Not seeing that the power of taxation of the state is the true expression of national patrimony in economic matters, the framers of the 1935 Constitution introduced provisions on the use and disposition of land and natural resources vesting exclusive rights of exploitation to citizens. This also meant restricting foreign investments in public utilities. The provisions were not revised but even elaborated in subsequent revisions of the Constitution. These provisions set a train of restrictive economic policies that helped to compound the mistakes of early industrialization policies. By tying the hands of future generations of Filipinos to deal with specific economic issues in their own time, the Constitutional provisions provided barriers against solving economic problems with realism as called for by changing times and exigency. Judged as the most likely to succeed in the early years after independence among many East Asian economies, the Philippines became the economic laggard among a group of highly performing economies during the second half of the last century.
The brand of economic nationalism that was fostered was exploitative and heavily protectionist in character. It built an economic and political framework that discouraged competition, enhanced monopolies and inefficiencies by nationals, inhibited the growth of international trade and hence postponed by a large margin of time the growth of economic specialization based on comparative advantage. A new kind of nationalism based on principles of competition and comparative advantage is needed. This will be helped greatly by the removal of stringent Constitutional provisions that affect foreign investments. An enlarged regional free trade within ASEAN and accession to the World Trade Organization are factors that will help to sustain this new ethos which will strengthen economic and national aspirations. Subjects: Economics and law; economic nationalism; trade and industry; Philippines; and economic development.
Contents Main Paper, pages 1-24 Annexes A. B. C. D. E. F. G. H. Poverty Is Our Main Problem: Don’t Blame Others For It, p. 25 Constitutional Provisions on the Economy and Social Justice, p. 26 The Cost of Protection, p. 29 Philippines vs. Thailand: Or, Harry Stonehill vs. Jim Thompson, p. 31 The Plight of Overseas Contract Workers, p. 32 Bob Hope’s Wisecrack, Or Philippine Opportunities Lost in the US Market, p. 33 Those Balikbayan Boxes and Consumer Welfare, p. 35 Efficiency Ethos in the Philippine Work Place: Texas Instruments, Intel, and Fedex in R.P., p. 37
Philippine Economic Nationalism By Gerardo P. Sicat∗
The reforms that come from above are nullified in the lower spheres owing to the vices of everyone; for example, the avidity to get rich quick and the ignorance of the people that acquiesces in everything. Noli me tangere, 1886 The most commercial and industrious countries have been the freest countries. France, England, and the United States prove this. Hongkong, which is not worth the most insignificant island of the Philippines, has more commercial activity than all of our islands put together, because it is free and is well governed. “The Indolence of the Filipinos,” La Solidaridad,
August 31, 1890. Jose Rizal
The subject is economic nationalism and internationalism in the context of Constitutional reform. My approach delves briefly into historical perspective. At the outset, it is better to be clear. The version of economic nationalism that has often shaped thinking about economic policy in our country has emphasized the fear of exploitation by foreigners. Our leaders over a long span of more than half century have erected a system of laws, beginning with the Constitution, reserving to the state the role of providing cover and protection for the Filipino, defining his exclusive rights over others. Many of the laws defining economic action have helped to constrict the degrees of freedom with which we can solve the main challenges of the times.
Although we have achieved some progress, that progress has been so uneven that we are gripped by the poverty of a large segment of our people. If our nation continues to face an everincreasing task to overcome the poverty of our poor, the blame for the severity of the challenge is not on foreigners but on our leaders and us. My version of economic nationalism is a positive one that rests on the strength and capacity of the Filipino. It is a belief that, given circumstances that are fair and openly competitive, our country men can achieve as much as others nationals of great nations to help them become great and prosperous. I will elaborate on these points later.
Paper prepared for a “Symposium on Economic Ideas and the Philippine Constitution,” sponsored by the Philippine Constitution Association, Sahara Heritage Foundation, and the College of Social Sciences and Philosophy, University of the Philippines, on February 1, 2002, at the Balai Kalinaw, U.P. Campus, Diliman, Quezon City. The author recently retired as Professor of Economics, School of Economics, University of the Philippines, Diliman, Quezon City. He is grateful to his wife, Loretta Makasiar Sicat, of U.P. Department of Political Science, Diliman, for discussing all aspects of this paper and for bearing with my views over many years.
∗ So, please forgive me for seizing upon this occasion to put forth my frustrations over the years. Realizing that I am writing for a wider audience, rather than to my economic colleagues, I have written a long paper that is even made longer by seven annexes. I hope that it challenges us to rethink our experience, and let pass our old assumptions and our deepest convictions through a fresh filter. For three-fourths of this paper, I hope to analyze the roots of our malaise, the wrong steps that we took, where we should have been and where we might likely end. Luckily, I see an optimistic future. And that it seems that that future could be sustainable. However, to attain that future still requires enormous efforts on our part to take the right steps. Among the things that will accelerate that move towards greater sustainability, our leaders have to deal correctly with the Constitutional questions.
Nationalism debate In the letter inviting me to this forum, I was reminded that this seminar is also in honor of Salvador Araneta whose writings on the subject have been influential. I was pleased to receive copies of his work from the Sahara Heritage Foundation, a cosponsor of this forum. His writings on economic development, economic nationalism, economic reform, and on Constitutional issues are articulated in many of these works.1 His books contain collections of his speeches, writings, notes, and newspaper columns. Surely, he truly spoke his mind. These writings represent the vision of one man conditioned by his experience on grand issues and by his participation in them. These works remind me that Araneta participated in three major debates on economic policy that caught the national attention during the 1950s and the 1960s.
