5 arrows for inclusive growth

LET me not belabor the obvious. Despite the 6.5-percent average annual growth rate for the past five years being trumpeted by the Aquino administration, I don’t know if there’s no more corruption, but I’m sure as hell there are still lots of poor people.

Levels of unemployment and underemployment, poverty and hunger have essentially remained the same. While hunger has moderated somewhat in the first quarter, it could be because inflation fell to 1.2 percent in the same period. And there has been no major typhoon. However, with a severe El Niño this year, incidence of hunger is expected to increase again.

These past years, growth has benefited mainly the rich. The question is why?

First, growth has mainly been consumption-driven rather than investment-driven. Second, agricultural growth and agricultural productivity remain low. Most poor people live in the countryside and eke out a living from agriculture.

Growth has mainly been in services, while the share of manufacturing has shrunk from 25.7 percent of gross domestic product (GDP) in 1980 to around 20.52 percent today.

Productivity in services is still much lower than in industry. In other words, what counts as services growth are poor-paying jobs like selling DVDs or working as fast-food workers or gasoline boys, while better-paying jobs in manufacturing aren’t being created to absorb our large labor pool.

Therefore, to achieve inclusive growth, reduce poverty, generate jobs and lower hunger, we have to do the following:

Make economic growth investment-driven rather than consumption-driven.

Tackle the problem of low agricultural productivity.

Increase the share of manufacturing.

Make our industries competitive.

But how?

If Japanese Prime Minister Shinzo Abe has his three magic arrows—expansive monetary policy via massive quantitative easing, robust fiscal spending and structural reforms—to cure the ailing Japanese economy, I will offer my own five arrows to achieve inclusive economic growth.

The five arrows address the big constraints to sustainable and inclusive growth.

u The first arrow is openness to foreign investment.

In particular, we need constitutional change to remove the foreign ownership restrictions.

Why, you might ask?

Even local investors, who are not restricted, are not investing. This is shown by the fact that our investment rate is quite low at 20 percent of GDP compared with about 25 percent in Malaysia, 33 percent in Indonesia and 47 percent in China.

Our banks are awash in liquidity. Instead of lending to businesses, banks are lending to consumers and parking their funds in the Bangko Sentral ng Pilipinas (BSP).

If local investors are not investing, why is it so important to remove the foreign ownership restrictions in the Constitution?

The answer is that there are monopolies and duopolies in strategic sectors of the economy—ports, telecommunications, airports, power distribution, cement, shipping, etc. These strategic sectors strangle the growth of the rest of the economy with their high prices and bad service.

One example is telecommunications, where we have the highest prices, bad service and slowest Internet speed in Asia. Because of the oligopolistic structure in their respective industries, our port and shipping costs are also very high.

So if you are a small company, how can you compete with your Asean neighbors, much more sell your goods via the Internet to the greater Asean market? You just don’t invest.

We need to have well-capitalized foreign companies to provide competition in these strategic sectors but because of the 60-40 rule in the ownership of public utilities in the Constitution, foreigners cannot come in.

u The second arrow is modernizing the Labor Code so that the focus is on labor productivity, rather than on labor security and unrealistic high minimum wages with no relation to productivity.

With its emphasis on high minimum wages and labor security, the effect of our Labor Code is to discourage employment and the upgrading of the skills of our labor force. Small- and medium-scale industries, which are the biggest generators of employment, therefore, don’t hire in large numbers.

According to the World Bank, the Philippines has one of the highest minimum wages relative to average wages in the world. It also has the most unproductive minimum wage earners in the world.

In other words, the legal minimum wages are not tied to productivity.

A study by Vicente Pacqueo, Ph.D., and economists from the Philippine Institute for Development Studies, the government’s own think tank, shows that the current high minimum wages deter employment, especially among the youth, the uneducated and women.

The legal minimum wage is, therefore, antiyouth, antiwomen and antiuneducated.

John Nye, Ph.D., the valedictorian in President Aquino’s Ateneo high school class and the Frederic Bastiat professor of political economy in George Mason University, says the first order problem of the Philippines is not poor public finances but our unrealistic minimum wages that hamper industrialization, or the movement of surplus labor in the countryside to industry.

The result is that migrant labor is going to low-paid, low-level service jobs, instead of good jobs in manufacturing.

The focus of the Labor Code on labor permanency after six months also deters companies from hiring. Once permanent, it’s very difficult to let go of unproductive employees.

Companies, therefore, often resort to labor-contracting organizations, which fire workers before six months. This results in labor being unable to absorb more skills and training in a particular job. Hence, workers are condemned to low productivity and low wages.

We therefore need to modernize the Labor Code. It’s the key to developing more labor-intensive industries. It’s the key to attracting foreign investors to invest in labor-intensive industries in our country. They are fleeing China because of a shortage in labor and going to countries, like Vietnam and Indonesia but not the Philippines.

u The third arrow is to dramatically improve our agricultural productivity.

We need to improve agricultural productivity for many reasons, one of which is that the majority of poor people are in the countryside. We need to raise rural incomes in order to make a dent in rural poverty.

However, what is holding back agricultural growth and agricultural productivity?

The biggest obstacle to agricultural growth and productivity is the Comprehensive Agrarian Reform Program (CARP). According to the World Bank, CARP is one of the most successful land distribution programs in the world, with about 87 percent of targeted lands having been distributed.

However, 28 years after its passage, have we seen rising incomes, more employment, increased productivity and reduced poverty in the countryside? No.

