Five arrows for the next President

The jury on Abenomics is still out. It still remains to be seen whether the three arrows can accomplish what China’s Deng Xioping’s “Socialism with Chinese Characteristics” has done for China. “Socialism with Chinese Characteristics” meant getting foreign investors to help build China, decollectivization of Chinese agriculture, and adopting state-guided and state-led capitalism.

However, certainly Abenomics is bold. Japan is the only developed economy that is using both expansionary fiscal and monetary policy at the same time. (The United States, the United Kingdom, and Europe are fixated on curtailing fiscal spending.) It also goes against long-held Japanese cultural biases against women in the workplace and welcoming foreigners.

The beauty of Abenomics is that Shinzo Abe immediately knew what to do after taking power. It also constituted a vision around which the nation could unite.

What about here in the Philippines? Will the next President know exactly what to do or to articulate a vision after being sworn in on June 2016?

To the next President, I’m offering, not three, but five arrows. These five arrows represent economic solutions to cure what principally ails the Philippine economy: widespread poverty. Take note, not solely sustainable growth, because increased growth without reducing poverty is meaningless.

• The first arrow is openness to foreign investment. This means not only removing the foreign ownership restrictions in the Constitution, but all other barriers to entry not requiring Constitutional change. This means reducing the foreign investment negative list, lowering the capital requirements for retail trade, and even liberalizing immigration rules to allow foreigners with certain skills to work here. The Belmonte resolution on constitutional change that just inserts “unless provided by law” in the Constitution, even when passed, still requires legislative amendments to open up the economy.

The first arrow will mean more foreign direct investment, more jobs, more technology transfer, better infrastructure, more competition, and lower prices for consumers.

• The second arrow is to modernize labor rules and regulations. Modernization will focus on labor productivity instead of unrealistic labor security and government-mandated wage-setting. This consists of: (a) liberalizing the rule requiring labor permanency after six months; (b) promoting on-the-job training through an apprenticeship program where young trainees are paid less than minimum wages; and (c) allowing labor and capital to negotiate labor rates without regard to the legal minimum wage in select depressed, labor-surplus areas or employment economic zones, as suggested by former National Economic and Development Authority (NEDA) Director-General Gerry Sicat.

Modernizing labor rules and regulations will promote employment especially among the young, the uneducated, and women; higher wages through higher productivity; and the creation of a skilled labor force. It will also allow industries, especially labor-intensive industries, to quickly grow and absorb all the surplus labor in the countryside. Labor will benefit not only from higher employment but also from the skills that they will gain from the job. With a global labor market, they can go anywhere if they are underpaid relative to their productivity.

• The third arrow is to increase agricultural productivity. This requires the liberalization of the rice import trade and shifting resources away from subsidizing the National Food Authority and the rice sector to other higher-value agricultural products. Increasing agricultural productivity would also necessitate improving the security of property rights in the agricultural sector by amending the anti-development and anti-growth provisions in the Comprehensive Agrarian Reform Law, subdividing the collective titles under CLOA (Certificate of Land Ownership Award), and removing the restrictions on sales and conveyance on agricultural land patents.

What will increasing agricultural productivity accomplish? More investments in the agricultural sector, reduced unemployment in the rural areas, lower food prices, and increased demand for industrial goods in the countryside leading to a positive feedback loop between industry and agriculture.

• The fourth arrow is a competitive exchange rate. I know, I know, we are supposed to have a “market-determined” exchange rate. We are supposed to have “inflation targeting,” instead of exchange rate targeting.

In an open economy and where most of the world suffers from deflation or near-deflation, inflation targeting must be balanced against growth and poverty-reduction objectives. In other words, in an open economy, one can be more aggressive in buying dollars to weaken the peso because the risk of inflation is mitigated by the ability to import. (The inflation rate just fell to a 20-year low.) Rice liberalization alone will result in a significant reduction in the consumer price index. Combined with a policy of massive infrastructure spending, the peso can be made to weaken without increasing inflation.

A weak peso will protect local industries from cheap foreign imports and curtail smuggling, boost export competitiveness of sectors like agriculture and BPO (business process outsourcing) services, increase the purchasing power of overseas Filipino workers, and therefore drive higher consumer spending, cheapen labor for foreign investors, and provide a shield to Philippine manufacturing in the ASEAN Free Trade Area while we work on issues like port congestion and poor infrastructure.

• The fifth and final arrow is institutional reform. Institutional reform is about competence and governance, not just “daang matuwid.” For example, the problem of our poor infrastructure is not just about corruption but also competence. Sure, there’s no corruption if an infrastructure doesn’t get built, but the economy suffers anyway. (Currently, government underspending is a problem.)

Institutional reform must encompass the bureaucracy, the judiciary, and political institutions. The next President must make institutions accountable, transparent, competent, inclusive and responsive. These can be done in various ways, but it is institutions which will shoot the four arrows. If the shooter is corrupt or incompetent, the arrows will miss their mark. Hence, institutional reform is an economic issue.

So far, while the first part of President Aquino’s promise of “walang korupt, walang mahirap” remains a work in progress, the second part about eliminating poverty remains unfulfilled. Therefore, job one for the next President is to reduce poverty. With these five arrows, the next President can.

Let the arrows fly.