Domestic industry: Lessons from ‘exclusive’ economic nationalism

All nations exercise some form of economic nationalism. The brand of economic nationalism that is practiced in our country and implemented even to this day in our economic policies is a form of “exclusive” nationalism in which foreign enterprises are essentially seen as competitors rather than as partners in development. Countries that have done “inclusive” policies which welcomed foreign capital have done much better.

The country’s restrictive economic provisions in the Constitution helped to create a fixity of those rules that reign in relation to foreign investment promotion. As in an orchestra, if the conductor (the Constitution) sets the tempo and the key, every music player abides to produce the compatible tune.

This narrow nationalist path of exclusion (“restriction”) of FDI became a hymn of faith for many instrumentalities of the government –the legislative branch making the laws, the executive branch implementing them, and the Supreme Court, interpreting them. And then, the same mantra was followed in the instruction books for all the young and university learners thus limiting rather than broadening their minds.

“Extent of liberalization of FDI policy is still deficient.” Of course, as experience would teach us lessons, this degree of exclusivism through joint ventures for domestic enterprises of the local market has somewhat changed and has been liberalized but only to a limit.

After unsatisfactory performance in the country’s economic achievements and seeing other countries were passing us by, some of those who believed in the mantra of exclusivistic approach had seen the light. For decades, embodiment of the rules on FDI promotion were found in the Investment Incentives and Export Incentives Act implemented by the BOI modified only by the more liberal PEZA laws that admitted 100 percent FDI-owned enterprises.

Dissatisfaction with the performance of the country in the area of promotion of FDI led to further reforms. Under the Foreign Investment Act of 1991, instead of identifying desirable areas of foreign investment which were announced by the Board of Investment (BOI), the government devised an alternative system: drawing up a negative list of areas in which FDIs were prohibited or allowed but under a set list of specific restrictions as to ownership.

With such a system, the list of permitted areas open to FDI participation became immensely much wider. The negative list could be adjusted by the government through periodic announcements.

Even then, to avail of investment incentives required securing them from government agencies that granted fiscal and investment perks, which included the BOI, the PEZA and some other special economic zones. The BOI specifically could devise its policies according to its charter within its own investment priorities plan (IPP) receiving incentives under its auspices. It is the government agency given the most powers to give those fiscal and investment incentives.

But it is now 2012, and the country is still far behind our neighbors that have continued to bring in FDIs while ours have not yet come in droves. The good news is that now, especially under the Aquino administration, there is a changed international perception about the country’s attractiveness to FDIs.

“The 9th negative foreign investment list issued.” The office of the president issues the negative list periodically. Last week, it issued an executive order (EO 98, dated October 2012) which represents the 9th such list since the adoption of the Foreign Investment Act of 1991. Substantially, the new list is almost the same as the 8th list (EO 584, dated February 2010) which it supersedes, except that there is an addition of some professional fields prohibited.

The negative list approach is a definite improvement over the old policy. But the list is still long. It contains all the prohibitions and restrictions under the Constitution that are starkly listed. Other countries, where they have such a listing, would have only those devised by their laws on foreign investment legislation because their constitutions are silent on such issues.

Even though some amount of “inclusiveness” has relaxed the restrictive policies, in a highly litigious setting, it takes only a handful of disgruntled local investors to question some developments with issues of constitutionality. Witness the Supreme Court decisions on mining (now resolved) and on the recent PLDT (a public utility) case on “60-40” Filipino-foreign capital definition.

Hence, the issue of amending the restrictive provisions of the Constitution does not lose force. In fact, any effort along this direction would further strengthen the country’s bid to become the next major destination of large inflows of FDI. Without making such an effort, these inflows could trim down the expectations by litigations along the way.

“Perverse lessons of narrow economic nationalism.” Let me conclude with some lessons learned from the efforts to push a narrow version of economic nationalism. These unique lessons of economic nationalism were learned through the cycles of booms and busts in the economy over decades of experience.

The first lesson was that they created unintended monopolies in the domestic market. The denial of competition from competing imports or of entry in the domestic business of able and well capitalized competitors virtually led to market monopolies.

Then came the second lesson: sacrifice of consumers in favor of a few industrialists. When the domestic scene involved the operation of a few competitors through BOI incentives, the competition involved only a few market players. Resulting oligopolies also led to high prices. Through all these, the Filipino consumer suffered but the long run gain for industry and for labor was doubtful.

Another consequence of such a policy – a third lesson – was that in many cases of investment in industrial projects, the proponents could earn profits upfront. The wily earned commissions from purchases of equipment to set up the business as they secured their financing. This raised project costs and made the servicing of loans to the financial institutions more difficult. In some cases of supplier credits, overpricing further added to these costs.

The end result of these – lesson four – was immense misallocation of the country’s enormous resources and human talents. Businessmen became less enterprising but found get rich quick opportunities. Lawyers got busy working around regulations rather than drawing up straightforward investment contracts. Financial institutions had clients that could not service their loans properly and ended up with non-performing assets in their books. Ultimately, many industries became owned – finally – by government institutions that also suffered from their mistakes because their capital which was the basis of their lending capacity had been used up.

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