BWorld 138, PPP vs ODA, Part 2

* This is my article in BusinessWorld last week.

“The first lesson of economics is scarcity: there is never enough of anything to fully satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics.”

-- Thomas Sowell (US economist and political philosopher)

This paper is a continuation of the same topic in this column last June 8. To summarize previous arguments:

1. User-pay principle via public-private partnership (PPP) means only those whose the service or facility will pay for its construction and maintenance. As a result, the rest of the population in other parts of the country will be spared of such cost.

2. All-taxpayers-pay principle means projects are paid by current taxpayers through the annual general appropriations act (GAA) or by future taxpayers through official development assistance (ODA). Taxpayers from Visayas and Mindanao will also pay for toll roads, dams, airports even if they hardly use these since these are located in Luzon.

3. It is not true that infrastructure projects funded by official development assistance (ODA) and/or taxpayers through the GAA are more beneficial to the public than PPP-funded projects. Iloilo Airport -- which was funded by ODA -- took longer to build and incurred cost overruns compared to the PPP-funded Mactan-Cebu Airport, which remains on schedule despite initial delays.

4. There are inherent problems and risks to the public under GAA- and ODA-funded projects since ODA funding normally has strings attached. Thus, a project funded by China ODA may require the government to hire Chinese contractors, suppliers, managers, and even workers.

We now add more reasons why the Dutertenomics’ shift from PPP to ODA (mainly from China) funding of its build-build-build plan is unwise and risky.

5. In a Management Association of the Philippines (MAP) forum two weeks ago, finance expert Vaughn Montes cited the big contrast between ODA-funded Subic-Clark-Tarlac Expressway (SCTEx) and the PPP-funded Tarlac-Pangasinan-La Union Expressway (TPLEx). SCTEx took seven years from government approval to completion, two years delayed, and cost nearly twice at $32.8 billion vs. the approved budget of $18.7 billion or P341 million per kilometer. TPLEx cost only P61 million per kilometer.

6. Investor confidence in the Philippine economy has gained momentum compared to some of our neighbors in the region and it is not wise to constrain such confidence by ditching many PPP projects and shift to ODA and GAA funding.

The expansion of FDI in the Philippines from 2000 to 2009 (last year of the Gloria Arroyo administration) was not significant (less than twice). However, during the same period, FDI expanded almost five times in Singapore, about four times in Indonesia and Vietnam, about three times in Thailand, Cambodia, South Korea, and Taiwan.

But from 2009-2015 or just six years, FDI in the Philippines expanded two and a half times while there was only two times expansion in Singapore, Indonesia, Vietnam, and Myanmar; and less than two times expansion in Thailand, Malaysia, Hong Kong, South Korea, and Taiwan. It is this kind of investor confidence and momentum that can greatly propel the Philippines into more investments and job creation, faster growth and infrastructure buildup.

7. The government’s PPP Center noted that “most PPP bids received in recent years have come at lower than the approved government costs. If in the instance that actual project costs turned out higher than approved government costs, the private sector partner assumes or shoulders cost overrun risk.”

8. The China government is the least trustworthy source of ODA funding considering that it is acting belligerently and aggressively in bullying the Philippines and other ASEAN neighbors that have claims over the many islands and islets in the South China Sea or West Philippine Sea (WPS). Note also that recent China-funded projects in the country were notoriously scandal-ridden -- North Rail and National Broadband Network (NBN)-ZTE projects.

The insistence of the Duterte administration to compromise the income and savings of Filipino taxpayers -- even if there are many big private investors, local and foreign, that are willing to shoulder the costs and risks of infrastructure projects -- may result in shenanigans and large-scale corruption.

And its consistent pronouncement of relying more on the money and contractors of the bully state across the WPS would further weaken the Philippines’ territorial claims to those islands and exclusive economic zone and weaken the rule of law.

Honest minds in the Duterte Cabinet should remind the President of the economic and political dangers that it is treading on.

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See also: 

BWorld 135, On reducing the distribution system loss, June 9, 2017 
BWorld 136, Income tax and the politics of envy, June 12, 2017 
BWorld 137, ASEAN trade expansion and RCEP, June 20, 2017

BWorld 96, Free trade means more investments and people mobility

* This is my article in BusinessWorld last December 15, 2016.

Free trade means giving people and private enterprises the freedom to produce more commodities that consumers demand at certain prices. These producers then leave sectors and areas where expected returns and other gains are lower if not dwindling.

This may sound “heartless” for losing sectors but whether one supports free trade or protectionism, there will always be winners and losers. It is just that there are more “net gains” from trade while there are more “net losses” from protectionism.

In a paper “Goods trade liberalization under the ASEAN Economic Community: Effects on the Philippine economy” published in the Philippine Review of Economics (PRE), December 2015, authors Dr. Ramon Clarete (UPSE) and Philip Arnold Tuano (AdeMU) examined the economy-wide effects of goods trade liberalization in the ASEAN. They used the Global Trade Analysis Project (GTAP) model in assessing the impact of the ASEAN Free Trade Area (AFTA) implemented in 1992.