These debates have a bearing on the topic of discussion. First of this was the debate on exchange rate devaluation or controls. Together with Alfredo Montelibano, who was also a high official in those years and who was a vocal advocate of realistic exchange rates for the agricultural export sector, he criticized the Central Bank policies maintained by Governor Miguel Cuaderno. (Controls won.) Later he proposed massive deficit spending, thinking that this would promote employment and induce output, not inflation, a subject that the Central Bank governor also disagreed with. (Cuaderno thought he won.) During the 1960s, Araneta and Montelibano would be on opposite sides of a question when the issue was industrial protection.
Noteworthy among these works are two books that deal with economic issues for the large part. Salvador Araneta, Christian Democracy for the Philippines: A Re-Examination of Speeches and Studies on the Subject (1958, reprinted by Sahara Heritage Foundation, 2002) deals with work and notes covering the period when he served as Secretary of Economic Coordination and Secretary of Agriculture. The second, published in 1965 is entitled Economic Nationalism and Capitalism for All in a Directed Economy.
Debate on nationalism and economic policy has a history older than the Republic The outcome of that debate had been settled long before it was fought in words. For far grander issues had been fought along the same lines before but in 1934, it was fought on Constitutional fronts, when the idea of our independence had already become inevitable. The acerbic words spoken in battle in the 1950s provided good description of the divide between industries that ate up dollars and those that earned them. But the earlier debate was trying to define a conception of economic independence. The content of the policies that produced restrictive industrialization were essentially written in the 1935 Constitution. That was the mantra or the mainstream thought that controlled the flow of events.
And that was still the same song written into the 1973 Constitution. And it remains ever stronger in the longer language of the 1987 Constitution. Our leaders – beginning with Manuel Quezon to the succession of presidents of the Republic, strengthened further by the influential nationalist rhetoric of Claro Recto – had worked along economic policies that had to be built around the Constitutional provisions that defined our actions. All the leaders of our Republic brought together the brightest people in the land to disentangle our problems to bring us better economic times often only to be beset by failures to overcome the key problem – how to get foreign capital to contribute more to our national progress.
What Economics has to offer to understand the issues Let me begin by stating some well-known economic principles that people understand. The first two of them are etched in the experience of anyone who has ever bought anything in a market. The others are easily understood upon reflection. Competition is good. Competition leads to lower price and higher output (compared to a state where competition is absent). Whenever there is competition between participants in an economic process, the price is likely to fall to a level that is reasonable.
Producers who face competition often end up accepting lower prices and selling more output. Monopoly is bad. Monopoly leads to higher price and lower output (compared to a state where competition is possible). Whenever a group or a firm has some power over demand or supply, the outcome is higher price. The output is also likely to be lower as a consequence. Monopoly output is what economists call inefficient outcome. The price is higher than it should be. The output is lower than it could be. The consumer loses some welfare. The monopolist pockets the difference. And some buyers that are able to buy at a lower price are excluded from the market because that lower price does not materialize.
Thus, the outcome is an inefficient outcome, because price could be reduced without the seller losing and output could as a consequence also be raised. Because of the profits that monopoly brings, producers always love to be monopolists, although they will compete with others when challenged. Trade is good. Trade when unimpeded enables buyers to obtain goods where they are cheaper. A country benefits from buying goods from the cheapest suppliers. Consumers benefit from cheaper goods. It stretches their budget. Relatively free trade is the analogue of competition among countries. The availability of more goods also makes us understand where and what the competition is. When trade is impeded, and goods disappear from the market or are pre-selected for us by those who have power to exclude them, we lose access to the available goods and our welfare as consumers suffers. Those were the lost years before import liberalization restored the landscape.
Specialization is good. Production of goods based on the best use of (freely priced) economic resources creates an advantage over other countries in terms of costs. This is what economists call the principle of comparative cost advantage. Any country will find ways of producing the best possible use of its resources. And if someone tells you that your comparative advantage is only to become a peasant without protection, be sure that your informant has not fully surveyed the alternatives, or he is ignorant of them, or he has a hidden agenda. The evidence that poor countries can make enormous gains from international trade by specializing in goods that they can produce cheaply – whether from agriculture or from industry – is no longer debated at least in learned discourse. What used to be doubted was whether this was possible beyond agricultural or mineral resource production. Ample evidence from Asia (especially from our neighboring countries) has dispelled these doubts.
The problem was that through many internal measures often adopted to give special favors to powerful economic sectors, these resources are not freely priced at the domestic level. In an imperfect world, a government can undertake useful interventions that overcome disadvantages that arise from the international trading and industrial system. This will be explained in due time. But it comes in two parts. First, the industrial countries with the economic power and even political power to impose make most of the rules of trade and payments in this world. They are, however, governed by their own internal politics and by the relations that they eventually must develop with other countries as powerful as they, who represent their own competition.
Second, as a developing country we must make those rules fair to us when formulated in international negotiations. But even as disadvantageous some of those rules might be, there are ways that government policies can alleviate their adverse impact. The point is that our government can overcome those through interventions that restores the competitiveness that might partly be lost by unfair rules. But wait and be prepared for my assertion. Philippine government policies arising from the mainstream nationalist line of economic policy worsened rather than improved our efforts at development in the decades following independence. The government often faced ever-deepening economic crises with policies of adjustment that were incomplete. They always had to go halfway because they were almost always forced to pay attention to the restoration of the old order. In addition, the shackles of the provisions of the Constitution stand in the way of improved adjustment.
