Maintaining momentum for structural reform in the Philippines

Author: Ramonette B Serafica, PIDS Six years ago, in his first State of the Nation Address, Philippine President Rodrigo Duterte underscored the need to relax economic restrictions to attract more investment. Included in the legislative agenda, and outlined in the Philippine Development Plan 2017–2022, were amendments to the restrictive provisions in the constitution and laws […] The post Maintaining momentum for structural reform in the Philippines first appeared on East Asia Forum.

Maintaining momentum for structural reform in the Philippines

Author: Ramonette B Serafica, PIDS

Six years ago, in his first State of the Nation Address, Philippine President Rodrigo Duterte underscored the need to relax economic restrictions to attract more investment. Included in the legislative agenda, and outlined in the Philippine Development Plan 2017–2022, were amendments to the restrictive provisions in the constitution and laws which limit foreign participation in the economy.

Labourers work at a construction site of a residential condominium building at Bonifacio Global City in Taguig, Metro Manila, Philippines, 22 August 2016 (Photo: Reuters/Erik De Castro).

Although discussions on economic constitutional reform did not go beyond committee level, let alone pass in the Senate, in the last few months three laws relating to economic liberalisation were passed by Congress.

The first to be enacted was Republic Act 11595 amending the Retail Trade Liberalisation Act. Signed on 10 December 2021, it reduced the minimum paid-up capital requirement for foreign retailers from US$2.5 million to PHP25 million (US$485,000). Under this act, foreign retailers with more than one physical store must have a minimum investment per store of at least PHP10 million (US$194,000), down from the US$830,000 previously required.

Next was Republic Act 11647 amending the Foreign Investments Act, which was signed on 2 March 2022. Under this act, micro, small and medium-sized enterprises with paid-in capital of less than US$200,000 are reserved for Philippine nationals. With the amendments, foreign nationals can set up an enterprise with a minimum paid-in capital of US$100,000. The only requirement is that the enterprises utilise advanced technology, are endorsed as start-up enablers or employ a majority of Filipinos and have at least 15 local employees.

The third and arguably most significant measure is Republic Act 11659 amending the Public Service Act, which was signed on 21 March 2022. It defines and limits the scope of public utilities to the distribution of electricity, the transmission of electricity, petroleum and petroleum products, pipeline transmission systems, water pipeline distribution systems and wastewater pipeline systems, including sewerage pipeline systems; seaports; and public utility vehicles. The 40 per cent limit on foreign ownership of public utilities will no longer apply to sectors not considered public utilities. This allows for full foreign ownership of telecommunications, airports, airlines, shipping and other services.

Safeguards were put in place to address concerns raised about the potential risks of foreign direct investment (FDI). These concerns include national security, reciprocal market access and the possible displacement of Filipino labour. One safeguard is the prevention of foreign state-owned enterprises from owning capital in public utilities or critical infrastructure.

Signing onto the RCEP agreement is another government priority which should complement the FDI liberalisation reforms. In the era of global and regional value chains, trade and investment are interdependent internationalisation strategies and must be treated as such from a policy standpoint.

Despite evidence of the potential benefits, the support from various industry groups and the provision of safety nets, opposition to joining RCEP was strong enough to make Senate members defer their decision. Champions of the country’s participation in RCEP are still hopeful that the Senate will eventually ratify the agreement when it reconvenes.

Similarly, there is a push to revisit Republic Act 11203 which was signed in 2019. Known as the Rice Tariffication Law, it abolished the importation monopoly on rice and shifted protection from quantitative restrictions to customs duties. Strong opposition from domestic rice producers who bear the immediate cost of liberalisation remains prevalent.

There are mixed opinions on whether a change in leadership will bring about a significant policy shift. In the case of Ferdinand Marcos Jr, the leading candidate in pre-election surveys, some predict a return of discredited economic programs while others do not foresee any significant changes. An important condition for policy change will be the composition of the 19th Congress. The economic liberalisation of the Duterte administration could not have been achieved without reform-minded legislators.

Regardless of who will lead the country over the next six years, economic recovery will be the top priority. The new administration will have more leverage given the reforms undertaken by the outgoing government. A ‘do no harm’ approach would be wise, but a proactive strategy that enables further reforms would be better. Amending constitutional restrictions should remain on the agenda of the next administration.

The possibility of a policy reversal is always present, especially if trade adjustment measures are inadequate or poorly implemented, and the touted benefits do not materialise or are distributionally skewed. Impact evaluations should help decision-makers determine the effectiveness of a policy. The debate on RCEP has brought the urgency of agricultural modernisation and the need to increase support for the sector to the forefront.

Removing investment restrictions is a necessary step, but it is not sufficient to attract and harness high quality FDI, particularly in services that require a sound regulatory and institutional framework. The next government must ensure a level playing field and improve regulatory governance.

Ramonette B Serafica is a Senior Research Fellow at the Philippine Institute for Development Studies (PIDS).

The post Maintaining momentum for structural reform in the Philippines first appeared on East Asia Forum.