SPEECH ON PROMOTING INCLUSIVE GROWTH: FIVE ARROWS FOR ACHIEVING INCLUSIVE ECONOMIC GROWTH AIM SGV HALL AIM CONFERENCE CENTER August 3, 2015

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SPEECH ON PROMOTING INCLUSIVE GROWTH: FIVE ARROWS FOR ACHIEVING
INCLUSIVE ECONOMIC GROWTH
AIM SGV HALL AIM CONFERENCE
CENTER
August 3, 2015
CALIXTO V. CHIKIAMCO
totivchiki@gmail.com
Let me not belabor the obvious. Despite the 6.5% average growth rate for
the past 5 years being trumpeted by the administration, ewan ko kung walang
corrupt, pero sigurado ako na marami pa ang mahirap.
Levels of unemployment and underemployment, poverty, and hunger have
essentially remained the same. While hunger has moderated somewhat in the
first quarter of this year, it could be that inflation has fallen to 1.2% and there has
been no major typhoon.
These past years, growth has benefited mainly the rich.
The question is why?
First, growth has mainly been consumption-driven rather than investment-
driven. Second, agricultural growth and agricultural productivity remain low.
Most poor people live in the countryside and eke out a living from agriculture.
Growth has mainly been in services, while the share of manufacturing, as seen

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from 1980, has shrunk from 25.7% of GDP to around 20.52% today. Productivity
in services is still much lower than industry. In other words, what counts as
services growth are poor-paying jobs like selling DVDs or working as fast food
workers or gasoline boys, while better-paying jobs in manufacturing aren’t being
created to absorb our large labor pool.
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
Make our industries competitive
But how?
If Japanese Prime Minister Shinzo Abe has his 3 magic arrows to cure the
ailing Japanese economy, namely: Expansive monetary policy via massive
quantitative easing, Robust Fiscal Spending, and Structural Reforms, I will offer
my own 5 Arrows to Achieve Inclusive Economic Growth:
The five arrows address the big binding constraints to sustainable, inclusive
growth.

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The first arrow is openness to foreign investment. In particular, we need
Constitutional Change to remove the foreign ownership restrictions in the
Constitution.
Why, you might ask? Even local investors, who are not restricted, are not
investing. This is shown by the fact that our investment rate is quite low, at 20%
of GDP compared to about 25% in Malaysia, 33% in Indonesia, and 47% in China.
Our banks are awash in liquidity. Instead of lending to businesses, banks are
lending to consumers and parking their funds in the BSP.
If local investors are also not investing, why is it so important to remove the
foreign ownership restrictions in the Constitution?
The answer is that there are monopolies and duopolies in strategic
sectors of the economy – ports, telecommunications, airports, power distribution,
cement, shipping, etc. These strategic sectors strangle the growth of the rest of
the economy with their high prices and bad service. One example is
telecommunications, where we have the highest prices, bad service and slowest
internet speeds in Asia. Because of the oligopolistic structure in their respective
industries, our port and shipping costs are also very high, so if you are a small
company, how can you compete with your Asean neighbors, much more sell your
goods via the Internet to the greater Asean market? You just don’t invest.

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An Italian economist from the World Bank saw this way back in 2008 and he
asked himself why is the investment rate in the Philippines so low? This is what
concluded: “inputs are expensive because of elite-capture in the traditional
sectors of the economy (agriculture, sea and air transport, power, cement,
mining, banking, etc.) There, the politically-connected conglomerates, protected
by favorable rules and regulations, enjoy barriers to entry and market power, and
hence sell at a high price their products (agricultural commodities, transport
services, electricity, cement, etc.), which are critical inputs for both upstream and
downstream sectors.”
We need to have well-capitalized foreign companies to provide competition
in these strategic sectors but because of the 60/40 rule in the ownership of public
utilities in the Constitution, they cannot.
The second arrow is modernizing the labor code so the focus is on labor
productivity, rather than unrealistic high minimum wages with no relation to
productivity, and labor security.
With its emphasis on high minimum wages and labor security, the effect of
our current labor code is to discourage employment and upgrading the skills of

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our labor force. Small and medium scale industries, which are the biggest
generators of employment, are not hiring in large numbers.
According to the World Bank, the Philippines has one of the highest
minimum wages relative to average wages in the world. It has the most
unproductive minimum wage earners in the world. In other words, the legal
minimum wages are not tied to productivity. A very rigorous and scientific study
by Dr. Vic Pacqueo and economists from the Philippine Institute for Development
Studies, the government’s own think tank, shows that the current high minimum
wages deters employment, especially among the youth, the uneducated, and
women. The legal minimum wage is therefore anti-youth, anti-women, and anti-
uneducated.
Dr. Gerry Sicat, the former Socio-economic Planning Secretary and
distinguished UP Economics Professor, has been saying this for years: labor
rigidities dampen the demand for labor and discourages labor-intensive
industries.
Dr. John Nye, the valedictorian in President Aquino’s Ateneo high school
class and the Frederic Bastiat professor of political economy in George Mason
University, says the first order problem of the Philippines is that our unrealistic
minimum wages hampers industrialization, or the movement of surplus labor in

