Charter Change

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What’s better for economic growth?

In the debate over the economic provisions of the constitution, we often hear that it would be better for the Philippines to lift all restrictions on foreigners. These are what prevent investments from flooding into the country, its advocates say.

One way of arguing for full liberalisation is to point to our progressive regional neighbours and say that they are less restrictive towards foreign participation in their domestic markets. Since they are growing much faster through investments, what we ought to do is adopt their policies and completely liberalise all the sectors of our economy.

This notion is often repeated and reinforced by politicians, businessmen, think tanks and commentators in the media. They portray opposition to full investment liberalisation as either based on selfish interests or irrational xenophobia.

The problem with this stylised argument is that it may not necessarily be grounded on fact. It could be a situation where a lie repeated often enough can become true in the minds of the public.

To test the assumption that our regional neighbours are not restrictive towards foreign investments, I consulted the World Bank’s Invest Across Borders report which contains the most authoritative information on statutory rules and regulations that govern foreign investment in domestic economies around the world.

This allowed me to answer the question, which region in the world is the most open to foreign direct investments? Is it:

a. East Asia and the Pacific (EAP)

b. The Middle East and North Africa (MENA)

c. Latin America and the Caribbean (LATAM&C)

d. Eastern Europe and Central Asia (EECA)

e. South Asia (SA)

f. Sub-Saharan Africa (SSA)

g. High income OECD nations (OECD)

Most would rank the OECD nations as the least restrictive followed by East Asia and the Pacific. This is based on the notion that richer and more prosperous countries generally tend to be more open to investment from abroad. No other region in the world has bridged the gap between rich and poor like EAP with MENA coming in second.

So what does the data tell us? The rich OECD countries are definitely the most open to foreign investments. But among all these regions, the EAP region is astonishingly the most restrictive. The following table comes straight from the World Bank’s findings:

Ownership Limits for Foreign Investors by Sector

Region/Economy Mining, oil & gas Agriculture & forestry Light manufact-uring Telecom Electricity Banking Insurance Transport Media Construction, tourism & retail Health care & waste manage-ment
East Asia & Pacific 78.4 82.9 86.8 64.9 75.8 76.1 80.9 66 36.1 93.4 84.1
Middle East & North Africa 78.8 100 95 84 68.5 82 92 63.2 70 94.9 90
South Asia 88 90 96.3 94.8 94.3 87.2 75.4 79.8 68 96.7 100
Latin America & Caribbean 91 96.4 100 94.5 82.5 96.4 96.4 80.8 73.1 100 96.4
Sub-Saharan Africa 95.2 97.6 98.6 84.1 90.5 84.7 87.3 86.6 69.9 97.6 100
Eastern Europe & Central Asia 96.2 97.5 98.5 96.2 96.4 100 94.9 84 73.1 100 100
High-income OECD 100 100 93.8 89.9 88 97.1 100 69.2 73.3 100 91.7

Source: World Bank (2010), Invest Across Borders.

Note: The table shows the average levels of ownership caps placed on foreign investors across eleven of the most regulated sectors (with a score of 100 indicating complete openness or full foreign ownership permitted). There were 87 countries in the sample.

For all but two of the eleven sectors featured, EAP is the most restrictive—and even in the case of those two sectors, electricity and transport, EAP came second only to MENA. The IAB report acknowledges this by saying,

East Asia and the Pacific has more restrictions on foreign equity ownership in all sectors than any other region.

The caveat is that EAP also shows the greatest intraregional variance with less populated jurisdictions like Singapore and the Solomon Islands having fewer restrictions and highly populated ones like China and Indonesia imposing more in their service sectors.

