Sunday, August 23, 2015

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 agenciesmake” 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.

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