Bernardo M. Villegas
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There is No Room for Complacency

           In my more than forty years of forecasting the Philippine economy, I have never experienced a more favorable international opinion about the prospects of the Philippine economy than during the last seven months.  Almost coinciding with the beginning of both the calendar and the lunar new years, international financial institutions, credit rating agencies, foreign banks and MNCs doing business in Asia have been competing with one another in heaping praises on the bright prospects faced by the Philippines in an otherwise gloomy global scenario.  These pundits seem not to run out of superlatives in praising the strengths of the Philippine economy.  There's the HSBC prognostication that the Philippines will be the 16th largest economy by 2050.  There's Morgan Stanley's including the Philippines among a select group of "breakout nations" with Turkey and Indonesia.  There's the constant reference to the Philippines as one of the emerging markets because of its large and young labor force and rising middle class.  There was an article in the Financial Times that raved about the "thriller in Manila" in which the Philippine is compared very favorably even with its dynamic East Asian neighbors.  In this regard, the SONA of President Aquino was an understatement.

          Indeed, 2012 will be remembered as the year when the Philippines stands out as the most favored nation in East Asia in terms of growth prospects.  As a region, Asia is showing clear signs of a slow down in economic growth.  The Chinese economy is forecasted to grow at less than 8% after the blistering rates of 9 to 10% over the last four or five years, even in the midst of the Global Economic Recession.  The tiger economies--Singapore, Taiwan, Hong Kong and South Korea--are all expected to post mediocre growth of 2 to 4% because of their heavy dependence on exports, which have been hard hit by the gloom battering Europe, the U.S. and Japan.  Thailand is both heavily export-dependent and "mired in a democratic stalemate in the late twilight of King Bhumidol, who has entered his 85th birthday and reigned for 65 years" (according to a professor of Chulalongkorn University).  Vietnam is facing double-digit inflation and a rapidly deteriorating currency as its monetary authorities struggle to modernize the banking system.  Even investment-grade Indonesia is losing its luster because of recent ultra-nationalist moves restricting foreign investments and a worrying return of crony capitalism, which threatens to reverse the significant gains against corruption during the first term of President Susilo Bambang Yudhoyno (SBY). In contrast, prospects for the Philippine economy are getting brighter by the quarter.

          Some of us economists at the University of Asia and the Pacific (UA&P) agree with Secretary of Trade and Industry Gregorio Domingo that Philippine GDP will grow by at least 7% for the whole year.  The first quarter saw a robust recovery of 6.4% growth after a 3.7% growth in 2011.  The major reason is the much larger investments in infrastructures by the Government which finally recovered from the paralysis by analysis syndrome during the first complete year of the current Administration.  We reckon that the second quarter will see an acceleration of growth to over 7% because investments in infrastructures by the Department of Public Works, Department of Education, Department of Agriculture, and Department of Transport and Communications accelerated during the months of April to June, the peak of the summer months during which construction activities are at their highest and preparatory works for the opening of classes are going on.   The doubting Thomases should read the SONA for details. The third quarter will see a further acceleration as some of the PPP projects will be initiated and the construction of office buildings, housing units, and commercial centers will be in full swing.  Finally, the factor that will make the fourth quarter the most likely to post the highest growth will be the consumption-led spending as OFW remittances rise  to finance the Christmas-related  expenditures of  the relatives of ten million OFWs. Then expect the first quarter of 2013 to benefit from election-related spending as political candidates splurge for the May 2013 elections.

          One does not have to be a super-optimist to predict that the last three years of President Benigno Aquino III will see an average annual growth of at least 7%, serving as a foundation and gauge for the next Administration.  That is the good news.  The bad news is that maintaining the growth at that pace for another six to twelve years so that we can finally reduce poverty incidence to less than 10% (from the present 26%) will not be possible with internal savings alone.  Take the case of China.  It has already the highest savings rate in Asia of 50% of GDP.  Despite abundant domestic savings, China still had to attract close to $100 billion of Foreign Direct Investments annually to power its average growth of 10 to 12% for more than two decades, the only way it could redeem some 400 million Chinese from dehumanizing poverty.  Vietnam is another case.  It has succeeded in attracting $7 to $10 billion of FDIs annually over the last five to seven years.  Indonesia's average annual FDI yearly has exceeded $10 billion.  Even with some corrections for accounting errors, Philippine FDIs have not exceeded $2 billion annually.  There is no way we can sustain a 7% GDP growth for the next twenty years, much less a 10% growth that can speed up the reduction of poverty, without our attracting at least a $10 billion FDI level annually.

          That is where Speaker Belmonte and Senate President Enrile are absolutely right.  We will never attract those much larger amounts of FDIs unless we remove from our Constitution the many restrictions against foreign equity investments in such vital sectors of our economy as media, education, public utilities, mining, and real estate. Removing the constitutional restrictions will give way to more enlightened legislation that can still protect the common good against the wrong kind of foreign investments.  For example, removing the absolute prohibition against the foreign ownership of land will enable Congress to legislate that only land on which a foreigner builds his home or his business can be owned by foreigners.  This will be the answer to the alarmist concern of some militant forces that "the Chinese will buy the whole Philippines."  In fact, the recent Executive Order on responsible mining is another example of enlightened policy making. It mandates Congress to legislate on the conditions for the granting of new mining concessions.  What the two leaders in Congress want is to remove from the Constitution what is properly a legislative task.  If there are to be restrictions to some forms of foreign direct investments, let them be through legislation (which can be changed when circumstances evolve) rather than through the constitution.  I never agreed with my fellow drafters of the Constitution in 1986 to transform the Philippine Constitution into one long-winded and verbose piece of legislation.  In fact, I tried to remind them (to no avail) that the United Kingdom does not even have a written constitution but has had a long history of very enlightened legislation.

          What really gets my goat is to hear some of our leaders saying that even without changing the Constitution, foreigners find many "creative" ways of going around the restrictions (including marrying a Filipina!).  What they fail to realize is that these "creative" ways are precisely the reasons why the Philippines is always at the bottom in the ranking of "Ease of Doing Business."  We are constantly pilloried by foreigners for corruption, red tape and bureaucracy and inefficient infrastructures--the three top reasons why they say they do not come to the Philippines.  I can trace all these three to the constitutional restrictions which force foreigners to hire very expensive lawyers, bribe government officials, suffer months if not years of going from one office to another if they want to do things legally, look for the right patrons, etc.  I completely disagree with the President that constitutional restrictions to foreign equity investments do not matter.  Removing them matters a lot to our fight against corruption, red tape and bureaucracy and inefficient infrastructures.  As I have written in other articles, we can more speedily improve our tolls ways, water systems, airports, electric utilities and telecommunications facilities if we remove the 40% limit to foreign equity.  For comments, my email address is bernardo.villegas@uap.asia.