Protectionist clauses in the Philippine Constitution restrict the flow of foreign direct investment

MANILA, Philippines – With the investment-grade credit rating from Fitch Ratings in March, an improved international business reputation, and sound fiscal management, the Philippines is poised to become the next foreign direct investment (FDI) destination of Asia.

Other conditions for a robust investment climate are in place: a large market, skilled human capital, youthful population, and strategic location that connects population centers across Asia.

The Philippines is increasingly open to international trade. By 2015, Southeast Asia will have the advantage of a single market through the Association of Southeast Asian Nations Economic Community (AEC).

According to data provided in the World Economic Forum’s Global Enabling Trade Report 2012, the country’s macroeconomic fundamentals are strong, making it attractive to at least a fraction of the foreign investors concerned over the Euro crisis.

Despite the improvement in the Philippine investment climate, the Philippine Constitution (1987) still has an antiquated article that supports laws restricting foreign ownership of property to 40 percent (Article XII), with minor adjustments and deviations by subsequent legislation. Removing the clause, and improving access and protections of foreign-owned business, would lead to a quantum leap in FDI and Philippine economic growth. Small changes to legislation are not enough. The Constitution needs to be changed in order to fully welcome foreign investors to the Philippines.

Philippine opportunities

The country’s biggest investment opportunities are in manufacturing, real estate, agriculture, mining, infrastructure, retail, and tourism – areas of investment that are largely untapped given the quantity of FDI seeking attractive international opportunities.

Manufacturing is especially attractive to Japanese and Korean firms. Retail is booming, given the rise in domestic consumption. With Robinsons Retail Group’s initial public offering planned for $800 million, the Philippine stock market is becoming more attractive to both foreign and domestic investors; it is up 27 percent, “stronger than any other market in Southeast Asia” (WSJ).

Mining is another area that promises to yield high investment returns, given that the Philippines is considered “to be the 5th most mineral-rich country in the world for gold, nickel, copper and chromite worth over $840 billion” (Rappler). Goldman Sachs chief growth markets strategist Christopher Eoyang points out that unlocking this potential will depend on the flow of FDI to the mining industry.

The Philippine business climate is generally peaceful, with very few labor strikes, due to alternative dispute-resolutions (such as conciliation-mediation) made available by the Department of Labor. The Philippine government touts industrial peace as its comparative advantage against other countries in the region, pointing to only three labor strikes in 2012, compared to Vietnam’s 857 strikes the year before (FT). In Bangladesh, about 500,000 workers went on strike during the summer of 2012, causing 300 factories to shut down (Institute for Global Labour and Human Rights).

Yet in 2012, the Philippines attracted a measly $2.8 billion in FDI, according to the Bangko Sentral ng Pilipinas (BSP). Even excluding China, which had FDI of $254 billion in 2012, this performance is abysmal compared to other Asian nations. As shown in the graph above, most Asian nations had less than $10 billion in 2004. Three countries rose clearly above the rest by 2012 – Singapore, India, and Indonesia. The Philippines stagnated at the bottom of FDI over nearly the entire period.

The 60-40 foreign ownership clause in the Constitution

Why is the Philippines lagging in FDI relative to its competitors? The economic strictures of the Philippine Constitution (Article XII) and the corollary protectionist laws that have emerged from them are key causal factors. Specifically, foreign ownership of property is restricted to a 40 percent baseline share in the Constitution, with minor deviations and adjustments in subsequent legislation. By imposing restrictions on foreign ownership, charter Philippine lawmakers believed they protected the country’s sovereignty from foreign encroachments. The thought was that by imposing barriers on foreign trade and investments and prohibiting controlling property rights of foreign nationals, domestic economic strength and independence would be achieved.

As it turned out, however, these economic restrictions repelled investors and mostly benefitted small interest groups in the Philippines. They are provisions that work against the provision of economic growth and greater employment opportunities. The interest groups that benefited support protectionism in the Philippines and do not want any form of competition, domestic or foreign, to threaten their almost monopolistic access to market shares and government influence.

