Carlo's Think Pieces

Reflections of a Filipino in the Netherlands

Posts Tagged ‘foreign investment’

Philippine Investment “Myths”

Posted by butalidnl on 24 June 2011

The Philippines needs investments in order to develop. Where should these investments come from? What do we need to do to get them? There are a number of ‘myths’ about investments in the Philippines, and these ‘myths’ either distract us from the real issues, or are even counterproductive.

National Patrimony Provision
There are many who want to amend the Constitution’s national patrimony provision, which reserves the ownership and exploitation of land and national resources to Filipinos. The idea was that if foreign ownership is allowed, foreigners will want to buy land and invest in the Philippines.

This issue is overrated. Foreign companies these days no longer really need to own land for agriculture or mining. All they have to do is to make long-term lease arrangements, or get guarantees to a steady supply of a given product. Take the pineapple plantations in Mindanao – they plant pineapple based on contractual arrangement, and end up supplying foreign companies.  But the land is owned by Filipinos. As for mining companies, the present Mining Act, with its provision for “Financial and Technical Assistance Agreements” which last 25 years allow foreign mining companies to operate in the country without having to technically “own” the land.

A danger of allowing foreigners to simply own land in the Philippines as a right – and no longer requiring them to go through all kinds of agreements and regulations is that they could use the land irresponsibly. In Africa, Chinese companies own land, they bring in their own workers and supplies, and export all production to China. The host country gains little in the process. I don’t see how this kind of foreign land ownership could benefit the Philippine economy.

Cheap Labor
This is a very old concept. Economic policymakers seem to have this idea that the Philippines is a country with cheap labor; and that keeping labor cheap is a very important part of attracting foreign investors.

I have news for these policymakers – Philippine labor is not cheap, and it hasn’t been so for a while. Instead of recognizing and adapting to this fact, the government has been implementing a cheap labor policy, to the detriment to Filipinos and the nation’s development.

If we recognize that labor is not cheap, the first thing the government should do is to prioritize the education and training of our workforce so that it could fit into the kinds of jobs that fit the level of our wages. The government should take steps to reduce other costs of doing business in the country, such as electricity, transport, taxes etc.

If anything, what the country needs is to raise the wage levels of a whole range of workers. This way, we could retain many workers who now prefer to work abroad. And a pool of skilled workers is another thing that is very good in attracting investments.

Need for Capital
One reason put forward for wanting more foreign investments is that the Philippines would otherwise not have enough capital to build its industries.  While it is true that foreign investors do bring in money, I think that the Philippines is perfectly able to raise the a substantial amount of the money domestically.

The Philippines has a lot of capital sitting at the sidelines. People invest them in things like real estate because the conditions for making investments are not too favorable. The investment climate has to improve – in things like less taxes and administration, lower power rates, better enforcement by the justice system of contracts etc – for Filipinos themselves to invest in new industries, agriculture etc. Things are so bad that the richest Filipinos, who would otherwise be pouring money into industrial investments, invest instead in building condominiums and malls, or in conspicuous consumption, or they salt their money abroad.

Local investments are a vital ingredient in attracting foreign investments. They provide a link to the local economy, and also to local policymakers and regulators. They are an assurance that the sector has a long term staying power in the country. The electronics industry has a growing number of Filipino investors, and it is booming. The BPO industry is now starting to get more Filipino investors.

Posted in Philippine economics, Philippine politics, Philippines, politics | Tagged: , , , , , , , , , , | Leave a Comment »

Why Invest in the Philippines?

Posted by butalidnl on 11 July 2010

Why would foreigners invest in the Philippines? That’s a good question, especially since there are lots of other countries which are trying to attract foreign investors.

Here are some reasons.

Large Population, Big Market
The Philippines has a large population. It is the 12th largest country in the world, with a population of about 96 million people. This is a lot of people, and they can mostly be reached by advertisements in the media. So, this means that, whatever your product, it will probably pay to try selling it to Filipinos. And in turn, this would probably mean that they will need to open at least a sales office in the country. And, for many kinds of products, it will also pay to manufacture these goods in the country itself.

Large Pool of World Class Labor that Speaks English
This is going to probably be why foreign companies would like to set up shop in the Philippines. If they do, they only need to import a few foreign experts, and then avail of the local labor pool. And the labor pool is quite deep, with lots of universities churning out graduates every year, and lots of Filipinos experienced in almost anything (of course, some of these may be abroad).  And  all these have been educated in English. This is not simply English as a subject in school, but English as the medium of instruction in school. We can see this in the fact that we are one of the main countries for call centers; our accent is relatively easy to neutralize.

This means that the Philippines will make a great center for their customer service (as shown by the growing call center industry in the country), and also for things like accounting back-office, or as regional office. The fact that you can source practically all your personnel locally makes it quite attractive. And salaries are still relatively cheap.

