Reflections on CREATE, ISI and EOI in Covid times
The government has been rushing a new package of tax reforms called Corporate recovery and Tax Incentives for Enterprises, originally dubbed as TRABAHO and subsequently re-christened as Citira. As advertised by the Department of Finance, CREATE should attract new investments, FDIS in particular, because the corporate income tax (CIT) is lowered at a rate comparable with those of the Asean neighbors.
ironically, the tax package has received strong resistance from a government agency directly under the Office of the President, the Philippine economic Zone authority. the latter is opposed to the removal of the generous tax incentives given to Pezaregistered enterprises. these firms enjoy income tax holidays (iths) upon their establishment in the Philippines. after a few years, these firms are subjected to a low 5 percent tax on gross income earned (Gie), with no other taxes imposed on them. thus, between this 5 percent Gie rate and the proposed 25 percent Cit rate, so much is going to be lost by the Peza locators and so much is to be gained by the Philippine tax collectors.
the Create proponents are raising valid questions on the Gie and other generous fiscal incentives given to locators in the industrial parks run or accredited by Peza as well as those developed by other government investment-promotion agencies or ipas. Why are incentives given without any time limits and without any performance yardsticks? Why are there no visible indications of deepening industrial development and mushrooming jobs after decades of iht/gie incentives being enjoyed by a number of Peza enterprises?
and yet, students of Philippine industrial development note that some of the industries set up by the locators, mostly auto parts and electronics/semiconductor assembly industries, have failed to grow at a higher level of product sophistication and market expansion. it appears that these locator firms occupy the lower middle of the global value chains (GVCS) of the auto, electronic and it multinationals. in short, most of the Philippine locators are engaged in assembly work, not in product innovation and development. these
locators are stuck in the assembly business, unable to scale the higher rungs of the industrial ladder. to put it simply, they are dependent on what the Mncs are willing to outsource to them for limited assembly work.
in contrast, our neighboring countries in asia—south Korea, taiwan, Singapore, Malaysia, thailand and China—have been scaling the industrial ladder through a conscious program of technology acquisition, product diversification and, yes, development of their own GVCS. this is exemplified by South Korea’s Samsung, which was once upon a time an assembler-contractor for Sanyo and which was able to transition toward original brand manufacturing all the way to product development and innovation with a lot of help from an inter ventionist State, which does not shy in providing credit, technology acquisition, r&d support and so on. But back to Create. it is ironic that the criticisms raised by the Create proponents are similar to the criticisms leveled in the 1970s by a group of laissez faire economists against the pioneer Filipino industrialists of the 1950s1960s (e.g., Puyat, Guevara, araneta, Concepcion, toribio and other industrial families). accordingly, the post-war isi industrialists f lourished around the high tariff walls and other protectionist isi measures. no time limits. no performance yardsticks. the isi industrialists were even called by some free-trade economists as “rent seekers.”
as a backgrounder, the high tariff walls were erected in the 1960s by President Diosdado Macapagal to placate the isi industrialists after he scuttled the import and foreign exchange controls on the advice of the IMF. Before the tariff walls, the isi industries boomed under the regime of import and foreign exchange controls managed then by Central Bank Governor Miguel Cuaderno, a fierce exponent of Philippine industrial development.
eventually, the isi program was replaced by the export-oriented industrial (eoi) program instituted by neda during the martial-law decade of the 1970s. the ascendant freetrade economists justified the shift by pointing out that the isi program was facing a dead end in terms of market development (allegedly, small domestic market), sustainability (dependence on imported industrial raw materials and machines, leading to chronic trade and balance of payments deficits) and job creation (due to limited industrial expansion). the eoi shift was further cemented in the 1980s, with the “structural adjustment program” (SAP) lending provided by the imf-world Bank group. But what is the scorecard? it was the isi industrialists of the 1950s-1960s who succeeded in placing the Philippines on the industrial map of asia—as no. 2 to Japan in asia, per World Bank report for the 1960s. On the other hand, the eoi program, put in place in the 1970s and continued for nearly five decades, has failed to deliver to the country the promises of higher industrial development, massive job creation and welfare development for all that were spelled out in the various neda medium-term plans from the 1970s to the present.
Worse, many of the isi industries collapsed during the eoi decades of the 1970s-present. this is not difficult to explain. the isi industries did not only lose the incentives (tariff and other protection programs) that they used to enjoy during the 1950s1960s. they also became the target of intensified tax campaigns. this is so because most of the eoi industries have been given the generous fiscal incentives. For government, therefore, taxes could only be raised from two fronts: the local firms (through corporate and other taxes) and the general population through Vat/e-vat.
now what is the point of this article in these Covid times?
the above historical snapchats are simply meant to remind the policy-makers, both from the executive and Legislative branches of the government, that one should avoid formulating “quickie” solutions to industrial development without strategizing the country’s development options in these uncertain times. For example, why focus the country’s investment campaign in getting Fdis at a time when the global market is shrinking, the GVC chains of many Mncs are broken and many countries are also looking inward? and if we shower Fdis with incentives such as opening the economy wholesale to them, what are the prospects that they will be able to create the jobs within the year or so when it is clear that the challenge is job creation now, not in 2022 or beyond?
as to going domestic, this is refreshing. it is obvious that the industrial visionaries at the Dti and other government agencies (hopefully, including neda), are not tied to the old dogmatic export-or-perish or go-outward-or-remain-inward narrow framework of the free-trade economists. they also see that the Philippine population of 110 million is a huge market, which can be a platform for the launching/relaunching/development of old and new Philippine industries.
it is clear that Covid-19 provides the country a grand opportunity to re-think what went wrong with both the isi and eoi programs and what the country should pursue today to meet the challenge of surviving a pandemic which still has no cure. More in the next issue.
The above historical snapchats are simply meant to remind the policy-makers, both from the Executive and Legislative branches of the government, that one should avoid formulating “quickie” solutions to industrial development without strategizing the country’s development options in these uncertain times. For example, why focus the country’s investment campaign in getting FDIS at a time when the global market is shrinking, the GVC chains of many MNCS are broken and many countries are also looking inward? And if we shower FDIS with incentives such as opening the economy wholesale to them, what are the prospects that they will be able to create the jobs within the year or so when it is clear that the challenge is job creation now, not in 2022 or beyond?