Presentation of FEF President Calixto Chikiamco during the #PHVote: The Leader I Want Forum Series: Aquino’s Last Mile: Ramping Up and Sustaining Daang Matuwid, held on August 3, 2015 at the SGV Hall 3/F AIM Conference Center, Makati City

1. FIVE ARROWS FOR INCLUSIVE GROWTH
Calixto V. Chikiamco
President
Foundation for Economic Freedom
#PHVote: The Leader I Want Forum Series: Aquino’s Last Mile: Ramping Up
and Sustaining Daang Matuwid
August 3, 2015
SGV Hall 3/F AIM Conference Center, Makati City

2. Economic Growth has been robust for
the past five years
4.4
2.9
3.6
5.0
6.7
4.8
5.2
6.6
4.2
1.1
7.6
3.7
6.8
7.2
6.1
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
GDP annual growth
Source: World Bank
Average=6.3%

3. Philippine GDP growth relative to
other countries
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
2010 2011 2012 2013 2014
Philippines
Vietnam
Singapore
Malaysia
China

4. But growth has not been inclusive
UNEMPLOYMENT and UNDEREMPLOYMENT RATE
Source: Philippine Statistics Authority
17.8%
6.4%
0
5
10
15
20
25
30
Underemployment rate
Unemployment rate

5. But growth has not been inclusive
• Unemployment is still high

6. But growth has not been inclusive
• Poverty levels remain the same
26.5
26.3
25.2
25.8
2006 2009 2012 2014S1
POVERTY INCIDENCE (%)
Source: Philippine Statistics Authority

7. But growth has not been inclusive
DEGREE OF HUNGER IN HOUSEHOLDS, PH: Jul 1998-Jun 2015
Source: Social Weather Station

8. Why?

9. Growth has been consumption-driven,
rather than investment-driven
GDP by Expenditure Shares at constant 2000 prices
Source: Philippine Statistics Authority
-20%
0%
20%
40%
60%
80%
100%
2008 2009 2010 2011 2012 2013 2014
Statistical Discrepancy
Net Exports
Capital Formation (FC + CI)
Government Final Consumption
Expenditures
Household Final Consumption
Expenditure

10. Growth has been consumption-driven,
rather than investment-driven
Gross Capital Formation (% of GDP)
Source: World Bank
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
45.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Philippines
Vietnam
Malaysia
Singapore
Thailand

11. Agricultural growth and agricultural
productivity remain low
Agriculture, Hunting, Forestry and Fishing,
at constant 2000 prices and growth rate
0
-0.72
-0.16
2.59
2.82
1.09
1.59
-1
-0.5
0
0.5
1
1.5
2
2.5
3
630000
640000
650000
660000
670000
680000
690000
700000
710000
720000
730000
2008 2009 2010 2011 2012 2013 2014
InMillionPesos
Source: Philippine Statistics Authority

12. -2%
-1%
0%
1%
2%
3%
4%
5%
0
200
400
600
800
1000
1200
1400
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Agriculture
value added
per worker
(constant 2005
US$)
Growth Rate
Agriculture value added per worker
(constant 2005 US$)
Source: World Bank

13. Share of Manufacturing has shrunk
25.70
20.52
0.00
5.00
10.00
15.00
20.00
25.00
30.00
Manufacturing, value added (% of GDP)
Source: World Bank

14. Growth mainly in the services sector,
but apart from BPO sector which
benefit mainly the college-educated,
productivity in the service sector is
lower than that of industry

15. Labor Productivity at constant 2000 prices
Source: Philippine Statistics Agency, Labor Force Survey
0
50000
100000
150000
200000
250000
300000
350000
400000
2010 2011 2012 2013
AHFF
Industry
Services

16. Therefore, to achieve inclusive
growth, reduce poverty, generate
jobs, and lower hunger, we have to:
 make economic growth investment-driven,
rather than consumption-driven
 tackle the problem of low agricultural
productivity
 increase the share of manufacturing (to
generate good jobs)
 make our industries competitive

