How narrow nationalism inhibited Filipino human capital growth (Part V)

The obstructive nationalism of past decades of independence on economic policy has led to a limited amount of foreign direct investment (FDI) inflows into the country compared to many East Asian economic success stories.

This happened even though, avowedly, many Filipino leaders had professed the need for foreign capital to supplement the country’s inadequate domestic saving.

Falling badly behind in attracting FDI. In comparison, many countries in East Asia fiercely invited foreign direct investments during important episodes of their economic development as part of their national development strategy.

From the 1960s to the 1980s, South Korea, Taiwan, Hong Kong and Singapore attracted massive amounts of FDIs and, in turn, expanded the international reach of their economies to industrial markets for their exports.

Coincident with the 1980s and following through toward 2000, our neighbors in ASEAN – first Malaysia and Thailand, and somewhat later, Indonesia – also attracted FDIs to strengthen their economic growth.

During the same period, China also transformed its economy through aggressive state strategy to attract foreign capital in industry. China’s rapid growth involved a heavy participation of FDIs in expanding its trade-oriented economy in the last 40 years, taking full advantage in the process for the rapid employment of its inexhaustible human resources.

Finally, in the post-2000s, Vietnam, following China’s example, also quickly transformed its economy by encouraging the influx of FDIs.

It should be said that Philippine efforts to industrialize began almost at the same time as the first wave among these countries. For a while, the Philippines was even in good pace with them, if not ahead. Over time, however, that favorable position dissipated because the accumulation of FDI wealth pulled the other nations ahead in overall economic performance.

FDI inflows, GDP growth, productivity and employment. All the East Asian countries cited above, compared to the Philippines, at specific stages in their economic histories, have experienced sustained GDP growth over time. Furthermore, because of improving demographic conditions, their per capita output growth became even faster.

The inflow of foreign capital helped to raise this growth performance.

FDI inflows into industry, agriculture and other sectors of the economy provided a multiplier for employment. Initially, the FDI investments brought new direct employment for workers in these foreign establishments. The initial and expanding payrolls that the FDIs delivered into the domestic economy stimulated newly earned incomes for workers which triggered further new spendings internally.

Thus, sustained FDI inflows provided a short cut toward achieving rising per capita incomes and improving living standards for workers. They could now afford better nutrition for their families and increase the opportunities for the education of their children.

As important, state finances also improved in capacity and reach. The governments were enabled to provide more budget to support social programs in health, education, and eventually, the arts and culture.

All these meant the rise of national living standards, a definite upward movement in the quality of life. A significant consequence was to lift the quality of human capital in the country. The path out of poverty was assured.

Meanwhile, under a regime of narrowly nationalistic economic policies… The improvement of Filipino human capital development has been hampered by the more limited benefits brought about by economic policies that relied more on domestic private capital to lead the way under the protectionist domestic policies.

Lack of sufficient reforms were often pushed by narrow, entrenched economic interests opposed to foreign competition. Under such policies of narrow protection, further and more serious income inequalities arose.

In the national experience, these also led to later economic difficulties. Many establishments which were pampered by highly protectionist policies became uncompetitive over time. Some of them became victims of their own growing pains. When exposed to changing national circumstances – such as energy shocks, interest rate changes, exchange rate scarcities which hit their raw material import needs, and changing economic policies toward more trade-openness, the protected industries became victims to economic collapse.

This was true of many efforts to set up integrated steel mills, cement plants, petrochemical projects, paper mills, textile plants and other types of factories. Had these projects been financed by FDIs, many of them would have grown and survived such challenges. And if they had failed likewise, at least the burden was not on the nation as much as it was from the foreign investors themselves.

Over time, then, in the Philippine case, domestic employment growth did not become as broad-based because of the lack of dynamic FDI investments that expanded the economy’s reach into foreign trade and new export markets.

However, with respect to the issue of expanding a good share of FDI inflows into the economy, it has been hampered by structural failure to reform the “original sin” – the presence of the restrictive economic provisions in the Philippine constitution that refer to FDI policies.

Even during this time, the Philippines was, over many decades, comparatively on even terms with other ASEAN countries, especially as it expanded its export processing zones to attract foreign capital.

Unfortunately, even as the other countries were improving their own development policies, Philippine restrictive policies on FDIs continued to be enforced as far as investment attraction policies referred to the domestic economy.

This arose out of the effort to preserve the domestic market rewards of growth only for Filipino enterprises. The dominant investment policy supported preference for joint ventures along a 60/40 split with the foreign equity in the minority.

Another disincentive was the gridlock in the approval process that started within the regulatory framework.

And finally, being a country of many lawyers and given the restrictive economic provisions in the Constitution, there was a highly lucrative industry of questioning the constitutionality of new laws that attempted to reform economic policies. Oftentimes, such moves were pushed by smart vested interests in highly protected sectors intent on blocking progress on the economic policy front.

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