OPINION: Everybody wants to cha-cha, but will it increase foreign direct investments?

10.03.2016
Politics Society Economy

Proponents argue that economic charter change will lead to more foreign direct investments for the Philippines. But is the equation that simple?

By Bianca Suarez

This opinion piece draws from the report and findings of the May 2015 AIM Policy Center working paper, “Economic Charter Change: Examining the Pros and Cons” by Ronald U. Mendoza and Monica M. Melchor.

On June 20, President-elect Rodrigo R. Duterte released his proposed 10-Point Socioeconomic Agenda, which aims to address issues in sustainability, tax, infrastructure, business operations, human capital development, and health. Notably, the third point calls to relax constitutional restrictions on foreign ownership in order to attract more foreign direct investments (FDI).1 A similar proposal was first introduced in 1999 under Former President Joseph Estrada. He established the Constitutional Correction for Development (CONCORD), which aimed to allow foreign ownership in land, media outlets, and public utilities.2 This ultimately encountered strong opposition from the Catholic Church and other sectors, causing the government to set the idea aside.3 There were subsequent attempts to pass economic amendments under the Arroyo and Aquino administrations, both ending with similar results.4

In the most recent attempt to amend the Constitution, House Speaker Feliciano Belmonte Jr. filed a bill in the House of Representatives that proposed to add the phrase “unless otherwise amended by law” to key economic provisions.5 Belmonte believes that this will provide future legislators with the flexibility needed to craft laws that attract greater numbers of investors, help boost the economy, and create additional jobs.6 With the impending ASEAN integration and Trans-Pacific Partnership, the clamor for economic charter change has only grown louder.7 Yet, the proposed bill failed to pass in the 16th Congress.8 This last failure to enact economic charter change and President-elect Duterte’s avowed intention to attempt, again, to do so begs us to ask the question of whether easing foreign ownership provisions in the Constitution would really attract greater foreign investments. Ronald Mendoza and Monica Melchor of the Asian Institute of Management Policy Center studied the relationship of FDI inflow and foreign ownership restrictions in 2015, publishing their results in the working paper Economic Charter Change: Examining the Pros and Cons. Their analysis revealed that there is a weak but positive correlation between foreign equity ownership and net foreign investment inflow.9

Currently, our Constitution limits foreign participation in the exploitation, development, and utilization of natural resources, operation of public utilities, and ownership of educational institutions and mass media.10 These sectors have been identified as key areas for economic development and foreign investment.11 Due to the heavy restrictions stipulated in the Constitution, however, investment in these areas has remained at a low 1.26% of total foreign investment in comparison to the global average of 9.80%.12 The World Bank's 2010 Investing Across Borders database indicated that foreign investment was likely to flow to countries that allowed foreign ownership of companies in a range of sectors. It also identified that complicated land acquisition and business startup procedures as well as unclear legal frameworks act as barriers to increasing FDI inflow.13 Stricter regulation of entry firms is also usually associated with sharply higher levels of corruption, as reported by the World Bank Enterprise Survey, and prevents businesses from expanding into certain countries.14 Furthermore, another study on foreign investments in OECD countries conducted by Stephen Golub suggests that restrictions on foreign ownership account for roughly 40% of the variation of foreign investment.15 But there is no guarantee that this applies to the Philippines, and others argue that constitutional change is not essential to improve economic development.

Openness to foreign ownership is a necessary but insufficient condition for attracting foreign investment.

Opponents of economic charter change assert that countries such as Indonesia and Vietnam possess dynamic economies despite strict regulations on foreign ownership. They further observe that developed Asian countries such as China, Taiwan, Japan, and South Korea had low foreign investments rates during the peak of their economic development. Christian Monsod, a former Constitutional Commissioner, warns that increased foreign ownership may cause land prices to hike beyond the reach of most Filipinos and further complicate the ongoing land disputes. He also feared that Belmonte’s proposal would have given too much power to Congress—with provisions able to pass with the support of a minimum of 7 votes from the Senate and 73 from the House of Representatives, down from the current 18 and 218 votes required, respectively, for a constitutional change.16

The Business Outlook Survey 2014, conducted by the US Chamber of Commerce and AmCham Singapore, further revealed that the Philippines ranked sixth out of 11 ASEAN countries in terms of desirability of environment for firms to expand their operations. Indonesia, Vietnam, and Thailand were the most popular locations for business expansion; Brunei and Laos were the least. According to the same survey, the top concerns regarding furthering investment in the Philippines were corruption, tax structure, infrastructure, laws and regulations, and ease of moving products through customs—not foreign ownership restrictions.17 Indeed, opponents of economic charter change have urged lawmakers to focus on addressing these issues prior to touching the Constitution.18

