Inconsistent with our Asean obligations

THE TIMELY Inquirer editorial “Investment drag” (Opinion, 7/24/15) deplored the failure of Congress to eliminate the restrictive economic provisions of our Constitution. These provisions are inconsistent with our membership in the Association of Southeast Asian Nations and the Asia-Pacific Economic Cooperation. The rules for membership in a common market have been established by the European Community. The most basic rule is that there must be free flow of persons, services, goods and capital among the member-states (the free flow of factors of production).

The restrictive economic provisions of our Constitution violate the rule on the free flow of capital; unless we remove these restrictions, we will not meet our obligations in the Asean. Simply stated, our Asean partners cannot invest in any economic activity in the Philippines which is limited under our Constitution to Filipinos; however, our nationals can engage in any economic activity in any of the Asean member-state. Our Asean partners will not agree to this setup.

The restrictive provisions of our Constitution are an anachronism now. These provisions were lifted from the 1935 Constitution.

Before World War II, the prevailing economic doctrine among nations was the “beggar your neighbor” approach. Under this doctrine, key sectors of the economy are reserved for local citizens, foreign investments are restricted, and high tariffs are erected to protect local industry. This doctrine has been replaced by globalization after World War II. Under this doctrine, barriers to trade, including the flow of investments, have been progressively reduced. Countries which have restructured their economies so that their industries can compete on a worldwide basis have developed quickly.

The restrictions on foreign investment are based on the assumption that such rules are necessary, otherwise foreigners will end up controlling the local economy. This assumption is false. In all instances, countries which open the door to foreign investors develop quickly. As a country becomes affluent, the locals end up buying the foreign-owned businesses in the country. At a later stage, the country starts investing abroad. This pattern of development has been the case elsewhere.

The most recent case is China. China opened its economy to foreign investors in 1979. Initially, China was a heavy importer of capital. But lately, China has itself started investing overseas. The United States before and after World War I transformed itself from a capital importing country to a major capital exporting country. Japan followed the same path in the period after World War II. The Philippines will undoubtedly follow the same path of development if we take out the restrictive economic provisions of our Constitution.

Our generation of Foreign Service Officers (FSO) had the front-line experience in seeing the decline of our economic status. In 1969, not long after we passed the FSO examinations, we were trained for four months in Geneva under the auspices of the General Agreement on Tariffs and Trade/United Nations Conference on Trade and Development (now the World Trade Organization). We trained in foreign trade promotion and how to attract foreign investments. In 1969, we were the second most developed economy in Asia, ranking second to Japan. From that time until we all retired sometime in the 1990s, we saw the Philippine economy slip from second place to last place in our region.

We were overtaken by two waves of countries: the first wave was what became known as the “Asian Tigers” in the 1970s, composed of South Korea, Taiwan, Hong Kong and Singapore. The second wave to overtake us was Malaysia, Thailand and Indonesia in the 1980s. Now Vietnam and Cambodia are poised to overtake us, with Burma (Myanmar) not far behind. Of the original six members of the Asean, we are now the tailender. The culprit in our lack of competitiveness is the restrictive provisions of our Constitution. Our Asean neighbors offer better investment terms while we are offering the equivalent of a flawed merchandise.

To cite a specific drawback of the economic restrictions in our Constitution, we do not allow foreign ownership of real estate in the Philippines. So if a big multinational company (MNC) decides to invest in the Philippines, it has to look for a local partner. Most MNCs, when they enter any market, are immediately concerned with two things: market share and brand recognition. The easiest way to achieve these goals is to sell its product as cheaply as possible even taking losses in the initial years of operation. The local partner, on the other hand, would like to get a quick return on investment.

The MNCs can afford losses initially. It can absorb the losses in the Philippines and offset them with gains in its international operations. The local investor does not have this luxury. So the solution is to remove the restrictions in our Constitution and allow the foreign investor to buy land for his factory. This is just one example of the many restrictions that obstruct the flow of investments into the Philippines.

The restrictive economic provisions were ensconced 80 years ago in our 1935 Constitution. We still maintain this provision in the face of overwhelming evidence that only by welcoming foreign investments can we speed up our economic growth and eradicate poverty in our country. Our neighboring countries have long ago recognized this fact. Hopefully, we will come to our senses and eliminate this obstacle to our economic growth.

Hermenegildo C. Cruz was accredited as Philippine ambassador to the United Nations in 1984-1986.