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Charter Change – the 2014 Version
Rotary Club of Makati
Peninsula Hotel, September 30, 2014
By: Christian S. Monsod
Thank you for inviting me. I am told to finish in 20-25 minutes. My talk consists
of three parts: (1) Previous attempts at charter change and why Joint Resolution
No. 1, of which you have a copy, is dangerous and insidious, (2) why foreign
investment? (3) Have we really closed the door on FDI?
Since 1987, there have been five attempts to revise the Constitution:
(1) Ramos – articulated purpose – remove obstacles to reform and growth,
including the term limit of the President. Aborted when PIRMA (People’s
Initiative for Reform, Modernization and Action) by Ramos allies was struck
down by the Supreme Court as unconstitutional.
(2) Estrada – articulated purpose – remove obstacles to reform and growth – but
limited to changing equity caps on economic provisions. Proposed by CONCORD
(Constitutional Correction for Development). Aborted by Estrada himself, when
his popularity waned from accusations of corruption.
(3) Arroyo early 2000 – change from presidential to parliamentary system,
French version – not supported by Arroyo. Died a quiet death.
(4) Arroyo (2006)– articulated purpose - good governance and economic
growth with major revisions to a parliamentary, federalist system with a
unicameral legislation plus changes in economic provisions – Aborted when the
SC struck down the Sigaw ng Bayan People’s Initiative, as unconstitutional by an
8-7 vote. The ten appointees of the Arroyo voted 5-for and 5-against – a golden
moment in the history of the Supreme Court.
(5) Arroyo (2009) – initiative by the House – proposal to make revisions by a
joint session with a joint vote, i.e. giving equal vote for congressmen and
senators. Supported by Arroyo but withdrawn in the face of widespread
opposition including from the Senate.
These attempts were unsuccessful because the people perceived the articulated
purposes as mere smokescreens for Ramos and Arroyo to stay in power. As for
Estrada it was about self-interest on how to make money in public office without
calling it corruption.
The articulated purpose of the Joint Resolution No 1 is the same as previous
attempts – to improve the well-being of our people.
Even if Joint Resolution No. 1 is not a smokescreen to remove or circumvent the
term limits, it is still a dangerous move because it would give too much power to
the Congress and open the door wider to corruption. And it is insidious because
it is a bad precedent in trivializing the basic law but is being represented as only
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giving the Congress “flexibility” with an innocuous and seemingly harmless
insertion of the phrase “unless otherwise provided by law” in 6 provisions (land,
natural resources, public utilities, media, advertising and educational
institutions) It is also a clever tactic – it forecloses debate at this time because
there are no specific changes being proposed on the foreign equity caps. The only
issue on the table is the wholesale insertions.
The business community has not expressed any concern about the implications
of the insertions. Either business has been disarmed by its innocuousness or as a
malicious mind would say - business does not mind transactional politics as long
as it is the beneficiary. After all, there are many examples of this in the past –
such as the loophole of stock distribution instead of land in agrarian reform that
the Supreme Court finally struck down as unconstitutional in the case of
Hacienda Luisita by a vote of 14-0 (another golden moment of the Supreme
Court) and the loophole in the banking laws that allows an alternative
compliance of buying government bonds in lieu of devoting 25% of its portfolio
to agricultural development, which is critical to achieving a sustained high and
inclusive growth as exemplified by the successful NorthEast Asian countries –
Japan, Korea, Taiwan and China.
The implication of the insertions is that once the insertions are in place (by a ¾
vote of all the members of the two chambers, voting separately, and by a
plebiscite) the present provisions would become meaningless and the insertion
would be virtually impossible to undo. Thus, the Congress will have the power
to increase the equity caps to, say , 60%, 75% or even 100% or back down again
through ordinary legislation, without need of a plebiscite. It does not only create
instability on the rules of the game but would also provide the precedent for
rendering meaningless any provision of the Constitution by ordinary legislation.
Only the majority vote of a quorum is necessary. For example, in the case of the
Senate, the vote can be as low as 7 senators compared to the present
requirement of 18, In the House of 290 members, the equivalent number would
be 73 instead of 218.
Can we trust our legislators with a power that is so vulnerable to abuse and
corruption? With respect to the economic provisions, or for that matter the
provisions on territory or on social justice, the foreign companies and foreign
countries who want to change them have the money to make it happen. Do our
legislators have the values to resist the temptation?
