What the economy needs is oxygen

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Calixto V. Chikiamco-125

Introspective

No, the Philippine economy doesn’t need oxygen because of a COVID-induced pneumonia, although the metaphor could still apply given the severe economic recession caused by the pandemic.

The Philippines needs oxygen because it’s suffocating from the dominance of monopolies and oligopolies in many industries. It is the most concentrated economy in Asia. (See the graph.)

In contrast, China is the least concentrated which accounts for the dynamism of its economy. In The Competitive Advantage of Nations, Michael Porter made a similar observation about Japan in the 1990s. Intense intra-domestic rivalry caused innovation and made Japan highly competitive.

What are the effects of this concentration on our economy and economic growth?

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Artificially high prices, poor services, lack of innovation, and lower productivity. More importantly, it also results in low private foreign and local investment spending.

Since the dominance of monopolies is also strong in strategic industries, i.e., industries whose output is consumed by other industries, the effect is lower investment spending. In 2008, Alexander Bocchi, an Italian economist did a study for the World Bank on why investment spending in the Philippines continues to be low and he came up with this answer.

“The capital intensive private sector expects low returns and does not want to expand investment at the economy’s fast pace. Marginal product of capital (MPK) is low for two reasons: a.) the public sector does not invest enough to provide incentives for private investment (as the return to private investment depends on both quantity and quality of public capital spending), and, b.) inputs are expensive because of elite capture in the traditional sectors of the economy (agriculture, sea and air transport, power, cement, mining, banking, etc.) which are critical inputs for both upstream and downstream sectors.”

He also said that this is the reason why growth is happening mostly in non-capital intensive industries, such as BPOs (business process outsourcing).

This is also why our institutions are weak, an observation echoed by the former head of the Philippine Institute of Development Studies, Professor Josef Yap: “Weak institutions and an oligarchic private sector are two symptoms of the same coin. A gridlock has evolved wherein stronger institutions are required to loosen the grip of the oligarchs, but at the same time the grip of oligarchs has to be reduced to strengthen institutions.”

In my last column, “Institutional Failures and Economic Growth,” I also traced the cause of our institutional failures to our political economy characterized by the dominance of monopolies.

Another effect of oligarchic dominance is the absence of “animal spirits” in the economy. Animal spirits represent the entrepreneurial vigor that help drive investment confidence in the economy. It is what drives entrepreneurs to innovate and disrupt existing industries.

This explains why there has been no tech “unicorn” in the Philippines. Unicorns are startup companies which are valued at $1 billion or more. There’s Grab (Singapore), Gojek (Indonesia), Bukalapak (Indonesia), Traveloka (Indonesia), VNG (Vietnam), SEA (Singapore), and Lazada (Singapore-based but owned by Alibaba) but none in the Philippines. SEA, the company behind Shopee, alone is valued at $55 billion.

The startup investment climate in the Philippines is pathetic. Most VC (venture capital) funds based in the Philippines invest outside of the Philippines.

Why are minimum wages high in the Philippines? My theory is that the monopolists allow them and don’t resist them if proposed by populist politicians and labor groups. The reason is that they can afford to part with some of their monopoly or superprofits to buy some industrial peace. Increasing minimum wages also serves another purpose: it prevents any insurgent from using a low-cost strategy to undermine its monopoly position. (For example, companies like Walmart used a low-cost strategy to disrupt the existing players. The Japanese car companies did the same in the car industry when they first entered the US. Now, it’s the Chinese doing the low-cost strategy disruption. It’s also happening here in the Philippines and not surprisingly, the Department of Trade and Industry in siding with the monopolists, imposed a safeguard duty against imported vehicles to protect the existing players. Consequently, the introduction of transport innovation, like electric vehicles, will suffer.)

Our high minimum wages and the dominance of monopolies in the economy are why the country hasn’t industrialized. MSMEs (micro-, small-, and medium-sized enterprises) in low-cost light manufacturing are constrained by the unrealistic labor regulations on one hand and the monopolies on the other, which impose high costs and poor service on their factory and service inputs.