When it comes to private ownership of land, the IAB report also shows EAP being the most restrictive to foreigners. The following is a screen grab. It shows that only 33 per cent of the EAP’s economies allow foreign ownership of land compared to 52 per cent for SSA, 80 per cent for MENA and SA, 95 per cent for EECE and 100 per cent for LATAM&C and OECD. Only three of the ten economies surveyed allow it. Most economies only lease land to foreigners and provide weak lease rights at that (the leases cannot be used as collateral for loans, subdivided or sublet).

land ownership

When it comes to ownership rights, EAP scored 83.3 out of 100 coming in fifth after the OECD (100), LATAM&C (98.2), EECE (97.6) and SA (93.8), ahead of SSA (77.3) and MENA (68.8). This again runs counter to the prevailing view that EAP provides greater security to foreign investors over their property rights, more than other regions.

The ease of doing business, particularly the cost of entering a country is the last thing we will look at. The ease of establishment is measured by the number of steps and length of time needed for setting up a foreign business. The following table also comes from the IAB website:

Starting a Foreign Business

Region/Economy Procedures (number) Time (days) Ease of establishment index (0-100)
Middle East & North Africa 9 19 58.6
High-income OECD 9 21 77.8
Eastern Europe & Central Asia 8 22 76.8
South Asia 9 39 62.5
Sub-Saharan Africa 10 48 51.5
East Asia & Pacific 11 64 57.4
Latin America & Caribbean 14 74 62.

Note: Ease of establishment index (0-100) evaluates the regulatory regime for business start-up.

MENA and the OECD are at the top of the league table with 19 and 21 days for each of them respectively to open a new business. LATAM&C and EAP are the worst performers in that order providing additional hurdles to them. It takes 64 days on average in EAP and 11 steps to open a new business. In China it takes 65 days on average and 18 steps, which is above the regional average. In the ease of establishment index which reflects the regulatory regime of regions, SSA and EAP are the worst performers in that order, meaning their regulatory regimes are the most difficult and least familiar to foreign firms.

Given its lack of openess, poor accessibility of industrial land, and larger regulatory burden, it is astonishing how the EAP experienced faster growth and pulled in larger investments compared to other emerging markets in the world as shown in the following charts.

These results will seem counterintuitive, especially for those who have been fed a steady staple of neoliberal ideology. It’s a case of empirical evidence contradicting normative beliefs: the most restrictive EAP region grew fastest and attracted the greatest value of foreign direct investments.

So why has the Philippines managed to lag behind its regional neighbours in terms of growth and development? What factors allowed them to take-off and overtake us? That is a subject for a much longer conversation and a later post. Suffice it to say that framing the problem around liberalisation in certain sectors, accessibility to land, ease of establishment or even property rights does not provide a convincing answer.

Let me conclude with what that this discussion demonstrates, and that is opening up our domestic market to foreign competitors is not a guaranteed way to bring about economic transformation. It is not a panacea. It does not necessarily follow that if you open up, you will attract more investments or grow much faster. There is a missing ingredient in all this, an “omitted variable”, as it were.

In part two of this series, I will discuss the various strategies employed by the East Asian tigers in their quest for economic prosperity and how the political and economic history of the region diverges from common public perceptions of what happened.

Kurap at mahirap pa rin

Poverty does not seem to be abating, neither is good governance improving much.

This inconvenient truth is the conclusion derived by the National Statistical Coordination Board (NSCB) as of its latest data releases.

Back in April, it found that the change in poverty incidence in the country during the first semester of 2012 (27.9 per cent) was not statistically significant from what it was during the same period in 2009 (28.8 per cent) and 2006 (28.6 per cent).  This rather dismal outcome of the administration’s first two years in office was downplayed by the Palace. It came after the employment report for the April-2013 quarter showed signs that jobs generation was heading south despite the economy’s stellar growth posted in the same period.

Then last week, the NSCB released a set of indicators on Philippine development. When it came to our performance under the global scorecard for good governance, the report said,

The country’s percentile rank based on the World Governance Indicators (WGI) on control of corruption, rule of law, regulatory quality, and voice and accountability had low probabilities of attaining the 2016 targets.

