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.