economic development

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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.

The Quest for an Elusive Development Framework

After unveiling his strategy for unblocking investments in public infrastructure, the policy statement of PNoy was drawing flak from all sides. The statement concerned his proposed method for mitigating regulatory risk which was to compensate private investors for any losses caused by legal or congressional action preventing them from charging fees in accordance with their agreements with the government.

This was the statement of Rep Edcel Lagman leader of the opposition in the house:

Government contracts are not inordinately sacrosanct so as to be immune from judicial review by the Supreme Court and police power legislation by the Congress. It is beyond presidential prerogative to shield contracts from final court judgments and valid legislative enactments.

Recalling perhaps the power purchase adjustments that gave power generators the right to charge unmet demand to power users after the Asian Financial Crisis, party-list member Rafael Mariano issued this statement:

It’s hogwash … just a tweak [of the] past administration’s marketing sell-out strategy at the expense of the Filipino people.

The problem with the president’s policy statement goes even beyond these issues alone. Most of these projects have a life of between 15 to 30 years. His administration will only last for the next five and a half. Given the amount of time devoted to the pre-feasibility phase all the way to construction, most of these might still be in the pipeline when PNoy steps down. So even assuming that it is able to defy the two other branches of government, how can it guarantee protection for private investors for the remainder of these projects’ lives?

Second, since the public projects being listed for private participation is based on the principle of user pay per use, they are entirely dependent on the ability to charge an appropriate fee. The fact that many projects such as the Metro Light Rail Transit and Southern Expressway have not been able to do so puts into question the business case that justifies the investment in the first place. In other words, the market for such goods cannot clear at the prices desired by the buyers and sellers.

This puts into question the project feasibility assessment process. All sorts of regulatory and administrative risk factors have to be priced into the project cost. If the government cannot justify them in this manner then it should not put it up for investment to begin with.

On the other hand, if the government sees the need to subsidize these projects in the long run based on some notion of public benefit, then it ought to build projections of its future obligations in forward multi-year budget estimates so that they can be subjected to congressional scrutiny. Such transparency is still missing.

Third, the 10 or so projects in roads, rail, and airports being characterized as “shovel ready” to be bid out next year are in metropolitan centers. The jobs to be generated during their construction are going to be centered there. If the PPP’s are meant to be the engine for development, then it appears to be development highly skewed in favor of city residents.

The problem of joblessness in the countryside won’t be addressed, not in the immediate future at least, not with the initial list of projects. If ever, it will lead to greater migration flows from the rural places to the cities. Somehow, what gets lost in all of this is a development framework wherein the needs of public investment are prioritized based on some holistic model of sustainability.

Despite all this, investor appetite seems to be there. One cannot discount the legitimacy issue that hounded the Arroyo regime which has now been effectively dealt with by a smooth transfer of power. PNoy is right to strike when the iron is hot. Conditions in the global village do support his thrust in leveraging private investment for public use.

Perhaps instead of searching for some quixotic fix to deal with all the bottle necks to our development, we need to take a long hard look at the system as a whole. I am not advocating a shift to a parliamentary system, although that would deal with the problem of congressional oversight since the executive and legislative branches would speak as one. What I am advocating is a roots to branch rethink of our assessment process.

A framework is still lacking in the PPP program. It needs to be more clearly articulated to the public. Beyond that, a strategy for bringing more equitable public and private investments in areas where they are sorely needed, such as in innovation, regional and rural development and natural and environmental conservation, remains elusive.

a Symposium on Financing for Development (FfD) in the Philippines

click to enlarge

Dear Friends,

Social Watch Philippines (SWP), in cooperation with KAAKBAY, Liberal Party’s National Institute for Policy Studies (NIPS), Friedrich Naumann Foundation (FNF), and CODE: Reforms for Economic Development (RED) Inc., will be holding a Symposium on Financing for Development (FfD) in the Philippines on September 16, Thursday, from 12:30nn to 5:30pm at the Case Room of the National College of Public Administration at the University of the Philippines in Diliman, Quezon City.

We are inviting you to attend and participate in the symposium. The symposium is open to the public and registration is free.

During the symposium, limited copies of the book, Public Finance or Penance for the Poor: Financing for Development published by Social Watch Philippines with the support of UNDP and NEDA will be distributed to select participants.

The Philippines is one of the signatories to the International Conference of Financing for Development or FfD, known as the Monterrey Consensus. Specifically, the consensus was mobilizing resources for the achievement of the Millennium Development Goals (MDGs), which consist of eight core goals, namely wiping out poverty and hunger, achieving universal primary education, promoting gender equality, reducing child mortality, improving maternal health combating HIV/AIDS, malaria and other diseases, ensuring environmental sustainability, and fostering global partnerships for development. Each goal has specific time-bound targets, most by 2015.

