When NEDA chief Felipe Medalla told Congress that the House of Representatives that a good example of the positive effects of foreign landownership could be found in Thailand and Malaysia, where "most of the tourist-oriented spots in these two countries [Thailand and Malaysia] are owned and run by Singaporeans," I decided that the government's disinformation campaign to promote charter change had gone far enough. A call to constitutional experts at the Civil Liberties Union of Thailand produced the response: "How can Singaporeans own land here when the law bans foreigners from owning land. They can lease land but they can't own it."
A check of Malaysian investment regulations reveraled that tourism is a tightly controlled business where the government restricts foreign investment to 30 per cent of equity owing to the availability of Malaysian capital and skills to develop the sector. But even more troubling than the blatant disinformation is the fact that the government's rationale for constitutional change--that it will make us more competitive in attracting foreign investment than our neighbors--is simply without basis. Many of our neighbors already have fairly restrictive investment regimes, and yet investment keeps flowing to them instead of to us. That the problem lies elsewhere emerges clearly in a comparative review of regulatiosn governing investment.
Using the most reliable recent statistics, the Asian Development Bank's
estimate of direct foreign investment inflows between 1992 and 1996
(comparative direct investment flows in the last two years of the Asian
crisis are still tentative), we find the following trends in foreign direct
investment (FDI) in key Asian destinations.
Foreign Direct Investment in Key Asian Economies
| Country | FDI (in billions US$) 1992-96 |
|---|---|
| China | 148.4 |
| Singapore | 32.9 |
| Malaysia | 23.1 |
| Indonesia | 18.2 |
| Hong Kong | 10.3 |
| Thailand | 9.7 |
| Korea | 6.2 |
| Philippines | 5.9 |
| Taiwan | -7.4 |
China has been the single biggest destination of foreign investment flowing to developing countries in the last few years, accounting for one fifth to one third of all investment going to the emerging economies, according to various estimates. Yet China is much, much more inhospitable to foreign investment in legal terms than the Philippines. Foreign companies are not allowed to own land though they may avail of land use rights via the contract and compensation system. Up to 100 per cent foreign ownership is allowed in a few sectors of the economy, but it is prohibited or restricted in many areas, particularly those which are not in line with the State Plan. China routinely bans foreign investment in those areas where it sees no specific need for the country, where it wants to protect a domestic industry, and where it perceives overcapacity may ensue. It encourages investment in areas where domestic enterprises either lack the necessary capital or technology for development, such as energy production, communications, environmental protection, and transportation. But even in these areas, foregn investors are subject to manifold restrictions.
The US Trade Representative's National Trade Estimates Report for 1999 (hereafter referred to as NTE)--probably the most authoritative source on international trade and investment practices--has this to say: "Examples of investment restrictions are abundant. For example, China bans investment in the management and operation of basic telecommunications, all aspects of value-added telecommunications as well as in the news media, broadcasr and television sectors-citing 'national security interest.' In addition, China severely restricts investments in the rest of the services sector, including distribution, trade, construction, tourism and travel services, shipping, advertising, insurance and education. Foreign firms are forced into joint venture positions in which they are often required to sell down to minority positions over a specified time period."
Once in the market, continues the report, "foreign ventures face numerous problems because of the uncertain investment climate created by policy vacillations and the uneven implelementation of laws and regulations." Among them is expropriation or nationalization of joint ventures, though this must be wth cause or compensation according to a 1990 amendment to the joint venture law.
There is not a day that passes without some investor grumbing about China's foreign investment regime on the pages of the Wall Street Journal or the Financial Times. Yet foreign investors-Japanese, American, European, and others-continue to flock to China in great numbers. According to UNCTAD data, FDI flows into China came to $45.5 billion in 1997 and, despite the Asian financial crisis, remained at that level in 1998. China's being perceived as a safe haven-because of among other things, strong controls on foreign capital inflows and outflows-is shown in the fact that its share of total FDI in developing Asia rose to 58 per cent in 1998.
What about Singapore, the second largest recipient of FDI in in 1992-96? The image of a totally open economy investment-wise is belied by the fact that foreign ownership of domestic banks is limited to a maximum of 40 per cent. Moreover, no new licenses for foreign retail banking have been issued by the Monetary Authority of Singapore for the last two decades because it considers the island state's banking sector saturated. Foreign participation is also restricted in the stock market, where stock exchange regulations limit membership in the Singapore Stock Exchange to firms with 51 per cent and above local ownership. As many have pointed out, the Singapore government is far more intrusive in its reach into foreign investors' operations than the weak Philippine state.
