Aquino promises at stake as Philippines slips in economic freedom index

MANILA, Philippines – The country is still considered “mostly unfree” in a global index that measures commitment to free enterprise and capitalist system.

On Wednesday, a Washington think-tank reported that the Philippines slipped further to 115th place out of 117 economies included in the 2011 Index of Economic Freedom.

This is a stark reminder to the 6-month-old Aquino administration, which has promised reforms in business and other economic areas to remove constraints that turn off investors and unlock economic opportunities for the country.

See: abs-cbnNEWS.com’s monitoring of the campaign promises of President Aquino

In the index, the 17th prepared by the Heritage Foundation Inc. together with US publication Wall Street Journal, shows that the Philippines’s had an overall score of 56.2 points.

In the 2011 index, the Philippines slashed 0.2 points from the country’s 56.3 overall score in 2010, when the Philippines ranked higher at 109th place. This slight changes in scores and the considerable drop of the Philippines in the ranking means other countries, including Azerbaijan, Mongolia, Cambodia, Bhutan, Sri Lanka, and to some extent, Indonesia, have been gaining ground faster than the Philippines.

The Philippines’s highest score in the index was 62.2 way back in 1997 when the Ramos administration implemented key reform measures such as trade liberalization and the opening up of the telecommunications and aviation sectors to greater competition.

It has been downhill since, largely due to recurring reasons: pervasive corruption and bribery, barriers to foreign investment, and weak institutions, judicial system, and fiscal health.

The highest form of economic freedom (100), Heritage said, is achieved if “individuals are free to work, produce, consume, and invest in any way they please, and that freedom is both protected by the state and unconstrained by the state.”

The Heritage Foundation measures economic freedom using 10 factors, which are then averaged equally into a total score. The 10 component freedoms of the Heritage foundation include: business freedom, trade freedom, fiscal freedom, government size, monetary freedom, investment freedom, property rights, freedom from corruption, and labor freedom.

Remittances

The think tank also noted the country’s achievements: “Despite the challenging global economic environment, the Philippines has made a notable recovery since mid-2009, driven mainly by strong export performance.”

Philippine exports, which are mostly electronics, have been posting double-digit growth rates after almost monthly dips of up to 40% in 2008-2009, when world trade started to suffer from uncertainties due to the financial crisis in the West.

It also noted that “The absence of entrepreneurial dynamism, however, still makes long-term economic development a difficult task.”

The government, it said, remains heavily dependent on foreign remittances, which “do little to promote sustainable growth.”

Over 3,000 Filipinos leave the country to seek greener pastures they couldn’t find at home. They join millions of other Filipinos working abroad who send money to their loved ones. The local economy is reliant on remittances, which are equivalent to more than 10% of GDP.

Consumer spending, a key stimulus of the local economy, are dependent mainly on these remittances. Retail and real estate activities have continued to be robust, largely sparing the Philippine economy from the global financial slowdown.

The constant emigration of skilled workers has shaved off 1.2 points in the Philippines’ score for “labor freedom.”

“Many of the country’s skilled workers have migrated to other advanced economies,” the think tank noted.

As a result, “The labor market remains structurally rigid, although existing labor regulations are not particularly burdensome.”

Hundreds of thousands of employees have found jobs in the burgeoning Business Process Outsourcing industry, but other key professionals, including pilots, mining engineers, and weather forecasters, have left in droves.

President Aquino has promised to provide better job environment when he assumed office in July 2010.

“The Philippines has pursued a series of legislative reforms to enhance the entrepreneurial environment and develop a stronger private sector to generate broader-based job growth,” the authors at Heritage noted.

Corruption, weak judiciary

In terms of “business freedom,” the Philippines’ score was lower by 4.7 points due to “severe challenges” that potential entrepreneurs face.

“The overall regulatory framework is burdensome, and the legal framework is ineffective, holding back more dynamic and broad-based expansion of the private sector,” it noted.

It said “deeper institutional reforms” are needed in four interrelated areas: business freedom, investment freedom, property rights, and freedom from corruption.

While the Philippines had modest gains in “freedom from corruption,” it noted that “corruption is perceived as pervasive” and that “a culture of corruption is long-standing.”

“The government has worked to reinvigorate its anti-corruption drive, but these efforts have been inconsistent. Reforms have not improved public perception and are overshadowed by high-profile cases frequently reported in the Philippine media.”

The Aquino government has vowed to go after wrongdoings by its predecessor through a Truth Commission, but the Supreme Court questioned the commission’s constitutionality.

However, even the judiciary is in question. “The judicial system remains weak and vulnerable to political influence and corruption,” the index noted.

A week judiciary impacts other “freedoms,” Heritage explained.

“Although the Philippines has procedures and systems for registering claims on property, including intellectual property and chattel/mortgages, delays and uncertainty associated with a cumbersome court system continue to concern investors,” it said when explaining the Philippines’ score for “property rights.”

Foreign investments

The think tank also noted that “Progress has been mixed, although some fiscal reforms have been accomplished.”

Fiscal stimulus and restructuring of public enterprises have widened the fiscal deficit. In 2010, the budget deficit will likely reach almost P325 billion, a record high.

The fiscal health of the country has limited the ability of the government to invest in key infrastructure projects, like airports, ports, road and train networks, among others.

This has led the Aquino government to anchor its infrastructure investment agenda on the Public-Private Partnership scheme. It will be seeking private investors to fund and build the much-needed infrastructure to unlock economic potentials in the country.

However, recent fare or toll hikes in infrastructure projects that were built and funded by private proponents have tested the Aquino government’s ability to balance its promises to promote public welfare and provide a healthy business climate to private investors.

In a show of political will, the Aquino government recently approved hikes in the fees for using the road and train networks (SLEx, NLEx, SCTEx, and the MRT and LRT lines), which are all inherited projects from the previous administrations.

The ability of the Philippines to keep infrastructure contracts sacred has been questioned in past infrastructure projects. “Questions regarding the general sanctity of contracts and the property rights they support have also clouded the investment climate,” Heritage noted.

The controversial airport terminal NAIA-3 easily comes to mind. The Arroyo government nullified the contract in 2002 on allegations of wrongdoings by the proponents. German firm Fraport AG, which had a stake in the consortium that build the much-needed facility, recently won an appeal in an arbitration case against the Philippine government in a Washington-based international tribunal.

In a recent interview on ANC’s Business Nightly, the German ambassador to the Philippines said the NAIA-3 issue has, indeed, clouded foreign investors’ interest in entering into contracts with the Philippine government.

The Philippine government has charged Fraport for violating anti-dummy laws for asserting control of a key facility. The Constitution does not allow foreigners to own more than 40% of key industries.

“The government imposes formal and non-formal barriers to foreign investment, and foreign remittances,” Heritage said.

The think tank deducts points from a country’s score when the government intervenes in a free enterprise. For example, 10 points was deducted from the Philippines’ “monetary freedom” score to account for measures that distort domestic prices.

It noted that the government “influences prices through state-owned enterprises and utilities and controls the prices of electricity distribution, water, telecommunications, and most transportation services.” –Lala Rimando, abs-cbnNEWS.com