The original sin The original sin began with the economic provisions of the 1935 Constitution. At the culmination of our nation building, just 10 years before promised independence, our Constitutional forefathers thought that the control of capital and all natural resources should belong only and fully to our people. Our Constitutional forefathers had a good idea. That the capital and resources exploited in our midst should benefit our people. Influenced by the fear that foreigners – especially Americans – would continue to exploit the nation despite independence, they borrowed from the language of the great socialist constitutions around about the use of natural resources and capital and restricted the provisions on foreign capital in public utilities. To write that in the Constitution would mean to protect the nation from any exploitation. These grand principles could have been put in the preamble. The Constitutional framers could rely on the principle that a truly independent country could use its sovereign powers to put the use of all economic resources to serve the interests of the people.
The power to tax is the final sovereign weapon. It could be employed to assure that the benefits from all economic resources such as land and mineral and other natural resources would be used for the benefit of the Filipino people when they took charge of their government. There would have been no problem about these grand principles if they were not so specific later. But, indeed, they became specific on the citizenship provisions and all other details in the supreme law of the land. By doing so, they raised the fear by foreigners in the country that their assets could be confiscated or their values forced down. It became therefore a matter of time that when the right time came, foreigners (mainly Americans) would call on their ultimate protector, their government, to protect them from the threat of confiscation and deprivation of assets that they had acquired before.
Quezon’s well-known dictum, “I prefer a government run like hell by Filipinos than a government like heaven by Americans” might have been said only for rhetorical effect. Deep down, he probably felt that Filipinos could run their affairs better than Americans. But in pushing for this provision and others that specified details about how Filipinos should govern the future, our Constitutional forefathers provided us, the future generations, with large blinders with which to see and define our own world of the future. To put it in another metaphor, they had tied us to their own vision. Or to put it in another way, they had leashed us to a post with a short rope from which we could only move with limited freedom. One of the advantages of the U.S. constitution was that a few men of common mind who just wanted their country to be rid of a foreign ruler wrote it. And they were writing it while they were still under threat of conquest and subjugation for they had not yet fully won their independence when they crafted it. As a result, they only had time to make sure that the guarantees to personal and human rights were clearly written down.
That was also their great advantage. In contrast, our Constitutional framers had the leisure to think about all these social and economic visions. And the time – the 1930s – were a time of ferment, socialist ideas, and economic depression all woven into one. The Philippine Constitutional fight was essentially a political fight. The fight for independence was nearly won, and what was needed was for them to fashion the future structure of government and to state national aspirations. In so doing, they overdid it, for they put in details that could have been simply enacted as warranted by changing circumstances. (See Annex B.) I do not want to be misunderstood. I am not in favor of changing to a minimal Constitution now that we have created a maximal constitution. And given our experience, every time we convene our wise men to write a new Constitution it becomes even longer. Our record at brevity is not good. Twice we amended the constitution, and we ended up with longer and more provisions defining details of the future policies. And yet, in essence, we only changed the political framework of the Constitution and expanded its coverage of details of social and economic programs.
The expense and the distraction alone would not be worth the exercise of a comprehensive remaking of the Constitution. But the key provisions affecting economic issues have to be addressed. They deal principally with citizenship requirements regarding economic participation of foreigners and foreign capital in our economic development.2 The only other urgent issue deals with the manner and choice of national officials and the form of government. This is so substantial a constitutional agenda that if given a choice between the most important issues, I would focus on the economic provisions.
But my brief for a change of government is to favor a cheaper and more direct form of government, a parliamentary system. To do away with a system of political contests that require a president, vice president and senators to spend enormous amounts of money just to win elections is likely to have beneficial outcomes by reducing corruption and influence peddling by interests. A parliamentary system will also assure that the contest for leadership will be among the most competent, the most experienced, and the most politically astute leader.
The original sin sinks into the national psyche Then came the war and independence in 1946. Americans, fearful of the consequences of the nationalist provisions about capital and land, pressured their government to protect the interests that they had accumulated in the country. This included land and businesses owned, covering all sectors of the economy. Independence would further expose these properties to forced sale if the economic provisions were to take effect. Moreover, Americans feared that the value of these assets had to be protected against the possibility of devaluation. They already introduced this as part of a safeguard provision in the Philippine Trade Act a provision of national treatment for American citizens and another provision that the peso could not be devalued without the approval of the American president. The American government responded with the only means that it had at the time. Push had come to shove, and it decided to apply political and economic power. National treatment required an amendment of the Constitution.
The parity amendment – which gave parity of treatment to Americans the rights reserved to Filipino citizens in the Constitution – was exacted as a price to be paid for the war damage act and the promised aid for rehabilitation. With the parity amendment, our leaders were made to swallow their pride. This sank deep into the national consciousness. This reinforced the nationalist rhetoric about the problems of foreign economic domination. The Commonwealth government was new and Manuel Quezon was president when businessmen and politicians were calling for national economic protectionism. Senator Claro Recto in the 1950s said that it was better to borrow the capital to invest and have Filipinos invest it in their own industries. Carlos Garcia was president when the loud noise within the government said, “Filipino First.” When he tried to run against Ferdinand Marcos with whom he served as Vice President after he lost the nomination, Fernando Lopez, candidate for nomination for President, had this to say (italics supplied):3 “How is it that in the face of development, Filipinos have remained poor?
