Once more, University of the Philippines School of Economics (UPSE) professors felt the need to weigh in on another important economic policy issue under the Marcos Jr. administration.

On April 7, nine current and former professors of UPSE – Toby Monsod, Emmanuel de Dios, Aleli Kraft, Cielo Magno, Orville Solon, Elizabeth Tan, Florian Alburo, Agustin Arcenas, and myself – released a new discussion paper titled, “How to change a constitution by hand-waving (Or, the unbearable lightness of evidence in support of lifting foreign ownership restrictions).”

You can check our paper here. It’s a detailed critique of the economic charter change debates, which are often reduced to mere hand-waving.

As we wrote, “We were impelled to write after observing how much of what passes for economic analysis on the issue has been dominated by casual opinion, loose reasoning, and an incomplete appreciation of empirical evidence.”

The paper can be a bit technical, but let me summarize here the key points.

1) Lifting equity restrictions is not necessary for explaining inward flows of foreign direct investments.

We started the paper with a discussion of the Foreign Direct Investment (FDI) Restrictiveness Index developed by the Organisation for Economic Co-operation and Development (OECD). If this restrictiveness index is 0, a country is totally open to FDIs; if it’s 1, the country is totally closed.

True enough, the Philippines (with an index of 0.37 in 2020) is more restrictive to FDIs compared to, say, Vietnam (0.13) or Singapore (0.06).

But some sectors in the Philippines (like banking, finance, retail, wholesale, and manufacturing, and insurance) are less restrictive than others. And other not-so-open sectors (like business services, construction, and tourism) can be significantly liberalized by tweaking ordinary laws that affect these specific industries.  

In short, if the goal is to open up some sectors of the Philippine economy to foreign investments, we need not open up the 1987 Constitution just for that.

2) Other factors, such as ease of doing business and corruption perceptions, matter more in promoting FDIs.

More importantly, it’s not clear from the existing empirical studies that foreign equity restrictions are the biggest or most crucial hindrance to FDIs.

We took pains to scrutinize three economic studies often quoted in the congressional hearings of late.

One study done by Rutcher Lacaza, a House economist, was highlighted by certain lawmakers pushing for economic charter change. In the proceedings, he mentioned once that “improving the foreign equity restrictions score of the Philippines from 0.281 to 0.077…will be equivalent to an additional FDI of USD 6.7 billion, or PHP 323 billion.” Put another way, if we improve the restrictiveness index by 10%, we can expect a 7.7% increase in FDIs.

Supposing these numbers are accurate (some of the study’s assumptions can be challenged), the same paper’s results would suggest that a 10% improvement in the restrictiveness index can boost FDIs by 60.5%. That’s a factor larger than 8 times compared to the supposed impact of loosening foreign equity restrictions. This finding should have been emphasized in the debates. But some lawmakers chose to cherry-pick numbers that bolster their arguments.

We are more confident in the assumptions and statistical model used by economists from the Bangko Sentral ng Pilipinas (BSP) who studied the flow of FDIs in ASEAN-5 countries. While they find that lowering the restrictiveness index is associated with more FDIs, improvements in other factors – such as corruption perception, rule of law, ease of doing business, and road and telecoms infrastructure – are associated with even more FDI inflows.

The takeaway is that existing studies consistently find that elements besides foreign equity restrictions could play a more significant role in attracting FDI than equity restrictions.

In short, as a way to boost FDIs, easing foreign equity restrictions is overrated.

3) We should pay more attention to the quality of FDIs, not just its quantity.

In the UPSE discussion paper, we also call on all policymakers advocating economic charter change to take a more nuanced (if not critical) stance toward FDIs. FDIs are not all good.

On the one hand, multinational enterprises (MNEs) can bring in new technologies and management practices that can have “positive spillovers” in the Philippines and make our economy more productive. One study back in 1997 found that “knowledge and technology transfers are expected to be the most important mechanisms through which FDI promotes growth in the host country.”

On the other hand, FDIs can be harmful and “counterproductive,” too, if they stamp out domestic industries or repatriate too much of their profits to their home countries.

Because of this, economists are hard-put to conclusively say that FDIs per se cause economic growth to accelerate. In fact, more often than not, FDIs tend to limit rather than enhance economic growth. The link between FDIs and economic growth may also be explained away by the fact that “the determinants of FDI happen to be the determinants of GDP growth.”

Whether or not MNEs bring in positive spillovers invariably depends on which specific types of FDIs they bring in.

We said that we need “a more discriminating approach to FDIs…one that features identifying what sort of technology and know-how can be of use to local firms, and proactively seeking out the same. This means focusing on the quality of MNE and its activities, rather than simply on the volume of FDI…”

Here, government can play a key role through so-called “industrial policy.” That is, government can actively “guide foreign investments into areas that bring the most gains to the country and to create an external social and regulatory environment that encourages foreign firms to share their technologies and facilitate upgrading.”

In sum, our paper aims to “disabuse the public of the notion that any and all forms of FDIs will be good for national development and a net contribution to economic welfare and efficiency.” Politicians, take heed.

4) The legal flexibility afforded by economic charter may result in abuse and uncertainty, turning off rather than attracting investments.

Finally, we commented on the proposed addition of the phrase “unless provided by law” in the Constitution. This is the meat of Resolution of Both Houses 7, and is meant to make economic liberalization easier.

On the one hand, inserting this otherwise innocuous-looking phrase is meant to introduce legal flexibility. Lawmakers themselves can introduce policies that promote FDIs, freed from the restraints of the 1987 Constitution.

But on the other hand, giving lawmakers more discretion can also be dangerous, and can stoke uncertainty in our economy.

Let’s say economic charter change succeeds. This fact alone won’t automatically bring in a tsunami of foreign investments. It will take some time for lawmakers to approve laws that will liberalize specific sectors.

In the meantime, however, prospective investments can be in limbo. “Investors otherwise eager to jump in may decide to postpone their decisions if there is the prospect of an improvement over the current regime of ownership laws.”

There’s another layer of problems. If the new laws allow Congress (or the executive) to handpick which foreign investments will be allowed to have full ownership, expect tons of lobbying and rent-seeking to happen.

What’s more, foreign investors and their investments might be exposed to tremendous risk if their businesses are dependent on privileges or franchises granted by government (look at what happened to ABS-CBN and, more recently SMNI, whose fates were determined by the direction of the political winds).

Granting even greater power to government through economic charter change can ultimately turn off investors, achieving the opposite of what we want to happen in the first place. We need to beware of the unintended consequences of economic charter change.

Let us be clear. FDI can potentially promote growth. But not by itself, and only under the right conditions.

Let me end with this quote from the paper: “We are by no means opposed to FDI and [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.” – Rappler.com

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.