The important provisions of AFTA mandated the 10 countries to: (a) reduce trade taxes and tariff on goods coming from other member countries, (b) remove quantitative restrictions on goods and convert it into tariffs that should decline through time, (c) reduce other non-tariff measures (NTMs), and (d) enforce rules of origin or goods should have local content of at least 40% of the freight on board (fob).

The results for the Philippines in their study showed the following:

1. Production effect: Of the 40 industries representing the Philippine economy, 24 suffered some output decline and 16 experienced output expansion at a bigger rate than the losses of the former.

2. Employment effect: Of the 40 industries, 31 experienced decline in the hiring of skilled labor while nine experienced expansion at rates larger than the combined employment losses in the former.

3. Trade effect: Thirty-six of the 40 industries that imported goods were able to benefit as compared to the 16 industries that engaged in exports. However, the gains were much larger than the losses of the other industries.

4. Price effect: Wages of both skilled and unskilled labor, cost of capital increased while land rent declined.

5. Overall effect: The Philippines gained some $237 million, equivalent to 0.05% of GDP, as a result of trade liberalization in goods under AFTA.

There are other benefits from trade liberalization besides the four measured by the above study. Freer trade creates more goodwill not only in trade and investments but also in mobility of foreign workers/managers and tourists across countries through more cultural and educational exchanges, and so on.

Here are some data on revenues from merchandise or goods exports, foreign direct investment (FDI) net inflows (i.e., inflows minus outflows for the given year), worker remittances and compensation of employees, and international tourism receipts that correspond with expansion in tourist arrivals.

  

The Philippines did not expand its merchandise exports as fast as compared to its many ASEAN neighbors. There are many factors for this, including a generally over-valued exchange rate, and many trade bureaucracies that prolong the process and increase the cost of exports and imports. All the four tigers in North-East Asia plus Singapore and Thailand are major exporters.

In FDI net inflows though, the Philippines reported an expansion of almost four times in just 10 years. Vietnam and Singapore benefitted the most in the southern region while China and Hong Kong continue to attract huge FDIs.

In labor remittances, China is #1 in the world while the Philippines is #1 in the ASEAN and about #4 worldwide, next to China, India, and Mexico perhaps.

The Philippines also reported that its receipts from international tourism expanded by more than twice.

Notice that five ASEAN neighbors that have higher merchandise exports are also the same countries that have higher tourism receipts than the Philippines.

The lesson here is that trade liberalization -- by cutting tariffs to very low, if not zero, rates and reducing non-tariff barriers -- can result in more FDI inflows, more tourist arrivals, more cultural exchanges in the region.

Other factors should accompany trade liberalization of course. Like better airports, seaports, and roads; cheaper electricity and high power capacity; more competition among airlines and shipping companies; fewer bureaucratic processes in investments and mobility; rule of law and reduced corruption and instability in enforcing various local and national laws.

Fewer taxes and trade restrictions, stronger law enforcement are just among several key ingredients to further modernize and reduce poverty in the Philippines and other developing countries.

Bienvenido S. Oplas, Jr. is the president of Minimal Government Thinkers, a SEANET Fellow and both institutes are members of EFN Asia.

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See also: 

BWorld 93, ASEAN multinationals, December 02, 2016 

BWorld 94, Economic freedom, taxes and tariffs in Asia, December 17, 2016 

BWorld 95, Manufacturing and electricity costs in Asia, December 17, 2016

BWorld 86, Philippine industrial policy

* This is my article in BusinessWorld Top 1,000 Corporations 2015, published in November 2015. I forgot to post this earlier, no online copy of that publication, only hard copy.
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Quo vadis, industrial policy?

A recurring question in the Philippines that crops up almost anytime anywhere is, “Why has the Philippines not industrialized as much as its East Asian neighbors?” It is a valid question, that opens up a plethora of valid and invalid explanations.

In a paper two years ago by former PIDS economist and now DTI Assistant Secretary Rafaelita M. Aldaba  summarized recent Philippine industrial policy as shown in table 1.

Source: Rafaelita Aldaba, “Twenty years after Philippine trade liberalization and industrialization: what has happened and where do we go from here,” PIDS Discussion Paper No. 2013-21, March 2013, Table 1.

  

It is a correct assessment, although it seems the import substitution industrialization (ISI) policy was just more than two decades (1950-72), not three. There was a “decontrol” policy or removal of quantitative restrictions (QRs) in 1962, and starting in the mid-60s, a revival of manufacturing was initiated but was not sustained. 

Export orientation on a limited scale was initiated in the mid-70s, coinciding with the world oil price shock in 1973 and the period of cheap foreign loans due to over-flowing petro dollars. It also coincided with some political stability because of political repression during the Martial Law regime.

There is a short but good literature on world and Philippines economic history from the late 1800s to the last decade written by Dr. de Dios of the UP School of Economics (UPSE) and Dr. Williamson of Harvard University. It shows that in Asia, the Philippines was third to Japan and China to attain fast growth of 5 percent or more a century ago. It was not sustained though, in the two decades before World War Two.

