BWorld 12, Investments, APEC and economic liberalization

* This is my article yesterday in BWorld Weekender.

MANILA WILL HOST the annual Asia-Pacific Economic Cooperation (APEC) Summit this coming November 18-19, 2015, or less than four months from now. Presidents and Prime Ministers of the 21 member-countries including the three largest economies in the world, US, China and Japan, will be coming to Manila for two days to discuss and sign certain agreements related to trade, investments and related concerns.

The Philippines’ trade and investments in the face of ASEAN integration just five months from now was also discussed last July 15 at the Tower Club in Makati City, sponsored by the Albert Del Rosario (ADR) Institute.

The convenor and main speaker was Dr. Epictetus Patalinghug (UP College of Business Administration, and a Trustee of ADR Institute). Discussants were Dr. Gilbert Llanto (President of the Philippine Institute for Development Studies/PIDS), Dr. Ramon Clarete (UP School of Economics/UPSE Prof. and former Dean), Mr. Donald Dee (Honorary Chairman, Philippine Chamber of Commerce and Industry/PCCI), and Atty. Wilfredo Villanueva (Head of Tax and General Counsel, SGV & Co.).

In his presentation, “The Role of Exports and Foreign Direct Investments in Industrial Development,” Dr. Patalinghug said that the five striking resemblance among highly successful economies were: (a) Openness to the global economy, (b) Macroeconomic stability, (c) High saving and investment, (d) Market allocation, and (e) Leadership and governance.

He also showed this summary of Philippine economic history. (See Table 1)

That is an objective and correct assessment. And it is not unique to the Philippines or its neighbors in the ASEAN, but rather the general trend for the rest of the world. If we check the economic integration and liberalization of the four newcomers to the ASEAN, namely Cambodia, Myanmar, Laos and Vietnam (CMLV), their pace of liberalization in trade and investments on average was much faster than the Philippines.

Let us focus on investments; in particular, foreign direct investments (FDIs). The UN Conference on Trade and Development (UNCTAD) released the World Investment Report (WIR) 2015 last month and that paper shows many interesting data. (See Table 2)

There was significant expansion in FDI inward stock (ie, net of FDI outflows) in many APEC member-economies. In particular, the expansion from 1994 to 2014 (two decades) were as follows:

* Americas: Peru 18x, Mexico and Chile 10x, US 7x, Canada 6x.

* North Asia: China 15x, S. Korea 12x, Japan 9x, HK 7x, Taiwan 5x.

* Southeast Asia: Vietnam 23x, Singapore 17x, Indonesia 16x, Thailand 13x, Philippines 11x, Malaysia 6x.

Australia, New Zealand and PNG did not experience significant FDI expansion.

Russia and Brunei are the “outliers” with 114x and 103x expansion, respectively, mainly because they have very low base in 1994. Russia has emerged from partial disintegration where a number of central Asian economies (Georgia, Kazakhstan, Tajikistan,…) separated from the former USSR. APEC was formed in 1989 but Russia, along with Vietnam and Peru, joined it only in 1998.

In terms of FDI stock/GDP ratio, three economies that have undertaken unilateral trade liberalization (meaning no or little trade negotiations) stand out: Hong Kong, Singapore and Chile, with ratio of 535%, 296% and 80%, respectively.

Some important lessons from the above numbers and discussion:

One, openness to trade almost always results in high attractiveness to foreign investments and all the opportunities they bring -- technological, financial, managerial, and market access. Clear examples are HK, Singapore and Chile. Also the socialist economies China and Vietnam that allowed certain degrees of economic freedom and the market system.

Two, global capitalism is about integration and competition, complementation and substitution, happening simultaneously. Business risks will always be there. Companies and people need to keep their radar for adaptation and familiarization of those risks, while keeping the pace of innovation at regular or higher levels.

Three, for the Philippines, its FDI stock/GDP ratio of 20% is the lowest among its neighbors in SE Asia, but this is not something to look down or commiserate. Some richer economies have rates lower than 20% like Taiwan, Japan, S. Korea and China. Nonetheless, this should be one reminder that the country needs to amend its Constitution to remove protectionist provisions that restrict or prohibit foreign investments in many sectors of the Philippine economy.

Four, more than low taxes and/or high profit, foreign businessmen are concerned more with the security of their investments, that threats of confiscation and political harassment are zero or kept to the minimum. Respect of private property, rule of law, and economic freedom by the people, producers and consumers alike, domestic and foreign entrepreneurs alike, are important factors to attract, retain and expand investments in the economy.

Bienvenido S. Oplas, Jr. heads the free market think tank, Minimal Government Thinkers, Inc., and also a fellow of the South East Asia Network for Development (SEANET), a regional center that advocates trade and investments liberalization.

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See also: 

BWorld 8, Manila's Traffic and Transport Woes, June 27, 215 

BWorld 9, Poitical populism vs. tax realism, July 05, 2015 

BWorld 10, Greece crisis, pension and rule of law, July 11, 2015 

BWorld 11, China's stockmarket and central planning, July 18, 2015

Free Trade 4: FTA in APEC

The coming Asia-Pacific Economic Cooperation (APEC) summit in Sydney, Australia this coming September, is looking to produce one good result: a possible free trade area (FTA) among the 21 member-countries. Of course, like most if not all FTA visions around the world, an FTA will become a reality in 10 or 20 years from date of signing, if not longer. Nonetheless, it's better than not putting that vision at all.

