SONAw what?

Where once we saw the distinction of the forces opposed as one so sharp it could only be characterized as a contest of “black and white”, today it is, to borrow the title of one racy best seller, “fifty shades of grey”.

In 2010, the mood of the country was wrapped up in the struggle between good and evil, light and darkness, the Righteous and Crooked paths. The people and their gallant knight stood against the hordes of “Villarroyo”. In 2012, the political climate has shifted from one of confrontation, to one of accommodation as the interests of personalities shape the re-alignments of political parties.

As the ruling Liberal Party and its rival Nacionalista Party prepare to envelope one another with the embrace of brotherly love for the 2013 elections where they face the formidable alliance of Messrs Binay and Estrada, they demonstrate the cliché that politics do make for strange bedfellows. LP senators once accused the NP standard bearer of being a crook and a liar, while a surrogate for the latter once labelled the president psychologically unfit to run the country.

All this comes at a time when he seeks to drum up support for his vision. Having vanquished the “wicked witch” from casting her “evil spells” in Congress and having exorcised her influence over the Supreme Court by impeaching her chief henchman there, the president now faces the task of defining an agenda which the nation can rally behind. The State of the Nation Address is presumably where he will spell this vision out.

Unfortunately, it is the spectre of 2016 that looms over the horizon forcing his team to consider the policy options open to them at this point. It would have been totally different had Sec Mar Roxas won the vice presidency back in 2010. With the line of political succession open to the LP, they would have the luxury of undertaking long-term reforms with the belief that they would be around to see them through.

With the rise of Jejomar Binay to the vice presidency that line of succession has been summarily cut off or at least rendered electorally less likely. The implications are that whatever reforms the present occupant of Malacañang institutes should have to be tamper proof so as to prevent any successor from personally profiting from them.

But where should it start?

Enter the proponents of charter change with their proposals for amending the constitution. The Senate President and Speaker of the House (an ally of the president) are both in support of relaxing the economic provisions of the constitution to make them more investor friendly. They are supported by a group of prominent economists who all say the time to do this is now.

Having experimented with the present set-up for more than a quarter of a century, it is time they say to revisit those constraints to allow the benefits of economic liberalization to fully take effect. On the one hand, this argument is countered by those that say that too much liberalization, not too little, is to blame for our present predicament. On the other hand, others say that judicial rulings that support financial as well as legal innovations have allowed investors to skirt around the restrictions on foreign ownership.

It is worth considering where the demand for constitutional revision comes from. There must be a reason behind these periodic calls. Apart from the obvious political motives of past administrations to perpetuate themselves in power, could it be that the political chaos and economic stagnation of the last ten years have anything to do with it? Is dissatisfaction with the system to blame for such clamours? Those opposed to charter change say, “if it ain’t broke, don’t fix it.” Those in favour believe however that it is broken.

If we consult the evidence, between 1994 and 2003, the proportion of people living below the poverty line declined from 40.6% to 24.9%. That is a drop of 15.7%-points in the span of nine years or -1.74% points per year. The population was estimated at 69 million in 1995, and it rose to 86 million by 2005, an average growth of 1.6 million per year. This implies that there was a net decline of 6.7 million Filipinos living in poverty (from around 27 million in 1994 to 20million by 2003).

Poverty then reversed course between 2003 and 2009 and rose by 1.6%-points to 26.5%. Given that the population grew to 92 million during this time, a net growth of about 4 million living beneath the poverty line occurred (24 million in 2009 from 20 million in 2003). This means that there was still a net decline of 2.7 million throughout the period from 1994 to 2009.

So what might account for the reversal of fortune after 2003?

As GDP growth rates during this fifteen year period reveal, the economy grew faster after 2003. The pro-cha cha people say that there was still not enough growth in the latter part of the last decade and that this could be addressed by removing the nationalist economic provisions of the constitution that discourage investments from abroad.

It was not for lack of growth that poverty increased the anti-cha cha side counters. What happened from 2003 onwards was not a lack of economic opportunity, but a lack of access to such opportunity hence the social reforms that are being put in place today with the ramping up of social services and instituting good governance so that resources flow to intended beneficiaries.