… Filipinos, by virtue of their subjugated position in their country, did not benefit from the fruits of colonial of corrupt leadership more quickly than a presidential. Former Senator Juan Ponce Enrile, now president of the Philconsa, states that the most conservative estimate at present to elect a president requires expenses of 2 billion pesos, which is the current equivalent of the salary of that office at present rates for 2,886 years. Another winning senator in the elections of 2001 said, when confronted pointblank by a television interview, and with hesitation, that he spent about 35 million pesos for his campaign. Given that this was an admission before a public audience, that might have been an underestimate. See for Ponce Enrile’s speech, see “Constitutional Change: the Less Travelled Alternative” (address before the Philippine Constitution Association, July 31, 2001). 3 Araneta (1965), p. 258. development…
The evidence will show that the fruits of development were siphoned out of the country… because it is dominated by foreign interest. “Any development under this setup will be colonial in character, and, therefore, harmful to the Filipino people; at any rate it can not do us much good. The other type of development is … a nationalist development of the economy… dominated by nationals and (which) benefits the nationals… “…The fundamental objective of economic policy is the Filipinization of the Philippine economy…. Real industrialization cannot be achieved so long as foreigners dominate our economic life.”
The above sounded incontestably like I.P. Soliongco, Renato Constantino, or Alejandro Lichauco. The speech was given broad publicity in the Manila Chronicle, the now defunct newspaper owned by the Lopezes. It appeared uncharacteristic of the gentle politician that was Lopez, who was brother of the powerful industrialist and sugar baron. It was Eugenio Lopez, who bought the controlling shares of Meralco, the public utilities firm distributing electricity to Manila, as original American investors sold out. And it sounded also like Jose Ma. Sison. Men of goodwill, and those who thought ill of the government and who wanted to overthrow the political order and institute their own, have thought the same on the subject. Their analyses were different, but their perceptions and their conclusions were the same. This was the mainstream of economic nationalism that deepened further after parity amendment.
But as the years went by, we discovered that we needed foreign capital to supplement our meager capital resources. Congress passed an investment incentives act, which was designed to attract investments, including foreign. But the resulting law, steered through legislation by Senator Jose Diokno, was designed to attract investments in industrial ventures which was tilted more towards encouraging investment projects that would be governed by a system of control of capacity expansion. Moreover, there were quite a lot of provisions which governed more the incentives for projects that were designed to meet domestic market requirements and not external market growth. This was, of course, the law that also created the Board of Investment. Further efforts were fashioned later to make the provisions more friendly to foreign investments, but each time, the proposed revisions always reached the wall – the Constitutional wall. The country later passed a law on promotion of foreign investments that was remarkable in its many features.
It gave tax and fiscal incentives about where and how investments would be, how much foreign equity would be allowed here, and how much in that venture. The law instituted many other concepts that added to the complexity and gave discretionary powers to those agencies and officials that reviewed and implemented the investment promotion laws: measured capacity, excess capacity, annual priorities, pioneer and preferred industry. In an earlier version, these were new and necessary industries, basic industries and the like. Before this, many laws and regulations were passed that defined the nationalist framework of our economic policies. Import trading was Filipinized in conjunction with import controls. When the Central Bank and General Banking Acts were passed the subject of foreign banks was left to banking regulation. But there was a strong opposition to the concept of foreign banking participation. As a result, no foreign banks could be admitted into the country. The four banks already operating in the country were allowed to continue, but the operations of these banks were restricted to their main head offices.
This decision could have severely restrained the growth of bank financing especially in international trade, since the domestic banks created were largely new, undercapitalized, and inexperienced. Later experience with domestic banks with limited capacity to expand credit because of their low capitalization and problems with respect to the prudential aspects of lending made it essential to pursue reforms to raise banks and open the banking system to foreign equity. One of the defining laws in the early years of independence was that on retail trade nationalization. This really meant Filipinization. The public debate on this law emphasized the need for the small Filipino retailer and the poor sari-sari vendor the opportunity to grow. It was directed mainly against the Chinese control of retail trade, but it had significant impact on large-scale distribution in which American interests were still present.
What it did was to reserve to citizens a very profitable segment of trading and marketing to citizens, and put the writing on the wall for foreign interests to stay out of retailing. Slowly, the substantial American retailing interests would sell out to Filipino corporations. This law probably had caused one avenue for future export growth in industry to be closed. In countries where foreign retail establishments were allowed to function, the trade opportunities of buying potential products from local suppliers for international supply chains was lost. In addition, the retail trade nationalization encouraged the monopolization of the domestic retail trade among a few large establishments. These were partly the reasons for the amendments opening the retail trade to foreign entry. (See Annex D.) Less dramatic in the public eye were the restrictive laws that were placed on in the laws on procurement, on public utilities, interisland shipping, transport, on professional practice and employment. The import and exchange controls were clearly designed to discriminate in favor of domestic enterprises.
Tariff protection defined protection for domestic industries. The preferential credit system in credit policy, the lendings of the government financial institutions, and many other provisions were there. From independence in 1946 until 1973, the Bell Trade Act, which was the economic adjustment act after independence, that was amended by the Laurel-Langley Agreement, was to dominate our politics and our policies about trade, industry and investment. And in 1974, special economic relations ended, and so did the parity amendment. But in dominating domestic politics, this issue also helped to fuel some hostility regarding foreign investment despite the recognition of the need for saving. In a country where the saving rate just hovered at around 20 percent of GDP – a rate that is lower than the rate achieved by more dynamic neighbors some of which exceeded 25 percent of GDP, the impact could only lead towards constraining rather than expanding investment.
