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SPEECH ON PROMOTING INCLUSIVE GROWTH: FIVE ARROWS FOR ACHIEVING INCLUSIVE ECONOMIC GROWTH AIM SGV HALL AIM CONFERENCE CENTER August 3, 2015

CALIXTO V. CHIKIAMCO totivchiki@gmail.com

Let me not belabor the obvious. Despite the 6.5% average growth rate for

the past 5 years being trumpeted by the administration, ewan ko kung walang

corrupt, pero sigurado ako na marami pa ang mahirap.

Levels of unemployment and underemployment, poverty, and hunger have

essentially remained the same. While hunger has moderated somewhat in the

first quarter of this year, it could be that inflation has fallen to 1.2% and there has

been no major typhoon.

These past years, growth has benefited mainly the rich.

The question is why?

First, growth has mainly been consumption-driven rather than investment-

driven. Second, agricultural growth and agricultural productivity remain low.

Most poor people live in the countryside and eke out a living from agriculture.

Growth has mainly been in services, while the share of manufacturing, as seen

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from 1980, has shrunk from 25.7% of GDP to around 20.52% today. Productivity

in services is still much lower than industry. In other words, what counts as

services growth are poor-paying jobs like selling DVDs or working as fast food

workers or gasoline boys, while better-paying jobs in manufacturing aren’t being

created to absorb our large labor pool.

Therefore, to achieve inclusive growth, reduce poverty, generate jobs and

lower hunger, we have to:

Make economic growth investment-driven rather than consumption-driven

Tackle the problem of low agricultural productivity

Increase the share of manufacturing

Make our industries competitive

But how?

If Japanese Prime Minister Shinzo Abe has his 3 magic arrows to cure the

ailing Japanese economy, namely: Expansive monetary policy via massive

quantitative easing, Robust Fiscal Spending, and Structural Reforms, I will offer

my own 5 Arrows to Achieve Inclusive Economic Growth:

The five arrows address the big binding constraints to sustainable, inclusive

growth.

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The first arrow is openness to foreign investment. In particular, we need

Constitutional Change to remove the foreign ownership restrictions in the

Constitution.

Why, you might ask? Even local investors, who are not restricted, are not

investing. This is shown by the fact that our investment rate is quite low, at 20%

of GDP compared to about 25% in Malaysia, 33% in Indonesia, and 47% in China.

Our banks are awash in liquidity. Instead of lending to businesses, banks are

lending to consumers and parking their funds in the BSP.

If local investors are also not investing, why is it so important to remove the

foreign ownership restrictions in the Constitution?

The answer is that there are monopolies and duopolies in strategic

sectors of the economy – ports, telecommunications, airports, power distribution,

cement, shipping, etc. These strategic sectors strangle the growth of the rest of

the economy with their high prices and bad service. One example is

telecommunications, where we have the highest prices, bad service and slowest

internet speeds in Asia. Because of the oligopolistic structure in their respective

industries, our port and shipping costs are also very high, so if you are a small

company, how can you compete with your Asean neighbors, much more sell your

goods via the Internet to the greater Asean market? You just don’t invest.

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An Italian economist from the World Bank saw this way back in 2008 and he

asked himself why is the investment rate in the Philippines so low? This is what

concluded: “inputs are expensive because of elite-capture in the traditional

sectors of the economy (agriculture, sea and air transport, power, cement,

mining, banking, etc.) There, the politically-connected conglomerates, protected

by favorable rules and regulations, enjoy barriers to entry and market power, and

hence sell at a high price their products (agricultural commodities, transport

services, electricity, cement, etc.), which are critical inputs for both upstream and

downstream sectors.”

We need to have well-capitalized foreign companies to provide competition

in these strategic sectors but because of the 60/40 rule in the ownership of public

utilities in the Constitution, they cannot.

The second arrow is modernizing the labor code so the focus is on labor

productivity, rather than unrealistic high minimum wages with no relation to

productivity, and labor security.

With its emphasis on high minimum wages and labor security, the effect of

our current labor code is to discourage employment and upgrading the skills of

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our labor force. Small and medium scale industries, which are the biggest

generators of employment, are not hiring in large numbers.

According to the World Bank, the Philippines has one of the highest

minimum wages relative to average wages in the world. It has the most

unproductive minimum wage earners in the world. In other words, the legal

minimum wages are not tied to productivity. A very rigorous and scientific study

by Dr. Vic Pacqueo and economists from the Philippine Institute for Development

Studies, the government’s own think tank, shows that the current high minimum

wages deters employment, especially among the youth, the uneducated, and

women. The legal minimum wage is therefore anti-youth, anti-women, and anti-

uneducated.