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the countryside to industry. The result is that migrant labor is going to low-paid,
low-level service jobs, instead of good jobs in manufacturing.
I repeat, Dr. John Nye says the unrealistic minimum wages are a first order
problem, and not a second-order problem like lack of infrastructure or increasing
tax revenue.
The focus of the current labor code on labor permanency after six months
also deters companies from hiring. They often resort to labor-contracting
organizations which fire workers before six months. This results in labor unable
to absorb more skills and training in a particular job.
We therefore need to modernize the labor code. It’s the key to developing
more labor-intensive industries. It’s the key to attracting foreign investors to
invest in labor-intensive industries in our country, which are now fleeing China
because of a shortage in labor, to countries like Vietnam and Indonesia, but not
the Philippines.
The third arrow is to dramatically improve our agricultural productivity. We
need to improve agricultural productivity for many reasons, one of which is that
the majority of poor people are in the countryside. We need to raise rural
incomes in order to make a dent in rural poverty.

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However, what is holding back agricultural growth and agricultural
productivity?
Three main reasons:
The biggest obstacle to agricultural growth and productivity is the
Comprehensive Agrarian Reform Program or CARP. According to the World Bank,
CARP is the most successful land distribution program in the world, with about
87% of targeted lands having been successfully distributed.
However, 28 years after its passage in 1987, have we seen rising incomes,
more employment, increased productivity, and reduced poverty in the
countryside? No.
Why? First of all, because of the uncertainty over property rights fostered
by CARP, there has not been much investment in agriculture. Why would people
invest if there’s a possibility that the lands will be taken away from them, or the
DAR extorting money for all kinds of clearances?
Property rights issues also bedevil CLOAs or Certificate of Land Ownership
Awards. DAR doesn’t award individual CLOAs but collective CLOAs. As I keep
repeatedly saying, the Philippines has the last remaining soviets in the world in
the form of collective CLOAs.

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On top of that, by law, CLOAs cannot be mortgaged, and even if foreclosed,
the bank can only sell them to qualified beneficiaries.
Second, as designed, the Comprehensive Agrarian Reform Law’s prohibition
of ownership beyond 5 hectares prevents efficient farmers from ever buying out
inefficient ones. Successful farmers cannot scale because CARP prohibits them
from doing so. This is why, even agricultural officials admit, that the average
farmers are now on average 57 years old. The young ones see no future in
farming.
What do we need to do? First, we need to end CARP, period. No more
extensions. No more CARP-ER or CARP-EST. Tama na. Sobra na, after 28 years.
Second, we need to amend the Comprehensive Agrarian Reform Law. The
suggestion of Dr. Raul Fabella, National Scientist for Economics, is that CARP
beneficiaries should be able to legally lease their CLOAs or Certificate of Land
Ownership Awards. The lease income acts as a safety net for beneficiaries, but
the lease also allows the inefficient ones to let more efficient farmers to use the
land.
Aside from amending CARL, what do we need to do to increase agricultural
productivity?

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We have to stop spending the majority of our agricultural budget on rice, a
low-value added commodity. We have no competitive advantage in rice
production, lacking the alluvial plains of Vietnam and Thailand, and instead, like
Malaysia, we should rely on trade for food security.
Finally, we have to liberalize rice importation by removing the National
Food Authority’s monopoly on rice importation. The NFA’s monopoly on rice
importation has resulted in massive corruption among our agricultural officials
and high domestic rice prices. Our countrymen are paying nearly twice as much
for rice as consumers in countries like Vietnam. High rice prices translate to
higher wages and therefore makes our industries less competitive. High rice
prices also mean that the poor, who include poor rice farmers who are net
consumers of rice, spend more of their budget on food.
I calculate, assuming only a small difference of PHP 5 per kilo between the
landed price of rice and the domestic price of rice, that the welfare losses
amount to PHP 60 billion a year, or more than the amount we are spending on
the Conditional Cash Transfer.
To increase agricultural productivity, let us also free the rural land market.
Our rural land market is very constricted, not only by the Comprehensive Agrarian
Reform Law, but by a Commonwealth-era law that prescribed restrictions on