It went on to say that the likelihood of us achieving a better score in terms of government effectiveness under the WGI by 2016 were high. Government effectiveness is different from control of corruption, rule of law, regulatory quality and voice and accountability, though. The former is probably what you would call, “good enough” governance as opposed to “good governance” which is what the latter implies. In the “light v darkness” narrative promoted by the ruling party, “good enough” governance is simply “not good enough”.

The most telling sign that the administration has failed to address the governance issue so far is that the country’s latest ranking in the Ease of Doing Business report slipped two places (from 134th to 136th) and that there was a drop in total investments in 2012. Reducing the cost of doing business is vital to attracting investments. Many say, that in order to open the floodgates to foreign direct investments, all we need to do is change the economic provisions in the charter that limit foreign participation in the local economy.

I personally have a different view, but even if, for argument’s sake that were to happen, if the cost of doing business remained high, it would still discourage investors from investing, as per the current situation in many sectors of the economy that already have been opened up to foreign investment.

It appears when it comes to fulfilling the administration party’s mantra of kung walang kurap, walang mahirap (there will be no poverty if there is no corruption) the government is making little headway, notwithstanding its herculean efforts to impeach the Ombudsman and the Supreme Court Chief Justice and jail the lady president that appointed them. By their own standards, the government seems to be failing in achieving its vision. As a result, income inequality, or the gap between the rich and the poor seems to be widening, as borne out by another NSCB paper released last week.

The government tried to put on a brave face by saying that income among all groups has risen. Unfortunately for the poor, their incomes have risen, but not enough to keep up with the higher cost of living to lift them out of poverty. The conditional cash transfers program which was given a significant boost by this administration was not sufficient. By the NSCB’s calculations, the cost of the government’s welfare program of about Php40 billion for the full year of 2012 was only half the amount required to deal with the problem in the first semester of that year.

The economic management of the nation does not seem to be progressing very well. The Philippine Development Plan talked about promoting inclusive and sustainable growth, but what we seem to be having is none of the sort. Despite all its efforts to improve the efficiency of tax collection and expenditure, to reduce debt and increase social spending and to promote the country as a destination for investment through good governance, these results show that we are just as far away from achieving that goal as we were before.

My advice to the government is not to seek to airbrush these blemishes from its record. It should acknowledge that its efforts thus far have fallen short. The president and his team need to then chart a different way forward. In other words, they need to attend to that “vision thing“, which is what I have been arguing it should have done from the start.

Establishing and Managing a Philippine Sovereign Wealth Fund

This is the second part of a series on this topic. In the first part, I discussed why we need a sovereign wealth fund or SWF in the first place. My main contention was that the Philippines is currently suffering from “Dutch disease” or the adverse effects of a sudden rise of income from its export of labour and from a rise of confidence in its domestic economy. In this second part, I will discuss how we could govern and operate our own SWF.

The Santiago Principles established by 26 countries with SWFs known as the International Working Group or IWG  in 2008 lays out a number of generally accepted principles and practices or GAPP to ensure that “the SWF arrangements are properly set up and investments are made on an economic and financial basis”. One of the main reasons for this is that as government-owned  entities, as SWFs continue to grow in importance to global capital markets and perform a bigger role in corporate governance, they need to demonstrate that their investment decisions are not politically motivated.

Traditionally, SWFs took the surplus foreign reserves accumulated within a resource exporting nation and invested them in long-term projects overseas. This allowed recipient countries that were often capital constrained and developing to benefit from such investment flows. The size and relative lack of transparency of some SWFs however caused many actors in the international community to cast a suspicious eye at these funds.

In the Philippine context, as discussed in the first part of this series, I propose that our SWF be confined to funding projects within the country given our chronic underinvestment in infrastructure and need to resuscitate our industrial sector. Given however our historically poor track record at ensuring that government owned and controlled companies manage their assets in a prudent manner, the main concern in establishing a SWF would be to ring-fence it from the influence of politics.

