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A PATH-DEPENDENT EXPLANATION OF THE PHILIPPINES’ DEBT-DRIVEN DEVELOPMENT STRATEGY

                       

Bing Baltazar C. Brillo

Associate Professor

Institute for Governance and Rural Development

College of Public Affairs and Development

University of the Philippines Los Ban͂os

This is an Author's Original Manuscript of an article published in “UP Los Banos Journal” on 2014 (vol.8, no.1, pp 47-54).

 

Abstract

The debt-driven development strategy was fundamentally about the massive infusion of external capital via foreign loans to boost the economy. This strategy started in the 1960s when the Macapagal administration decided to take in and utilize external borrowings, specifically the Stabilization Fund offered by the International Monetary Fund (IMF). This decision created a “path” and made foreign debts a key component of the government’s economic agenda. The subsequent Marcos administration, influenced by the established financial ties between the government and international financial institutions, did not only continue the economic strategy but extensively accelerated the external borrowings. This move transformed foreign loans as the engine of the economy. In time, the debt-driven development strategy became an established pattern and was institutionalized since it generated increasing returns and positive feedback that are self-reinforcing. This economic strategy has mutated into a “debt-trap” and has been underpinned by subsequent government laws (specifically, Presidential Decree 1177, Proclamation 50 and Executive Order 292). Consequently, the debt-driven development strategy became path dependent, which is persistent, difficult to reverse and “locks-in” on succeeding governments.

Key Terms: path dependence, critical juncture framework, debt-driven development strategy, Philippine foreign debt, Macapagal administration, Marcos administration

Introduction

A decision made in the past defines and delineates future decisions. Once made, a decision— whether a policy, program or strategy— may develop self-reinforcing incentives. This means that a past decision substantively influences and/or constraints future options which, in effect, makes the chosen policy, program or strategy persistent and difficult to change; and thus, developing into a path dependence. As an analytical concept, path dependence was developed in economics to explain technological evolution, but was later adopted in political science to examine the continuity of institutions and policies. In policy studies, the critical juncture framework became the main strain of path dependence in analyzing the sustainability of policies. The critical juncture framework contends that once a policy is selected, its application/implementation would generate increasing returns and positive feedbacks in time which would operate for the maintenance/continuance of the chosen policy and work against policy reversal (i.e. making policy change very difficult).

For the longest time, the debt-driven development strategy is the standard policy of Philippine governments in promoting economic growth and industrialization. Since its adoption by the administration of President Diosdado Macapagal in the 1960s and eventual institutionalization by the administration of President Ferdinand Marcos in the 1970s, this economic strategy has become an enduring policy sustained by the subsequent government of President Corazon Aquino in the mid-1980s. The persistent pattern has resulted in more and more foreign borrowings by each administration over time. Consequently, the country’s foreign debt has reached alarming proportions that debt servicing has become an economic burden, eating up a substantial portion of the national budget year after year. Despite this, the debt-driven development strategy is expected to continue with no sign of abating. Under this context, this article utilizes the concept of path dependence, specifically the critical juncture framework, to trace the evolution and explain the persistence of the debt-driven development strategy adopted by the Philippine governments.

The Concept of Path Dependence  

           

Path dependence, as an analytical tool, gained prominence when it was used to explain the dominance of the “QWERTY” keyboard, from the vintage typewriter to the sophisticated computers (David 1985 and 1999). The central contention was that the QWERTY keyboard gained ascendancy due to a specific decision made in history— the pioneer makers of typewriters adopted the QWERTY keyboard design.^[1] This initial decision would have critical consequences, as it gave the QWERTY keyboard an early lead over other typewriter keyboard designs. As more users preferred a widely used keyboard design, the QWERTY keyboard became the universal standard, making it costly to switch to other keyboard designs and compounding its leadership position. This situation would ultimately redound to path dependence; “locking-in” the QWERTY keyboard as the mainstream keyboard design and making it difficult for other designs to penetrate the market even if they maybe easier to use (see Arthur 1989 and 1994, Puffert 1999).  

The concept of path dependence was principally utilized in political science to examine the development and persistence of institutions and policies. The most common approach under this lineage is the so-called critical juncture framework. The critical juncture framework has three essential components: (1) the antecedent condition which refers to the prevailing situation before a decision is made; (2) the critical juncture which refers to the point of decision among the contingent choices; and (3) the specific trajectory which refers to the established pattern as the consequence of the decision (Collier and Collier 1991). In this arrangement, once a decision is made (i.e. a policy is selected among the alternative choices), it creates an established pattern that limits future choices and endures over time. Increasing returns and positive feedback makes the established pattern persist (Mahoney 2001, Page 2006). Consequently, these self-reinforcing incentives make changing or modifying the status quo policy very costly.

A simple analogy of the critical juncture framework could be seen through “the driver’s dilemma”—  where the driver of a car is at a junction and needs to decide which road to take to get to his destination. Once a road is picked among the alternatives and the longer the driver moves through this road, the greater the probability that he will stay on that road because it would be costly for him to return to the junction to change roads. Since changing roads means a waste of efforts (e.g. time invested in the journey and the time that will be expended in returning to the junction) and resources (e.g. wear and tear on the vehicle and the additional fuel that would be consumed), and risky (i.e. there is no guarantee that the new road is the more efficient route). Thus, these self-reinforcing incentives would strongly induce the driver to stay on the same road, and thus, establishing an “irreversible” path.

