FIVE ARROWS FOR INCLUSIVE GROWTH Calixto V. Chikiamco President Foundation for Economic Freedom #PHVote: The Leader I Want Forum Series: Aquino’s Last Mile: Ramping Up and Sustaining Daang Matuwid August 3, 2015 SGV Hall 3/F AIM Conference Center, Makati City
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
FIVE ARROWS FOR INCLUSIVE GROWTH
Calixto V. Chikiamco
President
Foundation for Economic Freedom
#PHVote: The Leader I Want Forum Series: Aquino’s Last Mile: Ramping Up and Sustaining Daang Matuwid
August 3, 2015
SGV Hall 3/F AIM Conference Center, Makati City
Economic Growth has been robust for the past five years
Manufacturing, value added (% of GDP) Source: World Bank
Growth mainly in the services sector, but apart from BPO sector which benefit mainly the college-educated, productivity in the service sector is lower than that of industry
Labor Productivity at constant 2000 prices Source: Philippine Statistics Agency, Labor Force Survey
0
50000
100000
150000
200000
250000
300000
350000
400000
2010 2011 2012 2013
AHFF
Industry
Services
Therefore, to achieve inclusive
growth, reduce poverty, generate jobs, and lower hunger, we have to: make economic growth investment-driven,
rather than consumption-driven
tackle the problem of low agricultural productivity
increase the share of manufacturing (to generate good jobs)
make our industries competitive
How to achieve inclusive growth?
Shinzo Abe’s
THREE MAGICAL ARROWS
Fiscal stimulus
Monetary Easing
Structural Reforms
Image source: The Economist
Five Arrows
for Inclusive Growth
FIRST ARROW: Openness to foreign investment
FIRST ARROW: Openness to foreign investment
Remove the Constitutional restrictions on foreign ownership in the 1987 Constitution – Why?
• current restrictions in the Constitution protects monopolies in capital intensive strategic industries, such as ports, airports, telecoms, shipping, e.g. duopoly in telecom sector
• WB’s Bocchi: Monopolies in strategic industries crimp forward-linking and backward linking industries.
Liberalize as much as possible all other restrictions on foreign investment, including the foreign investment negative list, the retail trade law, the practice of professions, and even immigration rules.
2013 FDI Restrictiveness Index Sources: OECD Statistics and IMF estimates
SECOND ARROW: Modernize the labor code
SECOND ARROW: Modernize the labor code
The existing labor code suffers from two
major defects:
1. setting up high minimum wages unrelated to productivity
2. labor permanency after six months
Minimum wages: job killer
• Paqueo,et al. (2014) – generally, Minimum wage is not always helpful to
the common man and the disadvantaged
– Minimum wage reduces the demand for workers in small firms.
– Minimum wage decreases the chance of the young, female, low educated and inexperienced workers being hired
– The rise in minimum wage results in lower household income (20 percent reduction based on our computation).
Minimum wages: job killer
• Dr. John Nye: Minimum wages hampers industrialization or the movement of surplus labor in the countryside to industry.
– Manufacturing share to GDP has shrunk from 26% in the 1980s to 21% in 2014.
– Migrant labor going to low-paid, low-level service jobs – e.g. gasoline boy, selling DVDs or banana cue, etc.
Minimum wages – job killer
• Dr. Gerry Sicat: Labor rigidities dampen demand for labor and make country unattractive to labor-intensive industries.
SECOND ARROW: Modernize the labor code
Result? - Industry cannot create jobs
- Workers can’t learn; contractualization
- Shift from agriculture to industry impeded
Who benefits? – the monopolists use high minimum wages to deter
competition
– Relatively small proportion of labor force at expense of unemployed
SECOND ARROW: Modernize the labor code
SUGGESTED POLITICALLY FEASIBLE SOLUTIONS Gerry Sicat’s proposed special economic zones where
LMW and labor security suspended in labor surplus areas
Liberalize the apprenticeship law Length of time for training Pay at 75% of LMW Open to other industries
Pass HB 5468 or the JobStart Act by Rep. Nograles 18-24 yrs. old high school graduates with less than one year
working experience Three months technical skills training with allowance of P200 Training graduates to be hired at a pay rate of 75% of LMW