I tend to agree with the naysayers. I don’t believe that the system we have is broken since it clearly was successful in bringing down the poverty rate in the early period. But I find that something is missing in their arguments so far particularly with respect to whether too much or too little liberalization is the problem.

Liberalization of trade and investment had been taking place since 1986 under the first Aquino presidency. Even after 1995 when the country joined the WTO, we still saw growth continuing and poverty declining up until 2003. In fact, the country’s growth accelerated thereafter. So why did poverty worsen?

Well, if we consider the entry of China into the WTO in September of 2001, we might begin to understand what happened. From 2002 to 2008, foreign direct investments skyrocketed in the Middle Kingdom. The boom was felt particularly in the manufacturing sector with coastal provinces becoming the “factory of the world”. Incidentally, China does restrict full foreign ownership not only of land but of other assets as well. In fact foreign investors gain entry by partnering with town and village enterprises owned by local authorities. This should bore a hole in the arguments of the pro-cha cha people.

The effect of China’s growth was not just that the Philippine economy had to specialize in very narrow categories of industries during this time it also had to face growth in the cost of petroleum as the voracious demand from China led to a global commodities price boom.

These twin effects would have been felt by poor Filipinos most severely as wages would have had to be held down to compete with Chinese workers while the cost of electricity and transport would have risen. Add to that the pain of a VAT increase, and you have the makings of misery.

If there is any consolation in all this, it is that the peak in Chinese growth may have been reached since the global financial crisis of 2008. Not only has demand for their products in the West declined, but the cost of running factories particularly wages has gone up making investments into China less attractive than before. This has led to a moderation of China’s growth rate.

This is the reason for investment houses scouting around for “the next China” and why the Philippines is being identified and given a second look in this regard. So assuming that this decade sees a correction of the misfortunes of the previous one, the country ought to be back on track to achieving more inclusive growth.

That assumes that the government puts its fiscal house in order and achieves this not by contracting expenditures as it has had to do in the past. It also assumes that the government is able to provide a stable policy environment to encourage investments in growth areas, boost infrastructure spending, reduce corruption and manage peace and order problems as well as international security risks.

So where does that leave the present administration?

Having successfully cleared any and all road blocks to its Righteous Path, exactly how far down that road does it intend to bring the nation with the remaining time that it has? Signing up to international partnerships to promote openness and transparency will ensure that future governments more or less adhere to such principles (or risk ostracism from the international community) just as signing up to the GATT and other treaties have done in the past.

Beyond this, using policy innovations with the use of technology would help. Just as modern medicine reduced infant mortality rates and increased life expectancy in the last century, so would automating polls and using smart cards reduce the scope for corruption in elections and social programs like the Pantawid Pamilya both now and into the future. Electronically linking the records of the BIR, BoC and SEC and strengthening the powers of the Ombudsman to electronically access dubious bank records and conduct surveillance should likewise discourage corruption.

All of these reforms are already within reach. What the government has to do is prove that it is up to the task. Setting goals and achieving them is the definition of success for any executive. His new program based budget already sets down the programs, spending and outputs to be produced in line with his social contract. Some of these outputs are framed around a forward plan to achieve a certain goal or outcome by 2016. It took two years to create this framework. That is not surprising given the way government works. From here on out though it is all about implementation.

To quote a phrase, nothing succeeds like success.

Doy Santos aka The Cusp

Doy Santos is an international development consultant who shuttles between Australia and the Philippines. He maintains a blog called The Cusp: A discussion of new thinking, new schools of thought and fresh ideas on public policy (www.thecusponline.org) and tweets as @thecusponline. He holds a Master in Development Economics from the University of the Philippines and an MS in Public Policy from Carnegie Mellon University.

  • ricelander

    “if it ain’t broke, don’t fix it.”

    The President himself said it and justified it with the 6.4% GDP growth. He did not mention it came mostly from increased government spending. Did not Investment shrink considerably all that time? Huh, I can easily make it 10% if I were President. How? Tax, tax, tax, borrow, borrow, borrow,then spend, spend, spend…

    • UPnnGrd

      “No tax increase!!!” was a promise made by PersiNoynoy, wasn’t it?