There are also other self-reinforcing incentives that work for the continuity of an existing policy (i.e. making it difficult to change). The two most common are: one, the short time horizon of politicians’ time in office; and two, the status quo bias of policies (North 1990, Pierson 2000). The first underscores the disconnect between the actions of politicians which are typically confined to the electoral timetable, and the time necessary to reform or change a policy (including the benefits that will accrue from the change) which usually requires more time (i.e. beyond electoral cycles). This time disconnect creates a tendency for politicians to not change the policy since the implementation and impact of the change are beyond their term of office. The second emphasizes the inherent characteristics of policies which oppose change. By nature, a policy is designed to resist change and last long for stability and predictability. Overall, these factors generate impetuses for the maintenance of the policy as well as impediments for policy change.[2]

Building on the discussions, this study uses the path-dependent approach in examining and explaining the persistence of the debt-driven development strategy in the Philippines. In particular, the critical juncture framework is utilized to elucidate the initiation, intensification and eventual institutionalization of the economic strategy from the Macapagal administration to the Marcos administration.

Establishing the Debt-Driven Development Strategy

The Antecedent Condition. The rise of the nationalist movement characterized post-World War II Philippines, which led to the government’s adoption of protectionist economic policies. Among the main ones were: (1) the import-foreign exchange controls, (2) the import-substituting industrialization (ISI) strategy and (3) the Filipino first policy. The import-foreign exchange controls were adopted by the administration of President Elpidio Quirino (1948-53) to deal with the Balance-of-Payment (BOP) crisis in 1949. This control mechanism was designed to conserve the scarce foreign currency reserve of the country by restricting the access of the private sector to foreign credits and curtailing the importation of consumption goods (Boyce 1990). Although designed as a temporary remedy, the subsequent administrations of President Ramon Magsaysay (1953-57) and President Carlos Garcia (1957-61) adopted and maintained it (Malaya and Malaya 2004). The first policy, import-foreign exchange controls paved the way for the second policy, the import-substituting industrialization (ISI) strategy (Golay 1961, Baldwin 1975). This economic strategy was designed to reduce foreign dependency by promoting economic independence via manufacturing replacements for imported goods. The ISI strategy operated through nationalizing/subsidizing key industries and imposing protectionist trade regulations (Street and James 1982). The Filipino first policy was adopted by the Garcia administration via the National Economic Council’s Resolution no. 204 in 1958. This policy gave Filipinos preferential treatment in all matters connected to the economic development of the country like applying for foreign exchange allocation (Constantino and Constantino 1978, Agoncillo 1990). Apparently, these protectionist policies defined the economic orientation of the Philippine governments in the 1950s.

The Critical Juncture. After winning the 1961 presidential elections, the newly-installed Macapagal administration was confronted by a crucial decision on whether to continue the protectionist policies of the previous administrations or adopt a liberalized economic orientation. The Macapagal administration opted for the latter— a market-oriented development strategy. This decision was influenced by: one, President Macapagal’s personal commitment to the United States’ government which openly supported his run for the presidency (Constantino and Constantino 1978); and two, the economic stagnation and the looming BOP crisis facing the country (Ofreneo, 1991). In reorienting the economy towards the liberalized setup, the government’s first major step was to abolish the import-foreign exchange controls and allowed the Peso to float in the international currency market (Malaya and Malaya 2004). This move was anchored on the understanding that the Macapagal administration would be getting $300 million of financial assistance from the United States government and international financial institutions, mainly through the International Monetary Fund’s (IMF) Stabilization Fund. In this scheme, the Macapagal administration was bestowed an open credit arrangement through external sources which it can use to promote economic growth and address the financial crises.

            The decision of the Macapagal administration to seek external financial assistance made foreign debt a significant component of the government’s economic development strategy. This decision was reinforced by the government’s move to hand over its economic agenda to a group of technocrats that staunchly adhered to the IMF fiscal prescriptions (Constantino and Constantino 1978). As a consequence, the flow of external loans steadily increased and reached $600 million in 1965; a surge from the $150 million foreign debt before Macapagal assumed office (Brillantes and Amarles-Ilago 1994). Thus, the government’s decision to seek external loans firmly placed foreign debt into the country’s financial ledger and made the debt-driven development strategy the principal economic policy.

Persistence of the Debt-Driven Development strategy

The Established Pattern. Although in its nascent phase during the Macapagal administration, the debt-driven development strategy was institutionalized by the Marcos administration which ascended into power after the 1965 elections. The Marcos administration did not only continue the debt-driven development strategy but substantively enhanced the economic policy. The decision to accelerate the external borrowings was considerably facilitated by the government’s established financial ties with international financial institutions and the US government. In turn, this defined the Marcos administration’s economic agenda which was built on the notion that the extensive infusion of external capital will bring about economic growth and industrialization. As a consequence, the country took in massive loans, not only from the international financial institutions but also from foreign governments and private commercial banks. This made external funds the critical source of the domestic economy’s capital needs, and hence, the main engine of the economy (De Dios and Hutchcroft 2003).

