Bernardo M. Villegas
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Filipino First Is Not Nationalist (Part 1 & 2)

          Those who are objecting to the removal of the restrictive economic provisions in the Philippine Constitution of 1987 are well intentioned nationalists.  They are actually faithful to the spirit of what the majority of the members of the Constitutional Commission of 1986 imbued in the final draft of the Constitution that was ratified by the Filipino people in 1987.   This spirit is embodied in the phrase that appears in the Declaration of Principles: “The national economy shall be effectively controlled by Filipinos.”  As the Chairman of the Committee on the National Economy of the 50-member Commission, I beg to disagree that the economic provisions of the Constitution were able to promote the national common good by limiting vital economic sectors of the economy to Filipino citizens.  It is about time that we redefine economic nationalism as meeting the needs of the Philippine economy in the twenty first century.  The evidence is so clear that limiting the ownership of large, capital-intensive industries to Filipinos or enterprises with majority Filipino ownership has nothing to do with Filipino-First but is actually equivalent to “Rich Filipinos First and damned the rest of us, especially the poor.”  Only the very rich Filipinos belonging to the top one percent of the population in terms of income class can afford the capital needed by such capital-intensive sectors as telecoms, airports, public utilities, media and higher educational institutions.  That is why we continue to have an elite economy.  To make matters worse, by limiting the majority ownership of these strategic industries to Filipinos, we are unable to capture much needed long-term capital from abroad, making it harder for the economy to address the problems of massive unemployment and dehumanizing poverty among the masses.   We cannot talk about the common good or the national good of Philippine society without giving the highest priority to eradicating mass poverty.

         A truly nationalist economic system will give the highest priority to generating maximum employment and eradicating mass poverty.  Ever since we obtained our political independence in 1946, the vast majority of our leaders have been inflicted with the “Filipino First” policy.  Of course, they had the best of intentions.  They were traumatized by centuries of domination of the Philippines by the Spaniards and then by the Americans.  They wanted to make sure that these former colonizers would not come back with a vengeance by dominating our national economy.  That is the reason why in the 1950s and all the way to the end of the last century, we had many measures to give Filipino citizens priority in the ownership and management of our businesses, both large and small.  Despite the good intentions of our leaders who considered themselves nationalists when they insisted on a “Filipino First” policy, the Philippines went from being one of the most promising emerging markets in the 1950s (together with Burma and next only to Japan) to being the “sick man of Asia” by the end of the last century.  One by one, our less developed neighbors like Singapore, Hong Kong, Taiwan and South Korea surpassed us in economic development as they became the famous “tiger economies.”  Then it was the turn of Malaysia, Thailand, Indonesia and most recently Vietnam to leave us biting the dust.

         The first adverse effect of the “Filipino First” mentality at the beginning of our efforts to develop as an independent nation was that it led our leaders to follow the wrong path to economic progress during the decades of the fifties all the way to the seventies.  Our neighbors had the sense to make full use of their human resources by following an outward-looking and export-oriented industrialization strategy, focusing on labor-intensive industries that employed the majority of their work force and that lifted them from poverty.  In contrast, we insisted on an inward-looking, import-substitution approach that subsidized the sugar barons and other exploiters of our rich natural resources as they invested in capital-intensive so-called industries (nicknamed “beauty parlor” industries by a former Mayor of Manila).  These so-called industrial enterprises imported semi-manufactured materials from abroad, did a minimum of processing and sold them to Filipino consumers at the highest prices that the market could bear.  Subsidies came in the form of very high tariff rates on finished goods imports, artificially low interest rates and a grossly undervalued foreign exchange rate (the exchange rate of the peso to the dollar was pegged at P2 to $1  for almost two decades) as the Japanese yen soared to  Y300 to $1, the Korean won to W1,000 to $1 and the NT dollar to 40 or more to $1.  Unwittingly, because of the desire to create “Filipino industrialists” under the banner of Filipino First, our policy makers were falling under the spell of the “resource curse”, i.e. make use of your rich natural resources such as plantations, forests and mineral resources to jump start development and ignore your most important resource, the human resource, a fatal mistake that the tiger economies did not commit because they were poor in natural resources.

