Charter Change (Not As We Know It)

As the nation mourns the tragic and untimely passing away of Jesse Robredo, we are reminded of the important legacy of good governance that he left behind from his stint as the mayor of Naga and as the secretary for local government. What Robredo’s case demonstrates however is how a good man when elevated to the macro-state level falters or finds it nearly impossible to duplicate his success at the micro-town level.

To a certain extent, his story embodies the story of President Aquino and the Liberal Party. You have a good, honest man who has well-meaning intentions for the country and a party that is reform-minded and progressive. And yet, as the polls are showing, their fortunes at the next election do not look so good.

Those who advocate charter change (cha-cha) for political reasons point to this situation as untenable. Why for instance are there senators who don’t understand the concept of intellectual integrity who use the words of others in their speeches without ascribing authorship to their sources and get re-elected time and again? Some pro-cha-cha people want us to shift our political system from presidential to parliamentary to strengthen the hand of political parties.

The problem as I have pointed out in the past is that political dynasties make up our political parties so that even if you shifted to a parliamentary system, most likely, nothing will change.

That is why the Senate President and the Speaker of the House have decided to push for revision in our charter’s economic provisions to remove impediments to foreign ownership of assets in the country, to open up competition, and to allow investments to flow freely into the country. That will lead to jobs growth and the fiscal dividend in the form of higher income taxes will help pay for better governance in the country.

But these calls have been muted or cancelled out by those who disagree with the diagnosis or who suspect that allowing charter change would open the floodgates to all sorts of considerations, including revising our form of government. It is also unclear as to whether revising the economic provisions is necessary since many legal impediments to foreign ownership have been worked around and still foreign investments have not poured in the way they have in China.

The fundamental question that these pro-cha-cha people have not answered is why hasn’t foreign investment poured into sectors that have been fully liberalized. The retail industry, the last sector to be opened up did not attract large retail investors for instance, but instead is attracting large gambling investments whose social costs may outweigh their economic benefits.

If one looks at what investors, as opposed to academics, commentators and politicians, have actually said, I am talking about the Joint Foreign Chambers of Commerce in the Philippines, constitutional change figures very minimally in their long list of recommendations. When it does, it focuses more on opening up the practice of professions in the country rather than changing the constitution to open up investment. Here is a direct quote from their statement which makes the following recommendation

Pending constitutional revision, apply creative but legal solutions, including the control test, to 60-40 ownership provisions, in order to increase investment and create jobs. The PRC (Professional Regulation Commission) should liberalize its procedures to accredit foreign professionals. The language regarding foreign nationals in the laws on professionals should be liberalized.

You might read that and construe it to mean they are advocating economic revision in the constitution, but it seems they are more than happy to settle for “creative but legal solutions”. When read in the context of the entire policy document, Arangkada Philippines, this recommendation is but one of a myriad other considerations that the joint chambers, which include the Americans, Europeans, Japanese, Canadians, Australians, New Zealanders and Multinationals in the country, have itemized.

If you read the full list of proposals, what these businessmen are effectively saying is that they are unhappy with the rules set in the country, rules that have to do with the way taxes, labor, the judiciary, peace and security, electricity, water, local governance, infrastructure, industry assistance, innovation, education and a whole host of other affairs are managed. In other words, bad rules and poor governance is deterring greater economic activity.

The question then becomes, what has to happen for these rules to change and for governance to improve? This leads me back to the plight that Sec Robredo suffered. He was a good man who tried to initiate new rules in his department for the way the funds would be released to local government units to reward good behaviour and good governance.

He was trying to overcome the multiple layers of government that often present roadblocks to development using funding as his policy lever. For his efforts, he was maligned during the Luneta incident as incompetent, not confirmed by Congress, and hurt by intramurals from within the administration. They say a prophet is not recognized in his own land, and that is certainly what happened here.

The leap for Robredo from small city to large country was too great a chasm to cross. Even assuming that he was able to see his reforms through, local governance is just one among a whole slew of problems. To create a consensus throughout the nation regarding the rules for investment and employment would be difficult, but to specify special autonomous regions that have their own charter, where the rules applied in the rest of the country do not apply would be more feasible.

The charter city concept pioneered by Paul Romer, the father of endogenous growth theory (to be explained below), and pilot-tested in Honduras overcomes most if not all of the problems investors face when they contemplate going abroad. While the opportunity of new markets and cheap labor attract them to invest overseas, the problem of sovereign, political and legal risk hampers their decision to do so.

To overcome these barriers, a charter city effectively outsources its rules, both the drafting and implementing of them, to another political entity. Hong Kong is held up as an example of how the British administered a region that became an engine of growth. Other cities in Dubai, United Arab Emirates have adopted this by allowing essentially English common law to operate within a defined territory with judges from England, Singapore and New Zealand.

Imagine a region the size of Subic in which the foreign investment and labor rules of the Philippines don’t apply, where the administration, including that of customs, policing, business licensing and legal adjudicating, is run by bureaucrats from another country, say Singapore, exempt from the salary standardization laws of the national government. To pay for this, Romer proposes a tax on the capital gains associated with rising property values.