Good Infrastructure
The Philippines has relatively good infrastructure. We have a good system of airports  and ports. Our roads are quite good. We have urban mass transit (i.e. LRT, MRT). Electricity supply is regular, with some outages especially during the summer.

The IT infrastructure is also good. High-speed internet is available in our major cities. It is affordable for a lot of middle class families. Mobile telephone availability is practically universal.

Politically Stable
Believe it or not, the Philippines is politically stable. It only looks unstable, specially for those living in the Philippines – with all the rumors and other things you read in newspapers. For one, the homegrown communist movement is more of a nuisance rather than a threat. [See CPP-NPA Helps Maintain Status Quo in the Philippines ] As for the Moro rebels, the government is constantly having a ceasefire with the MILF, while they negotiate a peace agreement.

Military rebels? Kidding? What kind of threat to stability do they pose, when they mostly resort to occupying hotels when doing a “coup de etat”. What kind of coup is that? Besides, the present Aquino government has good relations with a number of military rebel leaders; I don’t expect them to go against the government now.

No major threat to the interests of foreign investors are on the horizon. It is safer to invest in the Philippines, than to do so in places like Thailand or Indonesia. Of course, this doesn’t cover all the country – take the case in point of Western Mindanao, with its Abu Sayyaf – but it is generally peaceful, and stable in the rest of the Philippines. So, for foreign investors: just keep out of the Abu Sayyaf areas, and it’s alright.

Posted in NDF, Philippine economics, Philippine politics, Philippines | Tagged: , , , , , , , , , , | 2 Comments »

Philippine wages are too low

Posted by butalidnl on 28 December 2009

Philippine wage policy has been based on the principle of making the Philippines competitive by keeping wages as low as possible. With low wages, products made in the country will be cheaper and more competitive, and companies would want to base their manufacturing plants in the Philippines. The logic indeed seems impeccable. Unless, of course, we note the practice of the last few decades.

Foreign investors, even Philippine businesses, set up companies in the Philippines not mainly because of low wages. What counts more are things like productivity, infrastructure, location near markets or transport hubs, availability of specific skills, etc. The industries that are really labor-intensive have based elsewhere – thus, we see textile manufacturing in Bangladesh, small manufactures in China, etc. In short, the Philippines low-wage policy has not done much in terms of attracting foreign investors to the country. So, why bother with a low-wage policy? For one, low wages mean that profit margins are a bit higher; thus, businessmen will be the last to propose raising wages. Also, low wages makes it possible to employ more people to do the job than otherwise – notice how many salespeople crowd you when you enter some stores? Thus, it seems, the low wage policy is pro-employment, and pro-growth.

But we can try to look at things the other way. The low wage policy could be seen as hindering productivity growth and the overall growth of the economy. Since it is easier just to employ more people, the incentive of companies to become more efficient – and the workers more productive – is much less. With all the employees companies have, they have an incentive to have a revolving workforce, replacing one batch of temporary workers with another, in a bid to avoid employing them permanently and incurring higher wage costs. This hinders profitability in the long run, since stagnation in productivity growth will hamper competitiveness.

Another problem with low wages manifests itself at the level of the overall economy.  Workers’ wages are the main source of funds for consumption – the higher the overall wages in an economy, the higher the consumption capacity of that market. Minimizing wages may benefit individual companies, but the overall effect is that lesser products will get sold. This couldn’t be good for the economy.

How about foreign investors? Well, foreign companies do not really see the Philippines as a low-wage country.  Thus, wage levels are secondary for their basing decision.  It would be better if the country concentrated on the other, non-wage, measures e.g. improving infrastructure,  making the market efficient, ensuring an adequate pool of skilled labor, etc.  In addition, the country will be more attractive for foreign investors if they see that the domestic market is growing. Thus, if the total consumption capacity of the population is seen to be continually growing, this would be a plus point for investors – especially those which also wants to aim for the local market.

Low wages also mean that Filipinos will continuously be going abroad for employment. But, if wages increase continuously in the Philippines, at a certain point, they will be high enough to retain more workers.  Studies in Europe show that wages abroad have to be four times local wages for the flow of workers abroad to continue. Thus, if teachers earn Php 16,000 in the Philippines, they will be attracted by $400 wages as domestics in Hongkong. If they earn Php 20,000 they will stay in the country.

I propose that it would be best for the economy if wages are consciously made to increase every year.  The rate of increase should be just about 1 or 2 percent higher than inflation. This would at least keep it in pace with productivity growth, which we hope is improving every year. Actually, productivity is also a function of higher wages, because the prospect of increasing wages every year would push employers to increase the productivity of their employees.

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