Strategies for inclusive development

The Philippines successfully concluded hosting the 23rd World Economic Forum on East Asia which highlighted the impressive economic gains under President Aquino’s administration.

Just last year, despite Supertyphoon “Yolanda’s” widespread devastation, the country chalked up a gross domestic product (GDP) growth rate of 7.2 percent, the second highest in Asia, next only to China, although GDP growth slowed to 5.7 percent in the first quarter of this year. The World Bank revised its growth projection for the Philippine economy downward from 6.7 percent to 6.6 percent for 2014.

It scored investment grade ratings from all three major global credit rating agencies, the first time in its history and stood out as the fastest-growing economy in the Association of Southeast Asian Nations (Asean). From being labeled the “sick man of Asia,” the Philippines is poised for a long-term growth trajectory and real economic takeoff.

Virtually unchanged

And yet, despite this stellar performance, poverty incidence has remained virtually unchanged from 25.2 percent in 2012 to 24.9 percent in the first semester of 2013 (Philippine Development Plan Midterm Update; Annual Poverty Indicator Survey). In poverty reduction, the Philippines has lagged far behind its Southeast Asian neighbors, namely, Thailand, Malaysia, Indonesia and Vietnam (Diagnosing the Philippine Economy—Toward Inclusive Growth, Asian Development Bank [ADB] book, 2011).

The unemployment rate even worsened, as it rose to 7.5 percent in January 2014 from 7.3 percent in 2013 and the underemployment rate hovered at a high 19.5 percent for a total of 27.0 percent of the entire labor force (ADB Outlook, 2014). We already have 10 million Filipinos working overseas.

The Philippines had the highest unemployment rate for 2013 among all the 10 Asean countries (International Labor Organization [ILO] 2014 Report). See Table.

In fact, the increase in wealth of the top 40 richest Filipinos in 2011 was equivalent to 76.5 percent of the Philippine GDP growth for that year (Habito, Inquirer, June 26, 2012), manifestly showing that economic progress has disproportionately favored the economic elite.

The once vaunted “Filipino First” policy has morphed into a “Rich Filipino First” policy, as much of the country’s resources and wealth have been gobbled up by economic oligarchs. Simply stated, the remarkable economic growth has not been inclusive, bypassing the poor and the unemployed.

Inclusive development

While it is true that our chronic twin problems of poverty and unemployment may not be solved overnight, their alleviation and mitigation can be considerably hastened with innovative, stimulating and productive transformational strategies that will significantly uplift the lives of all Filipinos, including the poorest of the poor.

Our people cannot afford to wait for remedies that are agonizingly slow in coming. They need solutions with immediate and powerful impact. The following are compelling proposals and programs that will help bring this about.

Charter amendments

The first commandment of the 10 commandments of the amendatory process, according to Harvard law professor Laurence Tribe, in his book “American Constitutional Law” (2000), is that the Constitution should not embody economic policy. The constitutions of other countries are wisely silent on economic issues and, thus, they retain great flexibility in enacting economic laws responsive to the demands of the rapidly changing times.

But not the Philippines, where we have disregarded or overlooked this principle on constitution-making, for our fundamental law expressly embodies ultranationalistic economic provisions limiting foreign ownership and investments in vital sectors of the economy.

As a consequence, the Philippines has harvested the bitter fruits of this monumental constitutional blunder. Because of these misguided economic policies deeply embedded in our Constitution, for decades the Philippines has lagged far behind its Asean-5 neighbors in economic growth, foreign investments, job generation and poverty alleviation.

Lowest FDI

In the matter of foreign direct investments (FDIs), data from the UN Conference on Trade and Development show that for 2010-2012, the Philippines received only $6.8 billion in FDIs, while its Asean-5 neighbors received more than triple or quadruple: Vietnam—$23.8 billion, Thailand—$25.5 billion, Malaysia—$31.4 billion and Indonesia—$53 billion.

Our current level of FDIs remains at the bottom of the pack among these countries, according to the Foundation for Economic Freedom. See bar chart.