Dr. Gerry Sicat, the former Socio-economic Planning Secretary and

distinguished UP Economics Professor, has been saying this for years: labor

rigidities dampen the demand for labor and discourages labor-intensive

industries.

Dr. John Nye, the valedictorian in President Aquino’s Ateneo high school

class and the Frederic Bastiat professor of political economy in George Mason

University, says the first order problem of the Philippines is that our unrealistic

minimum wages hampers industrialization, or the movement of surplus labor in

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the countryside to industry. The result is that migrant labor is going to low-paid,

low-level service jobs, instead of good jobs in manufacturing.

I repeat, Dr. John Nye says the unrealistic minimum wages are a first order

problem, and not a second-order problem like lack of infrastructure or increasing

tax revenue.

The focus of the current labor code on labor permanency after six months

also deters companies from hiring. They often resort to labor-contracting

organizations which fire workers before six months. This results in labor unable

to absorb more skills and training in a particular job.

We therefore need to modernize the labor code. It’s the key to developing

more labor-intensive industries. It’s the key to attracting foreign investors to

invest in labor-intensive industries in our country, which are now fleeing China

because of a shortage in labor, to countries like Vietnam and Indonesia, but not

the Philippines.

The third arrow is to dramatically improve our agricultural productivity. We

need to improve agricultural productivity for many reasons, one of which is that

the majority of poor people are in the countryside. We need to raise rural

incomes in order to make a dent in rural poverty.

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However, what is holding back agricultural growth and agricultural

productivity?

Three main reasons:

The biggest obstacle to agricultural growth and productivity is the

Comprehensive Agrarian Reform Program or CARP. According to the World Bank,

CARP is the most successful land distribution program in the world, with about

87% of targeted lands having been successfully distributed.

However, 28 years after its passage in 1987, have we seen rising incomes,

more employment, increased productivity, and reduced poverty in the

countryside? No.

Why? First of all, because of the uncertainty over property rights fostered

by CARP, there has not been much investment in agriculture. Why would people

invest if there’s a possibility that the lands will be taken away from them, or the

DAR extorting money for all kinds of clearances?

Property rights issues also bedevil CLOAs or Certificate of Land Ownership

Awards. DAR doesn’t award individual CLOAs but collective CLOAs. As I keep

repeatedly saying, the Philippines has the last remaining soviets in the world in

the form of collective CLOAs.

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On top of that, by law, CLOAs cannot be mortgaged, and even if foreclosed,

the bank can only sell them to qualified beneficiaries.

Second, as designed, the Comprehensive Agrarian Reform Law’s prohibition

of ownership beyond 5 hectares prevents efficient farmers from ever buying out

inefficient ones. Successful farmers cannot scale because CARP prohibits them

from doing so. This is why, even agricultural officials admit, that the average

farmers are now on average 57 years old. The young ones see no future in

farming.

What do we need to do? First, we need to end CARP, period. No more

extensions. No more CARP-ER or CARP-EST. Tama na. Sobra na, after 28 years.

Second, we need to amend the Comprehensive Agrarian Reform Law. The

suggestion of Dr. Raul Fabella, National Scientist for Economics, is that CARP

beneficiaries should be able to legally lease their CLOAs or Certificate of Land

Ownership Awards. The lease income acts as a safety net for beneficiaries, but

the lease also allows the inefficient ones to let more efficient farmers to use the

land.

Aside from amending CARL, what do we need to do to increase agricultural

productivity?

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We have to stop spending the majority of our agricultural budget on rice, a

low-value added commodity. We have no competitive advantage in rice

production, lacking the alluvial plains of Vietnam and Thailand, and instead, like

Malaysia, we should rely on trade for food security.

Finally, we have to liberalize rice importation by removing the National

Food Authority’s monopoly on rice importation. The NFA’s monopoly on rice

importation has resulted in massive corruption among our agricultural officials

and high domestic rice prices. Our countrymen are paying nearly twice as much

for rice as consumers in countries like Vietnam. High rice prices translate to

higher wages and therefore makes our industries less competitive. High rice

prices also mean that the poor, who include poor rice farmers who are net

consumers of rice, spend more of their budget on food.

I calculate, assuming only a small difference of PHP 5 per kilo between the

landed price of rice and the domestic price of rice, that the welfare losses

amount to PHP 60 billion a year, or more than the amount we are spending on

the Conditional Cash Transfer.

To increase agricultural productivity, let us also free the rural land market.

Our rural land market is very constricted, not only by the Comprehensive Agrarian

Reform Law, but by a Commonwealth-era law that prescribed restrictions on

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Agricultural Free Patents. These restrictions prohibit agricultural free patent

holders from alienating their land within 5 years. It also mandates that the free

patent holder has the right to buy back the property within 5 years of

conveyance, making banks shy away from lending against these patents. There

are about 2 million of these agricultural patents.