In Malaysia, the third biggest recipient of FDI, columnist Jose Carpio informs us that the law allows a resident foreigner to own a single residential house and lot, but bars foreigners from owning commercial, industrial, or agricultural lands. As for ownership of companies, the NTE complains that the Malaysian government "retains considerable discretionary authority over individual investments. The Malaysian government has used this authority to restrict foreign equity (normally to a maximum of 30 per cent) and to require foreign firms to enter into joint ventures with local partners." In fact, as noted earlier, the government's Foreign Investment Committee explicitly restricts FDI to no more than 30 per cent of equity in those sectors for which Malaysian skills and capital can be used, a broad category that includes activities as diverse as publishing, shipping, construction, adversitising, and the mass media. US companies, notes the NTE, also complain that a "considerable portion proportion of government projects and procurement are awarded withnout transparent, competitive bidding."
Indonesia, the third biggest destination of foreign investment in the period covered, has an economic regime that would make the Philippines a foreign investor's paradise by comparison. No foreign land ownership is allowed, and land rights for foreigners are strictly categorized into "exploitation," "building," and "use." 100 per cent foreign ownership of companies is allowed but restricted. It was only in 1998, after years of being Southeast Asia's foreign investment hotspot, that foreign investors were allowed into harbors, electricity generation, telecommunications, shipping, airlines, railways, roads, and water supply-and then only (in most cases) in joint ventures with Indonesians. Only in 1998, during the financial crisis, was 100 per cent foreign ownership of banks finally allowed. However, discriminatory capital requirements on financial firms remain, with all insurance in the country, for instance, being purchased either from a domestic or joint-venture company.
Next to China, Indonesia usually draws the most criticism from US foreign investors, with complaints focused, according to the NTE on "high tariffs and taxes; unpredictable issuance of regulations and licenses; issuance of new regulations without implementation procedures, causing arbitrary interpretations; lack of intellectual property protection; widespread corruption; a court system unable to enforce legal contracts; and underdeveloped legal system that makes negotiation of credit facility documents difficult; laws that only provide for guarantees and not security interest; non-existent credit reporting; and underdeveloped capital markets."
Yet, as in the case of China, this grumbling has not prevented investors from moving tremendous amounts of FDI into the country, even at the height of the financial crisis. At $23.5 billion, the total stock of Japanese investment in Indonesia is greater than that in China, at $17.7 billion, and over five times that in the Philippines ($4.6 billion).
Hong Kong is often cited as the classical free market economy that does not discriminate against foreign investors. Yet government has postponed further liberalization of the telecommunications market in response to pressure from the dominant local operator Hong Kong Telecom. Contrary to free-market mythology, government is a large and influential actor in the economy, where it has kept key public services, such as the Mass Transit Railway (MTR), in the hands of the public sector. Foreign ownership of the MTR, one of Asia's most efficiently run public services, is considered unthinkable by the public and the government. True, foreigners are not discriminated against when it comes to landownership, but then, owing to the scarcity of land, land ownership by anyone is subject to many complex regulations. Besides, 40 per cent of Hong Kong's total land area cannot be bought or sold since it is part of the government-owned country park system.
In Thailand, as noted earlier, contrary to press reports, foreigners may not own land though they may lease it. The Alien Business Law continues to restrict foreign investment or foreign employment in natural resource sectors and in those where Thailand feels it cannot compete with foreigners and thus needs to protect, such as farming, transportation, and construction. Owing to the financial crisis, foreigners are temporarily permitted to own up to 100 per cent of Thai banks and finance companies for a period of 10 years, but they will be required to draw down their equity stakes to a maximum of 49 per cent after that. In telecommunications, Thailand will permit foreign participation only to 20 per cent of equity.
Before the recent financial crisis, Korea was considered by the United States Trade Representative as "one of the toughest markets in the world for doing business." Yet investors were on a queue trying to get in. But many were kept out by a tough but discriminating screening process that gave preferential treatment to Korean citizens and effectively allowed in only foreign investments that brought sophisticated technology with it. There were 185 sectors on a "negative list" where foreign investment was either restricted or prohibited. There were tight ceilings on aggregate foreign equity ownership and individual foreign ownership that were designed to keep Koreans in majority control of enterprises. There were tough restrictions on the direct purchase of land by foreigners.
