cebu City. As I confirmed in a recent visit to Vietnam, however, their countryside is replete with six-lane cemented roads and some of the most advanced facilities of irrigation, post- harvest and multiple servicesfor both their farmers and fisherfolks, explaining why Vietnam can export billions of dollars of rice, fish products, coffee and other high-value agricultural products. This high priority that Vietnam gave to rural and agricultural development explains also why the country has long ago brought their poverty incidence to single-digit level which we are still struggling to achieve, especially after the economic ravages brought about by the pandemic.
The third reason Vietnam has surpassed us in both sustainable and inclusive growth is its long-term greater openness to Foreign Direct Investments (FDIs). As the present Administration is targeting to attract $10 billion of FDIs annually in the next six years, that figure was reached by Vietnam more than ten years ago. It is paradoxical that a country that still considers itself communist has been able to outdo us in foreign direct investments. The reason is that for too long (until the most enlightened move of the Duterte Administration to amend the Public Service Act enabling foreigners to invest as much as 100% in such public services as telecom, airports, railways, seaports, etc.) we imposed so many restrictions against foreign equity investments, even enshrining these restrictions in our Constitution. Over the last decade or so, Vietnam has attracted FDIs double or more times than we did. Hopefully, the amended PSA will be utilized by the present Administration to aggressively attract FDIs to fund the next stage of Build, Build, Build, which must go beyond roads and bridges but must endow the economy the necessary telecom, transport and digital infrastructures to fully participate in the world-wide move towards Industrial Revolution 4.0.
In fact, if the President will get his wish that the Philippines will become an “investment destination” we have to go much beyond the usual enterprises locating in our so-called export processing and industrial zones and target big-ticket investments in these areas which have been opened to 100% foreign equity. We should learn from the experience of Megawide partnering with an Indian infrastructure company, GMR, to build the most modern international airport we now have which is the Mactan International Airport. For a while, before the PSA was amended, there was the ridiculous attempt of some legalists who were suing Megawide for allegedly allowing GMR to have more than the permitted 40 % foreign equity in that venture. Thankfully, this type of harassment will no longer be possible since foreigners, if they want, can own 100% of investments in airport, seaports, railways, etc.
The President must rely heavily on the cooperation of both the LGUs and the private business sector to reach a level of investments heretofore attained by the Philippine economy. Whereas, most of our peers in East Asia have long brought their investment to GDP ratios above the 30% level (China had more than 40 % in the 1990s), our total investments never left the low twenties. To attain both the fiscal stability and the high growth outlined in his SONA, the President must mandate his economic managers to do everything possible to attract $10 to $15 billion of FDIs annually in the next six years. Only these large flows of foreign capital, especially in infrastructures, will enable us to continue the Build, Build, Build program started by the Duterte Administration and to generate the necessary employment that will address the high underemployment rate of 15 % and the unemployment rate of some 5 %.
The President is relying a lot on tourism (both domestic and foreign) to attain the growth of 6 to 8% during his term. There is much that can be done through a partnership of the national government with LGUs that are ideally endowed with attractive tourism destinations. In the same way that Cebu has already a world class international airport, a good number of other LGUs rich in tourism sites (Batangas, Palawan, Mindoro, Ilocos Norte, Negros Occidental, Iloilo and many others) should attract foreign investors (in partnership with local firms like Megawide or DMCI, Inc.) to investment in world-class airports in their municipalities. I would especially like to see an international airport like that of Mactan in such areas as San Vicente, Palawan; Dumaguete, Negros Oriental; Batangas Province; Laoag, Ilocos Norte; and Cagayan de Oro. We can start negotiating with foreign firms that are already have experiences investing in the Philippines like GMR from India, Acciona from Spain, Balfour Beatty Group from the U.S.. etc. As I experienced especially in the presidencies of Fidel V. Ramos and Benigno Aquino III, various Philippine embassies and consulates in the prospective countries where foreign investors can be targeted partnered with Philippine banks and other enterprises to organize road shows in cities like Tokyo, Seoul, Taipei, New York, San Francisco, Barcelona, Madrid, Frankfurt, Milan, and many others located in the investing countries.
Speaking of South Korea, I was impressed with the daring of President Marcos in bringing up the possibility of going nuclear in our energy program. Everyone knows this is going to be a tough move to sell to the public. In one of the interviews on TV of Dr. Carlos Arcilla, Director of the Philippine Nuclear Research Institute, I learned that a South Korean firm has already offered to completely finance a nuclear plant using the more advanced technology of a modular approach. According to Dr. Arcilla, withthe vast improvement of nuclear energy technology over the years since the Chernobyl incident, a nuclear plant need not have the huge space of the decommissioned Bataan Nuclear Plant. According to him, it can be located in a small island like Semirara. This possibility should be pursued as early as possible. Once there is a proof of concept in Semirara or any other small island, the module can be replicated in other regions suffering from lack of electricity. I agree with those who claim that this is the fastest way we can decarbonize our energy program. Solar, which should continue to be promoted, would take much longer. To be continued.