In 2002, a Philippine Institute for Development Studies (PIDS) published a study estimating the available and required resources to achieve the MDG targets on a yearly basis until 2015. For 2007 to 2010, the financing gap was estimated between Php 350 billion to Php 447 billion. Several government, civil society, NGOs and private sector studies reveal difficulties and hurdles in mobilizing resources to achieve these MDG targets: bad governance and inappropriate economic policies perpetuated a massive outflow of resources through debt payments and corruption, leaving little for development purposes. Today, the financial crisis gripping the world as well as the expected global economic slowdown will definitely put a strain on mobilizing domestic resources.

As stated, Social Watch Philippines has published a book that puts forward policy recommendations on the five themes of FfD: mobilizing domestic resources, foreign direct investments, trade, Official Development Assistance (ODA) and debt. In addition to the FfD themes, the book also includes the analysis of the remittances of overseas workers as sources of financing for development.

As a contribution to the shaping of the legislative agenda and pushing for policy reforms to the newly installed government, Social Watch Philippines together with KAAKBAY, Liberal Party’s National Institute for Policy Studies and Code: RED (Reforms for Economic Development) saw the importance of sharing the analysis and policy recommendations on financing for development among key stakeholders to include concerned government agencies, legislators, citizens’ groups, development agencies, private business sector, academe and media. Thus, the symposium on September 16.

The symposium is undertaken to help contribute to the development of the agenda of present government towards policy reforms, and to share views and analysis of citizens’ groups on financing for development.

This symposium will serve as venue to exchange policy reform proposals among key government officials; legislators and citizens’ groups.

We hope you could attend the symposium and grace us with your presence.

Confirmation, queries and other details may be directed to the Symposium Secretariat c/o KAAKBAY thru Mr. Nonie Jeruta at Telephone number 2195493, and Mobile numbers 0928-207480 and 0917-9337572.

Thank you and my best regards.

Very sincerely,

LEONOR MAGTOLIS BRIONES
Lead Convenor
Social Watch Philippines

PROGRAMME

12:30nn – 1:00 PM Registration

1:00 – 1:10 Welcome Address
H.E. Ambassador, Stephen Lilie, British Embassy Manila

Ms. Patricia S. Alvendia, President, CODE: Reforms for Economic Development (RED) Inc.

1:10 – 1:20 Purpose and Value of the Symposium • Expected Outcomes of the Symposium • Administrative Guidelines
Engr. Alain Del Pascua, Executive Director, KAAKBAY Citizens’ Development Initiatives, Inc.

1:20 – 1:30 Opening and Setting the Tone • Backgrounder on the MDGs • Setting the Tone
Atty. Chito Gascon, Managing Trustee, National Institute for Policy Studies (NIPS) Director-General, Liberal Party (LP)

1:30 – 2:15 A Framework for Mobilizing Resources for Development • By Major Financial Themes: Domestic Resources, Foreign Direct Investments, International Trade, Official Development Assistance, External debt reduction and debt sustainability • Opportunities, Limitations and Constraints
Filomeno Sta.Ana III, Coordinator, Action for Economic Reforms Editor, Financing for Development “Finance or Penance for the Poor”

2:15 – 3:00 The MDGs and the Current Performance
• The Eight MDG Goals • Philippine Initiatives in Addressing these Goals • Current Performance vs. Goals • Conclusion
Prof. Leonor Briones, Lead Convenor, Social Watch Philippines Co-Author, Financing for Development “Finance or Penance for the Poor”

3:00 – 3:45 Updates and Views from the Authors of Financing for Development “Finance or Penance for the Poor”
Jessica Reyes-Cantos, Joseph Anthony Lim, Clarence Pascual, Mario Jose Sereno

3:45 – 5:15 Reactions and Questions from the Senators and Congressmen, and from the participants / Open Forum

5:15 – 5:30 Closing Remarks
Dr. Edna A. Co, Dean, National College of Public Administration, University of the Philippines

Emcee / Moderator:
Engr. Hermenegildo Estrella, National Council Member, KAAKBAY

Snacks will be served during the Questions and Answer / Open Forum period

Symposium Secretariat: KAAKBAY Citizens’ Development Initiatives, Inc.
Unit 1, 11/F, The One Executive Office Building, #5 West Ave. corner Col. Martinez Street
Nayong Kanluran, 1104 Quezon City, Philippines
Email: [email protected], Mobile: +63919 4985887, Landline: +632 5007488