The debt-driven development strategy was enhanced by several key factors: the relative ease with which to obtain foreign loans; the deluge of petro dollars in the 1970s (which prompted international commercial banks to aggressively seek clients to unload the funds [Balisacan and Hill 2003]); the foreign debtors pegging the interest at a lower rate than the one prevailing in the international financial market; the declaration of Martial Law in 1972 (which centralized political power that made it easy for the Marcos administration to impose its economic agenda); and the recruitment of technocrats in government (which justified the utilization of external borrowings as a legitimate economic strategy [Fabella1989]). These factors made external loans the standard mode for financing public investments (Bautista 2002); thus, from the 1970s onwards, most of the government’s big economic development projects were funded through foreign borrowings (Boyce 1993, Hutchcroft 1998). Furthermore, the debt-driven development strategy was reinforced in the 1980s when the Marcos administration was confronted by the imminent BOP crisis, the failure of the Export-Oriented Industrialization (EOI) program, the global oil price shock, and the aftermath of the assassination of Senator B. Aquino in 1983. The resilience of the debt-driven development strategy was manifested when the Marcos administration, as remedy, negotiated with its international creditors to restructure its debt payments and launch an economic recovery program premised on acquiring more external borrowings. As a consequence, the country’s aggregate debt progressed significantly from $599 million in 1965 to a staggering $27 billion in 1986 (Freedom from Debt Coalition 1989).

The decision of the Marcos administration to adopt the debt-driven development strategy did not only conform to but substantially reinforce the established pattern. The institutionalization of the debt-driven development strategy became evident when it evolved into a “debt trap,” a condition where the government has no choice but to continue borrowing to sustain a functioning economy[3] (Montes 1992, Brillantes and Amarles-Ilago 1994). In turn, the situation has ramified into a vicious cycle where more foreign loans were acquired to finance the government and to pay for the maturing foreign debts. Moreover, the Marcos administration’s decision to issue Presidential Decree 1177 in 1977 further galvanized the debt-driven development strategy. This law authorized the automatic appropriation for debt service in the annual national budget, effectively making debt service the priority in the budgetary allocation of the government.

The debt-driven development strategy has “lock-in” on the government, as its institutionalization as an economic policy was passed on to the succeeding Corazon Aquino administration.[4] Early on in its reign, the Aquino administration adopted the model debtor strategy to promote the country’s creditworthiness with international financial institutions and foreign investors (Bello 2004). This decision was legally concretized by Proclamation 50 which declares that the Philippine government recognizes all its debts and affirms its commitment to paying them, and Executive Order 292 which upholds Presidential Decree 1177, reiterating anew the automatic appropriation for debt service in the national budget. Thus, these actions firmly reinforced the debt-driven development strategy as an established pattern in the government.

Conclusion

The debt-driven development strategy commenced when the Macapagal administration decided to abandon the protectionist economic policies of the previous administrations and adopt a liberalized economic orientation. By seeking external financial assistance, the Macapagal administration’s decision created a “path” that made foreign debt a key element of the government’s economic policy. The established financial ties between the government and international financial institutions influenced the succeeding Marcos administration, as the government did not only continue the debt-driven development strategy but extensively accelerated it. There was massive infusion of external capital in the economy as the foreign borrowings became the main fuel for economic growth. In time, the path was transformed into an established pattern through a variety of increasing returns and positive feedback, such as the availability of foreign funds, the relative ease with which to get foreign loans, the government becoming populated by technocrats who adhere to the economic strategy, and the transformation of the debt-driven development strategy into a “debt trap” (where foreign borrowings sustain as well as burden the economy). The established pattern was further reinforced and institutionalized by subsequent laws, particularly Presidential Decree 1177, Proclamation 50 and Executive Order 292. Thus, under this context, the debt-driven development strategy is path dependent, making it persistent and difficult to reverse.

References

Agoncillo, T. 1990. History of the Filipino People. Quezon City: Garotech Publishing.

Arthur, B. 1989. Competing Technologies, Increasing Returns, and Lock-in by Historical Events. Economic Journal, 99(394) 116-131.

Arthur, B. 1994. Increasing Returns and Path Dependence in the Economy. Ann Arbor: University of Michigan Press.

Baldwin, R. 1975. Foreign Trade Regimes and Economic Development: The Philippines. New York: National Bureau of Economic Research.

Balisacan, A. and H. Hill. 2003. The Philippine Economy: Development, Policies, and Challenges. Quezon City: Ateneo de Manila University Press.

Bautista, C. 2002. Boom-Bust Cycles and Crisis Periods in the Philippines: A Regime-Switching Analysis. The Philippine Review of Economics, 39(1), 20-37.

Bello, W. 2004. The Anti-Development State: The Political Economy of Permanent Crisis in the Philippines. Quezon City: Anvil Publishing, Inc.

Boyce, J. 1990. The Political Economy of External Indebtedness: A Case Study of the Philippines. Amherst: University of Massachusetts.