There is strong evidence that lifting foreign investments restrictions could improve FDI inflows into the Philippines, particularly in the areas restricted in the Philippine Constitution.19 Nevertheless, openness to foreign ownership is a necessary but insufficient condition for attracting foreign investment.20 Mendoza and Melchor note that “easing restrictions on foreign ownership is necessary to encourage FDI and solidify the economic gains experienced in recent years, international experience and evidence suggests that it is not a silver bullet—other reforms need to be undertaken to ensure that the rapid economic growth and expansion is sustained.”21 Lack of infrastructure and rampant corruption are just two of the barriers preventing more foreign investment in the Philippines, and they should be addressed as part of a broader drive to attract and facilitate business expansion in the Philippines.22 With renewed investor confidence in the country and a growing middle class, the Duterte administration needs to relax foreign ownership restrictions in order to capitalize on its economic opportunities. Further, the corollary economic imperative for the incoming administration is to focus on ensuring inclusive growth—something that President Duterte has vowed to address.23 Our country's largest conglomerates do not generally operate in the kinds of wide value-chain industries that could employ large portions of our population in higher-paying jobs. We will need foreign manufacturing and other kinds of industries to help us do that.

 

FOOTNOTES

1

Magtulis, Prinz. "'Duterte Magic': 10-point Socioeconomic Agenda." PhilStar.com. The Philippine Star, 20 June 2016. Web. 29 Sept. 2016.

2

"What Went Before: Past Charter-change Attempts."Inquirer.net. Philippine Daily Inquirer, 21 May 2013. Web. 29 Sept. 2016.

3

Ibid.

4

Monsod, Christian S. "Charter Change: The 2014 Version." Inquirer.net. Philippine Daily Inquirer, 12 Oct. 2014. Web. 29 Sept. 2016.

5

Fonbuena, Carmela. "Belmonte's Charter Change Train Takes off." Rappler.com. Rappler, 18 Feb. 2014. Web. 29 Sept. 2016.

6

Ibid.

7

Gonzales, Iris C. "Clamor for Economic Charter Change Grows." PhilStar.com. The Philippine Star, 18 July 2015. Web. 29 Sept. 2016.

8

Luci, Charissa. "House Gives up on Economic Charter Change, FOI Bill." MB.com.ph. Manila Bulletin, 31 Jan. 2016. Web. 29 Sept. 2016.

9

Mendoza, Ronald. U., Melchor, Monica M. “Economic Charter Change: Examining the Pros and Cons.” (2015). Web. 29 September 2016. Working Paper forthcoming (AIM-RSN Policy Center for Competitiveness).

10

"The Constitution of the Republic of the Philippines." Gov.ph. Official Gazette, n.d. Web. 29 Sept. 2016.

11

Measuring Restrictions on FDI in Services in Developing Countries and Transition Economies. Tech. UNCTAD, n.d. Web. 29 Sept. 2016.

12

Data Availability - FDI Data, Trade Flows, Tariffs and Foreign Company. Rep. International Trade Centre, n.d. Web. 29 Sept. 2016.

13

Investing Across Borders: Indicators of Foreign Investment Regulation in 87 Economies. Rep. The World Bank Group, 2010. Web. 29 Sept. 2016.

14

Philippines Country Profile 2009. Rep. The World Bank Group, 2009. Web. 29 Sept. 2016.

15

Golub, Stephen. “Measures of Restrictions on Inward Foreign Direct Investment for OECD Countries.” Rep. OECD Economic Studies, 2003. Web. 29 Sept. 2016.

16

Monsod, Christian S. "Charter Change: The 2014 Version." Inquirer.net. Philippine Daily Inquirer, 12 Oct. 2014. Web. 29 Sept. 2016.

17

ASEAN Business Outlook Survey 2014. Rep. US Chamber of Commerce, 2014. Web. 29 Sept. 2016.

18

Monsod, Solita C. “It’s not Necessary to Cha-Cha." Inquirer.net. Philippine Daily Inquirer, 13 July 2012. Web. 29 Sept. 2016.

19

Mendoza, Ronald. U., Melchor, Monica M. “Economic Charter Change: Examining the Pros and Cons.” (2015). Web. 29 September 2016. Working Paper forthcoming (AIM-RSN Policy Center for Competitiveness).

20

Ibid.

21

Ibid.

22

Ibid.

23

Regalado, Edith. “Duterte Vows Inclusive Growth.” PhilStar.com. The Philippine Star, 23 May 2016. Web. 29 Sept. 2016.

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