A benign president such as the one we have now with long-term vision could authorize such an experiment. A proviso in our constitution exempting such a region or regions from the rules operating in the rest of the economy would have to be inserted. The rest of the country would still follow the same framework as present. Creating such an experiment would allow us to test the assumptions made by pro-cha cha advocates without disrupting or costing the nation too much in transitional arrangements.

Some would say this would be tantamount to surrendering our sovereignty to another country or that it is just another form of colonialism. The difference of course is that unlike in the past, this would occur with the consent of the governed. People who prefer to live under one set of rules could move to the new region. Those that don’t can opt out of it. There would be no coercion.

The development economist William Easterly has called this proposal dancing on the fine line between genius and insanity. Romer has successfully walked this line before. His endogenous growth theory predicted the end of business cycles through continuous innovation. Allan Greenspan while he was the chairman of the US Federal Reserve bought into this idea that America had entered a “new economy” which led to cheap money and financial deregulation which then fuelled the dot com boom and crash and toxic home mortgages which caused the global financial crisis.

Romer spent much of the 80s and 90s developing and defending his growth theory. Since the dot com crash he left a tenured position at Stanford to found his organization, CharterCities.org. It is a natural extension of his old theory. If a slow rate of diffusion of innovation is what prevents poor countries from benefiting from technology, then removing the barriers to diffusion is essential. Those barriers consist of poor policies and governance.

Most economic advisers and reform minded politicians like Robredo have tried to implement reforms in these areas at the national level. We have seen how difficult it can be given the interest groups that lobby and prevent them from succeeding. Charter cities offer a way to work around this problem (watch video embedded below). Investors get the best of both worlds, having the same set of rules, governance and infrastructure they are used to in their home country with the low cost of talented labor and other resources that moving to a host country affords.

So perhaps charter change is needed, but not in the form that we have been told thus far is essential. Perhaps charter cities would help break the deadlock between those who advocate for the status quo and those who support change. Perhaps it is a way to prevent the mass exodus of our brain trust to foreign shores in search of better rules and better governance. And perhaps it is a way to honor the legacy of Robredo whose quest for reform was like casting pearls before swine.

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

    “Creative legal solutions.” Hmm. what kind of creative legal solutions do you mean Cusp? The kind that hides true ownership, which leave the poor investor vulnerable to occasional shakedowns through threats of exposure if he did not cooperate?

  • ricelander

    Robredo. What I know is that the good man from Naga who wanted to replicate his success on a macro-level himself sadly did not gain enough confidence of the other good, honest man with good intentions for the country to enable him to deploy his ideas in full force. What he had was a department that was halved in two, with one head here and another there. He should have demanded full control or asked for another assignment or declined altogether.

  • UPnnGrd

    China can hasten this proposal. China can do to Pilipinas what England did to China, (where England invades/humiliates China into leasing a large chunk of land (Hong Kong) for 99 years).

    Barbero/masahista says some Malakanyang insider families may be A-okay where China invades Palawan, gets a 99-year lease and turn it into a Hong Kong . (Or maybe Malaysia invades Palawan? Who knows how strong the BIFF gets to be…. abangan.)

    • UPnnGrd

      But before Walden Bello or a few others were to say jobs will be created when China takes over PALAWAN…. remember that Pilipinas labor cost is higher than China wages. What this means is that Chinese will migrate to Palawan — good farming!! ( Which may be good as a buffer against BIFF’s but no plus-plus for providing jobs for new Pilipinas high school graduates).

  • Rolly257

    If we are going to adapt a parliamentary form of government we have to follow exactly (well, maybe 99 %) the British or Australian blueprint…I think Australia has the edge.
    We are going to limit the term and number of years a one Prime Minister can hold office…2 terms is the most and not more than 6 years or 8 years (3-year or 4-year term).

    • manuel buencamino

      I like voting directly for my country’s leader. I wouldn’t entrust that right to anybody else.

  • ArdeenD

    Well, the charter change advocates (to which I belong and agree in all three points) will not like this piece one bit. But back to the concept of charter cities seem like a pretty interesting ideas although for someone that has been debating in our college a few days back, what do you think would be the legal impediments to such a proposal. Just curious

  • Positively brilliant and inspiring. Not a bit insane. The area should encompass Subic to Clark. It would become a ripping fine economic engine powering broad acceptance of foreign engagement elsewhere. I’m not sure what the “sovereignty” argument gets you but endorsement of the Philippines as it is, hopelessly mired in social malaise and poverty. What’s so great about claiming sovereignty to THAT, other than ego-pride, especially when you could claim sovereignty to progressive wealth-building in the charter-city. It is all words and misguided pride, this sovereignty fear. Also, just slip an amendment or two into the Constitution and avoid opening the Pandora’s box of political game-playing.

    Best article of the year. Anywhere,