Boyce, J. 1993. The Political Economy of Growth and Impoverishment in the Marcos era. Quezon City: Ateneo de Manila University Press. 

Brillantes, A. and B. Amarles-Ilago. 1994. 1898-1992: The Philippine Presidency. Quezon City: College of Public Administration, University of the Philippines Diliman.

Collier, R. and D. Collier. 1991. Shaping the Political Arena: Critical Junctures, the Labor Movement, and Regime Dynamics in Latin America. Princeton: Princeton University Press.

Constantino, R. and L. Constantino. 1978. The Philippines: The Continuing Past, vol.2. Manila: The Foundation for Nationalist Studies.

David, P. 1985. Clio and the Economics of QWERTY. American Economic Review, 75(5), 332-337.

David, P. 2000. Path Dependence, Its Critics and the Quest for ‘Historical Economics’. http://www-econ.stanford.edu/faculty/workp/swp00011.pdf

De Dios, E. and P. Hutchcroft. 2003. Political Economy. In A. Balisacan and H. Hill (eds.), The Philippine Economy: Development, Policies, and Challenges. Quezon City: Ateneo de Manila University Press.

Fabella, R. 1989. Trade and Industry Reform in the Philippines: Process and Performance. Tokyo: Institute of Developing Economies.

Freedom from Debt Coalition. 1989. The Philippine Debt Crisis. Quezon City: Freedom from Debt Coalition.

Galang, J. 1993. The Philippines: Meeting the Challenge. Manila: Euromoney Publications.

Golay, F. 1961. The Philippines: Public Policy and National Economic Development. Ithaca: Cornell University Press.

Hutchcroft, P. 1998. Booty Capitalism: the Politics of Banking in the Philippines. Ithaca: Cornell University Press.

Lim, J. 1996. Philippine Macroeconomic Developments 1970-1993. Quezon City: Philippine Center for Policy Studies.

Malaya, E. and J. Malaya. 2004. So Help Us God: The Presidents of the Philippines and Their Inaugural Addresses. Manila: Anvil.

Mahoney, J. 2001. Path-Dependent Explanations of Regime Change: Central America in Comparative Perspective. http:// www.polisci.berkeley.edu/ Faculty/Bio/Permanent/Collier%2CD/scid-mahoney.pdf

Montes, M. 1992. The World Debt Crisis: Consequences for the Philippines and Her People. In E. De Dios and J. Rocamora (eds.), Of Bonds and Bondage: A Reader on Philippine Debt. Manila: Transnational Institute.

North, D. 1990. Institutions, Institutional Change, and Economic Performance. Cambridge: Cambridge University Press.

Ofreneo, R. 1991. The Philippines: Debt and Poverty. Manila: Oxfam.

Page, S. 2006. Path Dependence. Quarterly Journal of Political Science, 1(1), 87-115. http://dev.wcfia.harvard.edu/sites/default/files/Page2006.pdf

Pierson, P. 2000. Path Dependence, Increasing Returns, and the Study of Politics. American Political Science Review, 94 (2), 251-267.

Puffert, D. 1999. Path Dependence in Economic History. http://www.vwl.uni-muenchen.de/ls_komlos/pathe.pdf

Street, J. and D. James. 1982. Structuralism, and Dependency in Latin America.  Journal of Economic Issues, 16(3), 673-689.

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[1] The QWERTY keyboard was adopted primarily to deal with mechanical malfunction and not with efficiency.

[2] Proponents of path-dependent approach have suggested that an exogenous shock or a powerful external impetus (e.g. political scandal, mass protest, serious calamity and financial crisis) is necessary to neutralize the self-reinforcing incentives and disrupt the established pattern, and thus, providing the opening in the move for policy change.

[3] This situation was exacerbated since many borrowed funds were invested poorly which did not translate to sustainable revenues.

[4] The government of President Marcos was toppled in 1986 via the so-called EDSA People Power Revolution.

BUREAUCRACY-LEGISLATURE DYNAMICS IN POLICY MAKING: THE CASE OF THE FOREIGN INVESTMENT ACT OF THE PHILIPPINES

This is an Author's Original Manuscript of an article published in “UP Los Banos Journal” on 2014 (vol 8, no 1, pp 33-46).

Bing Baltazar C. Brillo

Associate Professor

Institute for Governance and Rural Development

College of Public Affairs and Development

University of the Philippines Los Ban͂os

Abstract

Time and again, scholars have interpreted policy making in the Philippines using the weak state framework— Philippine polity is characterized by a homogenous-controlling legislature and an ineffective-subservient bureaucracy. The legislation of the foreign investment act, however, suggests that a different dynamics existed between the bureaucracy and the legislature. First, the bureaucracy and the legislature were not homogenous. Despite having ideological unity, the government agencies and the legislative bodies took varying stances during the legislative deliberations. Second, the bureaucracy was influential in policy making. The influence of the bureaucratic agencies was evident throughout the legislative proceedings, from the agenda setting to the policy outcome. Third, the legislature was reactive to the bureaucratic inputs in policy legislation. The bureaucratic proposals and opinions were readily accepted, heavily relied on and served as the basis for the responses of the legislative bodies. Overall, the case of the making of foreign investment law reveals that, although lawmaking is technically the domain of the legislature, the bureaucracy holds sway in policy making.