(Source: Bénétrix et al. (2012), Table 4. Cited by Emmanuel S. de Dios and Jeffrey G. Williamson, “Deviant Behavior: A Century of Philippine Industrialization”, UPSE Discussion Paper No. 2013-03, April 2013, Table 3.)

The post-World War Two ISI period pushed annual growth rates of Japan, Taiwan and S. Korea to double digits and the Philippines resumed its early century dynamism.

Messrs  de Dios and Williamson noted that “While the Philippines conformed to the industrial convergence pattern, it began to deviate sharply from the pack in the 1980s.”

The years between 1984‐1991 was a “period of large‐scale relocation to Southeast Asia of Japanese manufacturing industries in response to the yen revaluation following the Plaza‐Louvre Accords. This wave of foreign direct investments (FDIs) benefited Malaysia, Thailand, and Indonesia and led to the build‐up of a significant export‐oriented manufacturing in those countries”, the two academics added.

The Philippines of course could not optimize its FDI harvest that period because its Constitution made and ratified in 1986, does not welcome huge FDIs in many sectors of the economy.

Nonetheless, the government of then President Corazon C. Aquino in 1991 pursued a massive trade liberalization and official abandonment of protectionism when it reduced tariffs to a range of 3%‐30%. The Ramos administration continued the liberalization process capped by the Philippines joining the World Trade Organization (WTO), and undertook a new wave of tariff reductions in his last year in office in 1998.

Trade liberalization in the 90s was not just a Philippines or Asian phenomenon but a global one.

After many decades of trade negotiations and deadlocks at the United Nations Conference on Trade and Development (UNCTAD), the WTO was formally created in 1994.

To summarize, the Philippines’ post-WW2 industrialization policy can be categorized into three major periods: (1) trade protectionism and import substitution from 1950-72, (2) limited liberalization and export promotion  from 1973-90, and (3) accelerated trade liberalization from 1991 onwards, with “blips”of protectionism in 1997-99 Asian financial turmoil, then 2008-2010 global  financial crisis that started in the US.

Philippine membership  in the ASEAN (Association of South East Asian Nations) Free Trade Area, Asia Pacific Economic Cooperation, various bilateral FTAs and Economic Partnership Agreements, emerging Regional Comprehensive Economic Partnership (RCEP, ASEAN + 6) and the lure of joining the Trans Pacific Partnership  (TPP), are important alliances to sustain trade and investment  liberalization.

There are two important challenges for the Philippines to optimize its membership  in those mega trade alliances: (1) remove investment protectionism by abolishing the “reserved only for Filipinos” (or zero FDI) in some sectors, and 60-40 restrictions to FDIs in other sectors. And (2) relax services protectionism especially in the practice of profession, where foreign professionals are barred from practicing here while Filipino professionals are allowed in many other countries.

Mr. Oplas is the President of Minimal Government Thinkers, Inc., a Manila-based think tank advocating free market economics, and a Fellow of the South East Asia Network for Development (SEANET), a Kuala Lumpur-based regional center advocating free trade and free mobility of people in  the region.

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See also:
BWorld 61, 100 indicators better than GDP, June 03, 2016 
BWorld 71, Free trade and higher income, July 11, 2016

BWorld 72, Economic integration and disruption, July 25, 2016 

BWorld 78, If the US becomes protectionist, who loses? August 11, 2016 

BWorld 84, Eliminate red tape in the Philippine energy sector, October 08, 2016 

BWorld 85, Drugs war morphed into war on critics of President Duterte? October 11, 2016

BWorld 69, Foreign direct investments and Pres. Duterte

* This is my article last week in BusinessWorld.

Investments, local and foreign, are like pools of water flowing down. They go where they are allowed and welcomed, not where they are restricted and barred. So government and national policies set the tone and signal if they welcome, partially disallow, or explicitly restrict investments.

Foreign investments are particularly very mobile and flexible. They can come and go in major cities in the world in very short period like within hours or minutes, such as investments in the stock markets and commodities.

Foreign direct investments (FDIs) are for long-term engagement. Once they have decided to come or skip a country or economy, there is little flexibility left because the sunk cost of putting up a factory, hotel, or power plant is huge. It is this type of long-term foreign and local investments that a developing economy like the Philippines should attract and welcome, not restrict and discourage.

The Philippines is not exactly a good haven for FDIs mainly because of the restrictions and the unwelcoming tone of our Constitution where many sectors are outrightly banned to FDIs (media, hospitals, universities, electricity distribution, etc.) or allowed but only up to 40% maximum in total equity investments. Socialist Vietnam has overtaken the Philippines more than two decades ago in attracting FDIs while late-comer Myanmar is trying to catch-up with us, attracting some investors restricted by the latter (see Table 1).

Notice in Table 1 the huge jump in FDIs under the past Benigno S. C. Aquino III administration, almost double compared to the amount attracted by the earlier Gloria Macapagal Arroyo administration.

In terms of accumulated and net inward stock (inflows less outflows of capital) of FDIs, the past Aquino administration has more than doubled the stock in just five years, from $26 billion in 2010 to $59 billion in 2015. Cambodia and Laos have also experienced this more than two times expansion in FDI stock in just five years, but at a lesser magnitude or volume of capital.