Public utilities formerly owned by American capital gradually shed their control, requiring a sizable amount of Philippine capital to buy into repatriating American capital. The public utilities – those formerly privately owned in the private sector – suffered long periods of poor service partly because the former owners had no incentive to expand their service and indeed had to sell out at the end of parity. PLDT’s bad service was legend, so that when the former prime minister of Singapore, Lee Kuan Yew, mentioned in a talk in Manila in the early 1990s how long it took to get telephone service in Manila, some Filipinos took umbrage at the apparent lack of diplomatic finesse.
Capital had become scarcer as development needs increased and the costs of early mistakes in industrial policy had begun to wreak their toll on the nation. And yet capital was being divested at the end of the Laurel-Langley Agreement. Today, this is widely recognized as the energy blackouts of one decade ago and other kinds of poor service in public utilities had become apparent. The need for large investments in public utilities and in public infrastructure in the country is never more urgent as today and the capital needs to be harnessed. The government now recognizes that focusing on the constitutional restrictions on public utility ownership is a key aspect of the solution.
Lost opportunities In the early 1950s, the Philippines was judged to be the most promising country in the Asian region by the knowledgeable international community, next only to Japan. The opportunities available to the new nation were large. The Laurel-Langley agreement assured preferential trade with the largest market of all – the US market. American reconstruction aid had restored many investments. American investments were hugely in place. American aid was significant because of support of the military bases and further fueled by the Korean war and its after-effects. And, of course, the bounties of sugar protection from the American quota further assured the country of bonanza. The reparations from Japan added further resources for investment. By the late 1970s, South Korea, Taiwan, Hong Kong and Singapore were being widely called the Asian tigers, the NICs (newly industrializing countries), the Asian miracles.
Thailand had caught up with us in our early economic lead and its industries were beginning to show results. And Malaysia was beginning to attract foreign investments in industry. Indonesia was awakening. The four Asian tiger countries turned their profits in the markets from garments and textiles that relied mainly on the US market and carried these into savings to widen further their thrust in exports in other industries and strengthen their domestic investments in infrastructure. Further success carried them to many other export ventures, and their economies rolled in with further success. The years were favorable for exporting countries, for despite the shocks of oil, exchange rates, and inflation in the world economy, foreign trade was booming and new opportunities were opening up in the newly rich Middle Eastern countries.
But what was happening in our country? From the years after independence we were busy supporting the growth of domestic industry designed to replace imports and to reserve that for domestic industry through a high level of protection. The great advantage of the preferential tariff arrangement with the American economy was largely ignored by policy. Our exports continued to be agricultural exports – coconut and sugar – and we added logs. Moreover, wealthy Filipinos, now in industry and banking and commerce, were anticipating the day when they could acquire control of the public utilities that remained in the hands of American interests as the Laurel-Langley Agreement terminated the provision of parity. In the early 1960s, Diosdado Macapagal coming in as president abolished exchange and import controls. He did the right move. But he missed to follow through with the structural changes that were needed to promote an even keel for the development of exports from industry as against the import substituting demands of industrialists of the time.
Because no sooner had these things been done, the government put in place high tariff protection to replace the controls. Tariffs and continued indirect subsidies through tax exemptions and tax-free imports of raw materials gave new leash of life to the import substituting industries. With credit subsidies to extend further support, the import substituting industries continued their heyday. This was happening during the Araneta and Montelibano debates on protectionism. Araneta defended to the hilt the flour milling industries and the import substituting industries. Montelibano decried the inefficiency of highly protected industries. Interestingly, Araneta accused Montelibano of seeking to prolong the favored protection that sugar has enjoyed in the US market through the quota arrangements. But the old order of protectionism had won long before, because of the mainstream nationalistic framework with which economic policy was influenced.
The import substituting industries continued to fluorish. So, for a long time, the domestic industries based on import substitution ruled the day. When they faltered precisely because they were dependent heavily on imports and on a peso exchange rate that was unrealistically overvalued, they still received further assistance. Domestic industry argued that, in time, it would become less dependent on protection. But they always pleaded for more time to keep their tariff protection. Otherwise, the extended argument went, employees would lose their jobs. This mainstream thought, now beefed up by a heavy layer of import substituting industries, continued to hold sway with high protection from tariffs and other subsidies for new industries and the restrictive policies of industrialization placed on the expansion of new capacity.
They consumed precious foreign exchange, earned little of it in a few cases, but in great many cases, even dissipated the precious commodity. Under these conditions, we tried to set up heavy and intermediate industries. The interests of the import substitution industries remained strong throughout the Marcos years even though the policy intent was, as in other presidencies, to improve the thrust into exports. Tariff reform to reduce rates was undertaken in 1974. That agenda was interrupted in part by the energy shocks of that period. Yet over the years efforts to attract foreign investments in new industries began to have a measure of success, but our neighbors, the Asian tigers and our ASEAN partners were beginning to get the large share of the flows. The government was hampered by many factors originating from what I called the original sin: the Constitutional legacy that was hostile to foreign investment. Why do I say this? The package of incentives that the Philippines offered was usually no better than what other countries offered investors. Some of them had the advantage of having sufficiently clustered industries to enable economies of scale for a new entrant because of the presence of suppliers.