The Santiago Principles help to define a set of best practices for us in establishing our own SWF in the Philippines. The Carnegie Endowment for International Peace talked about what the effect of signing up to these principles is by saying that

(b)y voluntarily submitting to the Santiago Principles, IWG members ceded their autonomy to establish governance arrangements in line with their individual needs and preferences. In a way, they made a conscious decision to limit the reach of their “sovereignty.”

You might be tempted after reading that to draw an analogy between the IWG to the World Trading Organisation or WTO which implements the General Agreement on Trade and Tariffs or GATT. Unlike that body, the IWG and its successor the International Forum of Sovereign Wealth Funds or IFSWF is purely voluntary and has no powers to sanction its members. The Carnegie Endowment does draw this distinction. What our Philippine authorities should do in drawing up the framework for its SWF would be to hard code “the Principles” in its charter.

As shown in the table below, the Principles may be divided into three distinct parts. These cover the legal and macroeconomic policy framework of the fund, its institutional and governance arrangements and structures, and finally its methods for managing investment decisions and handling risk. I am adapting the Carnegie Endowment’s description of these parts here.

Table 1: Santiago Principles*

Section What “the Principles” state there should be GAPP #
Legal framework, objectives, and coordination withmacroeconomic policies
  • disclosure of legal framework
  • definition and disclosure of policy purpose
  • public disclosure of funding and withdrawal arrangements
GAPP 1
GAPP 2
GAPP 4
Institutional framework and governance structures
  • clearly defined roles and responsibilities of the principal/owner (the government) and the agent (SWF’s governing body, officers and executives)
  • a limited role for the principal which is to set the broad  objectives, appointment of governing body or board, and oversight of operations
  • a clear mandate to the fund’s governing body to set strategy for achieving its objectives along with being accountable for its performance
  • delegated authority for independently implementing strategies and handling operations for officers and executives under clearly defined roles and responsibilities
GAPP 6 

 

GAPP 7

 

GAPP 8

 

GAPP 9

Investment and risk management frameworks
  • disclosure of investment policies
  • information about investment themes, investment objectives and horizons, and strategic asset allocation, including:
    1. disclosure of investments that are subject to non-economic and non-financial considerations
    2. whether they execute ownership rights to protect the financial value of investments
  • a framework that identifies, assesses, and manages the risks of its operations and measures to track investment performance employing relative and/or absolute benchmarks
GAPP 18 

 

 

GAPP 19.1

GAPP 21

 

GAPP 22

*adapted from Sven Behrendt (2010). Sovereign Wealth Funds and Santiago Principles: Where do they stand? Carnegie Papers No. 22, Carnegie Endowment for International Peace.

The policy aims of setting a SWF in the Philippines are clear: to channel excess foreign reserves in a productive way and to cope with the developmental needs of the country. As I stated in the first part of this series, existing legislation tasks the Bangko Sentral with ensuring an adequate supply of currency to meet our international obligations. It does not contemplate our current predicament where the annual flows of remittances and portfolio investments have made our gross international reserves (GIR) rise rapidly.

This has caused the appreciation of the peso which has put a strain on our exporters. Even our burgeoning business process outsourcing industry is beginning to feel the pinch of the currency’s upward trajectory. As I previously stated, the GIR is now sufficient to cover twelve months of imports and to meet all our external obligations with a comfortable buffer left over.

And it will keep rising especially if our government earns an investment grade credit rating as is expected next year. Our GIR should only be allowed to rise in proportion to our external commitments. As our economy becomes less dependent on foreign borrowing these external debts won’t rise as rapidly as they have in the past.

Once a targeted level has been reached, the Bangko Sentral should be authorised to declare any additional funds in excess of its requirements. The existing Central Bank Act should be amended to explicitly state this. The monetary board should be given the task of setting the appropriate benchmarks for making such declarations and for transferring excess funds into a SWF.