Note also the huge volume of FDI stocks in our neighbors in the region, especially Hong Kong, China, Singapore and Indonesia (see Table 2).

Expanding the country’s productive capacity via increased infrastructure will be one of the panel discussions in the forthcoming BusinessWorld Economic Forum, July 12, 2016 at Shangri-La BGC. The role of foreign investments, finance, and technology cannot be underestimated especially in high capex sectors like telecommunications and power generation.

The speakers in the afternoon panel on that day will be Mr. Ernest L. Cu, President & CEO of Globe Telecommunications; Mr. Eric Francia, President & CEO-Ayala Corporation Energy Holdings, Inc.; and Mr. Erramon Aboitiz, President & Chief Executive Officer, Aboitiz Equity Ventures, Inc.

There are a few big challenges for the new Duterte administration to sustain the momentum of high interest in the Philippine economy by foreign investors.

One is to remove the restrictive provisions of the Constitution and allow 100% foreign equity ownership except in land, something that he promised during the campaign period. This will require changing or amending the 1987 Constitution.

Two, to reduce business bureaucracies, local and national, that discourage many foreign investments even in sectors that they are allowed like power generation. This is already included in the 10-point agenda that his economic team has announced middle of this month. This needs serious implementation and not ningas-cogon, short-term practice.

Three, to reduce or remove various uncertainties that can discourage investments, even if foreign investments are liberalized tomorrow. These uncertainties include the agrarian reform program, which is always extended, and anti-mining, anti-coal power pronouncements.

And four, to erase from the country the terrorist and extortionist groups engaged in kidnap for ransom activities. This is a big turn-off for foreign investors and visitors planning to come to the country.

Bienvenido S. Oplas, Jr. is a Fellow of SEANET and President of Minimal Government Thinkers.

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See also: 

BWorld 23, ASEAN trade bureaucracies and Doing Business 2016 Report, November 07, 2015

BWorld 61, 100 indicators better than GDP, June 03, 2016 

BWorld 67, Economic projections under the Duterte administration, June 28, 2016 

BWorld 68, Criminal justice and Duterte, July 07, 2016

Free Trade 56, Trade, investments and taxes in APEC countries

The Albert Del Rosario Institute (ADRi) has published my new paper, in time for the Asia Pacific Economic Cooperation (APEC) Summit this coming November 18-19 here in Manila. My special thanks to ADRi President, Prof. Dindo Manhit.

I put a number of tables in that paper, data sources from the World Bank, UN Conference on Trade and Development (UNCTAD), World Trade Organization (WTO), Alas Oplas & Co. CPAs (AOC), Bangko Sentral ng Pilipinas (BSP) and the Philippine Statistics Authority (PSA).

Foreign direct investments (FDI) inward stock is a good indicator of how much FDIs have accumulated in a country net of outflows through time.

FDI net inflows is a better indicator than plain inflows because a country may get huge amount of FDI inflows but also suffering from huge outflows so that the net inflow is actually negative. Like the US, Russia, Hong Kong, Taiwan, Japan, S. Korea and Malaysia, at least for the the years 2012-2014.

 APEC countries are marked red here.

Trade bureaucracies as a form of non-tariff barrier (NTB).

My Concluding notes

1. To have more trade and investments, governments should learn to step back from too many regulations and taxation. 

2. Corporate income and other taxes in the Philippines in particular should decline in the face of rising tax competition among ASEAN countries. 

3. Non-tariff barriers (NTBs) like import licensing and SPS measures should be relaxed and reduced. 

4. Global capitalism is about integration and competition, complementation and substitution, happening simultaneously. 

5. Markets in a competitive environment always result in innovation and business creativity. 

6. Governments should focus on their core and basic function – lay down fair rules for all players, be an impartial judge or referee in cases of disputes, protect private property ownership, enforce the rule of law, contracts between and among people.

The 12-pages paper is also posted in slideshare.

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See also:

Free Trade 52, More on the Gravity model, September 08, 2015

Free Trade 53, TPP "final push" this September + paper by Dr. Clarete, September 19, 2015 

Free Trade 54, Eco-protectionism at APEC 2015 meeting, September 28, 2015 

Free Trade 55, TPP Agreement, finally, October 06, 2015
Business 360 8: TPP, RCEP, SAARC and Free Trade, June 17, 2013 

BWorld 12, Investments, APEC and economic liberalization, July 25, 2015

Business 360-28, FDIs in South and East Asia

* This is my article in Business 360 magazine in Kathmandu, Nepal, August 2015.
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Foreign direct investments in South and East Asia

Foreign investments are among the key ingredients for developing countries to hasten their growth and development. Two prominent proof of this are small territories, small population, but big economies Hong Kong and Singapore. They started as very poor economies in the 1950s and 60s respectively and their openness to global trade and investments very early have allowed them to maximize the financial, technological and managerial resources that foreign businessmen and professionals could share.

There are two main avenues for foreign capital to enter an economy. Via foreign direct investments (FDIs) and via portfolio investments like the stock market.  Here we will discuss only FDIs and leave the latter to future topics in this column.