Among Asian neighbors with markets geared to exports, such clustering of industries was sizable to enable orderly growth with domestic supply. In addition to the above, foreign investors were also met with friendly rhetoric by our Asian neighbors. And their labor costs were enormously better, with their labor markets free from raucous labor militants who were always radicalizing the employees. The domestic labor market and how it has become relatively high cost is a topic all its own. Suffice it to say that in our context, minimum wages were set at a national level for years and they represented a cost threat to some labor-intensive industries. Moreover, the countries with which we compete appeared to present a more credible front when it came to negotiating location sites for new foreign investments. They hardly needed to discuss the issue of acquiring factory sites except the price. The land question is one of the thorny aspects of foreign investments. The solution is to have property owners who would lease land sites or join in the venture, if only to be able to get assurances of land sites.
They did not encounter contradictory rhetoric about anti-foreign investment sentiments nor the mazes of ifs and buts that had to be measured in the language of the investment promotion law, and in the Constitutional provisions. The parity amendment was a psychological block in the process of bilateral trade and investment relations because the other parties demanded national treatment for their investments. National treatment is what foreign investors feel safe about, and they almost always seek to get their governments to obtain these privileges. But “national treatment” is at the very heart of the parity amendment. The Constitutional provisions on limitations to foreign investments and on land ownership were precisely the cause of the insistence of American asset owners in the Philippines to insist on equal rights with Filipinos or they would have been made to make a forced sale.
National treatment and freedom of profit repatriation are the most important issues that foreign governments demand for their investments. That is the assurance of freedom from confiscation or other forms of discrimination. If the Constitutional framers just remained silent on these issues of law, then the parity amendment would not have been necessary. And therefore, issues such as those confronted later would have been less problematic for Filipinos as it has been less problematic for other governments in accepting foreign investments. In international relations, the government encountered obstacles in negotiating improvements in the bilateral economic relations whenever the foreign investment issues touched on the Constitutional wall. Bilateral treaties of trade and friendship were made more difficult by the obstacles posed by demands for most-favored-nation (MFN) clause, an item of common usage in international treaties.
As long as special relations existed, negotiation of treaties bumped into the MFN issue. Under these circumstances, it was difficult to move forward, since exceptions to MFN are not a staple acceptable to any country. The issue of national treatment is the equivalent of the non-discriminatory aspects most-favored-nation clause in trade treaties. Tax and investment treaties, although they got negotiated more and more, after the expiration of the Laurel-Langley Agreement were still hampered by these reciprocity issues. The special relations with the US also led to another problem. Philippine trade participation in the multilateral trade system became a low priority, or in fact, one could say, that special relations made it seemingly unnecessary to put high priority to such an important issue.
The government debated membership in the General Agreement on Tariffs and Trade (GATT), the trade body that was the precursor to the World Trade Organization. But that issue was irrelevant as long as the parity amendment and the preferential trade arrangement with the US stayed. And even afterward, many of those in the import substitution industries had no interest in the benefits of multilateral trade rules because these were not salient to their interests. Nevertheless the government, even while remaining outside of GATT, would participate and monitor the multilateral negotiations in the Kennedy, Tokyo, and, later, the Uruguay rounds, three momentous rounds of multilateral tariff reduction rounds designed to improve the international trading order. This was done, if only to be mindful of protecting the country’s trading interests.
Consequences of the protectionist policies The consequences for the nation of the four decades when protectionist policies dominated industrialization policy were costly. Some of these cannot be quantified because they were opportunities lost for not being taken. Studies of protection and their impact on resource allocation are noted in a short annex. (See Annex C.) But the opportunities not taken were precisely the essence of what might have been. New export industries failed to grow as they did in neighboring countries in Asia. The country, with an enormous supply of labor, was not producing exports that employed labor resources unlike the other countries in the region. Most newly approved industrial projects were mainly for the domestic market, and many of them had little employment impact.
The fiscal and other incentives for industry were geared mainly for import substituting industries, even though by the late 1960s an export incentives law was in place. That law placed more incentives for exports to enterprises that were already in production to improve their prospects for exports. But these industries were high cost and not competitive enough even with additional export incentives. The export incentives were not particularly geared towards attracting new projects for exports. In fact, there was a contradiction. By controlling excess capacity in some industrial projects, the government put a bar against enterprises that were mainly destined to produce for exports. This required a special type of treatment, that is, through separate industrial export zones rather than being integrated in the general domestic economy. (But even these escape routes for exports were for later, by the middle 1970s).
Interested parties were mainly domestic corporations trying to fill up existing demand with import replacing industries. The foreign corporations that expanded capacities were essentially assuring themselves of keeping their Philippine market. In this way, subsidiaries of foreign companies continued to expand only as permitted by domestic demand. To acquire machinery and equipment, they needed foreign exchange. And they had to borrow a large part of it from either government financial institutions or from suppliers credit (which required amortization installments in foreign exchange). To sustain their raw material demands, they often had to import. To sell their products, they demanded a high protection rate to guarantee their profit. To import their raw materials, they wanted low tariff rates. It was also likely that, given business practices, there were built in profits for the investor just to invest in the machinery and equipment. In this way, there were profits to be gained even before the investment pushed through, thereby hampering the cost of the operations as a functioning enterprise later.