Key terms: Bureaucracy, Legislature, Foreign Investment Act, Policy Making, Weak State

Introduction

The centrality of the bureaucracy and the legislature in policy making is well established in political science literature. The engagements of the bureaucracy and the legislature can be seen throughout the policy making process, and the inputs of nongovernment actors in the legislation are coursed through the two governmental institutions. In Philippine studies, the interface of the bureaucracy and the legislature has been traditionally interpreted using the weak state framework (e.g. De Dios 1990, Rivera 1991, Montes 1992, Almonte 1993, Hutchcroft 1993, Rivera 1994, Rocamora 1998, Hutchcroft 1998, Abinales and Amoroso 2005, Almonte 2007, Magno 2009). In general, an unresponsive legislature and an ineffective bureaucracy characterize Philippine policy making. Although they are homogenous, the legislative bodies are seen as decisive, while the bureaucratic agencies are perceived to lack autonomy in shaping the policy outcome. Some scholars, however, have criticized this perspective as simply too broad to adequately illustrate the subtleties of contemporary legislation (e.g. Atkinson and Coleman 1989, Howlett and Ramesh 1995, Mikamo 1997); specifically, in accounting for the increasing diversity and competition between the bureaucracy and the legislature in contemporary policy making (e.g. Tiglao 1992, Pedro 2002, Batalla 2002).

This paper assesses the relationship between the bureaucracy and the legislature by examining the making of the Foreign Investment Act or Republic Act (RA) 7042. The Foreign Investment Law was a key economic policy of the administration of President Corazon Aquino in the 1990s.The liberalization of foreign investment was deemed requisite for economic advancement since it addresses perennial national concerns (such as unemployment, inflation, capital deficiency and economic growth) by seeking to increase the flow of investment and capital in the country. The Foreign Investment Act was also regarded as the precursor legislation that would pave the way for other liberalization policies. In examining the dynamics in the making of foreign Investment law, the study centers on the interaction of the bureaucratic agencies, specifically, the Board of Investments-National Economic Development Authority (BOI-NEDA) and the Department of Finance (DOF), and the legislative bodies, specifically, the Senate and the House of Representatives. The discussion focuses on three key issues that evolved in the legislative deliberations, namely, the negative list, the divestment period, and the transitory provisions.

The Bureaucracy-Legislature Dynamics and the Weak State Tradition in Policy Making[1]

The literature is replete with works by foreign scholars denoting that at the core of policy making is the institutional interaction between the bureaucracy and the legislature (e.g. Pye 1963, Goodnow 1964, Riggs 1967, Niskanen 1971, Aberbach, Putnam and Rockman 1981, Ripley and Franklin 1991, McCubbins and Noble 1995, Wright 1999, Svara 2001, Rose 2004, Alesina and Tabellini 2007). The bureaucracy-legislature dynamics is central in two ways: one, the engagement of bureaucratic agencies and legislative bodies unfolds at every stage of policy making process— from agenda-setting to policy formulation and enactment; and two, the inputs of stakeholders and interest groups are mediated through the bureaucratic-legislative interface. Their involvement in policy making comes from different sources; bureaucratic agencies are attached to the Office of the President, which means they formulate and push the government’s policy proposals, while the Constitution grants legislative bodies the law-making authority being the elected representatives of the people.

In contemporary policy making, both the bureaucratic agencies and the legislative bodies actively manage the legislative process, although they are two opposing views on how they interface. The first is the legislature-dominance perspective where the bureaucracy is deemed subordinate and supplementary to the legislature (e.g. Wilson 1887, Goodnow 1900, Weber 1946, Marx 1967, Weingast and Moran 1983, Ramseyer and Rosenbluth 1993, Yamamoto 2001). In this conception, bureaucratic agencies are mere sources of information, while legislative bodies make the policies. The other view is the bureaucracy-dominance perspective where the bureaucracy is considered more influential compared to legislature (e.g. Heclo 1978, Dodd and Schott 1979, Johnson 1982, Rourke 1984, Wilson 1989, Banks and Weingast 1992, Vogel 1996, Carpenter 2001, Im 2001). In this conception, bureaucratic agencies “make” the policies, while legislative bodies are expected to fully support and enact the bureaucratic proposals.

In analyzing Philippine politics from the dominant weak state tradition, the legislature-dominance perspective is considered the default assumption in policy making. The legislature is seen to be decisive, while the bureaucracy is perceived to lack the capacity to meaningfully shape the legislative process and outcome. For instance, scholars have given the following observation vis-à-vis Philippine policy making: Hutchcroft (1991 and 1993) cited the lack of autonomous bureaucracy that can be independent from the special interests dominating the legislature; Mikamo (1997) observed that in economic policy making the bureaucracy is underdeveloped and lacks the autonomy against the elite interest controlling the legislature; Coronel et al. (2004) contended that the legislators are the principal stumbling block to the changes reform-minded bureaucrats want to have; and Caoili (1993 and 2006) argued that the homogeneity among the legislators resulted in a conservative legislature that is reluctant to reform.

