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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
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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.
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Debt and Poverty. Manila: Oxfam.
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Journal of Political Science, 1(1),
87-115. http://dev.wcfia.harvard.edu/sites/default/files/Page2006.pdf
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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
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Structuralism, and Dependency in Latin America.
Journal of Economic Issues, 16(3), 673-689.
[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
10th year of the business operations and terminate on the 20th
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.
[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.