charter change

[In This Economy] A counter-rejoinder in the economic charter change debate

JC Punongbayan

This is AI generated summarization, which may have errors. For context, always refer to the full article.

[In This Economy] A counter-rejoinder in the economic charter change debate

Marian Hukom

I’m glad that there’s now a proper debate on economic charter change, what with the UPSE paper and the FEF rejoinder. But the latter merely proves the point of the former: there’s still too much hand-waving in the economic charter change debates.

On April 8, a group of economists (myself included) from the University of the Philippines School of Economics (UPSE) came out with a new paper discussing economic charter change, and why evidence in support of it is weak.

I wrote about the discussion paper in my column last week.

More than a week later, on April 16, the Foundation for Economic Freedom (FEF), a pro-market non-profit, came out with a rejoinder titled, “Let’s Change our anti-FDI History: A Rejoinder to the UPSE Discussion Paper on Charter Change.”

The title itself is funny, since it seems to imply that the UPSE economists were taking an “anti-FDI” stance. In fact, we made no such stance. We’re merely calling for a more sober discussion of economic charter change, and a more careful assessment of the evidence used to argue for (or against) it.

Specifically, we said that, “It should be clear however that we are by no means opposed to FDI and that we do see its potential to make a significant contribution to development. But this is only if we are clear-eyed about what and from where benefits from FDI are to be expected, what the real barriers to investment are, and what supporting institutions and policies are needed so that society can derive the most benefit from it.”

Let’s break down what the FEF said in their rejoinder. (Note that this piece is not an official counter-rejoinder of the UPSE discussion paper.)

Size matters

First, the FEF challenged the assertion that “equity restrictions have no significant impact on FDI inflows.”

This itself is misleading. In the UPSE paper, we acknowledged that in a 2021 paper penned by Bangko Sentral economists, the effect of foreign direct investment (FDI) equity restrictions appeared to be “statistically significant” in the basic versions of the quantitative model they used.

But this effect weakens a lot if you control for other important variables that affect investment inflows, such as corruption perceptions, the rule of law, ease of doing business, and road and telecom infrastructure. In fact, in some of the more comprehensive models used, foreign equity restrictions turn out to be statistically insignificant from zero.

Here’s exactly what we said: “In sum, differences in foreign equity restrictions across the ASEAN-5, as measured by the Equity Index, may help explain some of the observed dispersion of FDI outward position from source countries over the period, but they cannot be considered as the main explanatory factor and can hardly be called necessary. Improvements in the business regulatory environment, combined with improvements in infrastructure, not only have effects that dwarf the size of those coming from any change in foreign equity restrictions, but changing restrictions may not even have a significant bearing on outcomes.”

The FEF paper then went on to “move beyond theory and look at a proof of concept that negates the assertion.” It then discussed the case of liberalizing renewable energy in the Philippines.

But this aligns with a later point made in the UPSE paper, that FDI policies must take on a sectoral approach. That is, there ought to be a “discriminating approach to FDIs…one that features identifying what sort of technology and knowhow can be of use to local firms, and proactively seeking out the same.”

If liberalizing the renewable energy sector led to a tsunami of investments, well and good. But this single sector cannot be used as a blanket reason to open up the economy to any and all FDIs. As we said, “The key message to policymakers at this time is to take care not to assume that any and all types of FDI will be good for development.”

Necessary vs. sufficient

The FEF then went on to challenge the second assertion by UPSE economists, that removing foreign equity restrictions is nice but not necessary.

According to the FEF, “removing the restrictions is a necessary condition since we have to open the door first for investors to come in,” and “removing these anti-FDI provisions in the Constitution will signal our openness to foreign investment.”

First off, it’s inaccurate to say that we’ve closed the doors on foreign investments completely. As a colleague pointed out, public utilities, for instance, allow 40% foreign equity, not zero.

More importantly, I hope the FEF was able to read footnote 7 in page 4 of the UPSE paper, which discusses the whale of a difference between a “necessary condition” and a “sufficient condition.”

Something is necessary if without it something else can’t happen. For instance, lightning is necessary for thunder because without lightning thunder won’t occur.

On the other hand, something is sufficient if by itself it can cause changes in another thing. For instance, having an umbrella is sufficient to keep you dry if it’s raining. But it’s by no means necessary; you can stay indoors or wear a raincoat instead.

What we’re arguing in the UPSE paper is that tinkering with the 1987 Constitution and relaxing restrictive provisions in 3 sectors (advertising, higher education, and public services) is one of many sufficient conditions for FDIs to come in, but not at all necessary.

One proof is that there was a massive wave of FDIs during the term of the late former president Benigno Aquino III. That was achieved even without any charter change. This instantly debunks the FEF’s notion that reducing FDI restrictions is “necessary” for an influx of FDI. (This also highlights the exaggeration used by the FEF later in the rejoinder: “100 years of solitude from FDI.”)

The economic studies also point to the fact that there are other possible (in fact more potent) sufficient conditions for inducing investments. These include, as stated above, a lowering of corruption perceptions, greater rule of law, and better infrastructure. Among these sufficient conditions, reducing foreign equity restrictions is among the weaker ones.

We noted that, “One paper estimated the potential effects on FDI of improving perceptions of public sector corruption to be 8 times stronger than the potential effect of lifting equity restrictions.”

The FEF said that UPSE professors claim that addressing governance and infrastructure issues is the “exclusive approach” to attracting FDI. We made no such claim. It’s another exaggeration.