First of all, because of the uncertainty over property rights fostered by CARP, there has not been much investment in agriculture. Why would people invest if there’s a possibility that the lands will be taken away from them, or the Department of Agrarian Reform (DAR) extorting money for all kinds of clearances?

Property rights issues also bedevil certificates of land ownership award (Cloas). DAR doesn’t award individual Cloas but collective Cloas. The country has the last remaining soviets, or collective ownership of lands, in the world in the form of collective Cloas.

On top of that, until fully paid for, Cloas cannot be mortgaged and, even if foreclosed, the bank can sell them only to qualified beneficiaries, preventing farmers from accessing the formal credit markets.

Second, the Comprehensive Agrarian Reform Law’s prohibition of ownership beyond
5 hectares prevents efficient farmers from buying out inefficient ones. Successful farmers cannot scale because CARP prohibits them from doing so. This is why, even agricultural officials admit, the average age of farmers is now 57 years old. The young ones see no future in farming.

What do we need to do? First, we need to end CARP.  No more extensions. Second, we need to amend the Comprehensive Agrarian Reform Law (CARL). The suggestion of National Scientist Raul Fabella, Ph.D., is that CARP beneficiaries should be able to legally lease their Cloas.

The lease income acts as a safety net for beneficiaries, but the lease also allows the inefficient ones to let more efficient farmers use the land.

Aside from amending CARL, what do we need to do to increase agricultural productivity?

We have to stop spending the majority of our agricultural budget on rice, a low value-added commodity. We have no competitive advantage in rice production, lacking the alluvial plains of Vietnam and Thailand. Instead, like Malaysia, we should rely on trade for food security.

We have to liberalize rice importation by removing the National Food Authority (NFA) monopoly on rice importation. The NFA monopoly on rice importation has resulted in high domestic rice prices and massive corruption among our agricultural officials.

Our countrymen are paying nearly twice as much for rice as consumers in countries like Vietnam. High rice prices translate to higher wages and therefore make our industries less competitive. High rice prices also mean that the poor, who include rice farmers who are net consumers of rice, spend more of their budget on food.

u The fourth arrow is a competitive exchange rate.

Our monetary authorities are saying that their policy is “inflation targeting” and not “exchange rate targeting,” and under a regime of free capital flow, it can’t manage the exchange rate.

I’m not advocating hard capital controls, which are banned under some international trade agreements nor am I saying that the BSP should bear sole responsibility for a competitive currency.

What I’m advocating is a national policy, that is, a coordinated proactive stance of both the BSP and the executive, to deliberately prevent the peso from strengthening and to weaken it relative to other currencies.  How do we do this?

First, the BSP should be more aggressive in purchasing dollars.  As Fabella and Victor Abola, Ph.D., have shown, money creation from the purchases of dollars in an open trade regime is not inflationary because liberalized imports temper any kind of inflationary pressures.

All the more so, when the world faces structural deflation (i.e. overcapacity and lack of demand). All over the world,  the United States, Japan, Europe, China, Russia and even Thailand are fighting deflation, rather than inflation. The Philippines posted an inflation rate of 0.6 percent in August, the lowest in 20 years.

As Fabella said, the central bank is too focused on “fighting the last war.” The BSP, therefore, can be more aggressive in purchasing dollars to weaken the peso.

Second, the national government should undertake massive infrastructure spending because building infrastructure will lower the cost of doing business in the Philippines and dramatically increase the demand for capital imports, which will increase the demand for dollars and weaken the peso.

Third, as I mentioned earlier, we need to liberalize rice importation. Apart from the benefit of lower rice prices, rice importation will drive the demand for dollars and weaken the peso.

Even as the national government is doing everything to drive demand for dollars and weaken the peso, the government should also push down the costs of doing business in the Philippines by  improving competition through Charter change and by refraining from declaring more official holidays.

While the peso has recently depreciated against the US dollar, it has appreciated relative to other currencies in the region.

What are the benefits of a weak peso?

– Domestic manufacturers will be shielded by higher import prices and help curb smuggling.

– It will make our exports, from coffee to call center services, more competitive.

– It will increase the purchasing power of overseas Filipino workers and boost growth in the retail, housing and educational service sectors.

– It will boost tourism and make our peso-denominated labor more attractive to foreign investors.

– It will also protect agriculture, which has a high domestic value added.

u The fifth and final arrow is institutional reform.

The four arrows are useless if institutions are corrupt or inefficient because institutions in government wield the four arrows.

Institutional reform covers a lot, but I would like to focus on a particular reform: the strengthening of the political party system.

Without a strong political party system, we can’t hold our leaders accountable. If party-switching is rampant, how can we punish the people who gave us the terrible traffic mess we are experiencing now or the airport congestion?

All the Asian countries that experienced high growth rates and reduced poverty had political parties behind them: PAP in Singapore, the Communist Party of China in China, Koumintang in Taiwan, Umno in Malaysia, Golkar in Indonesia and the LDP in Japan. Here, we only have kaklase (classmates), kabarkada (friends), kamaganak (relatives) and kabarilan (practice-shooting partners.)

Overcoming the development challenge is a collective action problem. Only cohesive political parties can serve as the tool of the people to solve the collective action problem. It’s a key ingredient of a developmental state.

We have to ban political turncoatism and institute public financing of political parties and campaigns.

The central challenge of our time is to eradicate poverty. Daang matuwid (straight path governance) is not the solution to poverty. Despite massive corruption, many Asean countries have reduced or eliminated poverty.

To eradicate poverty, we have to let the arrows fly.

(Calixto Chikiamco is president of the Foundation for Economic Freedom, but the views expressed here are his own. Chikiamco is also a political economist, book author and Internet entrepreneur.)