Economic Reform and

Federalism

Jonathan E. Malaya
Executive Director
PDP LABAN
FEDERALISM INSTITUTE
27th September 2017
 Outline

 Economic Freedom
 Disadvantages of a Restrictive Economy
 Econ Provisions that Need to be Amended
 1987 Constitution Proposed Amendments
 Basic Features of the Proposed Federalism Model
 Economic Freedom

Pursuit of PH needs to
Economic legalize
Opportunity economic
freedom to
ECONOMIC
FREEDOM
achieve faster
Legal and more
Absence of sustainable
Frameworks for Regulatory
Markets economic growth
Burden
 Disadvantages of a Restrictive Economy
 Many economic policies enshrined in the 1987 constitution are binding
constraints to growth.
 Potectionist provisions that limit foreign ownership do not promotaze healthy
competition in a dynamic global economy.
 PH is one of the few countries left in the world where restrictions on foreign
ownership are in the Constitution.
Result:
 Fewer Investment
 Fewer Jobs
 Poor Infrastructure
 Non-Inclusive Development
FDI, GDCF, and GDP are all inter-related

FDI, Investment-to-GDP Ratios, and Average Annual Growth of ASEAN

Economies plus China, S. Korea and India, 2000-2010
 The Philippines lags behind in foreign direct investment
FDI Inflows (in current USD Million) in Selected ASEAN Countries,
2000-2010
 The Philippines is one of the most protectionist
economies in Asia
Allowed Foreign Equity: ASEAN Economies + Non-ASEAN TPP Partners
Philippine agriculture is both small and protected
Allowed Foreign Ownership and Average Contribution of Agriculture to
GDP in Selected ASEAN Economies, 2000-2010
 Land ownership may still be restricted, but not in the Constitution
Land Ownership Restrictions in Selected ASEAN Countries
Country Constitution Laws on land ownership

Malaysia No land ownership Non-citizens and foreign companies may acquire

restriction in land only with approval of state authority (National
Constitution Land Code of 1965)

Singapore No land ownership Foreigners may apply for ownership and

restriction in development of commercial and residential lands,
Constitution with or without conditions (Residential Property
Act)
Thailand No land ownership Foreigners may acquire land for capital
restriction in investments and residential purposes under certain
Constitution conditions (Land Act Code of 1954)
Economic Freedom Index

53.2%

52.2%

49.2%

Source:heritag
e.org/2017
index of
Economic
Freedom
Economic Freedom Index

66.2%

64.8%

62.6%

Source:heritag
e.org/2017
index of
Economic
Freedom
Economic Freedom Index

64.4%

59.4%

57.2%

Source:heritag
e.org/2017
index of
Economic
Freedom
 Foreign Direct Investment Index
Country 2017

Philippines $3.01 billion (mostly came from Japan, US,

HK, SG and Germany)

Vietnam $21.9 billion

Indonesia $7.3 billion

Myanmar $2.7 billion

Source: Bangko Sentral ng

Pilipinas
 Philippine Employment Index
April 2017a/ April 2016

Population 15 years and over 69,605 68,167

(in 000)
Labor Force Participation Rate 61.4 63.5
(%)

Employment Rate (%) 94.3 93.9

Unemployment Rate (%) 5.7 6.1

Underemployment Rate (%) 16.1 18.3

Reference Number:
Source: Philippine 2017-063; Release Date:
Statistics Authority Friday, June 9, 2017
 Theoretical Framework “KISS!”

•Sicat and Sicat (2004b)[1] maintain that Constitutions should be simply written, based on general
principles rather than specific rules, allowing greater freedom of movement of the factors of
production in pursuing economic activity.
•Should something go wrong, governments can always introduce ordinary laws to control the
framework of economic policy and allow greater economic activity, while also redirecting the
course of economic progress to change undesirable outcomes.
•“In countries that proceeded from simpler Constitutional premises, factors of production were
allowed greater movement because they omitted the issue of dealing with their regulation and
control. The benefits of greater trade, of movements of capital and labor where needed made it
relatively less painful to attain greater economic progress. In some countries that lacked domestic
capital, the participation of foreign capital made capital accumulation easier to achieve. This
permitted the absorption of labor and entrepreneurial skills in various sectors of the economy that
helped boost the nation’s productive capacity above its natural limits.

Sicat, G. and L. Sicat. (2004), “An International Comparison of Constitutional

[1]

Style: Implications for Economic Progress.”