This is expected to be the "fallback" position after the failed talks on reviving the Doha talks between the big and representative countries of the poor world and the rich world, and should other efforts to revive it will fail again.

Usually, agreements and communique like this among member-countries of any alliance or grouping of countries, will be full of "provided that" and other conditions, before any real free trade area can become a reality.

If countries, or better yet, trade negotiators and politicians of those countries, are serious in having free trade, no agreement with other countries is necessary. They can always declare a unilateral trade liberalization, and that's it. Hong Kong has done it; Dubai, Chile, Singapore, other smaller economies are doing it.

This means that trade "activists" who are leaning towards free market should not play along with those groups and individuals who declare, "free trade yes, on condition that...." We better address ourselves to the general public the "net gains" and benefit from free trade.

Last year, I wrote this:

Pan-Asia free trade area

September 05, 2006

A news from http://euobserver.com/9/22250/?rk=1 has this story,

Japan set to kick-start pan-Asian free trade area" by Lisbeth Kirk
21.08.2006 - 09:57

Japan minister of economy Toshihiro Nikai is set to unveil plans for a pan-Asian free trade area of 3.1 billion people, half the world'spopulation, Malaysian news agency Bernama has reported ahead of the 38thASEAN Economic Ministers meeting starting today in Kuala Lumpur.

The free trade area would include ASEAN-countries Australia, China, SouthKorea, India, Japan and New Zealand and would be promoted by a Japanese fundof 100 million US dollars....

The 39-year-old ASEAN bloc agreed already in October 2003 to set up a singlemarket by 2020, modelled on the EU. But ministers meeting this week hope to speed up the plans and get it ready by 2015. "We need to muster political will to create the AEC [Asean EconomicCommunity] by 2015, instead of 2020," ASEAN secretary-general Ong Keng Yongsaid, according to AP.

China and ASEAN have already agreed to create no-tariff zone by 2010 intheir combined market of 2 billion people.... ASEAN is the America's fourth largest trading partner. ASEAN was established on 8 August 1967 in Bangkok by Indonesia, Malaysia,Philippines, Singapore and Thailand. Brunei, Vietnam, Laos, Burma andCambodia have joined later....

This is a good development. Better than no regional or continental free trade area at all. Of course, there will be free trade among countries as early astomorrow if governments will not hinder trade.

Almost all people around the world want bargains, they want more choices. And only free trade, of big supply of various goods and commoditiesfrom everywhere, can do that. The job of trade protectionism, sometimes called "fair trade", is to restrict trade, to limit supply of various goods and services available to consumers, to limit choices.

What the governments of Japan and other countries do in the above plan is phasing out trade protectionism little by little, and any form of trade liberalization should be done with their consent first. Hence, if theywant full free trade to be realized in 20 years, or 30 years, or 50years, that's what will happen. If governments are out of the picture of regulating trade, then free trade can happen anytime. Government's main job should be to regulate and control criminals and robbers, terrorists and killers. Regulating trade that makes life easier for people, especially the poor and jobless, by giving them access to cheaper food, cheaper clothes, cheaper farm inputs, and so on, is bad and wrong "role" of government.

About the Doha round, me thinks US' Trade Rep. Susan Schwab should better talk to Prof. Jagdish Bhagwati, a famous academic economist (Indian-American, i think) in the US, than moving around talking to the trade reps of China and other countries. Dr. Bhagwati argued in some recentpapers for a unilateral trade liberalization for the US and estimated the benefits for the US economy in terms of economic growth and job creation. Hence, Mr. Bhagwati has no problem with EU's high export subsidies, high agri subsidies, and so on. But Ms. Susan Schwab has lots of angsts on such export subsidies, the same with her counterparts in the EU and Australia and Japan and many other countries.

On another note, When globalization hits home...

Globalization will definitely hit homes, wherever they may be. A city can experience job losses when a big company packs up and puts up its office or manufacturing plant in another country, the same way that the same city created new jobs when that firm that left came a few years ago, or a new firm comes in.

Many governments in developing countries are allergic to the idea of de-bureaucratizing business regulations, so many of their people are working abroad if not migrating outright to pursue their ambition and entrepreneurial spirit.

And many governments of rich countries are also allergic to the idea of reducing business taxes and of leaving wage-setting to the employers and the market. So many of their companies are leaving and putting up manufacturing plants and offices in developing countries.

These plus many other aspects of capital and labor mobility are all part of globalization. There are losers, definitely, but there are also gainers. Overall, there is net gain, or the number of gainers are plentier than the losers. But if the initial losers will learn to adjust and be flexible, they become gainers later.

One reader asked, “how much longer should the losers wait?”

It depends. A chicken farmer who has been raising chicken all his adult life and suddenly shifts to producing other livestock or crops that experience price hikes while chicken prices are going down can benefit from globalization and make money quick.

While those losers who just wait for new or additional subsidies from the state, and continue producing goods and services that experience price declines due to competition from other producers abroad, can remain losers for the rest of their lives.
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See also:
Free Trade 1: Estonia's Free Market, Globalization, May 09, 2006
Free Trade 2: Unilateral Trade Liberalization, May 17, 2006
Free Trade 3: Protectionism Perpetuate Poverty, September 05, 2006