Rethinking the necessity of amending economic provisions of 1987 Constitution

Prof. Anna Malindog-Uy

WITH its strategic location in Asia, large English-speaking population and robust domestic market, the Philippines has a vast potential to be an attractive destination for foreign direct investment (FDI). However, the country’s FDI inflow has remained relatively low compared to its Southeast Asian neighbors. The lifting of the economic provisions of the 1987 Constitution is often cited as a crucial step in creating a more conducive environment for FDI.

The Constitution contains several provisions that limit foreign ownership and participation in various sectors of the economy, including land ownership, public utilities, etc. Thus, it is imperative to ask whether amending the economic provisions is indeed a precondition for fostering an FDI-friendly and conducive environment.

FDI landscape

The debate on whether lifting the economic provisions of the Constitution is a precondition for attracting FDI is complex. While it is clear that these restrictions do play a role in the Philippines’ FDI landscape, they are not the sole factor. A multifaceted approach addressing various aspects of creating a more conducive investment climate in the country will likely be more effective than focusing solely on constitutional amendment/change.

The goal should be to craft policies that balance openness to foreign investments with protecting national interests, security and inclusive, sustainable economic development. It should also include improving other factors and primary conditions affecting FDI, such as ease of doing business, infrastructure, political stability, etc.

Regarding regulatory frameworks and legal structures shaping the FDI landscape in the Philippines, the nation already possesses a robust and comprehensive set of laws and regulations conducive to attracting FDI. There’s a compelling case to be made that the Philippines can effectively court FDI without lifting the economic provisions entrenched in the 1987 Constitution.

During the Duterte administration, recognizing the importance of FDI as one of the key economic drivers that helps the country move forward, the Philippines made headway and significant efforts to improve the country’s investment climate through various policy reforms. The Duterte administration pushed legislative measures that further liberalized the country’s investment landscape to attract more FDI.

It is worth mentioning that some of the needed legislation that would potentially be instrumental if implemented effectively and fully in shaping the country’s competitiveness include the game changer Corporate Recovery and Tax Incentives for Enterprises Act (Create); amendments to the Retail Trade Liberalization Act (RTLA), the Foreign Investment Act (FIA) and the Public Service Act (PSA); and the passage of the Ease of Doing Business Act.

Create was signed into law on March 26, 2021 to attract more FDI by providing fiscal relief. It lowers the corporate tax rate from 30 percent to 25 percent. This number will be reduced by 1 percentage point annually from 2023 to 2027. Before this law, the Philippines had one of the highest corporate income tax among Asean (Association of Southeast Asian Nations) member states, if not the highest. Create intends to rationalize fiscal incentives to attract more local and foreign enterprises to invest in the country. Meanwhile, the RTLA, enacted on Dec. 10, 2021, lowers the paid-up capital requirement for foreign retail enterprises. It will simplify and ease restrictions for foreign retailers that want to set up business in the country.

Likewise, the amendments to FIA, signed into law on March 2, 2022, allow foreign nationals to fully own small and medium enterprises with a minimum paid-in capital of $100,000, provided certain conditions are met, such as hiring no less than 15 Filipino employees, which is a reduction from the previous requirement of 50.

The amendments to the PSA under Republic Act (RA) 11659 were enacted into law on March 21, 2022 to liberalize specific sectors of the economy to foreign investment and ownership. The amendments lift foreign equity restrictions on industries not classified as “public utilities.” This allows foreign nationals to own up to 100-percent equity in businesses in newly liberalized sectors such as telecommunications, domestic shipping, railways and subways, airlines, expressways, tollways and transport network vehicle services.

Note that “public utility” refers to specific sensitive sectors/industries that must be protected from foreign control for the sake of national interest and security, like the distribution and transmission of electricity, water pipeline distribution, seaports, public utility vehicles, etc.

RA 11032, or the “Ease of Doing Business Act,” was signed into law on May 28, 2018. It streamlines the process of setting up and running a business in the Philippines. It improves the regulatory environment for businesses, thereby creating an FDI-friendly climate, less bureaucratic resistance and a more transparent business environment.

Implementation

However, it is crucial to inquire whether these laws are implemented fully and effectively to realize their intended purpose and impact. An equally pertinent inquiry pertains to whether the country possesses all the fundamental prerequisites essential to establishing itself as a premier destination for FDI.

These encompass a spectrum of factors, such as mitigated inflation rates, particularly concerning vital goods and services; reduced electricity communication and transportation costs; augmented indices in human development or competitive human capital; diminished corruption levels (bureaucratic hurdles); robust soft and hard infrastructures; consistent domestic political stability; decreased crime rates and sustained peace and order conditions, among others.

Consequently, before hastily pursuing constitutional amendments, it is imperative to thoroughly examine and prioritize these issues, integrating them into the decision-making process to be adequately addressed.

Furthermore, it is also essential to thoroughly substantiate any proposed constitutional amendments/change with empirical evidence and a comprehensive analysis. This includes demonstrating why it is necessary to lift the economic provisions of the Constitution, considering the existing legislation that already support and foster the easy entry of FDI into the country.

Conclusion

Amending or changing the Constitution is a significant endeavor and a process that requires widespread consensus and careful consideration of its long-term impacts. It is important to note that constitutional amendments/change are a significant and sensitive political process that requires careful consideration and broad public support. The ultimate decision must be made with the country’s long-term interest in mind.

Rather than fixating on advancing the increasingly discredited “fake” people’s initiative, the administration would be better served by prioritizing and spearheading the pursuit of a comprehensive and more inclusive economic reform agenda. This approach should extend and go beyond mere constitutional amendments/change, aiming to foster and enhance the country’s investment environment.

As far as lifting the economic restrictions in the Constitution is concerned, if this were to be pushed through, the country should prioritize the sectors where the Philippines has competitive and comparative advantages because these sectors are more likely to spur economic growth, create jobs and contribute to sustainable development and inclusive growth. For strategic reasons, it optimizes resources and attracts investors looking to capitalize on specific sectors the Philippines is well-positioned to offer.

Hence, by focusing on competitive and comparative advantage areas, the Philippines can ensure that any increase in FDI translates into meaningful economic benefits and contributes to the country’s long-term economic success.

Anna Rosario Malindog-Uy is a PhD economics candidate at the Institute of South-South Cooperation and Development in China’s Peking University. She is analyst, director and vice president for external affairs of the Asian Century Philippines Strategic Studies Institute (ACPSSI), a Manila-based think tank.