Policy consistency and labor laws

I was in Singapore last week to brief a group of businessmen potentially interested in doing business in the Philippines. They were impressed with the change that had been reported but still skeptical about the reality of it given the Philippines’ poor record in the past.

In most areas we were able to dispel that skepticism, but on these points we weren’t: policy consistency and labor laws. And they were quite right. The two points are major deterrents to doing business that have not been addressed.

Let me start with labor because it’s the easiest to do something about. It’s not minimum wage—oh, that is a discouragement if you want to go into manufacturing basics, of which garments would be a perfect example. There, labor cost is probably the most critical cost component. It’s why the Philippines lost its textile and garments industry. (It used to account for nearly 30 percent of the total employed in the manufacturing sector in the late 1980s. But this dropped by half in the mid-2000s, and its value-added share in total manufacturing declined from a tenth in 1988 to a measly 3 percent in the early 2000s—almost all because of labor cost.)

The single biggest labor-related deterrent to running a business in the Philippines is security of tenure. It’s not beneficial to workers, it’s the most misplaced concept I can imagine. It’s one of those typical things that sound good, but in practice are in fact detrimental (a ban on incineration is another foolish one I may address one day). Like so many other things, I’ve written about this endlessly—with no impact (maybe I should stop writing).

Security of tenure does one thing: It encourages mediocrity. Why work hard when you can’t be fired? Why work at all if you don’t want to? It has led to that inhuman policy of hiring “5-monthers,” or people who get a job and then are kicked out before the six months are up.

In the latest World Economic Forum (WEF) global competitiveness survey, for instance, the Philippines’ ranking improved by seven notches to 52nd out of 144 economies, from 59th out of 148 countries surveyed last year. Since 2010, the country has risen in the global ranking by 33 places—“the largest over that period among all countries studied,” according to the WEF. The Philippines would’ve placed higher if not for its dismal ranking in two indicators: infrastructure and labor market efficiency. In the latter, the Philippines ranked 91st, due primarily to poor performance in the following sub-indicators: hiring and firing practices (104th out of 144) and flexibility of wage determination (86th). The WEF also mentioned that “almost no progress has been made (in terms of labor market efficiency) since 2010.”

The other major deterrent to foreign investment is the much more difficult one: policy consistency. The Philippine political system is so structured as to give the president wide-ranging power to change policy at whim, with almost no counterbalancing control. It’s not just this President; to attack him is not my intention. It’s all administrations. It’s the Philippine system.

Gloria Arroyo had 10 years to mess things up. She imposed market-distorting controls. She halved drug prices; issued an executive order that capped oil prices in Luzon after Tropical Storm “Ketsana” (“Ondoy”) and Typhoon “Parma” (“Pepeng”); froze a tuition increase in state universities and colleges and urged their private counterparts to do the same; and cancelled the Ninoy Aquino International Airport-3 contract without proper compensation.

She also cancelled the waste-to-energy project with Australian firm Jancom Environment Corp. five years after its approval. Early in her term, she ordered the renegotiation of contracts with independent power producers due to an insistent public clamor to bring down electricity rates. It was a popular measure, but a surefire way of discouraging businessmen from investing in the country.

Under the current administration, the most glaring and disastrous was the President’s ill-advised decision to review the tax on mining—without a thorough study and intense discussion with all involved. It sent the industry into chaos; it put one of the potentially most beneficial sectors on hold. Billions of dollars in investment and exports, thousands of jobs, have been lost. On a whim. Then there’s the cancellation of the Laguna Lake dredging project with a Belgian firm. The company is suing the government. Maybe the company’s proposal wasn’t the best solution, but it was a signed contract. If there were valid reasons to cancel—and they’d have to be very strong—then full and immediate recompense had to be made. It wasn’t done.

Yet despite all he has done, he’s concerned that the positive changes he has wrought may not be continued by his successor. It’s a valid, very valid, concern. But the solution isn’t to give him another term. That’s a stopgap solution: He’s not going to live forever. The solution is to institute measures to set in stone policies relating to business, to make it so that if change would indeed be necessary—and times do change what policy environment is needed—such change is done in a manner that does not disrupt business. Passing the laws business has been clamoring for is the way to do it. But eventually the system, the culture, need to be changed.

I don’t think I have the solution to this, but perhaps it revolves around a truly more independent Congress. A two-party system where the parties have fixed ideologies and the members believe in those ideologies—and don’t switch on an opportunistic whim. Added to that, a shift to a parliamentary system where the prime minister is less of a “demigod” than a president is in the Philippine context.