Because of the country’s energy dependence, the import substituting industry was already heavily dependent on foreign exchange if only indirectly. The need for imported materials made this more direct. Without any dollar earnings, the import substitution industries were a recipe for disaster in case of balance of payments crises. This was, in fact, what happened. Not only that. In times of disaster, they could not service the loans that they had. So they affected their creditors, that happened to be in many cases the government financial institutions. So, many of the industries promoted for import substitution not only squandered the foreign exchange resources of the country. They contributed to the balance of payments crisis because of their insatiable demand for dollars. And they penalized consumers for their high prices. Moreover, they heaped on the government financial institutions non-performing loans and thereby squandered the country’s scarce savings. In contrast to our development, our Asian neighbors did very well. This they did without having any preferential market through the Laurel-Langley Agreement. Of course, later, there was to be the General System of Preferences (GSP) in trade for developing countries negotiated through the United Nations Conference on Trade and Development (UNCTAD). But this was available to all developing countries, including us.
The growth of these countries was propelled by the US market’s insatiable taste for cheap goods, made from cheap labor, especially after the prosperity of the years following the Second World War. When I was a graduate student in the early 60s at MIT in Cambridge, Mass., I saw a Bob Hope Show (Bob Hope was the original TV stand up comedian) in which his sidekick proudly showed him a thing that he had bought in a department
store. Bob Hope wisecracked, Yes, everything in the US is made in Japan. By the late 1960s and through to the end of the last century, Bob Hope could have said, Yes, everything in the US is made in Korea, Taiwan, Hong Kong Singapore, Thailand, Malaysia, China, yes, the Nike shoes in Indonesia, but not in the Philippines. Geographically, our country is right smack in the middle of these countries! Yet, we got a portion only a tiny bit of that market when trade and industrial economic reforms began to take hold, although our electronics export industry is now no longer small. (See Annex F.) Economists talk about a concept of deadweight loss when analyzing economic welfare. This is a concept about economic welfare loss of consumers and producers caused by low efficiency.
This is due to policy interventions (or to subsequent developments arising from these interventions) in the market that force consumers to pay a higher price for goods and lead producers to operate at lower levels of output. Put in a positive way, you could make all parties better off without making any one worse off if you got rid of the cause of the loss. By tilting major incentives in favor of import substituting industries through excessively favorable policies, the nation paid a high price. It was not only a cost to Filipino consumers in the market place – that is you and me and the working masses with their hard-earned keep.
Many of these industries – and the power of their lobby – caused the country to dissipate the large resources of foreign exchange that the country was earning in the early decades of independence. Their never-ending need for foreign exchange with which they were supposed to save the country was not sustainable, because they were not configured to produce foreign exchange. They were thus a recipe for national disaster, because given the costs that they were incurring, and the high prices that they were charging for their prices, they were handicapped from the very beginning to pay their own way in terms of exports. Others would observe that during the years of import substitution policy and high protection, many foreign investments did come to the country. And what did they do? These investments were either subsidiaries of foreign corporations or joint ventures with domestic partners. They did exactly what domestic import substituting industries did. Foreign drug companies, personal care cosmetics companies, tire companies, and a long list of other industries took advantage of the high protection rates to control the domestic markets for their products. They hardly sold any of their products to any other country.4 These industries were precisely the industries that the nationalists were decrying as exploitative foreign investments.
This follows on the long criticisms of the role of multinational corporations in developing countries. The criticism centers on many Years ago, during the 1970s, I was in a hotel in Bangkok eating a quick lunch before a scheduled afternoon meeting. I ordered a burger and was served my meal with all the garnishings, including a bottle of Del Monte catsup. The catsup label indicated that it came from the Del Monte subsidiary in Italy, and not from the Philippines where the company sold a Del Monte catsup in the local market. This demonstrates in part the principle of comparative advantage, but the main reason why the Del Monte catsup came from Italy was that there was hardly any incentive for this company to export from the Philippines. The protectionist policies were stacked up against the industry to export their products although they were geared for pineapple exports. Perhaps, given the cost of growing tomatoes at the time, there was no way by which the raw material for catsup could have matched the cost of production from Italy. Then, Del Monte was just making enormous profits from selling repackaged catsup.
Until domestic sauces like banana catsup became effective competition to Del Monte, the monopoly profits from catsup must have been comfortable for a firm wanting to make additional product lines to its main line, which was to grow and can pineapple for exports. This incident so flabbergasted me that I mentioned it incidentally in a discussion with newsmen who were tracking me at NEDA. Tony Lopez, then a reporter for Asiaweek, took the discussion to heart and landed me on the cover of that magazine for a long story on multinationals. important issues like property rights, patents, limitations on market agreements, and so on, which corralled developing country industrialists – especially the import substituting domestic industries including those with joint venture agreements with foreign enterprise – with limited market agreements. They could not export their wares beyond the domestic market. The problem was, however, the framework of the market, the policies of the host countries that made it possible. In short, in our case, it was the set of government policies that promoted import substitution to the hilt with high protection rates and willingness to deed the domestic market to inward-looking industrial interests.
The foreign investments in this case were freeloaders of the protectionist system of policies. They exploited the domestic markets as much as the Filipino industrialists who were able to set up their industries under the blessings of protection. They fed on the system that was promoted by the policy of protection. Even American capital opted for domestic import substitution. They were there only to keep and develop their own market shares. They did not develop new markets in other countries. They developed their Philippine market only. They became freeloaders of the home grown industrial policy. Our Filipino owned companies got technological contracts that limited their markets to the home market. And many businessmen became insular in their outlook.