But now, we have before us the golden opportunity to dismantle these impediments to progress once and for all. Ongoing proceedings in Congress seek to amend the Constitution by simply adding the crucial phrase “unless otherwise provided by law” to those provisions which limit or restrict foreign ownership and investments in certain significant sectors of the economy, notably in natural resources, land, public utilities, educational institutions and mass media.

These amendments are designed to attract massive investments into the economy because it is mainly through investments, especially foreign direct investments that jobs are created and poverty is reduced, resulting in inclusive development.

Philippine economic growth has been primarily consumption-driven, not investment-led and employment-oriented. We urgently need enormous investments in infrastructure, factories, natural resources, utilities, industry, agriculture and tourism.

The Philippines is in the process of adopting a comprehensive competition law as part of its commitment to the economic integration of Asean by end-2015. The integration will herald a “new era for borderless competition” across industries, as it is expected to transform the Asean countries into a single production base and market of over 600 million people, where there will be free movement of goods, services, skilled labor, investments and capital.

Fragmented competition laws

While the Philippines has more than 30 laws relating to competition, they are fragmented and not fully compliant with Asean guidelines, according to the Asia-Pacific Antitrust Review 2014.

The essence of a truly democratic free-enterprise system is competition. This proposed competition framework aims to unify all laws, regulations and policies that promote competition, innovation and productivity, rather than dishonesty, corruption and rent-seeking. The framework also aims to eliminate monopolies, cartels and unfair competition.

Antidynasty law

Political dynasties are expressly forbidden by the Constitution (Art. II, Sec. 26), but this prohibition is not self-executory as it is qualified by the phrase “as may be defined by law.”

Despite numerous valiant attempts, the proposed ban has been doomed, as Congress is regarded as the principal playground of political dynasties, which cannot be expected to embrace a law that would bring about their own political demise.

According to the Movement Against Dynasties (MAD), 80 percent of the Philippines is controlled by political dynasties. Even now, new dynasties are mushrooming all over the country. Political dynasties are “the source of corruption, massive cheating, violence, poverty, poor education and the stranglehold over business, the police and even the military where dynasties rule,” said MAD cochair Danilo Olivares (Inquirer, May 29, 2014).

A law banning political dynasties, now again pending approval in Congress, would democratize political power in the country by guaranteeing equal access and opportunity to public office, especially to poor but competent and deserving candidates.

Perhaps, in time, transforming leaders not belonging to entrenched political families, will ultimately be able to take over the reins of government and bring about accelerated inclusive development.

Good governance

Corruption is the top problem faced by developing countries, according to World Bank President Jim Yong Kim. The persistence of rampant corruption is one of the principal reasons for Philippine poverty and underdevelopment. The cost of corruption in government is stupendous, about P250 billion a year, according to the Philippine Public Transparency Reporting Project.

Corruption is one of the most critical constraints to foreign investments and, hence, to sustained and equitable growth. It also weakens investor confidence, undermines tax collection, causes poor conditions of infrastructure, hinders the pace of poverty reduction, reduces productive employment opportunities, and is a major contributing factor to inequalities in access to education, health and other productive assets (Diagnosing the Philippine Economy).

Agrarian reform

Hence, the merits of the invisible hand of the market—first asserted more than two centuries ago by Adam Smith, the father of modern economics, in his classic tome “The Wealth of Nations”—must be balanced by the virtues of good governance. There must be transparency and accountability in governance, and corruption must be exposed to the light of day for, as Justice Brandeis sagaciously declared, sunlight is the best disinfectant.

A major key to inclusive development is higher agricultural productivity. Two-thirds of poor Filipinos reside in rural areas and depend predominantly on agricultural employment and incomes (Diagnosing the Philippine Economy).

According to the World Bank, developing the agricultural sector in a sustainable manner represents the only viable way out of poverty. It further asserts that land reform significantly improves the well-being of farmer beneficiaries, as they accumulate capital and assets at a faster rate than nonfarmer beneficiaries and their farms are more productive.

