Domestic industry: Philippine-owned industries follow a 'narrow' nationalist path

CROSSROADS (Toward Philippine Economic and Social Progress)
By Gerardo P. Sicat
(The Philippine Star) Updated October 31, 2012 12:00 AM


(Last week’s column dealt with the failure to exploit unique opportunities for industrialization during early independence. Today, I touch on some points affecting the Philippine experience during this period of industrialization.)

The early outcome of the nationalistic program of industrialization appeared triumphant. It could not otherwise be, coming as the country was from the destruction of the war. It was brought on by a wide range of displacements of imported consumer goods by new domestic industries.

“Industrial protection, government paternalism and limited domestic market growth.” The installation of import and exchange controls made possible the stoppage of competing imports and the dominance of the newly created domestic goods assembled locally. Further rise in tariffs assured that the import supplies would become high priced but detrimental to the low income pockets of Filipino consumers at home, thereby assuring good returns for the new local industrialists.

The heavy presence of government discretion in these policies created a political framework of dependence between the businesses seeking protection, support and financing, on government decision-makers and those in charge of the political process.

The system was faulty.

(1) Instead of creating competitive pressures for the new industrialists, they became the main suppliers for the local market, essentially making them monopolies, promoted by paternalistic support of the government.

(2) These new industries did not earn any foreign exchange but they continually ate up the dollar earnings of export industries in order to continue producing.

(3) Many business proponents had inadequate capital and depended highly on government loans.

(4) Because of domestic market limitations, the new industries benefited only those laborers that they could employ. Thus unemployment of the growing labor force in the formal sector continued to enlarge in absolute terms.

“The Board of Investment and the nationalist agenda.” As the era of exchange and import controls essentially ended with their dismantling, the nationalist agenda for industrialization continued. By this time, the industrial interests were already well in place in the country’s growing industrial sector.

On the eve of the expiring investment promotion laws on industrialization and the near expiration of the Laurel-Langley Agreement (the end of parity for American investors), a new investment law had to be written to pave the way for the continued growth of industry. The new law was steered in Congress by Senator Jose Diokno, the inheritor of Claro Recto’s brand of economic nationalism, who headed the Economic Affairs Committee of the Upper Chamber.

The concepts, the incentives and the main thrusts of this law encouraged Filipino capital to invest in industry. This would have been perfect if it also included the same provisions to allow foreign investments in industrial ventures.

But as regards FDIs, the provisions were full of stops and regulations that limited their role in the economy. It promoted joint ventures only with Filipino control following the 60-40 equity restrictions. Figuratively, the BOI investment incentives represented the canonization of the restrictive economic provisions in terms of promoting Filipino industrialization.

Thus, the BOI investment promotions tended to be exclusive to Filipino enterprise and less inclusive to participation of FDI which was allowed mainly in a minority position. The industrial priorities plans were geared for Filipino-owned enterprises or as defined, joint ventures controlled by them.

There was provision for the possibility of fully owned FDI in industry. These were confined to “pioneer” industries which were intended to attract foreign capital in new technological and capital intensive ventures. But the law provided that in due time these FDI would be required to divest part of their ownership.

Efforts were undertaken by the government during the Marcos years to improve on the BOI law. But in general, the tight restrictions and confinement of major provisions for domestic Filipino owned enterprises under the joint venture arrangements continued to be the heart of the law. Despite the fact that the specific constitutional provisions on foreign investments limited the 60-40 Filipino-foreign equity rule only to public utilities and corporations dealing with land and natural resources, in the various applications of the incentives, the same policy was promoted as a desirable objective.

Until the government was able to direct its attention to inviting fully owned FDI to engage in export processing within the export processing zones, the country could not attract FDI except those that were mainly serving the domestic market and no more (as described in last week’s essay). In the meantime, most of the Filipino-owned industries were relatively small and medium scale enterprises, designed as they were to meet a small market. Thus, domestic industries tended to be limited in size and grew only from that start.

Most of the BOI-registered enterprises were Filipino- majority-owned enterprises and had little foreign equity contributions in them. The earlier provisions on pioneer industries that allowed for FDI to divest in due time contained much regulatory restrictions on what they could do that the provisions became barriers toward attraction.

Although the government was able to attract wholly owned foreign direct investments to engage in export processing for manufacturing under the export processing laws, it had limitations. Some access to the domestic market was critical for some types of industries in order for them to raise their stakes in the economy. The restrictions in the BOI law prevented this.

This explains why the performance of the BOI as an investment attraction agency has fallen badly behind the accomplishments of the PEZA. It has also fallen far behind similar agencies in other ASEAN countries, for instance those in Thailand and Malaysia. To use a term now well used in development economics, BOI policies were exclusive in favor of Filipino enterprises. The PEZA policies had an inclusive posture in inviting foreign enterprises that contribute to the country’s economic development.

Thus, most of the successes in manufacturing exports in the country have come from enterprises registered under the PEZA law and the earlier laws governing export processing zones that it succeeded.

In fact, the BOI law has been the principal stumbling block in creating a larger internal integration of the export manufacturing sector based in the PEZA, with domestic industries. The PEZA encourages the imports of raw materials of all the locators because their sources of supplies come from enterprises outside the country. The BOI promotion of industry was supposed to enlarge the domestic industrial sector.

On the other hand, few FDI and local Filipino-owned enterprises have the facilities to manufacture the raw material needs of the PEZA locators. There are too many rules and restrictions that prevent the setting up of compatible industries because of, again, the inability of BOI to invite sufficiently wide-ranged foreign direct investors under the investment incentives laws except under the “pioneer” registration setup.