The country example is China with deals familiar to us - the ZTE and railway
projects, the Chinese management control of our national grid, the aborted
Arroyo deal to lease Chinese companies more than 1 million hectares for food
production to be totally exported to China. That deal is actually unconstitutional
under Section 3 of Article XII, which is one of the provisions targeted for an
insertion.
Finally, JR-1 is potentially a divisive and costly exercise. Of course it can be
stopped if the Senate does not come up with 18 votes. After all, JR-1 reduces the
Senate’s power in the system of checks and balances of a bicameral legislature..
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But if that vote is somehow secured, then the plebiscite can be tumultuous once
people realize its implications. And it will cost us precious time and opportunity
to attend to more urgent matters.
Why foreign Investment?
The justification for FDI is that restrictions on foreign ownership stifles the
investment climate resulting in lost employment and growth opportunities, and
that such restrictions are anti-poor. (Now, that is hypocritical. The truth is closer
to what Prof. Emeritus Michael Meyer of Wharton had the grace to admit in an
article in yesterday’s BusinessWorld – that the “ethos of capitalism is you
operate for your shareholders rather than for the whole people”.) The argument
for opening our doors fully to FDI is that any investment is worth attracting
because “at least they contribute something” and “everything helps”. I beg to
disagree. The empirical evidence is clear – FDI has a role to play in development
but it is not the game changer on development that it is made out to be. What
counts is not the quantity of investment but its quality. And to determine quality,
we need to make a full accounting not just of its benefits but also of its costs. And
take account of such long-term considerations as brownfield vs greenfield
investment, about its contribution to raising the trajectory of our technological
development, about downstream plants that increase the value added in the
country. The classic case in this regard is mining, which we can discuss some
other time.
It is no longer debatable in economic theory that a sustained high growth rate is
necessary for poverty alleviation and that growth does not result in development
without an equitable distribution of its benefits. The issue on inequality is now a
major one even in developed countries. In the matter of the role of FDI role in
development, these are some findings:
(1) macro-level data may show an association between foreign direct
investment and higher levels of income, but they do not establish
causality. Similarly no generalization can be made between the activities
of foreign firms and income distribution.
(2) On a micro- or project level, a majority had positive effects on national
income but a sizeable minority 1/3 in two studies and anywhere from
25% and 45% in a third study had deleterious effects.
(3) Historically, FDI played only a minor role in the growth of highperforming Asian Economies. From 1966-1986 – their fast growth period
- FDI was more than 5% of total GDI only in Hongkong, Malaysia and
Singapore. Countries where FDI is less than 2% of GDI were Taiwan,
Korea, Japan and China. More recently, except for China and Singapore,
FDI in NE-Asia and SE-Asia have been less than 10% of GDI.
(4) The Factors that Affect Investment decision according to the World
Investment Report and others are:
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a) Adequate infrastructure
b) Skill levels (human capital)
c) Quality of the general regulatory framework
d) Clear Rules of the Game
e) Fiscal determination
f) Graft and corruption
The World Bank (and the IMF) does not put lifting (constitutional/legal)
restrictions on reserved areas as a priority condition to attract FDI.
They know that it is a fact of life in all developing countries as it was a fact
of life when the developed countries were themselves developing.
Have we closed the door to FDI? What is the Philippine situation on the
restrictions especially on land, natural resources and public utilities ?
(1) On land – Leases are allowed up to 50 years, with another 25
years on public land; condominium laws allow ownership of
residences. The favorite destinations now in our part of the
world - China, Indonesia and Vietnam have similar restrictions
on land with the same solution – lease and yet get more FDIs.
Actually any project that relies on the windfall on land for its
viability is not a good project. But there is a more important
dimension to land in our culture. Unlike in the United States
and Europe where land is just another economic commodity,
and because of the history of colonization and historical
injustices related to land, land is not just an economic
commodity, it is a social asset. We cannot talk about land rights
in the context of western culture and western legal maxims
because to the poor land embodies their emancipation into
mainstream society. Hence, social justice and agrarian reform.
Even the Chambers of Commerce seem to understand a bit of it
by admitting that lifting land restrictions may raise land prices
beyond the reach of the poor. Those who argue for equal
ownership rights to a foreigner on the ground that he cannot
bring land out of the country, just don’t get it and should be
summarily shipped out instead.
(2) On public utilities - by a valid re-definition of an industry.
Under the EPIRA (electric power industry reform act), only the
natural monopolies are public utilities, i,e, transmission and
distribution. Power generation and retailing can be 100%
foreign-owned. Our problem today is generating capacity and
the Constitution has no ownership restriction in that business,
why then are foreign interests not investing?