However, some scholars have questioned the applicability of the weak state framework in Philippine post-EDSA politics.[2] They argued that this framework is simply too general and indiscriminate to be of much analytical use for policy making (e.g. Atkinson and Coleman 1989, Howlett and Ramesh 1995, Mikamo 1997), and hence, inadequate to fully capture the intricacies of present-day Philippine legislation. The weak state proposition underestimates the interaction between the bureaucracy and the legislature in policy making and fails to emphasize the increasing fragmentation among them. For instance, Tiglao (1992) stated that post-EDSA democratic restoration has resulted in intense competition for political control and fragmentation in policy making. Pedro (2002) asserted that the dynamics in policy making is changing, as various actors in government and business have acted autonomously in legislation. And Batalla (2002), in support of Pedro’s finding, maintained that the fragmentation of political and business actors made it possible for the government to act autonomously and succeed in changing policy. Overall, these studies underscore the fragmentation of actors in contemporary policy making and suggest the need to reassess the dominant weak state framework.

Rationale for the Foreign Investment Law

The foreign investment policy came about in the Congressional Executive Investment Policy Review which reassessed the prevailing investments laws in the Philippines in November 1989 to February 1990. The body concluded that most investment laws in the country were outdated and needed immediate revisions. As a consequence, the foreign investment bill was proposed as part of the package of legislative measures to improve the country’s overall investment climate. The foreign investment bill was also designed to have a spillover effect since its passage was intended to precipitate the legislation of other policies that would further liberalize the economy.

            The foreign investment bill intended to repeal Executive Order 226, otherwise known as Book II of the Omnibus Investment Code of 1987.[3] The provisions of the said law, which were largely taken from RA 5186 and RA 5455 and enacted in 1967 and 1968, respectively, were considered passé and discordant with the current economic situation. This law catered to a period when the country enjoyed relative attractiveness to foreign investments. Since this advantage has already dissipated in favor of its ASEAN[4] neighbors, the country has had to compete under unfavorable conditions and thus often left with residual investments. Out of the $12 billion investments that flowed in Asia in the 1980s, only $500 million went to the Philippines, way below Thailand’s $6 billion, Indonesia’s $4 billion and Malaysia’s $800 million (Congress of the Philippines-Transcript: House of Representatives Session Proceedings on Foreign Investments Act 1990). The BOI-NEDA attributed the impressive investment draw of Thailand, Indonesia and Malaysia to the liberalization of their investment laws, and stressed the need for the Philippines to follow suit. The BOI-NEDA also warned that Vietnam has already made drastic changes in its investment laws and is poised to pull in more foreign investments at our expense.

            Foreign investments are important in a country’s economic development when the country is unable to generate enough domestic capital. Because of the Filipinos’ low savings rate, the Philippine government needed to tap into foreign loans and investments as sources of capital. Foreign borrowing was not an appealing option as the country was already heavily burdened by amortization and interest payments on foreign debts that stood at $28 billion at that time. Thus, this left the government with attracting foreign investments as the only viable alternative in resolving the country’s capital insufficiency.

            As the economic managers of the government, the BOI- NEDA and the DOF were convinced that the increase in foreign investment would have a profound impact on poverty alleviation, as the infusion of fresh investments would mean more businesses and enterprises that, in turn, would create more jobs. The BOI-NEDA and the DOF maintained that 1.24 million jobs a year are needed to make headway in addressing unemployment. To realize this, the BOI-NEDA estimates the country needs a total of P148 billion investments every year, a figure which can only be reached if domestic investments are supplemented by foreign investments. Moreover, the government agencies also agreed that the entry of foreign investments would bring other benefits to the country, such as transfer of technology, improvement in the quality of products, enhancement of competition and decrease in the price of commodities.

Issues in the Making of the Foreign Investment Law

On the side of the legislature, the Senate’s Committee on Economic Affairs and House’s Committee on Economic Affairs, Committee on Trade and Industries and Committee on Labor and Employment led the deliberations on the foreign investment bill. On the side of the bureaucracy, the principal agencies involved were the BOI-NEDA and the DOF. The interest groups that actively participated in the legislative proceedings were the Philippine Chamber of Commerce and Industry (PCCI) and the foreign chambers of commerce, namely, the American Chamber of Commerce, the European Chamber of Commerce, the Japanese Chamber of Commerce, and the Australian-New Zealand Chamber of Commerce. In general, the actors in the foreign investment bill advocated different positions– liberal policy and moderate policy. A liberal policy would considerably reduce restrictions on foreign investments. Advocates were the House, the DOF, and the foreign chambers of commerce. A moderate policy would cautiously welcome foreign investments while sufficiently protecting domestic industries. Advocates were the Senate, the BOI-NEDA, and the PCCI. The dynamics among the actors was particularly evident on how they handled the three principal issues that emerged from the legislative deliberations: (1) the negative list, (2) the divestment period and (3) the transitory provision.