Let me summarize then what are needed to increase agricultural

productivity, increase investments, and reduce poverty in the countryside: End

CARP, Amend CARP to allow for the leasing of lands, liberalize rice importation,

redirect the agricultural budget more to high-value added agricultural crops, and

remove the Commonwealth-era restrictions on agricultural patents.

The fourth arrow is a competitive exchange rate. Our monetary authorities

are saying that their policy is “inflation targeting” and not “exchange rate

targeting” and under a regime of free capital flow, it can’t manage the exchange

rate.

I’m not advocating capital controls, which are banned under international

trade agreements nor am I saying that BSP bears sole responsibility for a

competitive currency. What I’m advocating is a national policy, that is, a

coordinated pro-active stance of both the BSP and the executive, to deliberately

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prevent the peso from strengthening and to weaken the peso relative to other

currencies. How do we do this?

First, the BSP should be more aggressive in purchasing dollars. As National

Scientist Dr. Raul Fabella and Dr. Victor Abola have shown, money creation

from the purchases of dollars in an open trade regime is not inflationary because

liberalized imports temper any kind of inflationary pressures. All the more so,

when the world faces structural deflation (i.e. overcapacity and lack of demand).

All over the world – the US, Japan, Europe, China, Russia, and even Thailand –

they are fighting deflation, rather than inflation. The Philippines just posted an

inflation rate of 1.2% p.a., the lowest in 20 years. As Dr. Raul Fabella said, the BSP

is too focused on “fighting the last war.” The BSP therefore can be more

aggressive in purchasing dollars to weaken the peso.

Second, the national government should undertake massive infrastructure

spending, not only because building infrastructure will lower the cost of doing

business in the Philippines, but also to dramatically increase the demand for

capital imports, which will increase the demand for dollars and weaken the peso.

Third, as I mentioned earlier, we need to liberalize rice importation. Apart

from the benefit of lower rice prices, rice importation will drive the demand for

dollars and weaken the peso.

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Even as the national government is doing everything to drive demand for

dollars and weaken the peso, the government should also drive down the costs of

doing business in the Philippines, from improving competition through Charter

Change and refraining from declaring more official holidays.

What are the benefits of a weak peso? Domestic manufacturers will be

shielded by higher import prices and help curb smuggling; make our exports, from

coffee to call center services, more competitive; increase the purchasing power of

Overseas Filipino Workers and boost growth in the retail, housing, and

educational service sectors; boost tourism; and protect agriculture, which has a

high- domestic value added.

The fifth and final arrow is institutional reform. The four arrows are useless

if institutions are corrupt or inefficient because it’s institutions in government

which wield the four arrows. Institutional reform covers a lot, but I would like to

focus on a particular reform: the strengthening of the political party system.

Without a strong political party system, we can’t hold our leaders

accountable. If party-switching is rampant, how can we punish the people who

gave us the terrible traffic mess we are experiencing now or the airport

congestion?

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All the Asian countries that experienced high growth rates and reduced

poverty had political parties behind them: PAP in Singapore, the Communist

Party of China in China, Koumintang in Taiwan, UMNO in Malaysia, Golkar in

Indonesia, and the LDP in Japan. Overcoming the development challenge is a

collective action problem. Only cohesive political parties can serve as the tool of

the people to solve the collective action problem. It’s a key ingredient of a

developmental state.

We have to ban political turncoatism and institute public financing of

political parties and campaigns.

To sum up, to reduce poverty, generate investment, create jobs and curb

unemployment, I propose Five Arrows: First is Charter Change to remove foreign

ownership restrictions in the Constitution, Second is to modernize the labor code

to focus on productivity, Third is to improve agricultural productivity by amending

CARP and liberalizing rice importation, and Fourth is to deliberately make the

peso more competitive. The Fifth and final arrow is institutional reform, which is

about improving state capacity and democratic accountability.

What I’m saying is not new. It’s the same growth formula adopted by

China: openness to foreign investment, labor flexibility, increased agricultural

productivity, and a competitive exchange rate.

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I know what I’m saying is not politically correct. It’s far easier to talk about

keeping away foreigners, increasing minimum wages, or protecting rice farmers.

However, we have no choice. For so long as we cling to the same old discredited

ideas, marami pa rin ang magiging mahirap.

The central challenge of our time is to eradicate poverty. Pero hindi po

totoo na ang daang matuwid ang soluyson sa kahirapan. Maraming pong bansa

diyan sa Asean na laganap ang korapsiyon, pero natanggal nila ang kahirapan.

Ang solusyon po ang Five Arrows na sinabi ko.

To eradicate poverty, we have to let the arrows fly.

Maraming salamat at magandang araw po sa inyong lahat.