The nature of such a transfer, as I have suggested, should be in the form of a sovereign loan issued to the national government, which will own the SWF. This would help ensure that the projects which the SWF invests in will have a sufficient return to cover its borrowings and operating costs. It would also ensure that the value of the Bangko Sentral’s assets is preserved.

As to the appointment of its board and officers, the SWF would be subject to the same rules covering government owned and controlled corporations or GOCCs. The reforms carried out by the new GOCC law which created a commission that regulates the appointments, compensation and accountabilities of such officers would apply as well. This would include the need to provide audited financial statements and management reports.

In terms of the type of projects it would fund, I have suggested four potential areas or themes. This includes public infrastructure (such as the ones eyed for Public-Private Partnerships) aimed at both social and economic development, joint minerals exploration in consortium with private mining firms, industry cluster development projects, and clean, renewable energy projects.

The allocation of resources across these themes could be based on national priorities. Let’s be clear: the main purpose of this SWF would be to support the development priorities of the nation, and that should be stated unapologetically. But for specific projects, a set of solid business cases needs to be presented. When entering into joint ventures or consortia with private players, the SWF should also be allowed to exercise ownership rights over the project to protect its investments.

Just as with government financial institutions or GFIs, the SWF should be guided by proper prudential management principles that would monitor its risk exposure. Unlike the conservative treasury management practices of government banks and pension funds, the risk-return equation is different for an equity investor like the SWF. The risk tolerance would be higher while its returns need not necessarily be as big given its lower cost of borrowing. Its risk adjusted return on capital would thus be lower compared to commercial banks.

Some PPP bidders have expressed concern over political interference in the Philippines affecting their ability to set fees independently of the government. This has limited the appetite for actually managing the operations of the utilities and transport oriented projects. They have therefore chosen to participate only in building contracts. Takashi Ishagami of Marubeni Corporation has been quoted as saying that “the Filipino PPP is far away from our standard”. It has partnered with a local firm to jointly bid for a $1 billion railway project in which it would be merely supplying equipment.

That’s fine. If the SWF were to finance such partnerships, our excess foreign reserves would leak out of the country (as intended) through the purchase of foreign equipment. This will help temper the peso’s rise since these projects will no longer be financed through overseas assistance or equity from abroad. What could leak in, however, is foreign technology and know-how because as an equity investor, with a long time frame, the SWF would also have greater leverage to request that suppliers provide technology transfer to local partners. This should unapologetically be part of its investment prioritisation framework.

An Alternative to Charter Change

Rather than relaxing the maximum capital requirements on foreign participation in certain industries contained in our constitution, the government should instead be looking to accelerate the flow of funds into productive activity with the SWF as one of its prime vehicles. Where private players are too small to generate sufficient scale to participate in large projects, the government should encourage them to form a cluster and fund them to be able to compete with multinationals.

This incidentally was the vision of the late-Senator Benigno “Ninoy” Aquino for the Philippine economy which he explained in a speech delivered in Los Angeles back in 1981 while he was in exile. He sought to counter the Marcos regime’s formula of encouraging multinational firms to engage in extractive activities and to commercially fund projects like the Bataan Nuclear Power Plant. Juxtaposed to Marcos’ “crony capitalism”, Ninoy termed his philosophy “Christian socialism”.

Don’t be turned off by the name. As his remarks suggest, what he really meant was essentially a form of capitalism more akin to Northern Europe’s brand than to the English version as espoused by Adam Smith. The last time I checked, the German and Scandinavian economies seemed to be weathering the present crisis well, while maintaining one of the highest levels of income and social well-being compared to their Anglo-American counterparts.

Under President Benigno “Noynoy”Aquino’s rubric of good governance, the stage is now set to pursue that economic philosophy and vision for the country.  As the Carnegie Endowment for International Peace found, sound democratic institutions best explains a nation’s compliance with the Santiago Principles.