The UN Conference on Trade and Development (UNCTAD) has released the World Investment Report (WIR) 2015 in late June 2015. In the report are a number of very interesting data, some of which will be discussed here.

Cumulative values of FDI inward stock, net of capital outflows, is an important indicator of foreign investments in an economy. Here are the numbers.

http://unctad.org/en/Pages/DIAE/World%20Investment%20Report/Annex-Tables.aspx

South Asian economies overall were not able to maximize the potentials of FDIs all these years. India has the biggest FDI inward stock in the region, but comparing what it got with small population, small territories Hong Kong and  Singapore, the investments  it has attracted looked modest.

Nepal in particular needs to be more open to foreign investments considering the small amount it has attracted with just half-billion dollars as of 2014.

Socialist economies China and Vietnam that allowed certain degrees of economic freedom and the market system were able to maximize the potentials and benefits of FDIs. Vietnam’s FDI stock has expanded 23x in just two decades while China’s has expanded by 15x.

Other South East Asian economies were also able to expand their FDI stock rather fast. Aside from Vietnam’s 23x expansion, Singapore and Indonesia expanded 16x, Philippines 11x, and Thailand 9x.

We now check the value of FDI inflows over the last three years. The numbers for Afghanistan, Nepal and Bhutan are not good, the low values they got in 2012 further shrank in the next two years. Thus, the share of FDI as percent of gross domestic capital formation (GDCF) or simply total domestic investments, has been declining.

Bangladesh, Sri Lanka and Maldives have retained the average inflows per year while India and Pakistan have ramped up the FDIs they are attracting.

Some important lessons that South Asian economies can learn from their neighbors in North East and South East Asia would be the following.

One, being open to global trade and investments would mean being open to the various opportunities that  other economies in other parts of the planet can share. Global business is about integration and competition, about complementation and substitution. There are lessons to be learned, opportunities to be opened, so that business risks can be minimized and better handled.

Two, as shown in the numbers above, Hong Kong and Singapore are very good proof and examples that openness to global investments and trade can bring in more investments than one can imagine and hope for.

Three, there is a need to reverse the recent decline in FDI inflows especially in Nepal and Bhutan. More than high profit, foreign businessmen are concerned with the security of their investments, that these will  not be confiscated or nationalized even in periods of domestic political upheavals. Having the rule of law, respect of private property ownership, and ensuring the economic freedom of entrepreneurs, local or foreign, small or big, are important ingredients to attract investments, both foreign and local.

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See also:

Business 360-24: Reducing Construction and Electricity Permits, April 08, 2015 

Business 360-25, Economic Liberalization and GDP Expansion, June 23, 2015 

Business 360--26, Nepal earthquake and lessons from it, July 12, 2015
Business 360-27, Public health in Asia, July 18, 2015

Investment Liberalization 2, G7 and East Asia economies

Mobility of investments and capital across islands, countries and continents is part of human nature. A country or island for instance with plenty of beautiful white sand beaches will naturally attract investors who will put up modern resorts and hotels, that will attract more visitors from other countries, giving lots of jobs and other business opportunities to the locals and new migrants.

The UN Conference on Trade and Development (UNCTAD) released in late June 2015 its World Investment Report (WIR) 2015. The annex tables of that report are found here.

My sister's auditing firm published the 2nd issue of its monthly Business and Economic Update last month. Among the contents of that report are the tables below, original global data are taken from the WIR 2015.

Here, it shows that from 2012-2014, there was consistent net outflows of foreign direct investments (FDIs) in the G7 except UK and partly, Canada. Then in Hong Kong, Taiwan, S. Korea and Malaysia. 

http://alasoplascpas.com/publication-economic-02-Net-Inflows-of-FDI.php 

Numbers below show the ratio of FDIs over gross fixed capital formation (GFCF) or simply domestic investments. It is interesting to see how Germany and Japan have very small share of FDIs. This somehow gives an idea of their investment protectionism policies.

The most open economies to global trade and investments, Hong Kong and Singapore, have the highest FDI share to total national investments.  And an FDI share of 2.5 to 14 percent seems to be the average, possibly a healthy mixture, including the 10.5 percent for the Philippines. 

Until 2012, the bulk of FDIs in the PH came from the US, HK and Japan. By 2013 until mid-2014, capital from the US withrew, from HK declined significantly, from Japan retained, and a surge of FDIs from British Virgin Island.

http://alasoplascpas.com/publication-economic-02-FDI...

In portfolio investments like the stock markets, Japan, China, India and Hong Kong received significant inflows while many in the ASEAN experienced net outflows overall except Vietnam.

In merchandise exports (X) as a share of their GDP, Hong Kong and Singapore are run-away leaders, followed by Vietnam, Malaysia and Thailand. In non-merchandise, services exports like tourism receipts, Macao is a clear leader because of its huge gaming and casino facilities.

Personal remittances by their nationals who are working abroad, India, China and the Philippines (and Mexico) are the world leaders. The Philippines is #1 in the ASEAN.

http://alasoplascpas.com/publication-economic-02-Global...