Negative List

The negative list was designed to protect domestic industries by specifying which areas cannot accept foreign investments and those that can, but only up to a maximum or 40 percent. Both bureaucracy and legislature agreed that the negative list (a) is essential to the foreign investment bill; (b) should be short, because a long list would discourage the entry of foreign investors; and (c) should be temporary, only for three years, in order to avoid a repeat of protected industries becoming too dependent on government support even after a decade or two.

Bureaucracy and legislature differed on formulating the guidelines on what domestic enterprises should be on the negative list. They did agree to include those areas reserved or regulated for Philippine nationals by mandate of the 1987 Constitution and other nationalization laws (e.g. defense-related activities or activities with implications on public health and morals)[5] since they are existing laws. The disagreement was on those areas of activity deemed by the government as needing protection for a limited period.[6] Because being an open-ended category meant any industry or business can be included as long as its inclusion can be justified, thus, attracting vested interests to influence the criteria for inclusion in the negative list. Discussions centered on the capacity utilization criterion, which is whether a domestic industry has already served its specific market adequately (that would warrant its inclusion in the negative list). In the deliberations, the legislators were passive participants, as they largely took cue from the diverging opinions of the bureaucratic agencies. On one hand, the DOF sought to drop the criterion, argued that it is not needed since foreign investors are “rational economic managers” and would not invest in areas that are already overcrowded. The DOF intended to make as many economic activities open to foreign investment; naturally, the foreign chambers of commerce supported this position. On the other hand, the BOI-NEDA maintained that the criterion is still needed for the interim protection of local industries. The BOI-NEDA intended to provide as many safety nets for the domestic industries; naturally, PCCI supported this position. With the differing opinions expressed by the DOF and the BOI-NEDA, the Senate and the House eventually decided to abandon the discussion on the capacity utilization criterion by appealing to the bureaucratic agencies to settle the matter when they draft the implementing rules and regulations (i.e. after the passage of the foreign investment bill in the legislature).

Divestment Period

            The divestment provision was included in the foreign investment bill on two grounds: one, to make the bill consistent with the constitutional mandate for the state to develop a self-reliant and independent national economy effectively controlled by Filipinos (Article 2, section 19); and two, to allay the public fear that the economy would be eventually dominated by foreigners. The divestment requirement compels foreign investors who took majority equity to transfer the controlling interest (60 percent equity) to Filipinos and take minority position (reduce their equity to 40 percent) within 20 years from their commercial operations.[7] The rationale here is that the 20-year period is sufficient time for a foreign firm to earn money and recoup its investment.

The critical question on the divestment provision was whether to mandate or encourage divestment among foreign investors. On one hand, the BOI-NEDA (with the support of the PCCI) insisted on a mandatory divestment with a definite equity transfer program that clearly states the conditions and commence of divestment. The BOI-NEDA favored a progressive procedure where the divestment proceedings start on the 10^th year of the business operations and terminate on the 20^th year (Congress of the Philippines-Transcript: Senate Committee Hearings on Foreign Investments 1990). On the other hand, the DOF (with the support of the foreign chambers of commerce) maintained that the divestment should only be encouraged. The DOF warned that a categorical divestment period would be seen as a control mechanism that would, in effect, discourage foreigners from investing in the country. On the part of the legislature, both the Senate and the House mainly confined their assessment on the exchanges and arguments presented to them by the bureaucratic agencies. Eventually, both the Senate and the House followed the DOF’s position. The two legislative bodies agreed with the DOF’s contention that making the divestment proceedings mandatory will send a negative signal to potential foreign investors. Thus, the divestment provision was dropped and made recommendatory in the final version of the foreign investment bill.

Transitory Provision

            The transitory provision or so-called “open door provision” was considered the most contentious in the deliberations of the foreign investment bill. In view of the dire need for foreign capital and the deteriorating investment climate in the country, an interim open door policy was proposed to accelerate the entry of foreign investments. This transitory provision would open all areas of economic activity to foreign investors and suspend the implementation of the negative list for a given period. The rationale behind the move was to offset the lingering perception overseas of the country’s unattractiveness by sending a clear signal to the international business community that the Philippine government is serious in liberalizing its economy and welcoming foreign investments.

            The DOF, together with the foreign chambers of commerce, suggested a three-year transitory period for the unrestricted entry of foreign investors. This proposal was not only adopted by the House, but became the basis for the legislative body’s more radical position, as the chamber extended the three-year transitory period to a five-year period. The House rationalized that since the Philippines is facing fierce competition with other countries for foreign investments, an “extremely liberal policy” is necessary particularly during the transition period (Congress of the Philippines-Transcript: House of Representatives Session Proceedings on Foreign Investments Act 1990). On the other hand, the BOI-NEDA, together with the PCCI, argued that the transitory provision was not a critical component of the liberalization of foreign investment since it was temporary and palliative. The Senate heeded this proposal, as the legislative body dropped the transitory provision in its version. As rationale, the Senate cited that having a transitory provision would only pose the danger of foreign businesses gobbling up the market of small local industries (Congress of the Philippines- Transcript: Senate Session Proceedings on Foreign Investments Act 1991).

