Monday, April 11, 2011

PNoy’s central challenge

Introspective -- By Calixto V. Chikiamco

On the economic front, what is the central challenge of the Aquino government? It is to transform the nation’s past remittance-powered consumption-led growth to investment-driven growth.

Only an investment-driven growth will put the country into a higher plane of sustainable supercharged growth, the kind that has been experienced by China, Thailand, Vietnam, and our more dynamic Asian neighbors. If the Aquino government is to attain its target of 7% per annum growth, it has to attract investments that will create jobs, increase productivity, and generate income.

Only an investment-driven growth will enable the country to make a real dent in the poverty problem, all talk about more inclusive growth path notwithstanding. There will be no pie to share if the pie isn’t growing fast enough to outpace population growth and to improve the standard of living.

Only an investment-driven growth will improve the nation’s productive capacity. Massive investments are needed to build infrastructure, upgrade plant and equipment, and raise the quality of our human resources through technological transfer so that the country can be more competitive globally.

It doesn’t take genius, much less government action, to fuel the present remittance-driven consumption led growth. Former President Gloria Macapagal-Arroyo likes to take credit for whatever growth we had during her rule, but the fact remains that any growth under her would have been attained anyway courtesy of the remittances of our overseas workers.
While remittances are still growing, there’s a possibility that they may flatten, if not dip. The disaster in Japan and the turmoil in the Middle East are sending thousands of overseas workers back home. And what if the unrest spills over to Saudi Arabia? The twin dangers of escalating oil prices and the return of hundreds of thousands of jobless Filipino workers would be a nightmare.

And how is the Aquino government doing in attracting foreign investments?
Economist Bernardo Villegas says that the Aquino administration is doing "very, very poorly" in attracting foreign direct investments (FDIs) to the Philippines.

According to Villegas, FDIs in the Philippines in 2010 totaled only $ 1.8 billion. In contrast, China attracted $110 billion; India, $15 billion; Indonesia, $10 billion; and Vietnam, $7 billion.

The Philippines, he notes, was absent from a recent list of preferred investment destinations.

However, it’s not only the foreign investors who aren’t coming in. Local investors are reluctant to invest as well. Local banks are awash with cash. The BSP is holding about a trillion in deposit that the banks are unwilling and unable to lend. The country’s gross investment rate is at 14%, less than half that of Indonesia, and is the lowest in the region.
Former Socioeconomic Planning Secretary Felipe Medalla has noted that in a country where there’s a shortage of a lot of things -- power, roads, bridges, water, etc. -- it’s a wonder that there’s not much investment to supply the goods to take advantage of that shortage.
If money is not the problem, what is?

As I’ve been saying all along, it’s a property rights problem, not lack of macro-economic stability, not government deficits, not lack of savings.

By a property rights problem, I mean the lack of well-defined and secure property rights. Investors aren’t going to invest if there’s no stability in policies, if the government can arbitrarily take away their property rights, if the institutions are easily manipulated and corrupted by private interests, if the rules of the game are rigged or sold to the highest bidder.

In this respect, signaling is important. What the government telegraphs about the security of property rights in its words and actions can mean the difference between a vigorous investment growth or an anemic one.

President Aquino’s recent arbitrary decision to impose a nationwide log ban, without consultation or congressional endorsement, doesn’t augur well for the security of property rights. Who’s now going to invest in our forestry sector to create jobs in the countryside if by mere presidential whimsy, forestry rights can be cancelled even if it’s not responsible for the flooding?

However, for foreign investors, a critical signal will be given by how the Public Private Partnership program is run. Will the best and choicest projects be awarded on an unsolicited basis? Will the proposed publicly funded Infrastructure Corporation be used to privatize the benefits and socialize the costs? Will the financial clout of the Infrastructure Corporation be used to choose the winners and losers? Or will the government properly prepare the projects for bidding and award them in an honest and open way?

To be fair, President Aquino has taken some direct and indirect steps to improve the investment climate. He has liberalized civil aviation and adopted "open skies," opening the door for more investments in tourism enterprises and tourism-related infrastructure. He has refused to intervene in the PAL labor dispute and upheld the right of the airline to restructure to remain competitive. He has allowed the Southern Luzon Expressway investor to increase toll rates for a just return and refused to impose oil price controls the way his predecessor did.

In addition, President Aquino is rightly conducting a campaign against corruption. By having the ombudsman impeached, by appointing a fearless Heidi Mendoza to the Commission on Audit, and by going after grafters in general, President Aquino is signaling to investors that policies are not for sale and that there will be a level playing field.

But, is President Aquino succeeding, or is he failing? A most important metric in determining his performance is the rate of investment growth and the level of investments. Investments reflect a vote for the future. So far, he’s getting a failing mark. Therefore, PNoy’s central challenge is to get the country moving forward with investment-driven growth.

Calixto V. Chikiamco is the President of the Foundation for Economic Freedom and a board member of the Institute for Development and Econometric Analysis

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