 Past Initiatives

Executive Legislative

• Constitutional Correction for • Resolution of Bothe

Development (CONCORD)
Houses No. 1 in the 16th
• Consultative Commission
congress
(CONCOM) of 2005
 Present Initiatives

Executive Legislative

• Pres. Duterte's Executive Order • Resolution of Both Houses No. 2,

No. 10, which created a 25-man propose by Rep. Feliciano
consultative committee to Belmonte and Sen. Ralph Recto
review he 1987 constitution • Joint Resolution No. 1, proposed
by Sen. Richard Gordon
 Rationale for Suggested Amendments
 To Ensure free competition and reduce our
dependence on a few large companies and
monopolies in the country
 To promote market efficiency based on the
competency of producers and the enhanceent
of consumer welfare.
 To enhance international competitiveness by
meeting trade agreement obligations and
increasing foreign direct investments
 Economic Provisions that Need to be Amended Cover:

Operation Mass Foreign

Land
of a public Media and Practice of
Ownership
untility advertising professions
Main arguments for Constitutional reform:

1. Efficiency gains
•The Philippines cannot be seen as a truly open economy when its
fundamental law is protectionist and inward-looking in outlook, as
well as rigid and inflexible in structure.
• Industries deemed strategic are better protected by ordinary
legislation that may be crafted by Congress from time to time
based on actual realities and appropriate policies at that time.
•Constitutional reforms signal the international investor
community that the Philippines is open for business,
particularly if those reforms are part of a broader policy package
for a more open and globally competitive economy.
Main arguments for Constitutional reform:

2. Taking back a weak state from the oligarchs

•The Philippines has been described as a “weak state” subject
to capture by oligarchs and vested interests.
•Proper economic management is stymied when economic
oligarchs also control the state.
• Any Constitution is written by the victors in history. When we
speak of “preferential treatment for Filipinos”, we should also
ask: Which Filipinos are we talking about?
•The “nationalist argument” is belied by our successful Asian
neighbors who have open, robust and growing economies despite
their strong nationalistic traditions and sentiments.
Main arguments for Constitutional reform:
3. Reducing corruption
•Constitutional restrictions result in “adverse selection”, when the principal
(host country) ends up more likely to select a “bad” agent (foreign investors)
under asymmetric information.
•Restrictive rules either screen out “good” investors or else make the costs of
complying with (or circumventing) those restrictions prohibitive for most
investors, including the “good” ones.
•Meanwhile, the “bad” investors who break the rules anyway are likelier to be
the ones left standing. This increases the risk of selecting a “bad” investor.
•In the end, opportunities for corruption increase. “Bad” investors either try
to get exemptions from a weak Philippine state, or else they work around
existing regulations with the cooperation of conscripted state instrumentalities.
•In lieu of Constitutionally-based restrictions, the state must instead exercise
effective oversight and regulatory powers.
Claim: The Philippine economy is able to expand at high growth rates under the
present Constitution. Therefore, removing the restrictive economic provisions is
unnecessary. “If it ain’t broke, don’t fix it.”
Response: Two things are worth noting:
•One, our growth has historically been primarily driven by consumption rather than
investment. The fact of the matter is that the Philippines has attracted the least amount
of foreign direct investment during the past 25 years.
•Two, given the history of the economy, it remains questionable whether the
Philippines can sustain a long-term, high-growth path without massive and sustained
capital inflows.
•The main point of Constitutional reforms is to make the country more attractive
to FDIs that would help propel sustained economic expansion.
Claim: FDI has historically played only a minor role in the growth of most high-performing
Asian economies.
Response: There is considerable empirical evidence from various studies of the positive
effect of FDI inflows on host economies.
•Granger causality tests reveal positive unidirectional effects of FDI to GDP in the case of
Asian economies like China, Taiwan, Hong Kong, Singapore, Malaysia, Philippines and
Thailand, and in Latin American economies like Mexico, Brazil, and Argentina.
•Moreover, there is evidence that FDI indirectly affects the growth process inasmuch as it
serves as an indicator of economic openness, which Won et al. (2008)[1] have shown to be
the most important economic factor behind the rapid growth of the newly industrialized
Asian economies.
•In other words as argued by Hsiao and Hsiao (2006)[2], countries that successfully attract
FDI can finance more investments and grow faster than those that deter FDI.
Claim: The factors affecting FDI include physical infrastructure, skill levels, regulatory
framework, clear and consistent rules, and fiscal determination. With or without Constitutional
reforms, attracting FDIs will continue to be a challenge unless the above factors are addressed.
Response:
•While all the factors cited above are indeed important determinants of FDI inflows into the
country, this does not mean that there are no benefits to be derived from amending restrictive
economic provisions in our Constitution.
•Constitutional reforms are not a panacea for improving the Philippines competitiveness,
but they do have a major role to play within a broader package of reform efforts that will also
address the above factors.
•Moves to make the Charter more open to foreign investors will send a positive signal that
improves perceptions of the country’s investment climate, since the Constitution is the basic
law of the land that sets the tone for all other institutions.
Claim: Nationality restrictions are not a real issue for foreign investors, as there are ways of working around
them. On land ownership, foreign firms can lease land for up to 75 years, and foreigners can own condominium
units provided they do not own more than 40 percent of the condominium. Restrictions on foreign control are
not a constraint either, because foreign investors can still maintain control or beneficial ownership of
corporations by liberal interpretation, by redefinition through legislation, or by the use of creative financial
and other instruments.
Response:
•Investor efforts to work around the rules are not costless. The rules signal to investors that they are
unwelcome, thereby creating a perceived necessity for them to work around the control restrictions through
creative methods. Such “creativity” can be applied in the wrong ways and is not costless.
•In cases where the law is interpreted liberally in favor of foreigners, such interpretations can arbitrarily change,
providing incentives for investors to cozy up to authorities in the hopes of gaining favorable rulings. Ditto for
legislative redefinition, which is a political and thereby slow and tedious process, and even afterwards can still
be questioned before the courts.
•In sum, these restrictions add to the complexity and uncertainty of the rules of the game, while also
presenting opportunities for corruption as firms try to curry favors from the state to work around the
constraints.
Claim: If you open up the economy to foreigners, are you not afraid that it may
lead to the proliferation of destructive mining in the country?
Response: The study group recognizes the importance of protecting the
environment. We believe that good, reputable mining companies from abroad,
with the necessary capital, expertise, and good corporate governance, can
contribute much to the growth of responsible mining practices in our country.
This is why we are suggesting that Art. XII, Section 2 of the Charter be
amended as follows:

“The exploration, development, and utilization of natural

resources toward sustainable development, including
conservation, protection and enhancement of the environment,
shall be under the full control and supervision of the State.”
 Summary of proposed Constitutional reforms:

•Affirmatively commit the country to the essential principles and objectives

of economic growth, higher productivity, equity of opportunities, and
appropriately-regulated open competition.
•Delete references to preferential treatment of Filipino citizens in areas
of concern like land ownership, the use of natural resources, operation of a
public utility, educational institutions, mass media and advertising, and the
practice of professions and occupations. The objective is to maintain global
competitiveness but with due regard for reciprocity. Restrictions may later
be restored, if deemed necessary at that time, by Congress through
ordinary legislation .
Summary of proposed Constitutional reforms:

•Replace very specific details with general policy

statements in areas of concern like natural resource
usage, rural development, agrarian reform, labor, and
urban development and housing. These details may be set
forth instead by specific legislation and/or by
requirements to notify and/or seek approval of Congress.
The objective is to maintain flexibility and freedom for
Congress to write appropriate legislation in the future.
•Delete redundant references, such as the creation of
BSP and NEDA, which already exist, or the statutory
protection of cooperatives and indigenous people’s
rights, now that these laws have already been passed.
Summary of proposed Constitutional reforms:

•Seek simplicity and clarity of construction.

The language of the reforms proposed by the
study group will reduce the related verbiage in
the Constitution from about 3,000 words to just
over 1,100 words. The less is said about an issue
in the Charter, the more freedom the legislative
and judicial branches will have in the future to
appropriately respond to it.
 Conclusion
• The Constitutions should only enshrine basic
rights, policies, and principles that are deemed
fundamenta regardless of substantial changes in
local, regional, or global conditions.
• The Constitution should be flexible to hel PH
adjust to, and maximize opportunities in the
present times and meet the needs and aspirations
of the people
• Amending the restrictive economic policies is
crucial to attain economic development and more
inclusive growth
Thank you!
 Basic Features of the
Proposed Federal Model

Jonathan E. Malaya
Executive Director
 Set of Institutions Common to Federations

1. A written constitution with clear division of powers.

2. At least two orders of government:
a) Federal Government
b) Constituent Units
3. Bicameral legislature with a Federal chamber (Upper
house) to represent the regions.
4. A Supreme or Constitutional Court to protect the
Constitution and serve as final arbiter.
5. Intergovernmental institutions or mechanisms to facilitate
collaboration in areas of shared or overlapping jurisdiction.
 Basic Features

1. Dual executive
– President as Head of State;
– Prime Minister as Head of Government
2. Bicameral Parliament
– National Assembly with primary legislative power
– Senate as Federal Chamber representing the regions
3. Key role for “institutionalized” political parties.
4. Desynchronized regional and presidential elections.
 The President

