(Conclusion)
You either love him or you hate him, but US President-elect Donald Trump’s impending assumption of office in two months has had Asian markets on the edge amid fears of an escalating US-China trade war, which has been raging since 2018.
Hopefully, our economic managers’ scenario building over the past 12 months has made the pathway clearer on the country’s next steps into an environment marked by increased geopolitical and economic uncertainty and instability.
Many private economists share their concern. But while acknowledging business concerns heading towards a world with Trump 2.0, George N. Manzano, the former Philippine Tariff commissioner who now heads the Applied Business Economics Program at the University of Asia and the Pacific (UA&P), also cited one opportunity: heightened US-China rivalry will likely hasten more US and other foreign businesses’ plans to de-risk from over dependence on the world’s second-biggest economy (both as a manufacturing/operation base and market), which now struggles with its own deep structural economic issues besides.
Global logistics service provider DHL said on its website (on Nov. 6 and 12) that Southeast Asia has emerged as a prime choice for a “China-plus-one” strategy, whereby companies keep a presence in China but shift some capacity nearby. “While China’s manufacturing crown will not be replaceable in the short term, several Southeast Asian economies have emerged as powerhouses in different industries,” said DHL, which noted Vietnam’s and Malaysia’s expanding manufacturing capacities, and is banking on Indonesia, Malaysia, the Philippines, and Singapore to drive its own growth.
It remains to be seen if we have been able to capture some of the diversifying foreign direct investments (FDI) despite improving inflows data — though surely not as much as Vietnam or Indonesia. Perhaps we have begun to see the fruits of efforts to improve our attractiveness, gauging from the latest FDI numbers showing that we could be on the verge of reversing two straight years of contraction of net inflows as of August (even as that month alone saw a year-on-year drop).
Which is why the enactment on Nov. 11 — barely a week after Mr. Trump emerged victorious in the US elections — of Republic Act No. 12066, or the Corporate Recovery and Tax Incentives for Enterprises to Maximize Opportunities for Reinvigorating the Economy (CREATE MORE) law, couldn’t have come at a better time. This milestone sent a message to investors at a time of heightened unease that the Philippines has been working to improve the playing field for them. The Finance department had said that this latest investment law is designed to enhance the ease of doing business in the country, clarify value-added tax (VAT) rules, provide more attractive tax incentives, as well as strengthen governance and accountability, among other measures. It clarified provisions of RA 11534, or the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act that was signed into law in March 2021 and which sought to provide fiscal relief, especially from effects of the crisis spawned by the pandemic, for those doing business in the country.
Major business groups — like the Philippine Chamber of Commerce and Industry, the Management Association of the Philippines, the Philippine Exporters Confederation, Inc., the IT and Business Process Association of the Philippines and the Joint Foreign Chambers of the Philippines — immediately welcomed this key measure, showing that it addressed some of investors’ long-standing concerns about rules affecting them. Just on this count, it seems the government has been making the right moves — from appointing an industry leader in the person of former Robinsons Land Corp. chief executive Frederick D. Go as Special Assistant to the President for Investment and Economic Affairs of the Philippines (with the rank of Cabinet secretary) to acting on investor concerns like the time it takes for the government to approve major projects and a cumbersome, costly VAT refund process (something I remember writing on as a newly hired reporter in the early 1990s).
So, well-played there, because while some investor concerns have been simmering for quite some time, legislated reforms have less risk of being reversed on a whim by a sitting president (a key investor worry) than executive fiats.
IN PLAIN SIGHTBut then there can never be enough improvement, since we do not operate in a vacuum.
Besides comprehensive competitiveness indices that give an overview of how several economies stand vs each other, e.g., IMD’s World Competitiveness Ranking and the World Bank’s new Business Ready (B-READY) report, prospective investors and observers are guided by other surveys that track individual economies’ performance on specific indicators, e.g., the Corruption Perception Index, the Global Innovation Index, the Human Development Index, the Digital Competitiveness Index, etc., where the Philippines’ performance depends not only on how much it has improved (or worsened) its environment in these specific areas, but also on how its rivals have done the same.
So you could have the Philippines improving its score but still remain in place or worsening its ranking because a rival improved more.
These regular surveys hint at where we need to enhance our attractiveness to foreign investors.
IMD’s World Competitiveness Ranking (the latest issue published in June), for instance, assesses economies against 256 indicators. The latest ranking shows us staying at 52nd place out of 67 economies from last year (from 48th in 2022, 52nd in 2021 and 45th in 2020). We fared rather poorly in the areas of international trade (ranking 58th), international investment (44th), prices (48th), public finance (49th), institutional framework (53rd), societal framework (55th), business legislation (60th), business productivity and efficiency (51st), business finance (51st), management practices (47th), basic infrastructure (62nd), technological infrastructure (55th), scientific infrastructure (60th), health and environment (60th), and education (63rd). Key challenges were enumerated as sustaining the country’s job-generating investments; ensuring food security to temper inflation and keep prices affordable; addressing learning gaps to improve the education system; building sustainable infrastructure to reduce climate change vulnerability, as well as resolving the Philippines’ territorial rights to the West Philippine Sea diplomatically and peacefully.