Therefore, our surplus labor has no choice but to look for jobs abroad, producing stuff that we import.

Or they continue to eke out a marginal livelihood in atomized, fragmented agricultural lands. Growth happens when surplus labor moves from low productivity agriculture to high productivity manufacturing, but that is prevented from happening.

Instead of innovating, monopolies or dominant players buyout emerging competition or pay out a large percentage of their profits in dividends or stock buybacks instead of investing. What is to be done?

We need to remove the foreign ownership restrictions in the Constitution, and let foreign companies provide competition, especially in the strategic capital-intensive industries of telecommunications and transportation. The proposal of Speaker Lord Allan Velasco to introduce the term “unless otherwise provided by law” on the restrictive provisions is only a second-best solution because specific legislation must still be enacted.

The first best solution is to remove those restrictions by default and introduce the term “unless otherwise provided by law.” In other words, the default provision is liberalization, but Congress can pass laws to restrict investment in specific areas as the situation may warrant.

Yes, Charter Change to remove these foreign ownership restrictions is the mother of all reforms. The dominance of monopolies is the single biggest binding constraint to faster economic growth.

Short of Constitutional Change to remove the foreign ownership restrictions, the Public Service Act (PSA) must be passed. The PSA will remove telecommunications and transport as “public utilities” where foreign control is barred.

However, in defense of the monopolists, critics of Charter Change and the PSA are using all sorts of fake arguments and scare tactics to argue for a delay or scrapping of these major initiatives to introduce more competition to the economy and raise foreign direct investment.

One argument is that the Chinese will use the more friendly investment environment made possible by removing these foreign restrictions to take over the Philippine economy. On the contrary, removing these restrictions will enable the Philippine economy to diversify sources of foreign investment, for example, investment from Arab to ASEAN investors, and improve the quality of foreign investment, rather than relying on POGOs (Philippine Offshore Gaming Operators) to generate jobs and employment. Increased foreign investment will also lead to improved transport and telecommunications infrastructure, which will strengthen the country’s national security posture.

The other argument is that it’s not timely to do so. To these critics, there is never a good time. These Constitutional restrictions have been there since 1935 and accounts for why the Philippines keeps falling behind in comparison with its ASEAN neighbors. These critics want to kick the can farther down the road, but of course, their real motive is to keep the status quo intact where the economy continues to be controlled by monopolists.

Ironically, some so-called progressives (who, by definition, should be anti-monopolists) are the ones calling for delays in removing the foreign ownership restrictions and introducing more competition to the economy. In the Philippines, in a bit of dialectical irony, the Left and the Right have a unity and identity of opposites. The Leftist and Rightist ideologies have become one and the same: protecting the oligarchy from competition.

The real reason why investment spending is low in the Philippines isn’t the lack of infrastructure, or wrong tax incentives, or the weak rule of law (although those are the consequences when the economy is dominated by monopolists). It is low because investors see that there are legal and political hurdles to providing competition as Alexander Bocchi observed. What the economy needs is oxygen or freedom from the suffocation of monopolies, which are protected by these Constitutional restrictions and other hurdles to competition.

Oh, how I wish we had a Teddy Roosevelt. US President Teddy Roosevelt ushered in the Progressive Era in the United States in the late 19th century. He used the Sherman Antitrust Act to dismantle, regulate, or break up trusts, or association of monopolists. He took on the feared railroad trusts and won.

However, let’s go back to reality. More than ever, the Philippine economy needs oxygen. It needs to open up the economy to more foreign investments, which will increase investment spending, generate jobs, lower prices, improve service, foster innovation, restore the animal spirits of the economy, and help strengthen our institutions.

 

Calixto V. Chikiamco is a board director of the Institute for Development and Econometric Analysis.

idea.introspectiv@gmail.com

www.idea.org.ph

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