An erroneous industrialization strategy and a failure to invest in countryside and agricultural development explain to a great extent why the Philippines is still a poor country despite the historical fact that it was heralded as one of the Asian countries most likely to follow the economic success story of Japan after the Second World War. The third major error in economic policy was the repudiation of foreign direct investments as an important engine of economic growth and employment. This can be inferred from the very fact that today the issue of removing economic restrictions against foreign investors in key sectors of the economy (public utilities, advertising, media and education) is a major concern of our Legislators who are moving heaven and earth to amend the Philippine Constitution (Chacha) with the view of attracting more FDIs by removing these restrictions.
I respect the views recently expressed by a group of economists from the UP School of Economics who published a discussion paper asserting that there is weak empirical evidence that proves that liberal foreign ownership boosts FDIs. To quote from the discussion paper: “The reasoning seems to be that since the Philippines is the only country in the region with foreign equity restrictions in its Constitution, and since it has been receiving the smallest portion of FDI into the ASEAN, then the former must have caused the latter—an obvious post hoc fallacy.” I have not seen the econometric model that the U.P. economists used to arrive at this conclusion. I hope they had a multiple regression model that had the four independent variables of red tape and bureaucracy, corruption, inadequate infrastructures and FDI restrictions as explanatory variables and then showed the weakest relationship to be that between FDIs and economic restrictions. That is the only way they can prove statistically their claim about the weak evidence for liberal foreign ownership boosting FDI.
Even if they did, however, it is difficult for me to ignore more than 40 years of road shows I have been conducting in more than twenty countries all over the world where I always got the feedback that foreigners hesitated to invest in the Philippines because they refused to be minority owners of capital-intensive projects needing billions of dollars of long-term capital. This was especially applicable to investments in long gestating projects like airports, railways, tollways, power plants and telecommunication facilities which are the very types of projects in which we want foreign enterprises to invest today. I was happy to note that the UP economists cited inadequate infrastructures as one of the deterrents to FDIs. Almost always in the last ten years or so, foreign investors cited the very bad example of the FRAPORT investment in the Manila International Airport in which the Germans, because of foreign investment restrictions, were obliged to partner with a local group that turned out to be corrupt. The rest is history. It took years and years for the NAIA to be completed because of all the legal suits that ensued. In fact, the issue of corruption itself was the least mentioned during those many road shows in which I participated because the savvy investors know how to handle this very thorny problem. Let us take the example of Vietnam.
Those who are still looking for reasons why Vietnam exceeded us in per capita income in 2020 need not rack their brains anymore. Some twenty years ago in 2014, the Socialist Government of Vietnam, most probably inspired by what Deng Xiao Peng did in 1978 in opening up the Chinese economy to foreign investors, allowed 100 foreign equity in strategic economic sectors. In contrast, it was only in 2022 in the last months of the Duterte Administration when Philippine Congress amended the Public Service Act to allow foreign investors to own 100 % of equity in such vital sectors as infrastructures, telecom and renewable energy. No wonder FDIs in Vietnam have been anywhere from two to three times those in the Philippines over the last ten years or so. In 2023, FDIs in Vietnam exceeded $30 billion while we attracted less than $ 10 billion despite the efforts of President BBM in traveling to a record number of countries to convince foreigners to invest in our strongly growing economy (the Philippines today is one of the fastest growing economies in the Indo-Pacific region).
In addition to the long-term openness of the Vietnamese economy to FDIs, they beat us in attractiveness to foreign investors because of their lower energy costs and their lower industrial wages. To attest, however, that there is no corruption in Vietnam would be naïve: just consider the recent scandal of a Vietnamese female real estate by the name of Truong My Lan who swindled many investors to the tune of a whopping $12 billion. It is highly improbable that she could have accomplished such a feat without connivance from corrupt government officials. True, the positive feature of the Vietnamese Government is that they can inflict the death penalty on corrupt officials, as in the case of this Vietnamese lady. This can also be said about the Government of South Korea who has jailed a number of former Presidents and other top government officials for corruption. The same can be said of Malaysia, already a high-income economy. But the fact remains that despite all these deterrents, corruption continues to be rampant in these progressive economies in the East Asian region. Corruption and economic progress are not incompatible with one another. I repeat: we should fight corruption with all our might because it is morally evil, an injustice and sinful and not for predominantly economic reasons. In fact, there are a few cynics who make the seemingly empirical observation that corruption is the grease that enables the economic machine to run smoothly!
The very same reason for our following an inward-looking, import-substitution and protectionist industrialization strategy explains the aversion of our leaders during several decades against the presence of foreign direct investors in our national economy. The Filipino First policy was deeply embedded in the mentality of our leaders (whether left or right). This was the case as late as 1986 when I participated in the drafting of the Philippine Constitution of 1987. As the only professional economist among the fifty members, I was asked to be the Chairman of the Committee on the National Economy. Despite that influential position, I could not convince the vast majority of the members not to include multiple restrictions against foreign investments among the provisions of the Constitution.
I saw how deeply the nationalist mentality was embedded in the minds not only of the leftists (who were the most vocal against FDIs) but among very conservative politicians, members of the Catholic clergy and religious congregations, and business people. The issue on opening up to FDIs (which I espoused) was so contentious that some of the committee deliberations were racked with shouting bouts and in one instant the throwing of an ash tray. I never questioned the pure motives of the opponents of FDIs. They all had the good of the country at heart.
I failed, however, in convincing them that historically, the Filipino First policy resulted in “Rich Filipinos First, Never Mind the Rest.” This is because by limiting investments in strategic sectors like public utilities to Filipinos, those who were benefited were the local wealthy individuals who were the only ones with the huge capital to invest in such industries as telecom, power plants and other public services so that the resulting industrial structures inevitably evolved into monopolies and oligopolies that more often than not operated inefficiently and charged high prices with impunity because of lack of competition from foreign investors. The Philippine Competition Commission is relatively a .new government agency in our country.
Without presenting myself as a hero, this struggle to open up the economy to more free market forces was a personal project of mine when I returned from my studies abroad. Although Harvard, where I obtained my Ph.D. in economics, was a hotbed of anti-market economists (the University of Chicago where Nobel Laureate Milton Friedman taught was where the so-called Chicago boys worshipped free markets), I saw the importance of allowing free markets to function for philosophical and not empirical reasons. I subscribed to the principle of subsidiarity which states that what can be accomplished effectively by individuals or small groups should not be taken over by higher bodies, least of all by the State. A corollary of this principle is the freedom of enterprise. This freedom of enterprise mandates that anyone should be able to do business in our country whatever his or her nationality as long as the foreign investor is not a security threat. (To be continued.)