1. Head of state
2. Commander-in-chief and Chief
Diplomat
3. Elected at large by direct vote of the
people
4. 5-year term; 2 consecutive terms only
5. Can only be nominated by political
parties or coalition of parties with at
least 20% of seats in the National
Assembly
 Powers of the President

• Appoints and controls Cabinet members for Foreign Affairs, Defense,

and Internal Security only
• Presides over all Cabinet Meetings
• Power to dissolve National Assembly upon advice of PM for specific
grounds stated in the Constitution
• Power to approve legislation
• Power to veto legislation
• Power to enter into treaties and international agreements
• Appoints members of the Supreme Court, Constitutional
Commissions, Ombudsman, Constitutional Court, and lower courts
• Power to grant executive clemency
• May be impeached for grounds stated in the Constitution
 The Prime Minister
• Head of Government
• Exercises executive and
legislative powers
• Elected by Members of the
National Assembly
• Accountable to the National
Assembly
• Controls and appoints Members
of the Cabinet and the rest of
government whose appointments
are not vested in the President
• Majority of the Cabinet shall come
from Parliament
• May recommend to the President the
dissolution of the National Assembly
on specific grounds stated in the
Constitution
• All executive powers not vested in the
President shall be exercised by the
PM
• Responsible for domestic and
economic policy
• Exercise general supervision over
regional governments
• May be replaced by a vote of no
confidence and election of successor
by the National Assembly
 Bicameral Parliament

1. National Assembly
– Primary legislative power is vested in the National Assembly
– Primarily initiates and enacts laws. Senate concurrence
necessary only under specific instances stated in the
Constitution. Senate can propose legislation but initiation
and enactment is done by the National Assembly
– May replace PM by vote of no confidence and elect
successor.
– Holds the Government accountable through a question hour
and other mechanisms.
– May overturn a presidential veto by 2/3 vote.
– Prepare the articles of impeachment against impeachable
officials.
 National Assembly

• Election and Term of Members

– Maximum of 300 members,
½ of Members elected by
single member legislative
district and ½ by
proportional representation
by region from a list of
qualified political parties.
– Term of 4 years and may
serve for 2 consecutive
terms
 Senate
• Federal Chamber – Representing the
regions
• 2 Senators elected by direct vote per
region for a total of 24 senators
• Senate concurrence is needed in the
following:
– Bills affecting the administrative
structure, powers, jurisdiction,
revenues or finances of the
Regions
– Overturn a Presidential veto on
bills affecting the administrative
structure, powers, jurisdiction,
revenues or finances of Regions
– Treaties and international
agreements entered into by the
President
– Initiatives to amend the
Constitution
• Confirms appointments by the
President and the PM to the Cabinet
and lower positions except if
appointee is a member of
Parliament
• Serve as impeachment court during
impeachment proceedings
 The Regions
General Provisions
• New political subdivision – the Regions shall comprise
of all LGUs under its jurisdiction
• 11 Regions and 1 National Administrative Region
(number is dependent on number of regions)
• Parliament shall enact a Regional and Local
Government Code applicable to all regions unless any
of the Regions enact their own code.
• Prior to the enactment of this code, the existing LGC
shall apply.
• More share in national taxes and more autonomy in
legislation and executive functions
• The Regions are integral parts of the PH and they owe
allegiance and fidelity to the Republic
 Regional Assembly

• Exercises legislative authority over the exclusive

powers of the Regions
• Exercise concurrent legislative authority over the
“concurrent” powers provided that such laws are
consistent with national laws
• Maximum of 40 members, ½ of Members by single
member district and ½ by proportional representation
from a list of qualified political parties
• Federal functions may be further devolved to the
Regions subject to approval by the Regional
Assembly
 Chief Minister

• Chief Executive at the

Regional Level
• Analogous powers of the PM
at regional level
• Elected at large by direct vote
per region
 Proposed Revenue Assignment

Federal Government: Regional/Local Government:

• Customs charges and fees • Real Property Tax
• Excise Tax (except on minerals) • Business Tax
• Energy Tax • Excise Tax on minerals
• Capital Gains Tax (except on property) • Donors Tax
• Documentary Stamp Tax • Estate Tax
• Royalties • Motor Vehicle Tax
Shared Revenue: • Amusement Tax
• Corporate Income • Capital Gains Tax on property
• Personal Income
• VAT
• Effluent charges
 Transition

• Graduated exercise of
“concurrent” powers
• Creation of Federal Transition
Commission
• Creation of Regional
Transition Fund
• 10-15 year transition period
 Requirement for a successful Federal Government

• Cohesive and disciplined

political parties
• Strong and effective
bureaucracies
• Citizen participation
• Anti-Political Dynasty Act
• Electoral system reform
Thank you!