Economic reforms, further liberalization pushed

THE PHILIPPINES needs to gear its policies toward effective competition and further economic liberalization if it seeks to stand by its move to push for inclusive growth across member economies of the Asia Pacific Economic Cooperation (Apec).

As the host country to the Apec meetings this year, the Philippines made a significant yet bold pronouncement in May through the Boracay Action Agenda to Globalize the Micro, Small and Medium Sized Enterprises, which sought to enable these enterprises to become an integral part of global value chains and international trade.

However, the country’s credibility in thumping for such reforms will depend largely on its ability to make good of its commitments to promote inclusive growth, Anthony Amunategui Abad, a partner at the Abad Alcantara & Aquino Law (AAA Law), explained during the Inquirer Conversations forum held earlier this month.

Inclusivity

“We have to make a move toward regulatory and policy coherence toward our own pronouncement. If we say we want inclusive growth by including the small and medium sized enterprises (SMEs) in global value chains, it entails the hard decisions and difficult process of reforming the entire economy, and even the entire society and nation toward that process,” Abad explained.

“It goes against what we’ve had historically because we are an exclusive economy. That’s why we have the so-called jobless growth. We create a lot of macroeconomic growth that we can be proud of that but it’s not distributed. Only certain individuals make all the money and that makes it more unstable. An unstable economy, where the distribution of goods is so disparate and unequal, leads to instability whether politically, socially and so on,” he said.

Abad conceded, however, that inclusion or inclusivity is a difficult concept.

Citing portions of the book “Why Nations Fail,” Abad explained that successful economies and nations that were able to build themselves properly were inclusive. This meant that the more inclusivity you have, the stronger and the more resilient your economy will be. But inclusivity means there is actual community participation among all the members of the society in coming up with national production, value creation, and nobody is left out or disregarded.

Not equal but integral part

Under an inclusive economy, everybody—from the farmers, street cleaners, builders of structures, to those who provide public service—should be considered an integral part of that machinery that churns out production, value, technology and innovation.

“(Everyone) is considered not equal but integral parts of your economy. That book, ‘Why Nations Fail,’ points out that the Philippines, instead of being an inclusive type of economy, tends to follow the history of Latin America’s managed colonies, which were set up for the purpose of extraction of resources and the exploitation of labor, either slave or cheap labor, and the orientation has always been that way. That’s why we’re considered a failed state… because all this time we have not oriented ourselves toward inclusivity,” Abad explained.

The lack of inclusivity is likewise reflected in the weakness to provide public goods. Citing Raul V. Fabella from the UP School of Economics, Abad pointed out that if there was poverty of public goods, meaning a government was not able to adequately provide the shared services that the whole society required, then that economy could not be considered inclusive.

MSMEs’ role

And this is now where the role of the start-up companies and the MSMEs become highly crucial in achieving inclusive growth.

Abad explained that almost all production of modern and technologically advanced goods had been distributed across different countries in value chains. And when companies are given that chance to be part of the value chain, it creates the opportunity for them to earn the foreign currency, to generate more jobs in their respective countries and localities, and even bring the smaller firms within that circle by tapping them to provide specific, although smaller scale services and raw materials.

In this manner, the economic growth being felt by a few will now be spread out to benefit more, potentially up to the grassroots level.

“If you are able to integrate MSMEs, which are seen as stakeholder-based, into the economy, they may function as the machinery for inclusion. We are no longer questioning their economic backgrounds or their educational backgrounds. It doesn’t matter. These are the companies that provide more interesting, more useful types of business, employ more people, and thus enabling wealth to be distributed in a more equitable manner,” Abad said.

“But that also means (that the government has) to gear all its policies to prioritize MSMEs. If you are charging the highest tax rates on the middle class in the whole Asia Pacific region, then that is not prioritizing MSMEs. It’s making life harder for them as they are harassed by internal revenue authorities, being required to fill out all these forms and submit these requirements. We make all these pronouncements at the Apec level but on the ground that you are making life difficult for those you want to spearhead the inclusive movement,” he further said.

Removing restrictions

The international law expert pointed out that if the Philippines wanted to make good of its pronouncements for inclusive growth under the Boracay Action Agenda, for instance, the government must restructure everything internally by ensuring competition; opening up the economy to foreign direct investments (FDI), and allowing the FDIs to go straight into the start-up companies and SMEs. Doing this, however, would require the government to restructure the Philippine Constitution and remove all the economic restrictions that are provided under the current law.

“It’s a very strong signal when your constitution puts in ancient, antiquated, irrelevant restrictions on (foreign) ownership. There is no other country in the world that has investment restrictions in its constitution. We should give that power to Congress. We won’t be doing this in isolation. You just have to look at Vietnam and other Asean countries that have opened up—their countries are still intact and they are getting richer, eliminating poverty because they were attracting FDIs,” Abad said.

“We’re only getting 2 percent from the increase in FDI inflows into the Asean… We’re being left behind by policy, not because of lack of talent but because of these policy signals you send in the constitution. We must remove these restrictions in ownership, investments and capital,” he added.

Abad further said such restrictions to foreign ownership and investments were a form of protection that should be eliminated.

“I believe that protection should be in a more proactive and logical way, even for farmers for example. It’s not protection at the borders that will help them—it’s the infrastructure support, and the input support that builds up their capacity. All the border protection just postpones the inevitable and in the meantime, there is still inefficiency and corruption (in the system),” he said.

Abad further stressed that FDIs, contrary to popular thinking, can support the MSMEs by ensuring the availability of long term capital.

“You need capital in the system so that you can generate all the needed investments in infrastructure, among others, and that will lead eventually into inclusive growth. FDI by itself will not translate directly to inclusive growth, but without FDI, you will not see poverty alleviation in the way you’ve seen it in other countries. There is empirical data to show that openness and FDI accumulation can lead to inclusivity and poverty alleviation,” Abad said.

“We should allow FDIs to go straight to startups and MSMEs by removing all these restrictive economic policies in the Constitution,” he stressed.

Corridor discussions

The good thing about the ongoing Apec discussions is that it sets the theme and the goals toward such policy reforms. As an important forum that sees the attendance of the heads of states of 21 member economies, the Apec provides a platform where leaders can discuss and resolve disputes behind the scenes or the so-called corridor discussion.

The Apec discussions may be non-binding but the pronouncements and statements being issued often set the tone toward reforms and provide guidance to actual existing regional trading agreements.

“Because Apec is there, it tends to highlight and emphasize that urgent need to change things—not the palliatives, not band aid type of solutions. It highlights the need for deep systemic reforms that will lead to the concepts being floated in Apec about inclusivity,” Abad said.