Since the House version contained a five-year transitory period and the Senate version had none, the issue became the flashpoint in the Bicameral Conference Committee. At the deliberations, both legislative bodies were unyielding. The House was adamant in pushing for the five-year transitory period since it has a standing commitment to the two largest labor group coalitions in the country (i.e. the Labor Advisory Consultative Council [LACC] and Trade Union Congress of the Philippines [TUCP]), the DOF strongly supported the transitory period, and that there was unanimous support among its members. The Senate was resolute for the removal of the transitory period in the bill since it has standing commitment to the PCCI, BOI-NEDA and its members (Congress of the Philippines- Transcript: Bicameral Conference Committee on Senate Bill 1678 and House Bill 32496 1991).

             

In the negotiation, the Senate offered two-and-a-half years, while the House proposed four years transitory period. A three-year period was floated as a possible compromise, except that both legislative bodies were already reluctant to give in beyond their respective positions. The impasse was only resolved through the proxy engagement between the DOF and the BOI-NEDA over the President’s intercession on the issue. Since the President supported the DOF’s position on the transitory provision, the BOI-NEDA was compelled to abandon its original stance and its support for the Senate’s position. In effect, the bureaucratic agencies consolidated in favor of the House’s position, thus weakening the Senate’s position. This bureaucratic engagement defined the legislative dynamics, as the Senate eventually conceded more and agreed with the House to have a three-year transitory period (Congress of the Philippines-Transcript: Bicameral Conference Committee on Senate Bill 1678 and House Bill 32496 1991).

Summary of the Legislative Proceedings. The Eighth Congress opened the committee hearings in the Senate on Senate Bill 1678 on August 1990, and in the House on House Bill 32496 on November 1990. Pursuant to the provisions of Section 26, paragraph 2 of Article VI of the Constitution, the President certified the foreign investment bill as urgent in both chambers on 18 December 1990. The Senate hearings yielded Committee Report no. 1157 on 15 November 1990, which was approved on Second and Third Reading on 18 and 20 March 1991, respectively. The House hearings resulted in Committee Report no. 1226 on 6 December 1990, which was approved on its Second and Third Readings on 20 December 1990. The Bills were reconciled and approved by the Bicameral Conference Committee on 4 June, and ratified by the Senate and the House on 6 June 1991. The foreign investment law was formally signed by the President on 13 June 1991, and became RA 7042.

Conclusion

There was ideological unity between the bureaucratic agencies and the legislative bodies since all of them are in favor of liberalizing the foreign investment policy. But there was divergence on the extent of openness that would be allowed, particularly on the entry of foreign investors. Consequently, the bureaucratic agencies and the legislative bodies took different stances during the deliberations on the foreign investment bill. On the side of the bureaucracy, the DOF was pushing for a more radical form of liberalization, while the BOI-NEDA was endorsing a more moderate form of liberalization. In their engagement, the DOF took the upper hand over the BOI-NEDA since it defined the stand of the government on the policy issue and shaped the key issues (e.g. the divestment provision and the transitory provision) that characterized the law. On the side of the legislature, the House passed a more liberal version, while the Senate approved a more conservative version. In the legislative proceedings, particularly in the Bicameral Conference Committee deliberations, the House got the upper hand over the Senate since the compromises as well as the final form of the foreign investment law were tilted towards its preference. On the dynamics between the bureaucratic agencies and the legislative bodies, the influence of the former was apparent over the latter. Although lawmaking was technically the realm of the legislature, the experience in the legislation of the foreign investment law reveals the influence of the bureaucracy in policy making. Throughout the legislative proceedings the expert opinions of the DOF and the BOI-NEDA carried substantial weight and were frequently sought by the Senate and the House. Consequently, the legislative outcome was practically delineated by the engagement of the bureaucratic agencies.

 

On the whole, the making of the foreign investment law demonstrated that the facts of the case do not conform to the conventional weak state framework, specifically, its key proposition— Philippine polity is characterized by homogenous-controlling legislature and an ineffective-subservient bureaucracy. The policy making suggests that a different dynamics exist between the bureaucracy and the legislature. In particular, the legislative experience illustrated the following: firstly, the bureaucracy and the legislature were not homogenous since they displayed varying positions and preferences during the legislative proceedings; secondly, the bureaucracy was influential in policy legislation since it was the source of the agenda as well as critical information on the bill; and lastly, the legislature was reactive to the bureaucratic inputs in the policy making since it readily accommodated and heavily relied on the bureaucratic proposals which became the basis for the legislative bodies’ responses and actions. Since these findings are inconsistent with the key proposition of the dominant weak state framework, this study calls for more research on the bureaucracy-legislature dynamics to be able to sufficiently establish their institutional relationship in the Philippine context.

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[1] This section was derived from previous works of the author on Philippine policy making.

[2] Post-EDSA politics refers to the period of democratic restoration in the 1986 and onwards.

[3] Entitled “Foreign Investments Without Incentives”, specifically Article 44 to 56.

[4] Association of Southeast Asian Nations (ASEAN).

[5] Refers to List A and B of the Foreign Investments Act of 1991.

[6] Refers to List C (Transitory Negative List and Regular Negative List) of the Foreign Investments Act of 1991.

[7] Foreign investors whose enterprise exports 70 percent or more of their output are exempted from this provision.