Meanwhile, from another source, these numbers are interesting. Until 2012, the US was a major source of FDIs in the ASEAN. By 2013, capital from the US declined significantly. Investments from Japan, intra-ASEAN, UK and Netherlands are big. 

Source: ASEAN Investment Report 2013-2014, http://www.asean.org/.../asean-unctad-launches-asean...

Favorite destination of FDIs in the ASEAN are the services and manufacturing sectors. Data also from the ASEAN IR 2013-2014.

The above numbers and figures are additional reminders that the Philippines need to amend its Constitution and remove protectionist provisions that restrict or limit the entry of foreign investments in some sectors, while outrightly banning/prohibiting FDIs in other sectors.

It is not wise that government dictates that these areas are only for local investors and those areas, foreign investors can be allowed. Investments, local or foreign, automatically creates local jobs. If Filipino workers are prevented from being hired by foreign  investors here because the latter are restricted or banned on certain sectors, then many Filipino workers are hired by foreign investors in foreign lands.
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See also: 
Free Trade 35: EU-FNF Forum on 'FDI Engine for Job Growth', May 15, 2014 
BWorld 12, Investments, APEC and economic liberalization, July 25, 2015 
Investment liberalization, trends and lessons, July 26, 2015

FDIs, Hong Kong Democracy and China Communism

This 2013 data does not include foreign direct investment (FDI) outflows, only inflows and thus, the net inflow is not shown. Still a useful data.

For European economies in this list, including the fiscally-unstable ones like Spain and Italy -- and note, France is not in the top 20 -- most of those FDI inflows I think are from EU members also. I am interested to see the net or balance (inflows minus outflows). In the ASEAN for instance, Malaysia has high FDI inflows but FDI outflows are also high, so net inflow is negative for 2012 and 2013. I don't remember where I saw the data.

I got the above chart from The Vincenton. The article noted, 

"Hong Kong is undeniably one of the greatest free market experiments in Asia. It is certainly not a 100% free market economy, but it is one of the freest, if not the freest and most capitalistic, economies in the world. Despite imposing limited restrictions and regulations (such as limited restrictions on foreign ownership of land), which technically make Hong Kong a mixed economy with a higher degree of economic freedom, the HK government has the most liberalized investment policies in Asia, enticing local and foreign investors to put up businesses and provide jobs....

More taxes and higher tax rates do not necessarily lead to higher tax revenue collection and economic success. Know the concept of Laffer curve. At present, Hong Kong applies low and simple tax regime. Despite levying 15% salaries tax (the equivalent of our income tax) and property tax, HK government does not impose sales tax or VAT, withholding tax, tax on dividends and estate tax."

About the US' high FDIs, it has a perennial trade deficit, around $1.5 billion a day on average. But it is also gaining with huge FDI inflows. High negative current account is somehow offset by positive capital account, so overall balance of payment (BOP) is not so damaging. Have to check the numbers. China should be bulging with high trade surplus but it also has high FDI outflows, buying many US companies via FDIs or portfolio investments, in US stock markets.

HK government's main revenue I think, is not from taxes, but in selling land. It is the biggest land owner, the biggest land developer. Besides, if you have a dynamic economy, lots of private investments and private enterprises, many people have jobs in the private sector, government does not need to create too many welfare and subsidy programs, nor government should hire too many people.

There is an interesting article in WSJ yesterday by Joe Sternberg. He wrote,

Some local companies have grown increasingly vocal in recent weeks in opposing pro-democracy activists. The Occupy Central movement—a respectable group, unlike those who camped out in Lower Manhattan a few years ago—is promising to bring gridlock to Hong Kong's central business district if Beijing doesn't follow through on its pledge to allow genuine democracy in the territory by 2017. 

Many businesses are concerned about the risks and costs of business disruption if parts of Hong Kong come to a standstill. The Hong Kong offices of the Big Four accounting firms late last month took out an ad in several local newspapers warning that the protests would "shake" international confidence in the territory and could send foreign investors fleeing…. 

The companies err badly on the merits. If it's allowed to continue, the territory's slide into Beijing-lite authoritarianism, with the loss of rule-of-law and concomitant rising public discontent, will be far worse for business than the temporary disruptions of a public protest. But in most political systems, including Hong Kong's (for now anyway), being wrong is not a crime…. 

In response to the Big Four newspaper ad, an anonymous group of the firms' employees bought their own ad supporting Occupy Central. To the extent that the universal suffrage those employees support undermines the influence of functional constituencies, the accountants are arguing against their electoral self-interest. But they seem to realize that real democracy is in the political and economic best interests of all Hong Kongers, and Hong Kong's companies. It's a more enlightened view than that of their employers.