(3) On natural resources – minerals, petroleum, other mineral oils.
The Constitution allows FTAA (financial and technical
assistance agreement ) to be a 100% foreign-owned company
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with management of the operations, thanks to a liberal
interpretation of the provision in the La Bugal SC decision.
(4) Media – the issue of content has been overtaken by
technological developments and globalization, i.e. cable tv,
internet, social networking, annexes in local papers of articles
in foreign newspaper.
(5) Advertising – the separation of creative work from the
advertising function in partnerships appears to be a workable
compliance with the Constitution.
(6) On control – foreign equity with 40% or less ownership can be
protected by super-majority votes on key decisions;
(7) For foreign investors interested only in the financial returns,
there are innovative financial instruments like the global
depositary receipt (GDR) that separate financial benefits
(which goes to the investor) from voting rights (which goes to a
Filipino company who is interested in management control).
(8) Educational institutions – I do not understand why this is
included since this is not an economic provision. Besides, the
Constitution allows exceptions like fully foreign-owned schools
for the diplomatic community and transient foreigners, and
mission schools. Many schools have foreign partners. But
surely our legislators know that the content of education is
part of the patrimony of the country – our history, cultural
roots, our values, patriotism, the heroism of our ancestors, the
EDSA event that is already being subjected to revisionism –
these cannot be left for foreigners to interpret. The headline
today in one newspaper about ISIS recruiting from our schools
in Mindanao is another reason why our educational institutions
should be firmly under Filipino control.
(9) An insertion in Article XII, Section 10. I do not understand the
sense of including it for insertion because that provision gives
the Congress the power to add to the list of restricted activities
(the so-called Negative List).
To summarize:
Previous attempts to revise the Constitution have failed because the articulated
purposes were perceived as smokescreens for the real purpose – to stay in
power beyond the term limits prescribed by the Constitution. Joint Resolution
No. 1 articulates the same objectives of growth and the well-being of the people.
It also assumes that foreign direct investment is the game changer towards that
objective and that our Constitution has closed the door to FDI. Both these
assumptions are not borne out by the facts.
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Even if JR No. 1 is not a smokescreen to stay in power, it is a dangerous and
insidious attempt by the Congress to transfer power from the Constitution to
itself by the wholesale insertion of “unless otherwise provided by law”. If
enacted, it means that the Congress has the power to change the restrictions by
ordinary legislation and opens wider the door to corruption. More important it is
a bad precedent in putting any provision of the Constitution at risk for selfserving purposes.
Moreover, there appears to be no compelling case for lifting the restrictions.
Even the House appears to agree with the lack of urgency -- the target date, and
only for the wholesale insertion, is 2016, which will benefit, the good Speaker
says, the next administration. Which could mean that the real purpose of the
insertion proposal is to test the waters, so to speak. If it succeeds, other
proposals could follow.
The fact is that foreign investors are in control or in beneficial ownership of their
investment, either by express provision of the Constitution (FTAA), an
alternative to ownership in using the land (long-term lease), liberal judicial
interpretation (La Bugal case), redefinition through legislation (EPIRA), and
innovative financial instruments (GDR).
In the 2014 Doing Business rankings of the World Bank, the Philippines
improved 30 places out of 189 countries from 138 in 2013 to 108 in 2014
without any constitutional changes. With respect to the 2014 OECD rankings on
restrictiveness where the Philippines is no. 1, those who say that lifting the
constitutional restrictions is urgent to increase our FDI do not mention that
China is no. 2, Indonesia no. 5 and Vietnam no. 10 in the restrictive rankings and
yet get considerably more FDIs. Is the Constitution the real hindrance in that
regard? Those who cite that study as gospel truth should first read the footnotes
and the acknowledged limitations of the rankings.
What all the foregoing is telling us is that charter change is not the answer to
finally address the twin problems of mass poverty (which everybody else has
successfully addressed in our part of the world) and of inequality, for two
reasons:
(1) Amending the Constitution is not likely to open any new doors to FDI
because for all intents and purposes, they are already open and that,
(2) Amending the Constitution may not even need to be debated if we
successfully address all the factors that are the real hindrances to quality
FDI.
Certainly, JR No. 1 is not the answer to anything. Like previous attempts at
charter change, it is just another exercise on the taking and the use of political
power for self-serving ends. And that should not be allowed to happen.
Thank you.
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