Many of the flourishing economies in Asia, notably China, Japan, Taiwan and South Korea, have utilized their successful agrarian reform programs as a springboard to effectively transition to rapid industrialization.

The Comprehensive Agrarian Reform Program (CARP), together with its extension (Carper), is set to expire on June 30, without having completely achieved its objectives. According to an Asia-Pacific Policy Center study, under CARP poverty incidence decreased and landowner incomes increased. It is, therefore, advisable that CARP be continued and allowed to be fully implemented.

To make agrarian reform truly effective, however, these critical constraints must be remedied: lack of farm-to-market roads, irrigation systems, postharvest facilities, financial support, training and agricultural extension services.

‘Arangkada’

The Arangkada (“Move Fast”) program is a 10-year roadmap launched in 2010 by the Joint Foreign Chambers of the Philippines (JFC), whose main message is that the Philippine economy has grown so slow for so long a time that it has to double its growth rate and move twice as fast to create jobs, eliminate poverty and catch up with its faster-growing neighbors to enable the economy to compete in an increasingly interlinked world.

According to Arangkada, the three biggest challenges facing the Philippine economy are to move up to a higher level of sustained growth, create more and better jobs, and make growth inclusive. It further asserts that existing massive unemployment and poverty can best be solved by investments made by both locals and foreigners, and that competitiveness is the key to attracting those investments.

Industrialization

Industrialization is crucially important to rapid economic prosperity of developing countries. Sustained economic growth, as the foundation for reducing poverty and converging to high income, is the result of incessant structural change through industrial upgrading and diversification (Lin, “The Quest for Prosperity—How Developing Economies Can Take Off,” 2012).

The most important component of the industrial sector is manufacturing, a major driver of growth, which in the Philippines constitutes around 70 percent of total industrial output. But there are major constraints to be overcome, mainly high power costs, poor infrastructure, difficulty of doing business and protectionist measures.

After World War II, the Philippines was next only to Japan in economic progress. But it has been left behind by its Asean neighbors in attaining economic growth and eradicating poverty because of its erroneous industrial strategy. It adopted and lingered too long on import-substitution and protectionist industrialization, and failed to timely shift to the promotion of export-oriented and labor-intensive industries.

The Philippines has embarked on a reindustrialization program to recoup its lost industrialization. Manufacturing last year posted a 10.5-percent growth, nearly double the 2012 growth of 5.4 percent, although its growth moderated to 6.8 percent in the first quarter of this year.

But this revival is driven predominantly by robust domestic demand, while manufactured exports have still to diversify and intensify from over-reliance on semiconductors and electronic products.

Not etched in stone

Our economic principles and beliefs are not etched in stone or memorialized in solid granite. As Charles Darwin aptly reminds us: “It is not the strongest of the species that survive, nor the most intelligent, rather it is those most responsive to change.”

Economic dynamics constantly change and we cannot just remain mired in the past or have our perspectives frozen in time. We cannot remain stubborn and unreasoning in our feudalistic, antiquated, insular, and corrupt ways and practices, and continue to lag behind our Asian neighbors in the march toward inclusive progress.

Be bold

We must adapt and keep attuned to the revolutionary and fast-evolving international developments, especially to the new highly globalized, integrated and interdependent world, governed by modern state-of-the-art information and communication technology systems.

Now is the time to boldly confront and decisively challenge these intractable critical barriers and formidable structural bottlenecks to inclusive development. We have it within our powers to jump-start and redouble our efforts to radically change for the better the lives of our poor and marginalized countrymen; achieve a more just, humane and egalitarian society; and engender prosperity shared by all, through equal opportunity to avail ourselves of the abundant resources and blessings of genuine democracy.

(Robert Evangelista was chief legal counsel of the Philippine Center for Immigrant Rights based in New York. He pursued postgraduate studies in law and economics at the University of the Philippines [as UP Law Center scholar], constitutional law at Harvard and international economics at Oxford. He can be reached at evangelista.robert@gmail.com.) –Robert Evangelista, Philippine Daily Inquirer

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