THIRD ARROW: Improve Agricultural
Productivity
THIRD ARROW: Improve Agricultural Productivity
Why Low Agricultural productivity? 1. Uncertainty of property rights due to CARP
• never-ending extension of CARP, collective CLOAs, non-bankability of CLOAs
2. CARP Prohibition of ownership beyond five has. • efficient farmers cannot buy out inefficient ones
3. NFA monopoly of rice importation; 70% of agriculture budget going to low-value commodity, rice.
4. Restrictions on the rural land market: agri patent law.
Domestic and world price of rice (peso/kg), 1990-2010
Source: IRRI Lifted from PIDS Policy Notes No. 2011-11
THIRD ARROW: Improve Agricultural Productivity
End CARP (to end uncertainty over
property rights) and Amend CARP
Fabella: allow CARP beneficiaries to lease their land
Allow CARP beneficiaries to sell their usufruct rights to land
Repurpose DAR to do land consolidation
Dismantle NFA monopoly on rice importation, tariffy rice imports, direct aid to rice farmers, rely on trade for food security, and focus R & D on high value-added crops.
THIRD ARROW: Improve Agricultural Productivity
THIRD ARROW: Improve Agricultural Productivity
Amend the Agricultural Patent Law:
Remove restrictions on conveyance of
agricultural patents
Five years restriction on sale
Restriction by right to repurchase: non-bankability of free patent agri lands (about 2 million titles)
FOURTH ARROW: Competitive Exchange Rate
FOURTH ARROW: Competitive Exchange Rate
NOT capital controls, NOT managed
exchange rate BUT GOVERNMENT
POLICY TO MAKE THE PESO
COMPETITIVE.
FOURTH ARROW: Competitive Exchange Rate
How? Coordinated government response (BSP+executive) Massive infrastructure spending to drive the demand for
capital imports and dollars and lower the cost of doing business in the Philippines.
Rice import liberalization to increase demand for dollars, lower food prices, and dampen wage adjustment rate pressures
BSP aggressive purchasing of dollars Fabella and Abola: Money creation through purchases of dollars
not inflationary due to liberalized trade regime. World is facing structural deflation. Fabella: BSP fighting the last
war.
FOURTH ARROW: Competitive Exchange Rate
Other structural reforms to reduce the cost of doing business in the Philippines:
ChaCha to improve competition and lower prices in strategic industries
Benefits of a competitive exchange rate
• Increased purchasing power of OFWs – boost retail, real estate, and education sectors
• Make BPOs and other exports more competitive • Protect local industry; deter smuggling with high
import prices • Protect domestic high-value added sectors like
agriculture. • Shield domestic industry from AFTA while
working on issues like port congestion, poor infrastructure, etc.
FIFTH ARROW: Institutional Reform
FIFTH ARROW: Institutional Reform
Why?
Weak state capacity is a big binding constraint to growth.
Cases in point
Government under spending, DOTC failures in airports, MRT, LTO etc., NTC allowing mergers in telecoms, creating duopolies (regulatory capture), ERC favouring the oligarchy.
FIFTH ARROW: Institutional Reform
How? Strengthen the political party system
Law against turncoatism; public financing of political parties, public financing of electoral campaigns.
Solve the collective action problem of the political class. Strengthens political accountability.
(Parties behind development miracles – PAP in Singapore, UMNO in Malaysia, CCP in China, Koumintang in Taiwan, Golkar in Indonesia, LDP in Japan.
Dismantle private armies; reduce political dynasties Professionalize the bureaucracy (limit political
appointments) Strengthen separation of powers
Chinese formula for hypergrowth
1. Openness to foreign investment
2. Flexible wage rates
3. Property rights reform in agriculture
4. Competitive exchange rate
+ for Philippines: 5. institutional reform
Summary
FIVE ARROWS
Openness to foreign investment
Modernize the labor code
Improve agricultural productivity
Competitive exchange rate
Institutional Reform
End of Presentation
Contact Details: Foundation for Economic Freedom, Inc. 105 Philippine Social Science Center (PSSC) Commonwealth Ave., Diliman, Quezon City 1101