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I Had
It Backwards
By Michael Alan Hamlin
September 30, 2002
A couple of weeks ago, I was wringing
my hands over the frightening fall in foreign direct investment
(FDI) into the Philippines. In roughly the same period that Thailand
realized FDI of around US$2 billion, I noted that the Philippines
saw around US$16 million in new investment. Last week, I wrote about
how businessmen in Zhongshan were preparing for liberalization by
bringing their business processes up to global standards and learning
how to develop strong corporate brands.
In both cases, it seemed to me that
the Philippines is at a disadvantage compared to neighbors like
these, and that this disadvantage needs to be addressed. Foreign
investment creates jobs and generates export revenues. Strong businesses
able to compete internationally likewise create jobs, earn export
revenues, and pay more taxes which go toward improving infrastructure
and other government services. These are good things, I thought.
But I was being naïve. At least
that seems to be the case in light of pronouncements out of Malacañang
and the Department of Trade & Industry (DTI) last week. First
came the announcement that the government would roll back tariffs
and take advantage of all "loopholes" in commitments to
parties to the Asean Free Trade Agreement (AFTA). Two reasons were
given. For one, government took pity on uncompetitive sectors, allowing
them to disengage from the world economy to the detriment of downstream
industries and consumers who have less political clout, at least
until 2004.
Admittedly, government can argue
that it is only following the example of the world's so-called free-trade
champion, the United States. The U.S. unilaterally hiked tariffs
on steel earlier this year, angering its trading partners and steel's
U.S. downstream industries and consumers. As a result, steel prices
have skyrocketed; meanwhile, hundreds of steel import categories
have been exempted from the special tariffs as a result of complaints
and threats of retaliation from trading partners, robbing the administration
of the political good will among workers it had hoped to reap in
the first place. So the tariffs have turned into a political snafu,
whichever direction they work, or rather, don't work.
It's too bad that the Philippine
government didn't pay more attention to the impact of higher tariffs
on the tempers of small- and medium-scale enterprise managers and
entrepreneurs and their customers. Here in the Philippines, they
should be filling the impact of higher tariffs on such things as
steel, plastic products, and construction materials just in time
for the next presidential election. I wonder what'll happen then?
At any rate, the second reason given
for raising tariffs is taxes. Government feels that it is foregoing
revenues it could reap with higher tariffs. So, high tariffs will
help alleviate the country's mushrooming deficit. Naturally, there
are at least two reasons why this isn't so. First, the Philippines'
tax problem has nothing to do with tariffs or tax rates. It has
to do with tax collection. I know I don't have to explain why this
is so.
Second, higher prices depress demand.
As prices go up, consumers begin to hold onto their cash, waiting
for prices to drop. The best the administration can hope for is
sustained revenue collection. I don't even want to think of the
worst that could happen.
Why should foreign investors worry
about tariffs once they've invested and ensconced in the local economic
fabric? Well, many of them don't, such as the cement industry. However,
high tariffs signal a week economy. A week economy means little
demand for an investor's products. And, since the Philippines is
raising tariffs, for example, on petrochemicals, Malaysia will keep
tariffs high on automobiles, making automobile exports from the
Philippines unattractive. As a result, automobile manufacturers
will invest less, create fewer jobs, and generate for less export
revenue.
The irony is, not even the inefficient
industries that are protected will do well as they would if they
were competitive enterprises and didn't need artificial protection.
They need a strong economy, too, to sell their products, and they
won't have that for the same reasons. We saw that during the long,
dark years of the Marcos dictatorship.
That brings me to the second announcement
out of government last week. A pre-independence law called the Commonwealth
Act 138, passed in 1936, is being dusted off for the purpose of
placing local suppliers at an advantage over foreign suppliers in
the bidding for public projects. Once again, this is great news
for inefficient companies and very bad news for consumers and tax
payers who use the infrastructure they build.
The American Chamber of Commerce
has already pointed out that it is in the best interest of consumers
that government base its decisions on who offers the best product
or service at a reasonable price. But logic is no deterrent, apparently.
A day later, government announced that The Construction Industry
of the Philippines has been asked to draft the rules to implement
this ancient piece of thoughtless legislation. These are the people
who build all these great roads we have here.
In the meantime, foreign suppliers
will simply take their investments elsewhere, where they can get
a fair deal. And there are more and more places where that's possible.
So as I said, I was naïve when I suggested that government
must want to increase investor confidence in the Philippines. It's
very clear that investors are off the radar screen for government.
And likewise that the Philippines is off the radar screen for investors.
And now it's apparent that it's going to stay that way.
(Michael Alan Hamlin is the managing
director of consultancy TeamAsia and the author of three books on
Asian economies and companies. His latest book is Marketing Asian
Places, of which he is a co-author (Wiley, 2001). Write him at mahamlin@teamasia.com.).
Copyright © 2002 Michael Alan
Hamlin. All Rights Reserved.
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