17. How to achieve
inclusive growth?

18. Shinzo Abe’s
THREE MAGICAL ARROWS
Fiscal stimulus
Monetary Easing
Structural Reforms
Image source: The Economist

19. Five Arrows
for Inclusive Growth

20. FIRST ARROW:
Openness to foreign investment

21. FIRST ARROW:
Openness to foreign investment
Remove the Constitutional restrictions on foreign
ownership in the 1987 Constitution
– Why?
• current restrictions in the Constitution protects monopolies
in capital intensive strategic industries, such as ports,
airports, telecoms, shipping, e.g. duopoly in telecom sector
• WB’s Bocchi: Monopolies in strategic industries crimp
forward-linking and backward linking industries.
Liberalize as much as possible all other restrictions on
foreign investment, including the foreign investment
negative list, the retail trade law, the practice of
professions, and even immigration rules.

22. FIRST ARROW:
Openness to foreign investment
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Philippines
Vietnam
Malaysia
Singapore
Thailand
Foreign direct investment, net
inflows (BoP, current US$)
Source: World Bank

23. Gross Savings and Gross Capital
Formation (% of GDP)
Source:World Bank
43
20
0
10
20
30
40
50
60
70
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Gross savings
Gross capital formation

24. FIRST ARROW:
Openness to foreign investment
0.00
20.00
40.00
60.00
80.00
100.00
120.00
140.00
160.00
180.00
0.000 0.050 0.100 0.150 0.200 0.250 0.300 0.350 0.400 0.450
2012InwardFDIStocks(%ofGDP)
2013 FDI RR Index (Closed = 1; Open = 0)
MoreFDI
More Open
2013 FDI Restrictiveness Index
Sources: OECD Statistics and IMF estimates

25. SECOND ARROW:
Modernize the labor code

26. SECOND ARROW:
Modernize the labor code
The existing labor code suffers from two
major defects:
1. setting up high minimum wages unrelated to
productivity
2. labor permanency after six months

27. Minimum wages: job killer
• Paqueo,et al. (2014)
– generally, Minimum wage is not always helpful to
the common man and the disadvantaged
– Minimum wage reduces the demand for workers
in small firms.
– Minimum wage decreases the chance of the
young, female, low educated and inexperienced
workers being hired
– The rise in minimum wage results in lower
household income (20 percent reduction based
on our computation).

28. Minimum wages: job killer
• Dr. John Nye: Minimum wages hampers
industrialization or the movement of surplus
labor in the countryside to industry.
– Manufacturing share to GDP has shrunk from
26% in the 1980s to 21% in 2014.
– Migrant labor going to low-paid, low-level service
jobs – e.g. gasoline boy, selling DVDs or banana
cue, etc.

29. Minimum wages – job killer
• Dr. Gerry Sicat: Labor rigidities dampen
demand for labor and make country
unattractive to labor-intensive industries.

30. SECOND ARROW:
Modernize the labor code
Result?
- Industry cannot create jobs
- Workers can’t learn; contractualization
- Shift from agriculture to industry impeded
Who benefits?
– the monopolists use high minimum wages to deter
competition
– Relatively small proportion of labor force at expense
of unemployed

31. SECOND ARROW:
Modernize the labor code
SUGGESTED POLITICALLY FEASIBLE SOLUTIONS
Gerry Sicat’s proposed special economic zones where
LMW and labor security suspended in labor surplus
areas
Liberalize the apprenticeship law
Length of time for training Pay at 75% of LMW
Open to other industries
Pass HB 5468 or the JobStart Act by Rep. Nograles
18-24 yrs. old high school graduates with less than one year
working experience
Three months technical skills training with allowance of P200
Training graduates to be hired at a pay rate of 75% of LMW

32. THIRD ARROW:
Improve Agricultural
Productivity

33. THIRD ARROW:
Improve Agricultural Productivity
Why Low Agricultural productivity?
1. Uncertainty of property rights due to CARP
• never-ending extension of CARP, collective CLOAs,
non-bankability of CLOAs
2. CARP Prohibition of ownership beyond five has.
• efficient farmers cannot buy out inefficient ones
3. NFA monopoly of rice importation; 70% of
agriculture budget going to low-value
commodity, rice.
4. Restrictions on the rural land market: agri
patent law.

