Economic liberalization

In their report “Trade, Growth and Poverty,s” published in the Economic Journal in 2004, Dollar and Kray showed that countries which have liberalized have registered acceleration of real income in their growth patterns.

Their finding mirrors those of numerous reports that have indicated the benefits of liberalization on the economic growth patterns of developing countries. The correlation can be seen in practice in much of ASEAN, where increased liberalization of key economic activities has opened the way for high levels of economic growth and incoming FDI.

However, the Philippines remains one of the most restrictive countries in the region in terms of economic liberalization. This is reflected in the levels of FDI that the country receives; despite substantial growth in incoming FDI in the past years, it only accounted for 4.8 percent of total net FDI into the region in 2015 (Source: ASEAN Secretariat 2016. Table 25 – Foreign direct investment net inflows, intra- and extra- ASEAN. Retrieved 26/06/2016. http://asean.org/storage/2015/ 09/Table-251.pdf).

In fact, while economic growth in the Philippines continues to show some of the highest growth rates in the region, two out of three major growth drivers are consumption and OFW remittances (the other being the IT/BPM sector). If the country is to move towards a more sustainable model of economic growth, which has direct benefits for employment generation, inclusive prosperity and the country’s trade balance, it is important to incentivize investment.

The first step is to liberalize key economic activities. This opens the economy to much needed capital investments while giving foreign investors sufficient participation in the management of the business. This would manage the risk of their capital investments and increase their potential returns on investment in the country.

In addition to the major legislative reforms required to facilitate economic liberalization listed in this section, there are also low hanging fruits that have the potential to greatly benefit the economic landscape and services offered to Filipino consumers. Further amendment of the Retail Trade Liberalization Act to make it easier for foreign retail companies to enter the market, and the removal of restrictions on foreign ownership of solar and wind power from the IRR of the Renewable Energy Act of 2008, are two such measures.

Liberalization of key economic activities should also be considered as a priority in light of the ongoing EU-Philippines FTA negotiations and the discussions of the Philippines joining the TPP. Based on the existing TPP text which the Philippines would be required to adhere to and the texts of previous FTAs negotiated by the EU with countries in the region, economic liberalization will undoubtedly be a decisive factor in the completion of agreements for the Philippines’ participation in these two important agreements.

The European business community supports the passage of amendments to the Constitution that would allow greater foreign participation. Ideally, the economic provisions would be amended to totally remove the restrictions as in other jurisdictions. However, as consensus on this might not be easy to obtain and definitely will take time, we advocate the passage of amendments recommended in the 16th Congress, wherein the legislature would have the authority to pass laws that allow greater foreign ownership in certain activities, by inserting the phrase “unless otherwise specified by law” in front of restrictive clauses. This should be a reasonable middle ground as it does not automatically open all economic activities to full foreign ownership. Rather, it gives Congress the flexibility to pass legislation through the usual legislative process which includes stakeholder consultations and public hearings.

This will send a positive message to international investors and trade and investment partners alike, that the Philippines is open for business. Subsequent foreign investment influx and participation in economic activities and the completion of important agreements such as the EU-Philippines FTA and the TPP can be game changers for the Philippines’ positioning as an FDI destination in the region and at a global level, not least as ASEAN becomes a global hotspot for FDI.