Despite these and other regulations, foreign investment into Korea was still greater in the 1992-96 period than that flowing into the Philippines.
Lately, under IMF and US pressure, Korea has liberalized its foreign investment regime. But it continues to maintain significant restrictions on foreign participation in the financial sector. Foreign banks, for instance, are required to allocate a certain portion of their loan portfolio to Korean firms, and introduction of new financial instruments like derivatives, in which US firms were especially competitive, is tightly regulated. Thirteen business sectors remain totally closed to foreign investors and 18 are partially closed. Foreign equity restrictions remain on investments in the Pohang Iron and Steel Company, Korean Electric Power Corporation, Korea Telecom, and in many types of media. Agricultural land use remains tightly regulated, with non-Koreans prohinited from producing agricultural products for commercial purposes or taking agriculturally zoned land out of agricultural production.
Such continuing restrictions did not prevent FDI worth $8.8 billion from pouring into Korea in the crisis year of 1998.
When one looks beyond the East Asian countries to some of the non-Asian members of APEC that are open upheld as models of liberalization, one is surprised by the restrictions maintained on foreign investment. Under the Investment Canada Act, direct foreign acquisitions worth over Canadian $179 million are reviewable and subject to change or revocation. For acquisitions in finance, transportation, uranium production, or cultural businesses, direct acquisitions worth over C$5 million and indirect acquisitions worth over C$50 million were subject to review and potential change and revocation. When it comes to cultural production, that is, publishing, film, video, music, and broadcasting, any direct or indirect foreign investment of any amount is subject to review, prompting the NTE to complain about a a regime that "effectively allows Canadian officials to impose conditions on prospective foreign investments on a case-by-case basis."
In Australia, all potential foreign investments are subject to a screening process which allows the government to deny specific foreign investment on the basis of "national interest." Foreign investment in telecommunications is restricted, with total foreign investment in the one-third privatization of the state-owned telecommunications carrier Telstra limited to 35 per cent.
Compared to many of our trade and investment-restrictive neighbors, movement in liberalizing foreign investment in the Philippines has been marked, consistent, and applauded by the international business press. Yet this approval has not translated into higher levels of investment. The Foreign Investment Act (FIA) of 1991 opened most areas to foreign investment except those on three "negative lists." The third of these lists, "C", composed of sectors deemed adequately served by domestic firms, was eliminated by RA 8179, an amendment to FIA, which also allowed 100 per cent foreign ownership in enterprises serving the domestic market and removed foreign equity restrictions in enterprises exporting at least 60 per cent of their total products.
While foreigners are not allowed to own land, leasing terms are liberal, with the passage in July 1993 of RA 7652, which extended the maximum allowable lease to foreign companies from 25 years to 50 years, renewable once for 25 years. Liberal terms were also provided by the 1995 Mining Act (RA 7942), which gave foreign investors 100 per cent control over a maximum of 81,000 hectares of mineral lands for 25 years, renewable for another 25 years.
Liberalization has also definitely been the trend in the financial sector. Controls on repatriation of capital, dividends, and profit remittances on investments registered with the Bangko Sentral were abolished in January 1992. After being closed for 50 years, the insurance sector was opened up to 100 per cent foreign ownership in 1994. Republic Act 7721 also permitted 10 new foreign banks to open full-service branches in the Philippines and allowed each of them to own up to 60 per cent of a new or existing local subsidiary. Participation in the stock market was made more liberal than in Singapore, with membership in the Philippine Stock Exchange opened up to foreign-controlled brokerages provided they were incorporated under Philippine laws.
The investment liberalization thrust of the government was coordinated with its programs of liberalization and deregulation. The big-ticket privatizations carried out by the government involved the acquisition of state-owned firms via minority control by foreign groups: Petron to the Arab-American Oil Company (ARAMCO); Fort Bonifacio property to Metro Pacific consortium, a subsidiary of the Hong Kong giant First Pacific; and the Manila Bay Reclamation Area to the transnational land developer AMARI. The Ramos administration also turned over management of the Manila Waterworks and Sewerage Services (MWSS) to two joint ventures: the Maynilad Water Services that joined the Lopez-owned Benpres Corproation to the French firm Lyonnaise Des Eaux and the Manila Water Company that united the Ayala Corporation to the British firm Northeast Water and the US giant Bechtel Overseas Corp. The succeeding Estrada administration also posed no objections to the ttransfer of effective ownership of the strategic Philippine Long Distance Telephone Company (PLDT) to the conglomerate First Pacific.
