Bernardo M. Villegas
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Rebalancing Strategy
published: Mar 31, 2017



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CHACHA Needed For Inclusive Growth

           With due respect to President Benigno Aquino III, he should reconsider his stand against CHACHA. I am convinced that his Administration will not succeed in the next three years to attain inclusive growth and increase investments in infrastructure from the low of 2 percent of GDP to the required 5 percent without a tripling or even quadrupling of the annual flow of Foreign Direct Investments (FDIs), i.e. from the present measly $2 billion to $8 to $10 billion annually in the next three to five years.  This conviction comes from my direct contact with hundreds of potential investors in the U.S., Japan and Europe.  Just recently, I went on a nondeal investment road show to three key U.S. cities (Los Angeles, Chicago and Boston) after having covered Washington, D.C., New York, and San Francisco last year.  I was with CEOs of leading Philippine firms in mining, construction, infrastructure, BPO, electronics, biotechnology and investment banking.  The feedback we got from some 300 potential investors in the U.S. is that the restrictive provisions in our Constitution, especially as regards public utility, media, education and land ownership, constitute serious impediments to their putting equity investments in big-ticket items.  The good news about our investment grade rating encourages them only to invest in our stock market, not in actual capital goods and fixed investments.

          It will be difficult to sustain the growth of 6 to 7 percent we have experienced in the last two years, much less accelerate it to the needed 7 to 9 percent so as to make a dent on mass poverty, without levels of FDIs at least at $7 billion annually, a figure that Vietnam--poorer than the Philippines and with a much less developed financial system--had attained five or six years ago.  If we don't remove the restrictions from our Constitution, it is highly probable that Myanmar will surpass us in its ability to attract FDIs in the coming years.  I think the President is misinformed in comparing the Philippines to China as regards the correlation between restrictions and FDIs.  The Chinese can afford to be restrictive of land ownership, for example, because their Government is many times more efficient than ours in implementing infrastructure projects.  We have to compensate for our slowness in implementing projects by sweeteners like allowing foreigners to benefit from the appreciation of the price of the land that they can own and a continuation of some of the fiscal incentives, despite the hunger of the Department of Finance for more taxes.  As everyone knows, economics is always a matter of trade-offs.

          Amending the economic provisions in the Constitution and revising the Foreign Investments Act are not mutually exclusive.  As suggested by Speaker Feliciano Belmonte, Congress, acting as constituent assembly with the two houses voting separately, can amend only the economic provisions in the 1987 Constitution.  The amendment process can be very simple.  What the legislators can do is to append the phrase "except when otherwise provided by law" to all the restrictive economic provisions.  For example, to the provision that foreigners cannot own land, an amendment can be made by adding the clause "except when otherwise provided by law."  Then, a revised Foreign Investments Act can specify the conditions for the exception.  For example, the new Act can stipulate that foreigners can own the land on which they build their residences, their factories and other businesses, including real estate developments.  This would be an enticement to foreigners because as they come to invest in the Philippines, they can partake of the profits that accrue to both individuals and corporations from the appreciation of land prices.  The Act, however, will make it very clear that foreigners cannot just indiscriminately purchase land for speculation.  As the critics say, any unlimited ability to buy land could enable the rich Arabs or the Chinese to buy all the 7,100 islands of the Archipelago. 

          The same process can be applied to other restrictive provisions.  For example, as far as investment in education is concerned, the new Foreign Investment Act could stipulate that foreigners can own as much as 49 per cent of an educational undertaking.  I am of the opinion that education is such a sensitive industry that Filipinos must have majority ownership to preserve certain moral and cultural values that some foreigners may contradict.  The same can be said about media.   But instead of the total prohibition to own even 1 percent in any media enterprise, I would suggest that the new Foreign Investments Act should allow a 49 percent foreign ownership also to assure the preservation of certain national values that could be endangered in the hands of foreigners who may espouse such counter values as abortion, divorce and gay marriages.

          The strongest reason why we must have a CHACHA and not be content with just amending the "negative list" of the Foreign Investments Act is to remove from the fundamental law of the land the Filipino-First mentality that has been the cause of our inability to attain inclusive growth and the perpetuation of extractive and rent-seeking economic institutions.  Filipino First, which dates back to President Manuel Quezon, has actually prejudiced the Filipino masses by concentrating economic resources in the hands of  an elite group of families, who together with the politicians whom they control, has established all sorts of monopolies and oligopolies.  Since wealth is grossly concentrated in the hands of a few, the Filipino First policy actually has become equivalent to "Rich Filipinos First" policy.  The massive entry of foreign investors--regulated by the Foreign Investments Act---can do much to make all the sectors of the Philippine economy more competitive, with the resulting benefits to consumers in the form of lower prices, higher quality of goods or services and greater productivity from the technology that foreigners will bring with them.  The President should change his mind about CHACHA.  He is following the wrong advice.  For comments, my email address is bernardo.villegas@uap.asia.