With the government now facing the prospect of receiving investment grade status in the coming year, it must prepare for any unintended adverse consequences this might have as more short-term investors flock to our shores, boosting the peso’s value and putting more of an already unbearable strain on our exporters of goods and services.

For good governance to yield economic benefits to the people, it needs to be used to address the developmental challenges facing the nation. If we act soon, we won’t have to face these same challenges in the future. The country is already in a gradual demographic transition that will lead us from an excess supply to an excess demand for labour over the next decade.

While we still send our surplus workers overseas, we need to channel the wealth they are creating for our nation into projects that would increase economic opportunities for our people back home. This presents our policy makers with a once in a generation opportunity to get things right. Given the discussion covered in this series, it would seem apparent that a SWF would be the way to go.

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.

Shall We Dance (Cha-cha-cha)?

As foreign ownership of land is talked up in the Philippines, other countries like Brazil and Australia are looking to limit it.

Brazil began last year when it decided to treat farmland as a strategic asset on par with oil when the government invoked an old law from 1971 limiting the amount of rural land that foreigners are able to buy. It is estimated that as a result of this about $15 billion of planned agriculture investments will be dropped.

Australia followed suit early this year when its Parliament passed a resolution that would see for the first time their bureau of statistics (the ABS) collate a list of direct foreign ownership of agricultural land, water rights and businesses. This is seen as a first step towards taking any necessary action to safeguard the food security of the nation.

What spooked the federal governments in both cases were growing reports of sovereign wealth funds and state owned or state-backed enterprises buying up vast tracts of prime agricultural land. With the world population set to rise from 7 billion to about 9 billion by mid-century, the quest for food security is forcing countries like Qatar, China and Singapore to look overseas for their food supply.

Unlike the Philippines which has a constitutional restriction against foreign ownership of any kind of land, Brazil and Australia are not seeking to resrtrict foreign ownership, but merely monitor and manage it, to ensure that it doesn’t pose a national security risk or lead to speculative bubbles.

I think these considerations should give our legislators reason to pause and consider their plans for liberalizing participation of foreigners in certain sectors like communications, education, professional services and land. Liberalizing services may be necessary for the Philippines to join the Trans-Pacific Partnership and gain market access to signatory countries in the Asia-Pacific. Opening up real property is another matter.

Opening up land to foreign acquisition would require us to have a few necessary safeguards in place. How would the country maintain food security for instance? Should there be a requirement to seek government approval once the scale of land purchase breeches a certain amount? If so, what should that amount be?

The case involving the lease of one million hectares to Chinese interests for grains and bio-fuel crops which was halted by a petition to the Supreme Court due to its constitutionality will almost certainly become mute once constitutional restrictions are removed.

If stronger states such as Australia and Brazil start to place increasing scrutiny towards the use and sale of their land to foreigners, will the affected foreign firms turn to weaker states like the Philippines in order to pursue their agenda? Once these assets are sold, it will be very hard to retrieve them.

It makes the question of lifting constitutional restrictions all the more poignant. While it is true that it might stimulate much needed investments and exports, what will happen to us as a nation once our ability to feed our people is traded away?

25 years of rejecting kings, presidents, and voting

“We reject kings, presidents and voting. We believe in rough consensus and running code,” David Clark spoke those famous words, and for 25 years those words guided the Internet Engineering Task Force (IETF) in how it sets technical standards on the Internet. The IETF is a standards body made up of… wait for it… anyone. There is no membership to speak of, well except if you join their mailing list, and everyone is welcome to join.

Ars Technica wrote an excellent read if you want to know more about the IETF. Here’s a snippet:

The Internet Engineering Task Force turned 25 yesterday. In that quarter century, 79 meetings were held in 15 countries and 4,500 RFCs (requests for comment) were written, resulting in 70 Internet Standards and 155 current best practices. Many more protocols are proposed standards and are often widely used, but haven’t made it to standard status—yet. This includes HTTP, for instance.