         This rush to create artificially propped up industries in the name of nationalism resulted in an even more serious collateral damage.  Since our scarce financial resources were wasted on what some wit called the “bonjing” industries (Bonjing was a 1950s comics character  who was an adult acting like a baby), there was very insufficient funding for the most important pre-condition for long-term economic progress for a country with rich agricultural resources:  the building of farm-to-market roads, post-harvest facilities, irrigation systems and other infrastructures that the small farmers need to improve their productivity and income.  Even economies like Taiwan and South Korea that were poor in agricultural resources made sure they invested as much as possible in the beginning of their development process in rural and agricultural development. We then compounded the ill effects of the Filipino First policy in our industrialization efforts by bungling the very important process of agrarian reform.  We did the right thing by distributing huge land holdings of the rich to small farmers but we completely failed in endowing the farmer beneficiaries with the facilities they needed to make their small farms productive.  The new land owners among the small farmers actually became poorer since they lost the access to credit and other resources with which their former landlords provided them.  This almost criminal neglect of rural and agricultural development is the root cause of Philippine poverty.  It explains why, despite growth rates of 6 to 7 percent of GDP achieved recently, our poverty incidence remains to be among the highest in the Southeast Asian region.  Seventy five percent of the Philippine poor are in the rural and agricultural sectors.

         As I have discussed in another paper, the majority of the members of the Constitutional Commission of 1986 were still heavily influenced by the Filipino First mentality with which our leaders started the development process after independence.  In fact, this mentality was even intensified in many of them because of the perception that there was some attempt during the Marcos regime to open up the economy more to foreign direct investments.  This greater openness to FDI was considered by the Filipino First proponents among the Commissioners as one of the sins of the Marcos dictatorship.  So, as in many other policy areas, there was a strong motivation to enshrine in the Constitution the anti-Marcos provision of restricting FDIs in strategic sectors of the economy.  Opposition to FDIs was still another measure to banish the ghost of Marcos from Philippine society.  Such a mentality resulting from the trauma of martial law prevented a thoroughly rational approach to formulating the fundamental law of the land.  That is why, as many constitutionalists have observed, the Constitution of 1987 is one long, wordy legislative act rather than a Constitution.  (To be continued).

 

 

 

Filipino First Is Not Nationalist (Part 2)

February 23, 2021

 

         There is nothing wrong in the desire of those who drafted the Constitution of 1987 to ensure that the “national economy is effectively controlled by Filipinos.”  This is authentic nationalism.  Limiting equity ownership of foreigners in strategic and capital-intensive industries, however, is not the only and rather a weak measure to ensure effective control of Filipinos of the national economy.  The State, the ultimate protector of the common good of Philippine society, has many means of controlling the behavior of enterprises owned by a majority of foreign interests.  Through the Philippine Competition Commission, any monopolistic or oligopolistic act of a foreign-owned company can be penalized.  The raising of prices to unreasonable levels by these corporations can be prohibited by legislation or by an executive decree during times of crisis.  Any abuse of our human resources by foreign companies can be sanctioned by labor laws.  It has also been demonstrated that there are sectors where enterprises fully owned by foreigners have played second fiddle to  strong and mighty enterprises   owned by Filipinos, such as United Laboratories in the pharmaceutical industry, the SM Group in retailing, San Miguel Corporation in food and beverage,  ICTS in international logistics, and many others.  There is no need to limit foreign equity participation in such sectors as telecoms, airports, educational institutions, media and other public utilities to ensure that the national economy is “effectively controlled by Filipinos.”

