Carlos G. Dominguez
Secretary of Finance
Honorable House Speaker Lord Allan Velasco; Honorable Representantive Alfredo Garbin, Chairman of the House Committee on Constitutional Amendments; Honorable Members of the Committee; Trade and Industry Secretary Ramon Lopez; Former Finance Secretary Margarito Teves; fellow workers in government; members of the academe; non-government organizations; and the Joint Foreign Chambers: good morning.
Removing the restrictive economic provisions in the 1987 Constitution would be a significant factor in revving up the Philippine economy and sustaining its recovery. The means for amending the Constitution, however, is a political question. And I would not dare advise our legislators on the matter.
Nonetheless, I ask our legislators to act on something that is doable. What is most important is to undertake what is immediately achievable. It is preferable, of course, to achieve the liberalization reforms in one blow. But if there are things that we can do to open up the economy through administrative measures, we must implement them. If there are areas that we can liberalize by amending our existing laws, then let’s do that.
The restrictive economic conditions of our Constitution explain why, over the past three decades, the Philippines has received vastly less foreign direct investments than our ASEAN neighbors.
According to the latest World Bank data, the Philippines ranked seventh out of ten countries in ASEAN in terms of average foreign direct investment inflows to GDP ratio from 2015 to 2019.
Meanwhile, the latest Foreign Direct Investment Regulatory Restrictiveness Index by the Organization for Economic Cooperation and Development revealed that the Philippines is perceived by the international investment community as the most restrictive among the ASEAN countries.
A comparison of foreign direct investment inflows from 2015 to 2019 among ASEAN countries underscores the small share we received comparable to relatively more liberalized economies of Singapore, Indonesia, Vietnam, and Malaysia. The results are evident in the rate of expansion and rapid modernization enjoyed by our neighbors over the past three decades.
Let’s look at Vietnam for example. When the Philippines affirmed in 1987 its Constitution with restrictions to investments not based on practicality but on some notions of nationalism, Vietnam fully opened its doors to the world. Vietnam has effectively exported its way out of poverty by embracing trade and foreign investment liberalization complemented with domestic reforms through deregulation and lowering the cost of doing business. It likewise invested heavily in infrastructure. These reforms have steered the country to becoming a market-oriented economy.
Soon, Indonesia is also set to dramatically change its investment policies in a bid to boost its economy crippled by the pandemic, and to create more jobs. According to the draft presidential decree being prepared by Indonesia, the list of industries where foreign investment participation is limited will be cut from more than 300 to only 48. It is set to remove restrictions for sectors, such as communications, information and technology, energy, and tourism.
Even before that, Indonesia already passed into law last year an omnibus bill that reduces the red tape on the country’s current business and labor laws.
Indonesia also plans to introduce incentives for investments coming into its priority sectors. This is similar to what we are doing under the CREATE bill, a measure that is immediately doable and would offer us the opportunity to jumpstart our economic recovery. CREATE will modernize the Philippines’ tax incentives system, so that we are better able to attract more strategic and high-value investments. I must thank the House for passing this long-overdue reform.
The dramatic overhaul in Indonesia’s investment policies will leave us the only country in the ASEAN still maintaining inordinate restrictions on foreign investment participation in economic growth. This does not bode well for our competitiveness in the coming years.
It is never a good idea to tie down our economy to a fixed set of policies. In a world that is constantly innovating, it is always better to have an adaptable economic policy regime.
A very good analogy to explain this is by using the concept of anchors and sails. We must adhere to our anchor, which is our core set of principles. This will keep us grounded. But we should also be flexible enough to adjust our sails when the winds change direction.
The Philippines should have the flexibility to be able to adjust and maximize economic opportunities as, and whenever, necessary. State policies that should be in the Constitution should be limited to fundamental policies universally accepted and unalterable in character.
Meanwhile, regulation on foreign investments must be left to ordinary legislation of Congress. In that way, the imposition of restrictions can be debated more openly and the policies could be attuned to changing conditions.
Restricting economic activity is an outdated nationalistic concept, overtaken by technological developments. Maintaining preferential treatment for Filipino citizens in certain areas of concern no longer serves any imperative purpose.
