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November 12, 2015

Philippines Under PNoy: Lowest in ASEAN in Foreign Direct Investments

The final test of how investor-friendly a country lies in the level of foreign direct investments (FDIs) that it attracts. The proof of the pudding is in the eating, so to speak, and less foreign investors are biting.

The Philippines has the poorest record in terms of getting credit and protecting minority investors. This is unfortunate since the Filipino officials take pride in the country’s prudent but stable financial system. I guess that’s the dark side to very restrictive monetary policy: credit doesn’t flow to small and medium-scale industries which account for the overwhelming majority of local firms.

The Philippines has the highest total tax rate in the ASEAN-6 region at 42.5 percent. This compares poorly with Singapore’s 18.4 percent, Thailand’s 27.5 percent, Indonesia’s 29.7 percent, Vietnam’s 39.4 percent, and Malaysia’s 40.0 percent.

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Meanwhile, the Philippines is second to the last among its ASEAN-6 peers in terms of starting a business, dealings with construction permits, registering property, and enforcing contracts.

With such a major disadvantage in doing business in the Philippines, unsurprisingly, it has attracted the least foreign direct investments (FDIs) compared to its Asian neighbors.

Admittedly, ease of doing business is a necessary but not sufficient condition for attracting FDIs. The quality of public infrastructure, political stability and policy consistency are equally important conditions in attracting FDIs. But, regrettably, the Philippines is lagging behind its ASEAN-6 peers in these areas too.

If the Philippines wants to be a major player in ASEAN integration, its national leaders have to aggressively address the country’s well-known deficiencies.

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From last year to today, the Philippines has the biggest loss in ease of doing business among its ASEAN-6 peers. From a rank if 97 in 2015, it slipped to 103 this year.

By contrast, Indonesia, the last in the ASEAN-6 group, gained 11 notches, from 120 in 2015 to 109 in 2016. Singapore, as expected, was safely number one in ease of doing business from 2011 to 2016. That’s consistency.

Doing Business measures aspects of regulation affecting 11 areas of the life of a business. In the ranking on the ease of doing business in 2016, the following areas are included: starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting minority investors, paying taxes, trading across borders, enforcing contracts and resolving insolvency.

Except for starting a business, dealing with construction permits, and registering property, the rest of the areas are the responsibility of the central government. But even in the three areas where local authorities may have some responsibilities, the nature of competition among different cities and municipalities for investors suggests that it is in the interest of local authorities to be efficient and less bureaucratic as possible.

Investors, whether foreign or domestic, can vote with their feet. They can choose a local community that will tax less, will provide better local public services, and would likely provide protection for the investors’ interest.

On the other hand, it is in the interest of local authorities that investors locate in their community. First, investors will provide jobs to their local constituents. Second, they will expand the local tax base that would mean higher levels of essential local public services for their constituents.

In brief, deficiencies arising from starting a business, dealing with construction permits, and registering property have a way of solving themselves if competition among local governments is at work. Extracting as much rent (bribes) from potential locators or investors is therefore myopic and irrational.

That is probably why improvement in ease of doing business in the Philippines in 2015 was a fluke. From last year to today, the Philippines has the biggest loss in ease of doing business among its ASEAN-6 peers.

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