In addition to such outright divestitures to foreign-controlled groups, the Ramos administration introduced Build-Operate-and-Transfer (BOT) schemes undertaken by consortia led by foreign groups, among them firms controlled by the children of ex-Indonesian strongman Suharto (daughter Tutut in highway construction and son Bambang in hydro projects). The most recent BOT scheme is the controversial $450-million Caliraya-Botocan-Kalayaan Project awarded by the Estrada administration to a consortium led by the Argentine firm IMPSA Asia Ltd.
But as important as the changes in law and the high profile welcome given to selected foreign players was the ideological revolution carried out by Fidel Ramos, who institutionalized a pro-globalization, pro-foreign-investment orientation in the upper rungs of the Philippine economic bureaucracy and key sectors of Philippine business. A veritable neoliberal revolution that transformed our bureacratic, political, and economic elites into a pro-foreign capital, pro-globalization lobby took place under Ramos. In fact, the Philippines has become over-liberalized, and the balance has definitely shifted to favor foreign investors over local investors.
Yet the response to all this has not come up to expectations. Direct investment rose from $228 million in 1992 to $1.6 billion in 1994 then dropped to $1.5 in 1995, $1.4 in 1996 and $1.11 billion in 1997.
What went wrong? The problem does not lie in foreign investors' perception of an inhospitable climate. Nor does it lie in non-competitive wages: average wages in many of those countries receiving more investment than the Philippines, like Singapore, Malaysia, Thailand, and Korea, are much higher than those in the Philippines. The problem lies in the changing priorities of investors and where those priorities place the Philippines. Since the mid-eighties, foreign investors have no longer been principally interested in using investment sites as cheap-labor platforms from which to export cheap manufactures to the rich markets of the North. Their main objective now is to set up facilities to exploit expanding domestic markets dominated by growing middle classes, and many investors, especially the Japanese, are willing to accommodate to restrictive investment rules in many countries to get at those middle classes in the Asian tiger economies.
In this light, it is not its investment regime but its macroeconomic policies that have disadvantaged the Philippines. The mess created by crony capitalism under the Marcos regime was followed by six years of IMF-imposed structural adjustment under the Aquino administration, where the nation's top economic priority was paying off the foreign debt. This starved the economy of much-needed inveestment. At the same time, redistribution of assets and income via effective land reform was postponed indefinitely. The result of these growth-unfriendly policies was not surprising: zero average growth between 1983 and 1993, resulting in 54.0 per cent of Filipino families living under the poverty line by 1991, a rate higher than the 52.0 per cent in 1985.
Foreign investors surveyed the dismal scene and came to the conclusion that the Philippines was an unattractive market-a conviction that was reinforced when they looked at the income distribution figures, which actually worsened in 1991 relative to 1985, with the share of income going to the lowest 20 per cent falling from 5.2 per cent to 4.7 per cent while that going to the top 10 per cent rose from 36.4 per cent to 38.6 per cent.
True, greater political stability came with Fidel Ramos. But his great labor to bring foreign investors in was nullified by the priority he placed on macroeconomic stabilization instead of expansion and his placing asset and income distribution on the backburner, as Aquino did. Official statistics indicated that the poverty rate had dropped to 32 per cent by the end of the Ramos administration, but that was taken with a grain of salt by many who attributed the improved figure largely to methodological changes in measuring poverty introduced by government statistical agencies. Even more telling to foreign investors was the economy's gini coefficient (a measure of income inequality) in the mid-1990's: at 42.9, it was the 26th or 27th highest in the world. To investors, such figures translated not only into a low-potential market but also into future political instability and social strife.
What seems clear, in short, is that the way to make the Philippines even more attractive to foreign ivnestors is not to make our already liberal foreign investment regime even more liberal by changing the constitution. The answer lies in those long postponed measures of social reform that would redistribute income and create a truly attractive market for local and foreign investors alike. If I were a foreign investor and had to choose between investing in the Philippines or investing in Vietnam, I would not think twice. I would choose Vietnam because of the potentially large market indicated by its lower levels of income inequality and because of the promise of long term stability provided by a relatively cohesive citizenry that is not rent by sharp class conflicts.
Indeed in 1997, foreign direct investment in Vietnam was close to 100 per
cent more than foreign direct investment in the Philippines, despite rules
that were 10 times more strict and a socialist and anti-capitalist
constitution!
