Lessons from history for President Aquino
President Aquino has been quoted in the newspapers as being lukewarm to the idea of changing the Constitution to lift the restrictions on foreign investment. He may be making the same mistake as his mother did of being overly protective of the economic oligarchy.
If one were to recall, his mother, former President Corazon Aquino, restored democracy and made many economic reforms, including tariff and foreign exchange liberalization, but the one thing she did not or could not do was to dismantle the monopolies shackling the Philippine economy. That encouraged the coup plotters against her and her term ended with high inflation, budgetary deficits, and an energy crisis.
It took her successor, former President Fidel Ramos, to dismantle some of these monopolies in telecommunications, shipping, and domestic air transportation. The result was a boom in economic growth and surging business confidence, until President Ramos committed the grave mistake of letting the peso become overvalued. The Ramos boom ended in the Asian Financial Crisis of 1997.
President Aquino should not commit the same mistakes that his mother and former President Ramos did: he should undertake Charter Change to allow more competition, especially in the protected areas of public utilities, media, and educational institutions, and he should pursue a competitive currency policy.
What is the shackle that is preventing the country from achieving sustainable, investment-led growth? The answer is the oligarchic privileges that are preventing more competition.
Alexander Bocchi, the Italian economist from the World Bank who studied why investment rates in the Philippines are so low, states: “Why a low productivity of capital? In the traditional sectors of the economy, several rent-seeking corporate conglomerates, controlled by the local elite, use their political connections to: a) hinder tax collection, hence hampering public capital spending (which is a necessary condition for private investment: for example, the availability of public infrastructure is essential to stimulate the private sector’s willingness to invest); and b) limit economic entry, drive potential investors out, discourage smaller firms to grow bigger, produce expensive inputs, and enjoy market power and oligopolistic rents. As a result MPK is low because of: i) insufficient public investment; and ii) a high cost of inputs, due to elite capture.”
He added: “Oligopolies further reduce the investment appetite. Operating as monopolies and oligopolies, the corporate conglomerates find it convenient to restrict production – and investment – below competitive level. Also, their willingness to invest is inhibited by their concentrated ownership structure, and their uncertainties about the stability and duration of government favoritism.”
However, one may ask: there are no foreign investment restrictions in other industries except in those areas reserved by the Constitution for Filipinos, so why the urgency of lifting the restrictions in the Constitution?
First, it will be a clear and unmistakable signal to foreign investors that the country welcomes competition, especially in the strategic sectors of the economy. It will represent what economists call a “credible commitment,” signaling an openness to foreign investment.
Second, it will open up competition and foreign investment in the critical area of infrastructure investment. The number and quality of public private sector bidders will dramatically increase if foreign investors are allowed in.
Just take as an example the Cebu airport. In the beginning, the DOTC disqualified those investors who had investments in airlines, rightly fearing conflict of interest between the airport operator who has to serve all airlines and the airline they own. However, since foreign investors are disqualified by virtue of the constitutional prohibition of foreign majority ownership in public utilities, only the Ayala-Aboitiz partnership would qualify. The DOTC had to relent, set aside its fears of conflict of interest, and allow San Miguel, which has a stake in PAL, and the Gokongwei group, which owns Cebu Pacific, to participate. Even then, the number of Philippine conglomerates that can participate in this kind of biddings is still small and prone to collusion.
President Aquino should learn from his success in tourism.
Why tourism is booming
The tourism industry was shackled by the lack of international airlines bringing passengers into the country because the dominant Philippine carrier, Philippine Airlines, opposed the entry of new foreign carriers without “reciprocity” even though it didn’t have the airplanes to engage in reciprocity. The result was that the country remained a laggard in attracting tourists compared to countries like Thailand and Singapore, despite our country’s obviously superior attractions. The cause of our poor tourist arrival growth therefore was the lack of inexpensive and convenient access for tourists to come to the Philippines due to a “closed skies” policy favorable to oligarchic interests.
To his credit, President Aquino took on the vested interests and adopted “open skies,” enabling more foreign carriers, including the budget airlines representing the future of air travel, to come in. Now, tourism is booming. Fares have dropped and foreign airlines like Air Asia and Dragon Air are flying out of Clark. If the present constraint to tourism growth is the limited capacity of our decrepit Ninoy Aquino International Airport, that’s another story altogether.
But here again, remove the constitutional restrictions on foreign investment in airports, allow more competition, and growth will surely follow.
Didn’t the same story happen in telecoms? When former President Ramos took on the dominant telephone monopoly, PLDT, and opened telecommunications to other players like Bayantel, Globe, and Digitel, didn’t the service sector grow on the back of telecommunications growth? Wasn’t the massive BPO industry created on the back of liberalization of the telecommunications sector?
The lesson is clear: If President Aquino wants sustained investment growth, he has to take on the oligarchs and open the country to more competition. He has to remove the constitutional restrictions on more foreign investment and competition.
As for the exchange rate issue, he should also learn from the mistake of former President Ramos who disregarded sound economic advice and allowed the BSP to make the peso “overvalued.”
The overly strong peso made the stock and property markets frothy, giving the illusion of prosperity. The strong peso with the assurance by the former BSP Governor that he will allow a devaluation only over his dead body, also encouraged banks to borrow in dollars and lend in pesos. When the hot money suddenly reversed course in the wake of the Asian Financial crisis, the result was a crash from which the country took decades to recover.
Former President Ramos’ dreams of amending the Constitution to enable him to run again similarly crashed in the wake of the economic downturn and his legacy marred by his administration’s mismanagement of the exchange rate.
Peso as grave threat
As if history is repeating itself, the country is facing a similar problem with the peso now getting too strong for its own sake - dampening exports, encouraging smuggling, undermining the call center business, and reducing the purchasing power of OFWs.
However, in contrast to Ramos’ time when the voices calling for a competitive currency were weak, this time around the political economy is more favorable.
Banks and corporations are not as exposed to foreign exchange risks as before. The system is awash with cash, enabling corporations to issue peso denominated bonds of long maturities rather than borrow abroad. The OFW sector has gained more political and economic clout with OFWs gaining the right to vote and its remittances powering the economy. The BPO industry, non-existent in 1997, is a major contributor to the economy and has gigantic firms like Ayala and Teleperformance in it.
However, the Aquino administration seems clueless that the strong peso is a grave threat to the economy and that it is hurting large swaths of the economy, including the retail, housing, and education sectors which are dependent on OFWs money. Instead of being pro-active like the governments in Japan, Switzerland, and Brazil which voice out their desire to make their respective currencies competitive and whose central banks embark on aggressive quantitative easing, the Aquino government seems to be mute and behind the curve, allowing the BSP to make tepid responses to the strengthening peso.
There is a popular saying that “those who don’t learn from history are condemned to repeat it.” President Aquino should bear this in mind, and not allow the record highs of the Philippine stock market get into his head.
If he remains protective of the Philippine oligarchy and not open up strategic sectors to more competition and if he remains “deadma” to the gathering storm of a strengthening peso, Daang Matuwid may well run out of steam, and he may end up missing an opportunity to have altered the course of Philippine history. Not inclusive, sustainable investment-led growth, but no wang-wang may constitute all of his legacy. - Rappler.com