      Maybe he’ll leave “tax increase” to Binay or BongBong or whoever wins 2016.

    • If you average out the last two years of his administration, the year to date growth in the first quarters of 2011 and 2012 is about 5.6%. That is well within the expected growth rate found in his plan of 5-6%, although the target is 7-8%.

  • UPnnGrd

    My suspicion is that  Vietnam is the country-of-first-choice for the Japanese or European or USA firms seeking alternatives to China-located manufacturing plants. 

    Now, history will show cases where Pilipinas was held out as a third or second choice  (despite high cost of electricity/power)  as part of the negotiating game.

    Pilipinas became even less attractive when PersiNoynoy took over and raised the issue of dependability of contracts —  the issue of whether contracts signed with one administration gets honored by the next administration.  

    • To be sure there are other places in the region that could compete. Vietnam’s Foreign Direct Investments have taken off since 2006, the year it acceded to the WTO. It has experienced such rapid inflation recently though that could be of concern.

  • ricelander

    …those that say that too much liberalization, not too little, is to blame for our present predicament.

    Too much trade liberalization.   You open the floodgates to products from more efficient economies while choking investment that would improve efficiency and competitiveness of our industrial sector, what do you expect?  Our timid local industrialists, sensing business risk beyond their capacity to absorb, turned tails instead, closed shop and reinvested in less risky businesses, the result being our manufacturing sector, the sector that should be absorbing our overflowing labor force, now virtually non-existent.

    …judicial rulings that support financial as well as legal innovations have allowed investors to skirt around the restrictions on foreign ownership.

    What innovative judicial rulings?  More like “legal” accommodations formulated in connivance with authorities to skirt the Constitution— at some price, of course.  The same accommodation that could make a foreign investor jittery and extremely vulnerable to manipulation depending on the whims of the times.

    …China does restrict full foreign ownership not only of land but of other assets as well. In fact foreign investors gain entry by partnering with town and village enterprises owned by local authorities. This should bore a hole in the arguments of the pro-cha cha people.

    You have any list of “town and village enterprises owned by local authorities” in the Philippines with which a foreign investor with, say, $4B could partner?   In good humor I was thinking of coops like Samahan ng mga Tricycle Drivers Association of the Philippines if they could pool among themselves a counterpart $6B.

    • The TVEs don’t necessarily have to invest anything. What they do is provide security to investors, guaranteed permits, de facto property rights. For as long as the venture continues to profit and make money for the TVEs, their partners remain safe from expropriation.

      • ricelander

        Interesting. TVEs making money just providing those services— without risking any investment? Hmmm. But how is this arrangement possible under the present Constitution?

        • China’s case demonstrates that a country can simulate property rights even where no property rights exist. In other words, even without it being explicitly written in the law. In China, for instance no one owns land but the state. Farmers are given long term leases which they can pass on to their children. The same goes for foreign investors.

          By contrast, a country such as the Philippines which may have property rights written in the law but does not enforce them is inferior to the former. But that is not a flaw of the constitution per se but of our legal and administrative system.

          • manuelbuencamino

            I think Enrile and Belmonte have it backwards about nationalistic provisions which were put in place because the idea if for Filipinos to control the Philippines first and foremost and then to attract foreign investment. We can survive without foreign investments but where we live if we end up being guests in our own country?

          • UPnnGrd

            GuLLOO (and also PersiNoynoy who is implementing the same policy as guLLOO) have alredy demonstrated that Pilipinas can let go control of Piliinas land when guLLOO (and PersiNNOOYY) gave thousands of hectares of Pilipinas agricultural land to China. ( ** However, there are challenges to the constitutionality of the land-to-China give-aways that GuiLLOO and PersiNNOY have entered into, but the cases are slow in moving thru the legal processes — why is “to-be-determined”? )

        • UPnnGrd

          bongBong Marcos may have the answers already with the the windfarms in the Ilocos.