I am against street occupations because they are another form or type of coercion and massive prohibition. People's freedom to walk, pass by, do business in the affected areas are prevented  or restricted.  But I am also against permanent BIG government coercion and dictatorship, like the China communist government dictatorship. I hope the Occupy movement in HK will minimize business disruption in the business district, while sustaining the campaign to free HK from the clutches of Beijing's long distance communist intervention.
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See also:

John Cowperthwaite, Statistics and Central Planning, January 23, 2014 

Free Trade 32: Hong Kong's Unilateral Trade Liberalization and John Cowperthwaite, February 12, 2014

Lion Rock 12: Bill Stacey on Free Markets, Big Government and Hong Kong, March 10, 2014

Hong Kong's Corporate and Forest Jungle, June 10, 2014

Free Trade 35: EU-FNF Forum on 'FDI Engine for Job Growth'

Last Tuesday, May 13, I attended the EU-FNF forum on "Foreign Direct Investment: Engine for Job Growth" held at the Mind Museum, Fort Bonifacio Global City, Taguig. It was a powerhouse forum. Welcome messages given by Jules Maaten, Country Director of the Friedrich Naumann Foundation for Freedom (FNF) in the Philippines, and Guy Ledoux, Ambassador of the European Union (EU) Delegation to the Philippines.

Amb. Ledoux expressed further optimism about the Philippines and its business environment, saying that European investors are the biggest bloc of foreign direct investment (FDI) in the Philippines. A summary of the forum is also posted in the FNF website, EU FDI in PHL to Double in Five Years and there is a long quote from Amb. Ledoux there.

House of Representatives Speaker Feliciano "Sonny" Belmonte (in barong, seated right in the photo below) spoke and mentioned that he personally supports amending the PH Constitution and remove restrictions to foreign investments. He enumerated several important Congressional bills that will help encourage the entry of more FDIs. Like the Anti-trust or Competition Law, Tax Incentives Management and Transparency Act, amendments to the Build-Operate-Transfer Law, Cabotage Law, among others.

I stumbled on this data from the IMF. Not only direct equity but other forms of asset inflows were used here, hence, a total of $28.4 billion inward direct investments were recorded in 2012. But interestingly, many Philippine-based businessmen, local and foreign, sent their money to the Cayman Islands and Virgin Islands. The two are considered as among the "tax havens" around the world because of the low taxes, low bureaucracies they slap on money coming from anywhere around the world. Which should be a lesson to the central bank and other government agencies: the less that you monitor and bureaucratize foreign investments and savings, the more that that they will come to you.

source: IMF, Coordinated Direct Investment Survey (CDIS)

The four important speakers in the first session, from left: Department of Trade & Industry (DTI) Secretary Gregory Domingo; Andrew Powell, Managing Director of Bosch Philippines, Amb. Ledoux and Donald Kanak, Vice Chairman of the EU-ASEAN Business Council.

Interesting point from Bosch: the company being innovation driven, is inventing and innovating a new product every 25 minutes on average. Wow. Mr. Kanak said that by having more investments and competition, more high paying jobs are created, which provide more consumer and tax base for the country.

Sec. Domingo mentioned that one of the important assets of the Philippines is its big and young population. Yes, I fully agree. Big and young population is an asset, not a liability, that is why I never supported the RH bill, now called RH law. The average age of Filipinos, about 24 years old, is almost half that of Japan, 44 years old. Soon Japan, Taiwan, S. Korea, many European countries, will be begging for more Filipino workers and managers to run their factories, banks, hotels, offices and households. Or if their immigration policies will remain paranoid to the entry of more immigrant workers, many companies in those countries will locate here and take advantage of the country's big, young and trainable manpower.

From left: Jules Maaten, Coco Alcuaz of ANC who acted as moderator in the panel discussion of these four prominent speakers.

The next panel was bigger, five speakers and five reactors, moderated by Mr. Vergel de Dios, a veteran media man. The speakers were (1) National Economic & Development Authority (NEDA) Assistant Director-General Rosemarie Edillon, (2) Public-Private Partnership (PPP) Center Director Eleazar Ricote, (3) European Chamber of Commerce in the Philippines (ECCP) President Michael Raeuber, (4) Rep. Anthony del Rosario of Davao, and (5) Philippine Chamber of Commerce & Industry (PCCI) Honorary Chair Donald Dee.

The panel of reactors were (1) Philippine Institute for Development Studies (PIDS) President Dr. Gilberto Llanto, (2) Foundation for Economic Freedom (FEF) President Calixto "Toti" Chikiamco, (3) Makati Business Club (MBC) Project Coordinator Jose Cortez, (4) Spanish Chamber of Commerce in the Philippines President D. Javier Warleta, and (5) EU Head of Trade Section Walter van Hattum,

Toti Chikiamco pointed out that more than the high cost of electricity, what bothers many investors, those in SMEs in particular, are the high government-imposed minimum wages. Plus the various mandatory social contributions. This is a good point. Employment is a private contract between the employer and employee. A job applicant seeking high pay and many benefit package must compete with other job applicants with better qualifications and longer work experience, in landing that job. Government should come in only to enforce a private contract between the two camps if there is dispute in the interpretation and implementation of the contract. Government has no business actually setting what should be the minimum wage, the minimum benefit package, and so on. Minimum wage laws protect only those who already have jobs while providing no protection to those who are jobless or are still seeking work.

Movement of FDI is directly related to movement of goods and services across countries and continents. Free trade and free mobility of factors of production are closely linked. When the business environment at home becomes more rigid, more bureaucratic and over-regulated, more taxed, investors and professionals will seek other location where they can do business in a freer environment.