The government was to blame in part because it always yielded to pressures for reversals in attempt at reforms. For years, the Philippine Chamber of Commerce and Industry was a watchdog against government moves to reform aspects of trade and industrial policy. In contrast, in the countries that I mentioned, the chambers were in the forefront of telling the government to expand markets, create more opportunities outside the country, and enable conditions at home to make business further reduce costs. In the eleven years that I spent in the government, much of what I heard from the Chamber of Commerce and Industry, was essentially to hold back on the needed reforms because domestic industry could not compete. They needed more protection, more fiscal incentives, more time, and so on.
At the high plane, there was always the exhortation to expand economic growth and exports. But when the chips were down, what they or their industry committees wanted for the government to do was to lower tariffs for their raw materials or to raise the tariffs on competing products if not to hold off a planned tariff reduction. One of the national dangers that we face today is that now, the agricultural sector is seeking high protection. If we seek a repetition of history, just look at what protection has done to the sugar industry. If only the interests of business and industry were more balanced at the time, then the dominant control of economic policy by the domestic industries that were mainly import substituting would have been blunted. For instance, if the industrial interests had a strong export sector that was earning dollars, if the foreign investments in the country were good export earners, as the situation now appears to be, then these demands for high protection would have fallen down more quickly.
These were the years when the American Chamber of Commerce was already much eclipsed, and during which American investments in the country was mainly piggy backing freely on the import substitution strategy. The Confederation of Export Industries was still weak. The Chamber of Agriculture and Natural Resources which was once a dynamic bastion for the traditional exports was now busy, happily cutting down our forests and joining in the parade of more import substituting industries and economic activities restrained by citizenship requirements. But by then, quite a number of its leading lights – including Montelibano – were also engaged in import substituting industries and the weight of their economic interests were aligned with the Chamber of Commerce and Industry or in domestic services like banking and trading. The Makati Business Club, finally frustrated also with the import substitution strategy, had begun to develop a well- rounded voice for business.
Until exporters gained in size to express their problems and to get the attention of the government to deal with them, it was difficult for the government to balance various economic interests. For oftentimes, export industries did not have concerns that coincided with those of industries serving only the domestic market. What is the Nationalist issue in economic development? The industries that are designed for the domestic market or for import substitution have common demands. They insist on high tariff protection for years or a guaranteed domestic market that assure them profits. They want a cascading tariff structure to give them a built-in profit. This means high tariffs on rival, imported products, low tariffs on the raw materials. They desire long years of protection.
When reminded of the need to reduce the tariff, or to have a program of tariff reductions, they do not want to have any “premature” reduction of tariffs. In addition to this, they wanted the preferential access to credit from the government that, in the past, even took the form of governmental guarantee when the project accessed external loans. The record of credit payments of many of these industries is poor, basically because of their crisis prone nature. The other part of the equation that explains this behavior was that many of them got arranged as projects because of their political connections. In fact, what I had not discussed here is that the import substitution industries promoted by the government can be explained from another perspective.
Politics and cronyism often get involved in the project selection process. Most of us would understand this sufficiently if we but put the EDSA “revolutions” in context. The years 1986 and 2000 are just time demarcations, but the corrupted process began in its rapacious manner during the late 1940s as soon as import and exchange controls got instituted. And they got grafted into our political culture and then into the industrialization process which heavily depended on political patronage and behest loans. Just look back and review the bad loans that the DBP and the PNB that finally got turned over to the Asset Privatization Trust in 1986. The list of companies that date back to the early 1950s are included in these books, and many of them were designed, according to their proponents, to raise domestic industrial output by replacing imports. These two major financial institutions, in the end, paid the burden of financing many of the import substituting industries. Quite a good list of enterprises – including steel and other large-scale industrial projects – were in this list.
But who in the end paid for these failures. It is not these two financial institutions but all of us. In the end, all Filipinos paid for these failures. It is not only the additional tax burden that had to be paid for these failures of industrialization. It was a burden of present and future generations. The early cost to past generations of consumers whose welfare were cut enormously by the high priced products that were imposed by the protected industries are not even factored into these. These were only the financial losses. In addition, interesting names will be found who own these enterprises, if one but made a little research. I must add that the companies and persons who ventured into these ventures are not linked to any period of any presidency but to several. The link between import substitution industries and the corrupted political process is entrenched in practices that allowed projects to proceed, not on economic efficiency, in the sense of world economic efficiency, but on their alleged economic feasibility with the help of high and sustained protection rates.
Dependent economic nationalism is an exploitative brand of nationalism The mainstream economic nationalism is a nationalism dependent on the government to provide protection, unequal rules in favor of citizens in all areas, patronage, and so on. It is a dependent type of nationalism, reliance on giving an edge to countrymen for production at the expense of consumers. It is not fair play. It is time to use the economic criteria that I enumerated at the beginning. What are the common characteristics of the demands of those who want to promote industrialization based on what I called mainstream nationalism? This is the normal meaning attached to those who want to promote industrialization based on economic nationalism. Competition is good. But they want to eliminate competition.
If they say this is not so, they want to have an edge over the competition. This is the meaning of their demand for protection. Monopoly is bad. But they want monopoly, or some element of it. They want higher prices for their products. In short, they want to make a gain at the expense of consumers. The nation is asked to support them with higher costs. If “consumers” are a bunch of other industries that produce other products for the market, they want to make the costs of these industries higher so they can keep their profits. But these other producers will have to pass on their costs to consumers eventually. Trade is good. But they want to impede trade by raising taxes on imports. If they can get a gullible government to ban the import, they will want it.