An unfair society

The Research Institute of Credit Suisse paints a grim picture of wealth distribution in the Philippines. According its latest Global Wealth Report, the Philippines is one of the most unfair societies on the planet where one-tenth of one percent of the population control 76% of the country’s wealth.

In terms of incomes, the report showed that a whopping 89% of adults in the Philippines earn under P500,000 per year (or less than P10,000 per month); 10.2% earn between P500,000 and P5 million; .07% earn between P5 million and P50 million; while the .01% elite earn over P50 million per year.

No surprise, 16.1% of all Filipino families live below the poverty line. These families, mostly consisting of five people, collectively earn below P10,481 per month. On the other hand, a mere 105,000 individuals earn between P4 million to P400 million pesos a month.

The Philippines has a GINI coefficient of 82.6. For those unaware, the GINI index is a statistical number that measure a country’s degree of wealth inequality. The higher the value, the more uneven the distribution of wealth.

How did the Philippines become a society so severely imbalanced?

It was designed that way by the narrow elite who write our laws. The law, and the many regulations that govern business, were purposely written to favor big business and eliminate competition.

As a result, most industries in the Philippines operate with just a few players controlling supply, price, distribution and access. In other words, our industries are set up as oligopolies with little or no pressure from competition. This is particularly true in power generation and distribution, telecommunications, infrastructure development, transport services, manufacturing, agriculture, large-scale retail and wholesale industries.

The few players in oligopolies enjoy scandalous profits despite being inefficient and delivering products and services that are oftentimes substandard. Their owners become bigger (and wealthier) without much pressure to improve.

Moreover, having a relatively small number of large-scale employers in an economy gives rise to a situation called “monopsony.” In a monopsony, the few employers that exist can repress wages so as to maximize profits. They keep the workforce living at subsistence levels while they amass wealth. Case in point: Note how cashiers and salespersons in large retail chains live hand to mouth while their owners roll in profits. Monopsonies exacerbates income inequality.

Why do oligopolies thrive in the Philippines? Oligopolies prosper and multiply because our laws favor them. In particular, our laws give undue advantage to big local corporations to the detriment of small- and medium-sized enterprises (SMEs) and foreign firms.

Despite the efforts of governments to develop the SME sector — business conditions in the Philippines remain extremely challenging for them. In obtaining business financing, for instance, banks remain tight-fisted in granting credit to SMEs despite the law mandating them to allocate 10% of their loan portfolio to the entrepreneurial sector. In contrast, clean credit lines are readily granted to large corporations.

In project biddings, government agencies and private firms often require a minimum paid up capital and other constraints that preclude SMEs from participation.

Even the justice system works against SMEs. In enforcing contracts, only big corporations have the resources and wherewithal to navigate their way through the justice system. In trade, nontariff measures (NTMs) or steep technical regulations, act as barriers that prevent SMEs from engaging in imports and exports. In government regulations, the Bureau of Internal Revenue and local governments make it tedious (and expensive) for SMEs to obtain the necessary permits, licenses, and tax clearances to operate.

All these make it nearly impossible for SMEs to mature into strong entities that can compete with oligopolies.

With SMEs unable to break the stronghold of industry giants, one would assume that large foreign firms would fill the gap and provide the needed competition.

Unfortunately, this is not the case. Again, Philippine laws were written in such a way that it discourages foreign firm from competing with local behemoths.

As we all know, the 1987 constitution restricts foreign participation in industries relating to public utilities, mass media, education, and natural resources. In addition, the constitution puts a 40% cap on foreign equity in most sectors.

A study conducted by the Organization for Economic Co-operation and Development (OECD) shows that the Philippines has the most restrictive environment for foreign investors as compared to 62 other emerging economies. While other countries are doing their best to attract foreign direct investments, our constitution discourages them.

The economic laws of the 1987 constitution have worked contrary to the national interest but to the advantage of local conglomerates. It is the reason why electric power supply across the country is perennially in deficit despite being the most expensive in the region. It is why internet speed is among the slowest despite high toll rates. It is why the mining industry remains low yielding and environmentally damaging despite our wealth of natural resources.

The economic laws of the constitution is like a slow-releasing poison that the legislators of the time damned future generations of Filipinos with. We will do well to amend it. The sooner, the better.

In contrast, the sectors that received the highest level of foreign participation by way of equity investments are the most efficient and productive today. They include the hotel and tourism sector, food production, oil and gas.

With SMEs and foreign firms unable to penetrate industries and provide competition, oligopolies are free to manipulate supply and price. They grow not by becoming more efficient but by controlling market conditions.

This is why the elite control the lion’s share of the country’s wealth. What is interesting is that the majority of these families also belong to (or are connected with) political dynasties. The elite write the laws from which they benefit. It is a perverse, self-serving design that we have been forced to live with.

The establishment of the Philippine Competition Commission in 2016 was a step in the right direction but much has yet to be done to eliminate undue advantages enjoyed by the oligopolies.

So what can be done to level the playing field and promote competition? Three reforms need to be put in place: 1. eliminate the barriers that prevent SMEs from flourishing, the most significant of which is access to credit, ease in government regulation, and lowering cost of trade; 2. open Philippine industries to foreign competition by amending the restrictive laws of the constitution; and, 3. pass the Anti-Political Dynasty Law.

The second and third requirements necessitate statesmanship and self sacrifice from our legislators.

But, as expected, certain members of congress have already said they would oppose the proposal to outlaw political dynasties when charter change is deliberated.

It looks like the elite are intent on keeping their perverse, self-serving design in place.

 

Andrew J. Masigan is an economist.