Labor policies are not a barrier to investment

Last February 16, we held a conference on barriers to investment. It was a working conference that brought in a variety of groups that are involved in one way or another with wanting much greater levels of investment in the Philippines. It was to discuss a working paper we have done and have now finalized from this working group discussion.

If the presidential candidates take note of our findings and promise to do them if they win, this country might finally get somewhere. As it now stands, the Philippines is last in the levels of foreign investment coming into Asia (excluding the minor countries), yet should be first. It could be, well after China and India, but it won’t be unless these reforms are done.

In the past 10 years a paltry US$14.8 billion has flowed in. Vietnam that wasn’t even on the map a decade ago got $38.8 billion. Malaysia $49.8 billion, Thailand $49.9 bilion. Even Indonesia, the worst affected by the 1997 Asian financial crisis, and with all its troubles, received $22.4 billion, or almost double the Philippines’ level. And since Indonesian President Susilo Bambang Yudhoyono came to power in 2004 that number has accelerated by almost three-fold, from $1.9 billion in 2004 to $6.9 billion in 2007. The Philippines attracted only $2.9 billion in 2007.

There seems to be a correlation with the way the world perceives the Philippines and the level of foreign direct investments that are coming in. The country is 87th out of 133 countries in the World Economic Forum’s Competitiveness Report, 43rd out of 57 countries in Institute for Management Devlopment’s Global Competitiveness Ranking, and 144th out of 183 countries in International Finance Corporation’s Doing Business Report. In every indicator, not only is the Philippines very low on the scale, it is deteriorating.

The list goes on, but you get the message: Change must occur. That change involves eliminating the barriers to investment we’ve identified. So what are they? In order of importance, they are:

1. Corruption

2. Contract sanctity violation (e.g. cancellation of NAIA-3 Contract with PIATCO, government’s amendments of contracts with independent power producers in 2002).

3. Supreme Court decisions against business (e.g. It ordered Meralco to give a retroactive refund because tax is not supposed to be a business expense)

4. Arbitrary interpretation of government regulations

5. Interference by local government officials,

6. Discriminatory taxation (e.g. excise tax differential on alcohol, cigarets & tobacco)

7. Constitutional restriction on land ownership

8. Constitutional restriction on ownership of public utilities

9. Restrictions in the foreign negative list, particularly practice of professions

10. Constitutional restriction on ownership and management of educational institutions

There are actually a lot more—we looked at 35 to 40 items, but we narrowed it down to these 10 priority reform areas. These are the 10 areas that the business community has identified as the biggest barriers to more investors coming into the Philippines. There are many benefits to attracting more foreign investments, the transfer of capital and the generation of more jobs being two of the more important ones, but there are costs as well. So we considered both the economic and social benefits and the costs of each reform area and have taken account of it in our rankings.

Five of the top 10 barriers are what we call—Behind-the-Border-Barriers. The BBBs deter both domestic and foreign investment. And these are the barriers that even if you eliminate all the others—the 60-40 rule on ownership, etc.—very few investors would still come in. BBBs discourage investments by increasing costs, increasing risks and creating barriers to competition. The significant excess of savings over investment that currently exists is one indication of the presence of BBBs. According to the Asia-Pacific Economic Cooperation, this could mean two things: there are excess funds in the economy that are not being used for expansion to boost growth or create more wealth or worse, they are being invested outside the country. This resource surplus has been building up in the Philippines and has averaged almost 3 percent of GDP since 2000.

And it is not just the perception that the Philippines is corrupt that is the problem. Although it is a huge problem. Especially in the Philippines, whose brand of corruption had been described as “chaotic”. The country has been ranked 139th out of 180 countries in the Transparency International Corruption Report, worse than what it was in 1998. The country’s corruption ranking has steadily deteriorated since 2001 and is now near the bottom among Asian countries surveyed by TI. Companies from countries with strong anti-corruption laws can’t invest in many of the projects here. These countries account for three-fourths of all investments made in the world. If the Philippines had a stronger anti-corruption stance, foreign direct investments would be some $500 million to $1 billion higher. The other BBBs just add to this and increase the uncertainty and risks for business. A businessman would rather put his money in a country where contracts are honored, where the laws of the land are clear and where the government’s interpretation of laws is not changed at whim.

From our research, we have seen that investors invest in a country where structural reforms to address the BBBs have been addressed or started. Infrastructure is of course a key factor, but our study also shows that poor governance—which covers the entire range of security, law enforcement, graft and corruption, the justice system and rule of law issues— inhibits investments in Asean. Thus, a government that projects a strong image that it is addressing the BBBs will be the most successful in attracting foreign investments.

To address the BBBs we suggest more transparent contract preparation and a law disallowing amendments once a contract is finalized through a transparent process, the appointment of “friends of court” to provide expert opinion in the Supreme Court’s deliberation of investment-related cases; and a special court for handling investment-related cases. We have also suggested changes to address the other barriers we identified in the report. To address corruption, the sincere, personal anti-corruption commitment of the national leader is what is most needed, with some big corrupt personalities jailed as an example and warning to others.

The participants that attended our February 16 workshop agreed with these barriers we identified and our recommendations. The healthy debates and sharing of experiences among the participants who came from the business community, the government, and the academe also gave us more insight on what else they want to see changed to improve the level of investments in the country. We’ll cover some of that in the future. –Peter Wallace, Manila Standard Today

Comments to my columns can be sent to wbfplw@smartbro.net