As Europe becomes more bureaucratic, economies in Asia become good prospects for investments as our politicians and bureaucrats here have not mastered yet the art of heavy bureaucratism that their counterparts in Europe and North America practice. FDI is both demand-pull and cost-push.

Lots of good speakers, and lots of food after, it was a good forum.
All photos except the table are from FNF facebook page.
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See also:
Free Trade 31: FTAs, EPAs and the Heckscher-Ohlin Theorem, January 10, 2014
Free Trade 32: Hong Kong's Unilateral Trade Liberalization and John Cowperthwaite, February 12, 2014 
Free Trade 33: ASEAN Economic Community 2016, February 16, 2014
Free Trade 34: ASEAN's Bilateral and Regional FTAs, February 27, 2014

Foreign Aid 11: People Mobility and Aid Hypocrisy

Mobility = Freedom. A person living in an unfree society or culture can free himself by leaving that place or cultural village and move to another place where unnecessary restrictions and prohibitions are absent or at a minimum.

International mobility of people, their goods and services, is an attempt by people to find personal and economic freedom. If they find a good job or education and training abroad that makes them more productive, then both their origin and destination countries will benefit.

Remittances from migrants to their folks back home is growing fast every year. It is estimated that in 2009 alone, they sent $319 billion. That's several times bigger than official development aid (ODA) or foreign to developing countries, and bigger than foreign direct investments (FDI) inflow into those countries.

The Philippine peso also has been appreciating (aka "getting stronger") recently. One important factor is the huge inflow of foreign remittances by Filipinos working abroad. Last year, total remittance via the financial institutions was about $16.3 billion. This year, it should hit between $18 to $19 billion.

With international and local migration of people, the mutual beneficiaries are people to people.

With more foreign aid like MDGs, WB and ADB loans, mutual beneficiaries are government to government, and indirectly, bureaucrats to bureaucrats.

A sick or aged person in the US or Europe -- if there are no qualified locals, or there are qualified locals but not interested to do the work or asking too high salaries -- will remain sick if foreign health workers and professionals are not allowed to come in. Thus, it's people to people mutual beneficiaries.

Foreign aid is government to government. Politicians of rich countries tax-tax-tax their citizens, a portion of which will be given to politicians and bureaucrats of poorer countries through foreign aid. If one or both parties is/are corrupt and/or wasteful, foreign aid is immediately wasted. And there is a tendency on the part of politicians and bureaucrats of poorer countries to become more complacent and wasteful with foreign aid money. If they can be wasteful with their own citizens' tax money, why not be more wasteful with tax money of rich countries?

Implication: free market groups should demand less or no foreign aid, and more international mobility of people, their goods and services, with the least restrictions possible.
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Meanwhile, one Filipino bureaucrat from the ADB who is also a member of one of my discussion ygroups irritatingly asked,

"Nonoy why are you so upset (putting it mildly) with ADB, WB, USAID etc. employees & consultants? Like everyone else we work our asses off to deserve our salaries, fees."

The lady was wrong. I was not upset with ADB, WB, USAID, UN employees and consultants. Neither am I upset with Globe, Smart, Google, Jollibee, Victory, PAL, Cebu Pac, Chinabank, Teotico arts and gallery, Dome coffee, etc. employees and consultants.

What I was criticizing was the exemption from mandatory, obligatory, withholding personal income tax system for employees and consultants of foreign aid bodies. Aren't the UN, ADB, WB, USAID, IMF, etc. living off on tax money, both for their operations and the salaries and perks of their staff and officials?

Contrast it with us, workers in the private sector -- we live off on clients' money. No clients, no money, we go hungry. Yet we are subjected to mandatory witholding personal income tax.

Rule of law means no exception. The law applies to all, governors and governed; administrators and the administered. But for the foreign aid establishment, the law on mandatory personal withholding income tax does not apply to them. They are not ordinary mortals, they are above us.

Such hypocrisy of public policy. If we want the rule of law, then we should abolish personal income tax. Fair is fair. Whether one works in tax-hungry foreign aid bodies or not, no one should be forced and coerced to surrender up to 1/3 (or 4 months out of 12 months work) of his/her monthly income to the state.

A friend Paul H. commented:

From these debates you not only see the differences between statists and the anti-statists, but the diversity among anti-statists as well, in that they would counter the statists' arguments in a variety of ways.

For instance, you mention that you cite everyday examples to make your point, while others will go the other way and discuss matters in a strictly theoretical manner. It's all good!

Yes, the free market movement and philosophy rests on spontaneity and diversity, never on uniformity, monotony and central planning.
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See also:
Foreign Aid 6: IMF is Engineerable and Abolishable, September 05, 2006
Foreign Aid 7: Wolfowitzoellickation of the WB, May 30, 2007
Foreign Aid 8: Abolish the IMF, August 08, 2007
Foreign Aid 9: WB Wants Hike in Gasoline Excise Tax, July 10, 2009
Foreign Aid 10: Why We Don't Need It, February 15, 2010