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Agricultural Free Patents. These restrictions prohibit agricultural free patent
holders from alienating their land within 5 years. It also mandates that the free
patent holder has the right to buy back the property within 5 years of
conveyance, making banks shy away from lending against these patents. There
are about 2 million of these agricultural patents.
Let me summarize then what are needed to increase agricultural
productivity, increase investments, and reduce poverty in the countryside: End
CARP, Amend CARP to allow for the leasing of lands, liberalize rice importation,
redirect the agricultural budget more to high-value added agricultural crops, and
remove the Commonwealth-era restrictions on agricultural patents.
The fourth arrow is a competitive exchange rate. Our monetary authorities
are saying that their policy is “inflation targeting” and not “exchange rate
targeting” and under a regime of free capital flow, it can’t manage the exchange
rate.
I’m not advocating capital controls, which are banned under international
trade agreements nor am I saying that BSP bears sole responsibility for a
competitive currency. What I’m advocating is a national policy, that is, a
coordinated pro-active stance of both the BSP and the executive, to deliberately

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prevent the peso from strengthening and to weaken the peso relative to other
currencies. How do we do this?
First, the BSP should be more aggressive in purchasing dollars. As National
Scientist Dr. Raul Fabella and Dr. Victor Abola have shown, money creation
from the purchases of dollars in an open trade regime is not inflationary because
liberalized imports temper any kind of inflationary pressures. All the more so,
when the world faces structural deflation (i.e. overcapacity and lack of demand).
All over the world – the US, Japan, Europe, China, Russia, and even Thailand –
they are fighting deflation, rather than inflation. The Philippines just posted an
inflation rate of 1.2% p.a., the lowest in 20 years. As Dr. Raul Fabella said, the BSP
is too focused on “fighting the last war.” The BSP therefore can be more
aggressive in purchasing dollars to weaken the peso.
Second, the national government should undertake massive infrastructure
spending, not only because building infrastructure will lower the cost of doing
business in the Philippines, but also to dramatically increase the demand for
capital imports, which will increase the demand for dollars and weaken the peso.
Third, as I mentioned earlier, we need to liberalize rice importation. Apart
from the benefit of lower rice prices, rice importation will drive the demand for
dollars and weaken the peso.

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Even as the national government is doing everything to drive demand for
dollars and weaken the peso, the government should also drive down the costs of
doing business in the Philippines, from improving competition through Charter
Change and refraining from declaring more official holidays.
What are the benefits of a weak peso? Domestic manufacturers will be
shielded by higher import prices and help curb smuggling; make our exports, from
coffee to call center services, more competitive; increase the purchasing power of
Overseas Filipino Workers and boost growth in the retail, housing, and
educational service sectors; boost tourism; and protect agriculture, which has a
high- domestic value added.
The fifth and final arrow is institutional reform. The four arrows are useless
if institutions are corrupt or inefficient because it’s institutions in government
which wield the four arrows. Institutional reform covers a lot, but I would like to
focus on a particular reform: the strengthening of the political party system.
Without a strong political party system, we can’t hold our leaders
accountable. If party-switching is rampant, how can we punish the people who
gave us the terrible traffic mess we are experiencing now or the airport
congestion?

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All the Asian countries that experienced high growth rates and reduced
poverty had political parties behind them: PAP in Singapore, the Communist
Party of China in China, Koumintang in Taiwan, UMNO in Malaysia, Golkar in
Indonesia, and the LDP in Japan. Overcoming the development challenge is a
collective action problem. Only cohesive political parties can serve as the tool of
the people to solve the collective action problem. It’s a key ingredient of a
developmental state.
We have to ban political turncoatism and institute public financing of
political parties and campaigns.
To sum up, to reduce poverty, generate investment, create jobs and curb
unemployment, I propose Five Arrows: First is Charter Change to remove foreign
ownership restrictions in the Constitution, Second is to modernize the labor code
to focus on productivity, Third is to improve agricultural productivity by amending
CARP and liberalizing rice importation, and Fourth is to deliberately make the
peso more competitive. The Fifth and final arrow is institutional reform, which is
about improving state capacity and democratic accountability.
What I’m saying is not new. It’s the same growth formula adopted by
China: openness to foreign investment, labor flexibility, increased agricultural
productivity, and a competitive exchange rate.

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I know what I’m saying is not politically correct. It’s far easier to talk about
keeping away foreigners, increasing minimum wages, or protecting rice farmers.
However, we have no choice. For so long as we cling to the same old discredited
ideas, marami pa rin ang magiging mahirap.
The central challenge of our time is to eradicate poverty. Pero hindi po
totoo na ang daang matuwid ang soluyson sa kahirapan. Maraming pong bansa
diyan sa Asean na laganap ang korapsiyon, pero natanggal nila ang kahirapan.
Ang solusyon po ang Five Arrows na sinabi ko.
To eradicate poverty, we have to let the arrows fly.
Maraming salamat at magandang araw po sa inyong lahat.