Domestic industry: how nationalism with blinders failed us

CROSSROADS (Toward Philippine Economic and Social Progress)
By Gerardo P. Sicat
(The Philippine Star)
Updated October 24, 2012 12:00 AM


More than any country at the beginning of political independence in 1946, the Philippines was poised to become one of the most likely economic success stories in East Asia. Although it suffered immensely from World War II, no country had an instant economic recovery program readily available under sound financing.


Moreover, the Philippines had a highly educated labor force among the colonized regions in the East, the legacy of a program of universal free elementary education and a generous public health policy enforced during the colonial government. Most Filipinos had gone to elementary school at least and a large proportion of the labor force had gone to high school and beyond. Perhaps compared with any other new country, there were proportionately more literate citizens than anywhere.

“Poised for rapid recovery from war damage on the road to development.” The traditional exports of sugar and coconut oil products were assured a rich market, even though at quantitative but sizable quotas. These had been the mainstays of the nation’s export revenues before the war. Moreover, a preferential tariff access to the most economically powerful country at the beginning of the postwar period for 25 years assured the Philippines a window of growth for new exports.

What a gift in terms of market access that was! Even though this was a bilateral preferential trade agreement (meaning, American exports to the Philippines also enjoyed preferences), this arrangement was unique. No other country had that ready access to a highly industrial and economically powerful country market at the time.

It could be said that that agreement was earned at the cost of giving American citizens the same rights as Filipinos under the “restrictive economic provisions” against foreign capital in the Philippine Constitution during the 25-year adjustment period. In addition, that quid pro quo also brought in a war damage compensation program of $620 million, which was a very large sum then. (We have to multiply this by 15 to scale up to the US dollar of today.)

In addition to these, the expenditures of the US military lingered for decades in the country with the presence of military bases employing a large labor segment and procuring local goods from the Philippine economy. The initial outlays at the end of the war were sizable, adding further dollar inflows into the economy.

“We deny ourselves the golden ‘gift’.” As a new nation, our policy actions deflected us from taking advantage of the unique situation that was our great edge. We focused industrial and economic policies that distanced us from exploiting the golden ‘gift’. The measure of that denial can be assessed by looking at what our neighbors did.

They catered to the US market even without the advantages that we had in the cusp of our hands. Hong Kong, South Korea, Taiwan and Singapore did not enjoy preferential trade benefits yet they progressed by producing goods for the American market. Hong Kong and Singapore simply had free trade policy as their weapon, while South Korea and Taiwan used economic controls to favor mainly industries that exported their produce.

We could have done the same ourselves. In fact, we had a great headstart over them which we denied ourselves through a difference in outlook. We installed import and exchange controls to promote industrialization. We devised policies to promote domestic industries producing only for the home market.

What we chose was a “narrow” path of favoring our citizens and limiting the role of foreigners. Instead of allowing foreigners as partners in enterprise, our leaders enacted rules and laws that expanded our rights while denying them the same.

The rules of exchange and import controls typified these measures. They extended the grant of investment incentives in the creation of industrial enterprises mainly to citizens. The law on retail trade nationalization that Filipinized retail trade distribution is another example. That law closed the door toward the role of foreign companies in the retail distributive trades.

“American investments decline at home.” American investments under these circumstances continued to come to the country but these were the firms that simply sold their wares to foreigners. Eventually, we would lose out in attracting more American companies with technological edge and which sought production sites for their world-wide markets that brought them cost advantages.

We encouraged mainly those American industries that produced for our own domestic market needs. Thus, we mainly had the same industries that operated in the country before the war. The country got American brands – although under much more limited means – to establish in the Philippine market.

So came in assembly industries that met domestic demand – for cars and trucks, for household appliances like refrigerators and air-conditioners, for processed foods, for personal grooming and cleaning, for medicines, and for sundry consumer items that we were used to. We continued to enjoy, through licensing arrangements, consumer goods like Coke, Pepsi, bubble gum, pop songs and others. We even imitated them to produce our own substitutes. The petroleum refining industries built the required domestic needs, but no more. We remained steadfast in clinging to American products. Hollywood continued to mesmerize us.

In return for our inward looking policies, foreign investors ceded the domestic market for Philippine enterprises to cater to and no more. Thus, the restrictions we imposed on foreign enterprises at home were matched by severe market restrictions that they gave to Philippine enterprises through licenses.

These arrangements made some Filipino industrialists rich and comfortable. They had monopoly over a wide range of the industrial market. They derived continuing profits from their licensing agreements with American enterprises. But the limited opportunities that these brought to American enterprises also made them lose interest in the limited Philippine market. They simply maintained a contented presence as the domestic economy slowly expanded.

“Our East Asian neighbors get American investments instead.” What we failed to capitalize on was what our neighbors – engaged in their own development efforts – seized upon. They had enormous labor available at low cost. They used their strengths and attracted US foreign investors to come to them.

American companies sought investment sites with low production costs and found these in South Korea, Taiwan, Hong Kong and Singapore. Later, these American companies sold or transferred their factories to reliable local sub-contractors. This was a great technological and business learning experience for these Asian neighbors.

This was how the East Asian factories produced the garments and textiles, household comforts in the home like radios, televisions, and refrigerators and kitchen utensils for the American home.

As a country, the Philippines could have exploited its advantaged position early enough. But did not through default if not neglect.