Economic policies for more inclusive growth

By Gerardo P. Sicat (The Philippine Star), March 2, 2016

Inclusive economic growth achieves sustained and improving quality of employment, rising incomes and productivity and higher standards of living for the country’s citizens.

It happens best when the macroeconomic environment is stable, with fiscal, monetary and trade policies in relative balance.

Such a condition prevents macroeconomic turbulence. When booms and busts happen regularly, the economic gains of yesteryears could be lost or wiped out.

Achievements toward more inclusiveness in economic policies. In recent times, policy changes have moved toward the promotion of inclusiveness. This has happened across different political administrations.

The liberalization of trade and industry is a big step toward achieving inclusive growth. The country’s decision to join the WTO (World Trade Organization) when it was established helped to produce the discipline needed to work for greater competition..

A parallel development was the ASEAN (Association of Southeast Asian Nations) agreement to become a free trade area. Subsequent FTAs (free trade agreements) that ASEAN and our country have negotiated with other countries are steps further cementing this reform toward open competition.

The biggest winners in the economic liberalization of trade and industry are Filipino consumers. They benefit from a wider choice in quality and price of all kinds of goods.

Evidence of this can be found in the country’s stores in malls and public markets. During the heyday of high protection and import substitution, the choices were fewer and the cost of goods much higher.

The benefits to producers still have to be cemented. Reducing existing inefficiencies and rigidities that currently afflict the markets for economic resources — capital, labor and land — need to be worked on to improve the gains for producers and wider groups in the economy.

The next important reform agenda: repair the inefficiencies in resource markets. We must focus on the critical problems that still contribute to high costs of production that hamper competitiveness of Philippine output, both at home and in world trade.

More investment is the key to inclusive growth. More investment produces the jobs needed to help erase poverty. More investment expands the national capacity for production and also facilitates technological progress and rising productivity.

The current political season, in fact, keeps repeating the message of “more investment.”

Economic reforms are needed to correct the rigidities and the inefficiencies that hamper the markets for the factors of production and unlock the magic of realizing more investments in the economy.

Capital. Qualified restrictions on foreign direct investments embedded in the constitution are a product of pre-independence policies. The direct historical roots trace back to the nationalism of the 1930s.

These restrictions have encouraged and led to more restrictive policies in other aspects of investments in the domestic economy.

Existing BOI policies have been designed to provide more advantage to domestic enterprises relative to foreign investments because of the policy of reserving the home market to domestic enterprises.

This form of selectivity no longer works with the advent of the ASEAN free trade area. Goods produced in other ASEAN countries can penetrate domestic markets through the free trade area.

Why not liberalize entirely the foreign investment field serving in the domestic economy then? The dichotomy of BOI and PEZA (Philippine Export Zone Authority) incentives for foreign enterprises has been rendered anomalous by the ASEAN free trade area.

More Philippine resources will be employed if foreign investors produce in the country. Otherwise import penetration through competition in these goods will come from enterprises located in other ASEAN countries.

The amendment of the restrictive provisions on foreign investments in the Philippine constitution would provide a much better framework, as it would be a game changer for investment policy with broad-ranging implication on the inflows of more foreign direct investments.

Labor. In the course of decades, Philippine labor policies have become far more advanced than warranted by the economic conditions. Population growth and the large supply of labor have made job creation not only important, but also imperative.

The typical large East Asian economy sensitized their labor supply conditions to the relevant economic conditions. They devised their policies to create more jobs in commerce, agriculture and industry. Those that pursued this strategy are now industrialized and higher income countries than us.

The Philippine labor market has so many inefficiencies and inflexibilities that it is time to focus on reforming these policies.

In the Philippines, government interference has been biased to raise wages periodically. Wages should be essentially guided by labor-management agreement and by “social contract” between the state and the labor sector.

Such contract should focus more on improving training for skills (as it is doing), investing in human capital through education, and in encouraging investments so that jobs are created but should allow market forces to work.

One of the remedies proposed to partially reform labor market policies has been my proposal of labor employment zones, which I have explained elsewhere.

Land. The employment of land for economic activity suffers from a lot of restrictions and regulations as a factor of production. Two major sources of tensions have intervened.

The first is the land reform program. In the course of decades of its implementation, the land reform program has expanded far beyond the original plans. This has reduced the scope for investments in land.

The comprehensive land reform program has broadened the coverage of land reform. Before, the land covered by land reform were confined to rice and corn lands.

The second set of influences refers to the long standing constitutional restrictions on land ownership regarding foreigners.

These developments have helped to limit potential investments in agriculture, commerce and industry. The issue of land as a factor of production is highly linked with many important issues. There are opportunities as well as tensions that need resolution.

The topic is very complex and it requires more space for discussion.

Missing during the electoral campaign? During the electoral campaign, these difficult issues are hardly ever mentioned. Yet, they are at the core of moving forward in making the Philippine economy perform much better.

What we hear most about in their economic programs include the creation of more jobs and investments and those that involve more government expenditures (public infrastructure, subsidies to the poor like CCTs [conditional cash transfers]).

The next president of the country who decides to face these issues squarely will find that there is a high pay-off in terms of strengthening inclusive growth.

My email is: gpsicat@gmail.com. Visit this site for more information, feedback and commentary: http://econ.upd.edu.ph/gpsicat/