34. Domestic and world price of rice (peso/kg),
1990-2010
Source: IRRI
Lifted from PIDS Policy Notes No. 2011-11

35. THIRD ARROW:
Improve Agricultural Productivity
 End CARP (to end uncertainty over
property rights) and Amend CARP
Fabella: allow CARP beneficiaries to lease their
land
 Allow CARP beneficiaries to sell their usufruct
rights to land
Repurpose DAR to do land consolidation

36. Dismantle NFA monopoly on rice
importation, tariffy rice imports, direct aid to
rice farmers, rely on trade for food security,
and focus R & D on high value-added crops.
THIRD ARROW:
Improve Agricultural Productivity

37. THIRD ARROW:
Improve Agricultural Productivity
Amend the Agricultural Patent Law:
Remove restrictions on conveyance of
agricultural patents
Five years restriction on sale
Restriction by right to repurchase: non-
bankability of free patent agri lands (about 2
million titles)

38. FOURTH ARROW:
Competitive Exchange Rate

39. FOURTH ARROW:
Competitive Exchange Rate
NOT capital controls, NOT managed
exchange rate BUT GOVERNMENT
POLICY TO MAKE THE PESO
COMPETITIVE.

40. FOURTH ARROW:
Competitive Exchange Rate
How?
 Coordinated government response (BSP+executive)
 Massive infrastructure spending to drive the demand for
capital imports and dollars and lower the cost of doing
business in the Philippines.
 Rice import liberalization to increase demand for dollars,
lower food prices, and dampen wage adjustment rate
pressures
 BSP aggressive purchasing of dollars
 Fabella and Abola: Money creation through purchases of dollars
not inflationary due to liberalized trade regime.
 World is facing structural deflation. Fabella: BSP fighting the last
war.

41. FOURTH ARROW:
Competitive Exchange Rate
Other structural reforms to reduce the cost of
doing business in the Philippines:
ChaCha to improve competition and lower prices
in strategic industries

42. Benefits of a competitive exchange rate
• Increased purchasing power of OFWs – boost
retail, real estate, and education sectors
• Make BPOs and other exports more competitive
• Protect local industry; deter smuggling with high
import prices
• Protect domestic high-value added sectors like
agriculture.
• Shield domestic industry from AFTA while
working on issues like port congestion, poor
infrastructure, etc.

43. FIFTH ARROW:
Institutional Reform

44. FIFTH ARROW: Institutional Reform
Why?
Weak state capacity is a big binding constraint
to growth.
Cases in point
Government under spending, DOTC failures in
airports, MRT, LTO etc., NTC allowing mergers in
telecoms, creating duopolies (regulatory capture),
ERC favouring the oligarchy.

45. FIFTH ARROW: Institutional Reform
How?
 Strengthen the political party system
 Law against turncoatism; public financing of political parties,
public financing of electoral campaigns.
 Solve the collective action problem of the political class.
Strengthens political accountability.
 (Parties behind development miracles – PAP in Singapore,
UMNO in Malaysia, CCP in China, Koumintang in Taiwan, Golkar
in Indonesia, LDP in Japan.
 Dismantle private armies; reduce political dynasties
 Professionalize the bureaucracy (limit political
appointments)
 Strengthen separation of powers

46. Chinese formula for hypergrowth
1. Openness to foreign investment
2. Flexible wage rates
3. Property rights reform in agriculture
4. Competitive exchange rate
+ for Philippines: 5. institutional reform

47. Summary
FIVE ARROWS
Openness to foreign investment
Modernize the labor code
Improve agricultural productivity
Competitive exchange rate
Institutional Reform

48. End of Presentation
Contact Details:
Foundation for Economic Freedom, Inc.
105 Philippine Social Science Center (PSSC)
Commonwealth Ave., Diliman, Quezon City 1101
Telefax: (632) 4532375 (Main Office)
Tel No.: (632) 8939602 (Accounting)
Website: www.fef.org.ph
Email: fef@fef.org.ph
Facebook page:
www.facebook.com/FoundationforEconomicFreedom
Twitter: @RPeconfreedom