Crisis as Opportunity Gives More Power to the Strong 2 of 3

(Start of Part 2 of 3. From Post #64)

Today, the European Chamber echoed my post on Monday, June 2 (See Post #64). The financial crisis presents opportunities from changing conditions that level the playing field to investors. Indeed, the government ought to take advantage of the crisis to initiate needed reforms to better position the country as an investment destination in the future.

Of course, the Chamber focused on programs that benefit foreign investment. I have nothing against foreign investment. I did learn a lot of industrial engineering in the early 80s and of project finance later working for multinationals. I also finished my MBA via a scholarship, a social investment from the USAID. Still, I find it disappointing if, in giving incentives to others, we fail to encourage our compatriots to invest in our country. In fact, the best endorsement we can give to foreign investors is for Filipinos to invest in the Philippines.

We should also not commit the same mistake we did in the past (See Cororaton, Posts #12 – #13) of giving incentives to foreign investors that had an unintended consequence: a dual economy – a separation between foreign and local markets.

China avoided this by using their huge local market to encourage foreign investments with backward supply linkages. By setting up incentives that do not “protect” local industry, the Chinese trusted their own industry to be able to adjust to competition and upgrade themselves. Without the disconnect, they created a manufacturing powerhouse though “learning-by-doing.” The creation of China as industry powerhouse is a clear demonstration of Lundvall’s insight: the interactive effect of DUI-learning and STI-learning in an arena of fast growth. (See Post 154 (rewritten from #17) for his model of National Innovation Systems). Chinese industry did learn to compete globally and, in the process, hollowed out Philippine industry.

The present crisis does provide opportunity to re-invent ourselves. As I mentioned in Part 1 of this post (#64), we cannot depend on foreign investments even as I welcome them. There is enough Filipino money overseas and if we have to give incentives it is better to give Filipinos priority. At the same time, we should implement policies that protect capital from losses due to boom-and-bust, currency depreciation and economic mismanagement in general. These policies include:

• A fiscally responsible executive and legislative that minimize deficits, the main controllable reason for the boom and bust cycles. Our financial bureaucrats do get it but are often overruled by our politicians;
• A truly independent Bangko Sentral that substitutes for gold standard (See Post #61, #62, #63) by implementing monetary policies that stabilizes the peso value and avoids currency debasement coming from inflation;
• Those that minimize corruption (rather than just demonizing corruption as bad) like, for example, flat tariffs that eliminate Customs discretion and that are low enough create no reason to bother with smuggling; and
• Over time, those that strengthen other institutions like our courts that honor property rights and honor contracts and mass media that do their proper role as the fourth estate.

While these policies will indeed attract Filipinos to repatriate savings held overseas, they will also – even without incentives – attract foreign investors into the Philippines to stay.

For Filipinos, there are naturally-hedged investments – that’s what Part 3 is about.

(Click here for Part 1 of 3 andhere for Part 3 of 3.)