      Some of those who object to FDIs in public utilities and other strategic sectors are wont to refer to the examples of some tiger economies like Taiwan and South Korea who have attained First World status without relying heavily on foreign direct investments.  The Philippines, by the widest stretch of the imagination, cannot be compared to these two thoroughly Confucian societies.  They, during their take off to long-term economic progress, never had to suffer under the disadvantages of an imperfect and unruly democracy like ours.  Let’s examine especially the case of South Korea that was the poorest among East Asian countries in the 1950s after the nation survived the Korean war.  When Park Chung Hee took over as a military dictator, their per capita income was less than US$100.  The country literally lifted itself by the bootstraps.   With very low savings rates in the 1950s and the 1960s, the country had no alternative but to make full use of its human resources by adopting an outward-looking, export-oriented industrialization strategy that took advantage of the rich markets of the U.S. and Europe for such consumer goods as textiles, garments, shoes, gift products,  toys, wigs and other labor-intensive products.

  This strategy, as contrasted with our own inward-looking, import-substitution approach to industrialization, worked very well for South Korea (coupled with a very wise move to develop its rural areas through the famous Saemaul Undong movement) so that by the time the country was ready for full-blown industrialization and urbanization  at the beginning of the 1980s, their savings to GDP ratio rocketed from the low 20s to 30 to 40 percent of GDP.  Thus, with such high levels of domestic savings, South Korea did not have  to turn to FDIs during the period when it was implementing its own version of the Build, Build, Build program that endowed the country with some of the most modern infrastructures in the whole of Asia (bullet trains, airports, skyways, infrastructures that bored tunnels through numerous  mountains, etc.).  Unfortunately for the Philippines today, we cannot claim a surplus of the long-term capital needed for the Build, Build, Build program that we have to sustain for at least the next ten or more years if we are to catch up with the quantity and quality of the infrastructures of our neighbors.  Our Government is already doing its share of significantly increasing its borrowings to address the negative impact of the pandemic (our debt-to-GDP ratio has already increased from the low of 30 to 40 percent to over 50 percent and may reach 70 percent if the pandemic is not put under control soon).  We direly need FDIs to supplement our scarce long-term capital for improving our digital infrastructures (which include media), airports, public utilities and higher educational institutions.

         Instead of comparing ourselves to the Taiwanese and South Koreans, we should look at our peers in the ASEAN Economic Community.  The most recent comparative figures showing the percentage of FDIs to GDP are as follows:  Cambodia, 53.33 percent; Indonesia, 20.45 percent; Laos, 32.33 percent; Malaysia, 41.11 percent; Myanmar 16.87 percent; Philippines, 12.26 percent; Singapore 203.78 percent; Thailand, 40.43 percent;  Vietnam, 60.31 percent.  For the whole of Southeast Asia, the average is 46.30 percent. It is notable that even Myanmar, that is now very much in the news because of the recent military coup, has a higher percentage of FDI to GDP than the Philippines.   As a side comment, Vietnam surpassed the Philippines in GDP per capita in US dollars last year for two major reasons:  their more effective handling of the COVID pandemic and their attracting much more FDIs over the last five or more years than the Philippines, especially  among those foreign firms which left China during the Trump Administration..

         Speaking of the Trump Administration, there are those advocating for a so-called nationalist or protectionist policy who are arguing that there are very developed countries like the United States and the United Kingdom that are now turning inward.  There is no reason that we should follow their example.  These highly developed countries have per capita incomes that are eight to ten times our measly $3,900.  They can afford to sacrifice economic growth.  Furthermore, they demonstrate precisely the wisdom of not enshrining an economic policy in the basic law of the land.  They show how important it is to give the legislature enough flexibility to “roll with the punches.”  In our case, the circumstances we face today require that we attract large amounts of foreign capital to meet our needs of the present.  Who knows, sometime in the future when our per capita income reaches some $15,000 or more, we may need to be more restrictive of foreign direct investments, especially from countries like China that in the future may be throwing its economic weight around the Indo-Pacific region.  If we don’t enshrine any particular economic policy in our Constitution, we will by then be free to also be protectionist.  The moral of the lesson is that for the common good, we should add that innocuous phrase “unless otherwise specified by law” to the restrictive economic provisions in our Constitution.  For comments, my email address is bernardo.villegas@uap.asia.