Corruption and the foreign ownership rule
(An open letter to the President on the nationality restrictions to foreign investment in the Constitution)
Dear President Aquino,
You recently asked the National Economic and Development Authority to gather “evidence” whether the nationality restrictions in our Constitution represent a binding constraint to development.
To be sure, some economists would list lack of infrastructure, poor tax revenues, galloping population growth, and others as of a higher order priority in terms of binding constraints. They will cite countries like China, which has some nationality restrictions, especially in the ownership of land, as countries that developed despite nationality restrictions.
However, these economists make a faulty assumption: that there’s strong state and strong institutions that can act on these binding constraints.
We argue, however, that the nationality restrictions in our Constitution have a corrosive and corruptive effect on our state and institutions, thereby making them less able to tackle these first order problems. Therefore, the highest priority is to strengthen our institutions, rather than assume these exist, and that economic problems can willy nilly be solved.
The truth is that there had been many cases in the past where these nationality restrictions have led to controversies and scandals. The best example of this is the PIATCO-NAIA 3 project which was adjudged by our Supreme Court as being tainted by corruption and irregularity. Many of our institutions -- from the media, the executive branch, the legal establishment, to the judiciary itself -- have been dragged down to this day by this case of corruption.
And what was the source of that corruption? The German company had to get a Philippine partner because it could not undertake the project by itself, being barred by the Constitution to only 40 percent ownership. Institutions had to be corrupted because the government could not conduct a fair bidding where qualified investors, whether foreign or local, could participate. Dummies had to be used in order to get a sweetheart contract from the government.
The cancellation of that project, while justified, gave us a black eye in the foreign investment community and scared off foreign investors. The controversy would not have happened had our Constitution been more open to foreign investors, dispensing the need to circumvent the law through dummies.
We need not mention that there are other controversies, such as the PEA-Amari deal and the Supreme Court decision favoring “Filipino” ownership of the Manila Hotel, which have left our institutions diminished because nationality restrictions and preferences in our Constitution generated unnecessary scandal and controversy.
The degradation of our law and institutions has not been limited to those controversies. It is public knowledge that the current restrictions are being evaded through various means by foreigners who control mass media and advertising companies, public utilities, educational institutions, and even land and real estate companies.
Indeed, these restrictions result in “adverse selection,” leading to only those foreign investors who are willing to skirt our laws, pay dummies, and engage in graft and corruption, to come here to do business.
What is happening to the Philippines is much like what happened to the United States during Prohibition. The outright ban on alcohol consumption led to the corruption of police agencies and the judicial system in the United States. Similarly, the nationality restrictions promote an environment prone to bribery and corruption and favorable to unscrupulous lawyers, judges, and media people.
Therefore, lifting the nationality restrictions in the economic provisions in the Constitution is in accordance with your fight against corruption and toward “matuwid na daan.” It strikes at a root cause of corruption and strengthens our institutions.
Moreover, Mr. President, recently you were reported to have castigated a TV news celebrity for being unprofessional and biased. However, instead of merely criticizing him, which would not probably lead to a change in behavior, wouldn’t it be better if CNN, BBC, or some other international news organization of sterling reputation could come here, invest, and show local networks what it means to give fair, professional, and unbiased news reporting? The best guarantee of fairness and professionalism in broadcasting, Mr. President, is to enable competition, whether local or foreign, in the media industries in the hopes that world class journalism will develop.
There are many other compelling reasons to liberalize and amend the nationality provisions in our Constitution, such as the opportunity losses the economy will suffer if we can’t join the Trans Pacific Partnership. The Trans Pacific Partnership is a body of nations led by the United States that gives preferred trade access to member nations. However, discrimination against foreign investors in our Constitution will disqualify the Philippines from membership in this body and leave us further behind our neighbors like Vietnam.
All in all, Mr. President, econometric modeling will only tell you so much. Just as your decision to have former Chief Justice Corona impeached was right because it was in accordance with your theme of matuwid na daan, and not because some econometric study said so, a decision to support Charter Change to lift the nationality restrictions in the Constitution should also be right because it will be about strengthening our institutions and striking at a root cause of corruption.
Mabuhay po kayo! Ipagpatuloy ang laban sa korupsyon! Lift the nationality restrictions to foreign investment in the Constitution!
Calixto V. Chikiamco
Foundation for Economic Freedom
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