Kenneth Akintewe, portfolio manager at Aberdeen Asset Management in Singapore, observes that family-controlled big businesses in the Philippines dictate the terms of business in the Philippines: “There is a real hesitancy to allow foreigners to come in and have a major say on how businesses are run. Until that dynamic changes, it is difficult to see foreigners being particularly enthusiastic” about investing in the Philippines.

If there is an inherent flaw in the 1987 Philippine Constitution, it is in the integration of economic policies into its provisions. While a constitution embodies the fundamental law of the land and lays down principles and general guidelines, economic policy must be more specific, changeable, and consist of programs that cater to the changing needs and challenges of market fluctuations.

A Filipino congressman, Misamis Occidental Rep. Loreto Leo Ocampo, understood the economic dynamics of the restrictions when, during an introduction of his resolution for a constitutional amendment in 2011, said: “All our economic policies should not be in the Constitution because changing them is difficult. They should be dynamic and refinements should be just a subject of legislation.” In order to attract foreign direct investment, he continued, a constitutional amendment should include the revisions of the following provisions:

Remove the 60-40 percent equity limitations; remove control and management exclusively by Filipinos in companies with foreign equity; expand the role of foreign investors in the exploration, development, and utilization of natural resources; allow foreign ownership of industrial lands; liberalize media by allowing foreign investment in media; liberalize the practice of profession by allowing foreigners to practice their profession in accordance with the principle of reciprocity; liberalize investments in educational institutions by allowing foreign investment in tertiary education; among others (SunStar).

How were these economic policies inserted into the Constitution, and by whom? Suffice it to say that the 1987 Constitution, created to replace the 1973 Constitution that provided constitutional justification to the autocratic rule of former President Marcos, was drafted under a tense political atmosphere of transition. Marcos was seen to have been too close to foreign interests. Interest groups, including industry groups and leftist academics, took advantage of this public sentiment during the constitutional drafting process.

Constitutional amendment necessary

Amending the constitutional restrictions on foreign ownership would not be a complicated process. According to the Constitution, any amendment or revision may be proposed by the Philippine Congress acting as a Constitutional Assembly, upon a vote of three-fourths of all its Members, or by a constitutional convention, or by people’s initiative.

To this end, House Speaker Feliciano Belmonte Jr., expected to retain the speakership for the 16th Congress, is pushing for a charter change. Lawmakers sympathetic to charter change are confident that they have the numbers to convene a Constitutional Assembly, with the ruling Liberal Party’s 105 members, coalescing with members of the Nationalist People’s Coalition, National Unity Party, Nacionalista Party, and at least 16 senators from the Upper House (Asia News Network).

President Aquino and his advisers have expressed reluctance towards efforts to amend the Constitution. They say that for now they are reviewing archaic laws and introducing new economic legislation for the next Congress to be installed in July.

The Budget Secretary, Florencio Abad Jr., would focus on minor modifications to the 22 year-old Foreign Investment Act (FIA) rather than amend the Constitution.

It seems Malacanang does not want to rock the boat. Meanwhile, the economic provisions of the Constitution will continue to enable an inefficient rent-seeking, monopolistic economy that benefits only a few entrenched interests rather than those who need new jobs from broad economic growth. The economic policies in the Constitution will continue to diminish the sacredness of the nature of the Constitution, or of any constitution, for that matter, as the fundamental law of the land. Whatever it is that is preventing President Aquino and his advisers from addressing these issues certainly cannot withstand the scrutiny of reason, common sense, and fairness.

Unless the Philippines embraces constitutional change and foreign direct investment, the growth of the Philippine economy will be crippled. With everything else in place to attract FDI, namely, a large market, skilled human capital, a youthful population, a strategic location that connects population centers across Asia, and emerging market competitors that are soaking up the lion’s share of FDI flows — the stakes are indeed high. —-Priscilla Tacujan, Ph.D. (The Philippine Star)

Dr. Priscilla Tacujan is a consultant for Corr Analytics Inc., a New York-based company providing political risk analysis to emerging market investors.