The IETF grew out of a group for government contractors working on the ARPANET who got together a few times a year to discuss what needed to be done to improve the network. In the intervening 25 years, it turned into a standards organization that creates standards related to the technical operation of the Internet.

Rough consensus translates to what is the dominant view point of the group. The interest of the IETF is that it is interested in “practical, and working systems that could be quickly implemented.”

Is there something, we Filipinos could learn from rough consensus?

The rough consensus is that we are not a rich nation and that incapacity exists. Looking at it under the context of charter change, In many ways, the answer has always been making the best with what we got, and building on top of it. In search of the most bang for the buck; and it will never be a perfect system. And politics would always be a series of compromises, imperfect.

Engineering and politics have one thing in common. In both spheres, the world is imperfect and every implementation is already partly a failure. The world is imperfect and while we attempt to build perfect systems, there will always be flaws in everything we do.

The second important quote that describes what the IETF is, and how it does business is known as Postel’s Law: “Be conservative in what you send and liberal in what you accept.” In my humble opinion it also works in a democracy.



Image credit: xkcd, some rights reserved.

Why I am against playing with Charter Change

Yesterday, renewed calls for Charter Change came once more into the foreground of our national discourse. No less than a former Chief Justice of the Supreme Court is spearheading this new thrust. And Deputy Spokesperson Abigail Valte’s response was beautifully praised, “democracy is already in the recovery room as of May 2010.”

To be honest, I have always been for some change in the charter. I personally find it too wordy that even the most common of us can’t understand. Our most basic law should be something each Filipino could readily understand. It should be simple. It should be filled with wisdom. It should be timeless.

The Charter has flaws and this is recognized by both sides. It is common ground for those both and for and against dabbling with the nation’s basic law.

In recent years, I have been against charter change because one could never trust the powers that be to change it for the greater good, much less have faith that it is the future we safeguard. That tomorrow promises something better.

It isn’t that I do not trust Aquino to write a better charter than his mother; it is that I do not believe we have wisdom enough as a people to do a better job.

This is my second reason. I never really believed that our nation has exhausted the possibilities of the current Constitution. For one thing, a provision of the 1987 Constitution remain unused. The Freedom of Information Act was promised to us, and yet more than 20 years after EDSA, its future remain bleak.

Then there is this.

People believe that by changing the national charter, the fundamental problems of our nation are swept aside. It will still take years to feel the effects, good or bad. Charter change today for example, does not answer the much needed reform in our Education system. That is primarily a function of the department of education, and of experts in the field. Teachers will not magically be smarter; their salaries will not suddenly improve.

Charter change does not magically create more money for the government to use in social services. The poorest of the poor will still have the same health care coverage. There will still be children walking our streets at night. There will still be drugs and crime. In the farthest regions of our nation, bandits will still roam to terrorize the population.

Charter change does not make our police more competent. It does not make them less corrupt. It does not improve their capability to fight crime. It does not make people trust our police. That’s the job of the national police commission, the PNP command, and the Interior department.

Charter change does not change the fact our justice system is flawed. It does not make accusations that our judges sell cases more truthful or less true. And if they are on the take, how does it help change the system?

Some people believe that changing the charter to remove the economic limitations of ownership to be a step in the right direction. As a believer in the Free Market, yes, I agree there should be as few rules and that government should be limited to acting as a referee in the marketplace.

Yet, fundamentally, there is no stopping our current framework to reduce protectionism. The recent debacle of broadband use is an example. There is no basic policy. There are no basic rules set to ensure that telecoms are in their best behavior that consumers are protected.

A third reason that no matter what words we put into the basic law, at the end of the day, it is people who will govern and live in our country. It is we the people who will elect the same congressmen, and the same senators, simply because the bench is that shallow. It matters even less that that bench is shallow, except that it is the those who govern who must govern properly and in the interest of the nation.

