Low FDI inflows: Its genesis

I continue my discussion of last week and hark back to the early part of our independence history.

Economic adjustment during independence and beyond. The independence law of 1934 signaled the direction and the process toward full freedom by July 4, 1946 and beyond.

At the beginning of the transition to independence, a major problem was to reduce the heavy reliance of the Philippine economy on the United States. This required an orderly economic adjustment program.

When the Philippines adopted a new political constitution, a significant part of the provisions drafted by Filipinos for the country’s self-government specified restrictions on foreign capital.

It is interesting that former US president Franklin Delano Roosevelt approved the Philippine constitution as provided in the independence law without much comment on those provisions which affected American capital.

As emphasized last week, the temper of those times included a heavy dose of strong inward “economic nationalism” by Filipino leaders. During the early days of the Philippine Commonwealth period, former president Manuel Quezon gave prominence to the “National Economic Protectionism Association,” or NEPA, a private Filipino association that tried to instill and promote economic nationalism.

During that time, major economic institutions were established. Among the first was the National Power Corporation to promote energy generation, the National Development Company to help pioneer in the promotion of new industries, and the National Economic Council to create economic plans.

Early independence. The outbreak of the war and the consequent destruction of a large part of the national economy required major changes. With the grant of independence to the former colony, the US took care of its own interests in certainly unambiguous terms.

The US wanted a long term military presence. It was the supreme military power after the end of World War II. It wanted a Pacific military presence for a long time.

It concluded a 99-year lease of two major military bases and certain related installations in the country with the new Philippine republic. To protect the loss of value of the assets of Americans in the country, the peso could only be devalued upon approval by the US president as provided in the independence law.

Then, the US further demanded that the same rights of Filipinos be given to Americans during the period of economic adjustment which was now to last until 1973.

This was the “parity rights” provision. In order to grant this, the newly independent country had to amend its political constitution.

The approval of the parity rights amendments would set in motion a newly crafted American law that defined the economic adjustment program involving trade issues with the newly independent republic. This was the Philippine (or Bell) Trade Act of 1946.

Also, it would bring in a large package of economic rehabilitation program to the Philippine economy, totaling $620 million. In those days, that was a very large amount of money. This was the Philippine Rehabilitation Act of 1946 which authorized payments of war damage to private citizens. (The peso then was pegged at two pesos to one US dollar and current prices were a small fraction of what they are today.)

Indeed, the new president of the Republic, Manuel A. Roxas, endorsed the approval of the grant of parity rights to a national referendum vote to amend the constitution. On March 11, 1947, a decisive vote of 79 percent gave their approval.

Thus, the 25-year period of trade adjustment with the United States was set in motion for the new Philippine republic.

The parity rights gave Americans the rights of Filipinos during this period. In practical terms, Americans received the same rights as citizens in the matter of participation in land, public utilities and natural resources industries for that period.

The early years of independence were prosperous. Economic recovery was quick. There was relatively free spending, with rehabilitation money and pent-up consumption needs being satisfied.

The traditional export industries reasonably recovered their markets, prewar consumption standards were on the way to getting restored, and rapid reconstruction took place, financed from war damage payments and other sources of foreign exchange.

Import substitution takes over. But then, within five years of independence, serious balance of payments problems emerged, the dollars became very scarce, and the government had to resort to import and exchange controls.

This change in policy also ushered in a program of industrial import substitution to stimulate economic production, spurred by the advent of import and exchange controls to combat the balance of payments needs.

Industrial incentives took major inward directions and made it more difficult to develop new exports. The grant of industrial privileges became more determined by nationalistic criteria unrelated to efficiency and prospects.

The trade policy should have created a strong growth of new Philippine exports to the United States , the world’s largest economy, because preferential trade gave it large tariff advantages. However, Philippine domestic economic policy took a different direction by developing mainly the domestic market for industry.

Had we taken full advantage of the opportunities available then, we would have experienced the euphoria of an export-driven fast economic growth experience similar to those of South Korea or Taiwan.

Whether by default or wrong choice, the restrictive nationalistic economic policies had much to do with the trade and industrial policy direction we took.

Other East Asian economies take advantage. Without the help of any preferential trade agreement, different East Asian countries used the orientation of their economies to take advantage of trade opportunities with the United States. Initially, they focused on penetrating the light consumer goods markets and then, once in, exploited them to the hilt.

But to succeed, they vigorously promoted the inflows of foreign direct investments (American and otherwise) to develop and exploit the US consumer market demand. That market was large and growing, providing a strong source of growth for exports and for generating large domestic employment of labor at home.

In succession, this was what South Korea, Taiwan, Hong Kong and Singapore did early in their postwar histories. This was also what China did early in its growth reforms and what Vietnam today is doing. Thailand, Malaysia and Indonesia much later followed this strategy.

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