The FEF then said that “the lifting of the foreign equity restrictions is not being proposed as a magic bullet that will cure all ills and should not be seen as neglecting to fight corruption, investing in infrastructure, or improving the rule of law.”

True enough. But as a potential means of promoting FDI, lowering FDI restrictions alone is terribly inefficient.

I use “potential” here because, to this day, studies on FDI restrictions focus on correlation and not causation. Economists have yet to come up with proper, causal studies showing that FDI restrictions have any solid causal impact on FDI.

Speaking of which, the FEF said that “restrictiveness cannot be separated from corruption; it may be a cause for corruption as National Scientist for Economics Dr. Raul Fabella showed in the PIATCO [Philippine International Air Terminals Co., Inc.] case.”

In a nutshell, the PIATCO case involves the controversial contract awarded to PIATCO itself for building and operating NAIA Terminal 3, which became embroiled in legal and corruption issues, leading to its non-operation for years despite completion in 2002.

However, citing the PIATCO case is not at all evidence that there is a direct causal link between foreign equity restrictions and corruption. Other factors, such as a weak judicial system, lack of transparency, or insufficient regulatory frameworks may be inducing corruption regardless of foreign ownership restrictions.

In short, there is a danger of overgeneralizing from this single case study.

Too much discretion

Later in their rejoinder, the FEF said that the UPSE professors used a “strawman fallacy” by cautioning that giving Congress flexibility in attracting foreign investments will result in “too much discretion in crafting economic policy.” The FEF added that we’re a rare country where foreign ownership restrictions are found in the Constitution itself.

They neglect to mention, however, that Congress has, in fact, successfully passed one law after another loosening these constitutional restrictions, even without charter change.

These laws include amendments to the Foreign Investments Act, amendments to the Public Service Act, and the Retail Trade Liberalization Act. On top of these, sectors like manufacturing and energy are open to 100% foreign ownership.

But despite these measures, why are investments still anemic? And why have investments been declining in the past two years, despite recent efforts by President Ferdinand Marcos Jr. to entice investments from all his foreign trips? It cannot be all about the constitutional limits.

The FEF also glosses over the realities of Philippine politics, where lawmakers, if given enough discretion, can easily set out to undermine and even outright destroy businesses (just look at what happened to ABS-CBN during the Duterte administration).

Note, too, that 1987 Constitution was an anti-dictatorship constitution, designed to avoid a repeat of the many abuses during the Marcos regime. In other words, the current Constitution is designed with the political idiosyncrasies of Philippine politics (kinship ties, patronage politics, rent-seeking culture, etc.) in mind. The framers wisely knew that abuses are likely in our political setting, and aimed to prevent such abuses by making the Constitution extra hard to change.

The FEF further argues that opening up foreign restrictions will “improve contestability in a market dominated by existing monopolies and duopolies.” But can they name monopolies and duopolies in higher education and advertising – two of the sectors they’re aiming to open up?

What about public services? The FEF cites greater investments in telecom with the entry of Dito Telecommunity, as well as the spread of Elon Musk’s Starlink.

But note that Dito’s entry has been marred with national security concerns, because it is partially owned by a Chinese state-owned company. And Starlink was able to spread across the country because it was approved as a value-added service (VAS) provider by the National Telecommunications Commission (NTC) – a totally legal workaround to the 1987 Constitution’s restrictions.

In other words, our current Constitution already allows foreign investors to enter most sectors. It is no longer a binding hindrance.

Finally, the FEF cited the Supreme Court challenge to the law amending the Public Service Act, which in their view led to investors becoming in limbo. They argued that, “if the Supreme Court decides to rule that this law is unconstitutional, this will greatly damage the image of the Philippines with foreign investors. Adding the phrase ‘unless otherwise provided by law’ will render this Constitutional challenge moot.”

But as the UPSE paper noted, lawmakers will still need to craft specific laws to open up higher education, advertising, and public services. That, too, will take time. And even if these laws pass, can we really expect a plethora of foreign investments to flock into these three specific sectors – enough to buoy the economy and accelerate growth? I don’t think so.

All in all, I’m glad that there’s now a proper debate on economic charter change, what with the UPSE paper and the FEF rejoinder. But the latter merely proves the point of the former: there’s still too much hand-waving in the economic charter change debates.

We need more evidence (and a more nuanced appraisal of it) in the coming weeks and months. –

JC Punongbayan, PhD is an assistant professor at the UP School of Economics and the author of False Nostalgia: The Marcos “Golden Age” Myths and How to Debunk Them. He was recently named one of The Outstanding Young Men (TOYM) for 2023. JC’s views are independent of his affiliations. Follow him on Twitter/X (@jcpunongbayan) and Usapang Econ Podcast.

1 comment

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  1. ET

    I agree: “There’s still too much hand-waving in the economic charter change debates.” A magical wand will soon be added to this hand-waving, which will result in surprises from the ruling political dynasty’s triumvirate corruption, repression, and disinformation machinery.

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JC Punongbayan

Jan Carlo “JC” Punongbayan, PhD is an assistant professor at the University of the Philippines School of Economics (UPSE). His professional experience includes the Securities and Exchange Commission, the World Bank Office in Manila, the Far Eastern University Public Policy Center, and the National Economic and Development Authority. JC writes a weekly economics column for He is also co-founder of and co-host of Usapang Econ Podcast.