There is hardly any difference between a party-list congressman and a regular congressman. They can both be overwhelmed with power; they can both abuse their power.

Bocchi in his work called the “Puzzle of the Philippines,” highlighted that our nation is a low capital investment one. The same fundamental problem exist in our political parties.

At the end of the day really, the answers to our nation’s problems is how to unlock incapacity. We have the tools today to do so. Our constitution does not forbid better training of our national police. It does not prevent us from enacting a better basic education policy. It does not prevent us from creating a nation where healthcare is free. It does not prevent us from creating a silicon valley.

Changing the charter does not make our people less fearful about tomorrow. It does not prevent legislators to view tomorrow shortsightedly. It does not make our religious wiser and less conservative. What it does, is to distract the Nation and the People from the change what we can do today. That change, I believe in the long run can do more to help bring our people out of poverty.

My point is: there are a lot of changes we can make to reduce incapacity in our country. There is a degree of change within the present framework we can enact that makes the world less unequal, more stable, and increasingly sustainable. We are not powerless to do so. And when we have created a more stable environment, with our leaders and our people filled with a little more wisdom, and a bit more responsible, perhaps then, we can begin talking about rewriting our charter to institutionalize what our nation has become, and what our nation hopes to achieve.

Democracy is already in the recovery room as of May 2010

I just love how Deputy Presidential Spokesperson Abigail Valte phrased it.

Q: Ma’am, former Chief Justice Puno said that he is pushing for Charter Change. Will this make you rethink your position?

VALTE: Well, no, because the President has always been consistent in saying that nobody has been able to present an argument to prove that there really is urgency in changing the Constitution, and that again, not doing so would place the country at risk. But having said that, I believe that the former Chief Justice said that democracy is on a stretcher. We’d like to respond by saying that democracy is already in the recovery room as of May 2010.

True, most apt, and nicely phrased.

BSAIII statement on Con-Ass

Official statement by Senator Benigno S. “Noynoy” Aquino on moves to amend the Constitution through a constituent assembly (Con-Ass), June 9, 2009

On Charter Change

“There has been so much talk on how to amend the Constitution, but the case for changing it has not been made. In the first place, is there a need to amend our Constitution? If so, is it something that needs our attention right now?

“Last week, the lower house voted to amend the Constitution through a constituent assembly without determining first whether or not Charter Change was even necessary. They are espousing a solution to a problem that has not been properly identified. Isn’t this the height of illogic coming from elected 3 officials expected by the people who voted for them to make logical decisions?

“Just a few hours after the sponsor of the measure delivered his speech, a vote had taken place without exhaustive debates. To amend the Constitution requires months, even years of deliberations, but a resolution to proceed with Charter Change through a constituent assembly was decided upon by the lower house with undue haste. It is a devious move that would undermine the role of the Senate in the amendment process and thus, is vehemently opposed by the people. Why then did the lower house insist on passing the resolution despite public criticism that it should not be pursued?

“I am against any move to amend the Constitution and I am against this move by the lower house to desecrate the identity of Congress as a bicameral institution. I am committed to preclude this rushed manner of changing our fundamental and sacrosanct law.

“This recent effort to trifle with our Constitution should sear the conscience of every Filipino. Such a ruthless display of tyranny of numbers can only come from a government so used to being insulated from culpability for so long. For all the sins Mrs. Arroyo and her allies have committed against the people, shall we still allow them the opportunity to perpetuate their reign?

“To sit idly by and do nothing is to be complicit to this ongoing crime. We have to make our voices heard. I join the Liberal Party in condemning this shameless act orchestrated by the Arroyo government. Enough is enough. It is time to take the power from a mere handful in Congress and give it back to the people where it rightfully belongs.”

[Archived from the official campaign web site of President Benigno S. “Noynoy” Aquino III]

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