For instance, the restriction on foreign investments in public utilities forced us to depend on undercapitalized Filipino businesses. Our public utilities remained backward. Our logistics system remained one of the weakest in the region. The inefficiency of public utilities has forced Filipinos to pay more for necessities and has stymied the growth of small businesses.
Liberalizing the participation of foreign risk capital in this area by encouraging experienced and strategic investors to expand services would improve the delivery of our public utilities in our country. Our lawmakers can make this happen by approving amendments to the 84-year old Public Service Act.
The restrictive provision banning foreign investment in exploiting our natural resources is an outcome of an erroneous understanding. Our natural resources belong to the State. This should not necessarily mean only Filipinos may exploit them. What is important is that the State collects the proper royalties and ensures that the proceeds benefit the Filipino people. We have foregone many opportunities for the efficient, responsible, and sustainable exploitation of our natural resources as a result of the limited participation of international investments.
The Constitution bans foreign professionals from practicing in the country. This has deprived our people of the opportunity to absorb and learn new ideas and standards. This has barred us from receiving the best professional services and availing of cutting edge technologies.
It will benefit our people if we allow foreign professionals to practice their professions here and, on the principle of reciprocity, demand our own professionals be allowed to practice abroad. This will broaden the international markets for Filipino professionals. The necessary amendments to the Foreign Investments Act will achieve these objectives.
The limitation of ownership of educational institutions to Filipinos is surely obsolete in this age of remote learning. Through digital communication technologies, Filipinos may now access the best information from everywhere. What the ownership limitations caused is the closure of many private institutions due to lack of capital to sustain operations.
Over the past year, we saw the closure of many private schools given the difficulties imposed by the pandemic. This will create a shortage in educational services that can only be magnified by restrictive investment provisions. High-level skills development in the country should be opened to foreign equity. The Philippines’ strategic location and proficiency in English undeniably make it a highly viable site for future offshore campuses of internationally recognized learning institutions.
In the age of the Internet that has seen the migration of the audience to digital sources of information, the prohibition of foreign ownership in the mass media and advertising is most anachronistic. All the prohibition accomplishes is to prevent our own media and advertising companies from building international networks that will enhance their viability.
The ban on the foreign ownership of land, however, should remain since this evokes strong emotional reactions. The rest of the investment liberalization strategies should accomplish enough to enable our rapid economic recovery.
Those who insist on maintaining protectionist policies might learn much from our experience in liberalizing the rice trade. When we allowed the importation of rice based on a tariff schedule, this did not result in the death of our rice industry. On the contrary, it resulted in an increase in rice production to its highest level ever.
Revenues from the tariffs provided a fund to modernize our farms and improve the incomes of our farmers. Best of all, today’s Filipino consumer enjoys a reduction in the price of rice of up to 10 pesos per kilo from its peak in 2018. This is particularly helpful for low-income households that spend a fifth of their budgets on rice alone. Consumers also have a variety of rice choices now under a liberalized rice trading regime.
The Rice Tariffication Law is proof that opening up the economy challenges our local producers to be competitive and that local players actually respond positively if given adequate support.
The restrictive economic provisions are residues from a period when our people had very little trust in the market. Today, with better economic literacy, we should be better able to understand how market disciplines result in efficiency and lower costs.
Should we start the process towards a more liberal investment regime, this will be a strong signal to the international investment community that the Philippines is open for business.
Immediately, the Congress can help in restarting our economy by acting on our pending priority economic bills.
We call on our legislators to swiftly ratify the CREATE bill. As I have mentioned earlier, we want to push for the passage on the amendments to the Foreign Investment Act and the Public Service Act. We also need to modify the Retail Trade Liberalization Act. These measures complement the other reforms we have done, such as the Build, Build, Build program and the Ease of Doing Business law.
Over the longer term, opening up our economy is indispensable to achieving a truly inclusive investments-led economic growth that will open more employment opportunities for our people. It will produce a modern, efficient, and robust economy that will guarantee prosperity for all Filipinos.
Thank you.
-@@@-
Copyright © 2021 Department of Finance