The World Bank’s B-READY 2024 replaced the global lender’s flagship Doing Business series (which was discontinued in 2021 after running since 2003) using an improved analytical framework. Published on Oct. 3, the maiden B-READY report used “a new approach to assessing the business and investment climate,” e.g., focusing on “private sector development as a whole” instead of just the business environment for small- and medium-scale enterprises, as well as putting more attention on quality of regulations and public services on top of the regulatory burden of businesses. The Philippines ranked 16th out of 50 economies in terms of regulatory framework, 24th in terms of public services, and 36th in operational efficiency in this maiden tally. The country got its best scores in the fields of labor, international trade, and utility services. “Within these areas, the economy implemented all the measured good practices in terms of labor inspectorates, provides electronic systems and interoperability of services for international trade operations, and provides transparent information (connection requirements, tariffs, complaint mechanisms) for water and electricity,” the World Bank said of the Philippines in its report. The country got its worst scores in business insolvency, business entry, and market competition. “Within these areas, the economy does not provide interconnection of e-case management system in liquidation and reorganization, and lags in terms of exchange of company information for business entry and in university-industry collaboration to promote technology transfer.”
The government can also take its cue from assessments like the US State Department’s Investment Climate Statements. Its 2024 statement on the Philippines cited amendments to the Foreign Investment Act and the Public Services Act to completely open various sectors to foreign ownership, as well as the CREATE Act which cut the corporate income tax rate to 20% or 25% from 30% and standardized incentives across 14 investment promotion agencies. However, it also noted that “poor infrastructure, high power and logistics costs, regulatory inconsistencies, a cumbersome bureaucracy, and corruption have hampered the government’s efforts to attract foreign investments,” and that “[l]arge, family-owned conglomerates dominate the economic landscape, sometimes crowding out smaller businesses.”
Business groups also regularly issue their wish list of pieces of legislation before each Congress convenes for its regular sessions. Such lists include certain measures which have proven more difficult to advance, such as freedom of information and easing bank secrecy.
ALWAYS ON THE WATCHThen, there is the painful task of checking how rivals beat us to the draw. Vietnam, for example, in 2008 bagged Samsung — which is now that country’s largest FDI, with $17.3 billion invested in eight factories and one research and development center (Samsung’s current investment in Vietnam now stands at around $22.4 billion). These Samsung subsidiaries produce nearly a third of the firm’s global output and make Vietnam the second biggest exporter of smart phones in the world after China. (Apple followed suit about eight years ago, transferring part of its Apple Watch, iPad, MacBook, and AirPods production to Vietnam, making that country the company’s fourth-biggest supplier hub after China, Taiwan, and Japan, according to Dezan Shira & Associates’ Vietnam Briefing site).
What did Vietnam do? According to our Trade department, Vietnam “aggressively lured investors by providing large tracts of lands to large manufacturers,” even providing state subsidies for rent of land. The country also offers preferential tax rates for 50 years, not to mention zero-rated import tax and VAT, a “50% reduction” in electricity, water, and telecommunication rates, plus no labor unions (OK, so that last one will be a stretch here).
Probably sensing growing competition from neighbors, Vietnam upped the ante with Decree 10/2024, which went into effect on March 25, streamlining processes and increasing support for investors in high-tech parks. That law provides that projects in these parks will enjoy perks like exemption from land lease fees and reimbursement for land clearance expenses, preferential interest rates on loans, and requires local authorities to “develop suitable living areas and social infrastructure” around these parks to accommodate workers.
JUST THE FIRST STEPTo be sure, putting reforms in place, whether by executive or legislative action, is just a first step. A country’s attractiveness does not lie solely in adopting such measures, but — just as importantly — in their effective implementation as well.
The template of close government-business cooperation, from conceptualization, to legislation, to even implementation (through reliable response to feedback from business) should enhance reform efforts.
Of course, we are not alone in this model. So, more must be done.
One thing I miss is the comprehensive annual reports of the Joint Foreign Chambers that used to track the progress (or lack of it) of specific reforms. Those thick reports were packaged under the chambers’ Arangkada Philippines advocacy that began in 2010. They gave the government at that time a clear idea on which reforms to prioritize and where bottlenecks lay. For some reason, those yearly reports ended as the previous administration assumed office and gave way to annual forums. (In casual chats, some foreign business leaders noted that some key officials of the past administration were not receptive to proposals for improvement, but would not say if such experiences led to the end of the Arangkada reports.) True, there are other outfits that track the progress of reforms — I recall, for example, that an institute of the UA&P had its own Political Monitor that had this feature — but none of them have been as exhaustive as the annual Arangkada reports.
In the spirit of inclusivity, business chambers may also choose to team up with some media outfits to encourage and sustain wider public discussion of specific reforms (I am sure that BusinessWorld, for example, would be open to such collaboration). Doing so would draw other relevant sectors into the reform conversation and could provide a sounding board for more ideas and also exert positive pressure for government action.
And, of course, the government should be tougher on bribery. It’s galling to hear anecdotes that just one bad experience turned away promising businesses, our lofty reform promises notwithstanding.
Because until that narrative changes, do not expect to be top of mind in this game.
(Part one of this column — No time to rest – https://tinyurl.com/26hbuwhr — came out on Nov. 7.)
Wilfredo G. Reyes was editor-in-chief of BusinessWorld from 2020 through 2023.