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The Stupidity of Wanting More Investments But Still Unwilling to Remove UNNECESSARY Restrictions


I was doing some browsing on Facebook. I'm really amazed at how people can be so stupid. Worse, some of these stupid people happen to be university graduates. I guess having a degree is just a degree if the person has very little common sense, am I right? Even a licensed professionals can be very foolish if they misuse their titles for personal gain or promote something stupid. I noticed some people who identify themselves as Kakampinks (a term given when the Liberal Party of the Philippines' presidential candidiate, Maria Leonor Gerona-Robredo chose pink) still don't get it. Some Pinks (formerly known as Dilawan or Yellows) have had a better understanding of economics. Some of them are economist Andrew James Masigan and the late John Charles "Carlos" P. Celdran. Masigan has been a long proponent of economic reforms. Celdran understood the problems holding the Philippines' potential back. Unfortunately, some people have been lacking rela understanding. Some of them want more investments. However, reading their comments, I'm afraid it's sorely misguided. I couldn't understand the baffling stupidity of several comments. In fact, I don't feel like uploading every screenshot here. 

Want to know what's the baffling stupidity I've read as well? It's people who defend the rule of the 60-40 ownership. It's people who defend the Filipino First Policy of Carlos P. Garcia. Although Garcia is long dead, I simply can't get over how his Filipino First Policy was a recipe for disaster. Some people even stupidly comment that every country has a 60-40 policy going on. Wait, what? That thing is really utterly shocking. When I ask for a source--I can get some stupid comments like, "You're so stupid!" or "Trust me bro." as their "valid source". We also have thought leaders such as Teodoro Acevedo Casino who insist on retaining the 60-40 as the "key" to economic development. It's a good thing, really, that Casino hasn't been in the legislative and neither has Neri Javier Colmenares won a senate seat. Hilario Davide Jr. even dares to say that I'd say any lawmaker who supports the 60-40 policy is an obstructionist. 

Why is Garcia's "Filipino First" policy not a good invitation to foreign investment?

Going back, I'd like to talk about Garcia's policy which I really think has become damaging to our democracy:
The ”Filipino First” policy of this administration re­ceived a resounding popular indorsement in the last election. Politically we became independent since 1946, but econom­ically we are still semi-colonial. This is especially true in our foreign trade. This policy is therefore designed to regain economic independence. It is a national effort to the end that Filipinos obtain major and dominant participa­tion in their own national economy. This we will achieve with malice towards none and with fairness to all. We will accomplish this with full understanding of our inter­national obligations towards our friends of the Free World. We will carry this out within the framework of our special relations with the United States to whose citizens we granted until 1974, by Constitutional provision, equal rights as Filipinos in the exploitation of our natural resources and public utilities, and to whom we also granted trading parity rights under the Laurel-Langley Agreement. Under this policy we will welcome friendly and understanding foreign capital willing to collaborate with us in the exploitation of our vast natural resources preferably on joint venture basis.

This becomes the problem when a nation wants investors to come in but they have this condition. I'm laughing at what Garcia stated in his speech that there will be malice towards none and fairness to all. This is really stupid because I feel the malice is really there. I did write a post where some people foolishly think that we're in a Game of Conquest between Foreign Direct Investors (FDIs) and Overseas Filipino Workers (OFWs) (read here). This is where Garcia's so-called "malice to none and fairness to all" fails. This can be observed in the current times sometime after Garcia passed away:

  1. I can observe how people are saying that FDis are invaders who will just leech and rape the natural resources. 
  2. Foreigners can only own up to 40% (except for sectors no longer applied to it) while Filipino companies should own 100% abroad.
  3. In regards to OFWs, I could remember the sentimental hatred against Singapore in regard to the execution of Flor Contemplacion. Later, China was practically hated for the rightful execution of three drug carriers. It seems that some people expect nations to bow down to the Philippines in regard to the fate of wayward OFWs. 
Pretty much, the 60-40 ownership restrictions where FDIs can only own 40% of their net profits are a big problem. Who in their right mind will rent a commercial space if they had to give up 60% of their net profits to their landlord (read here)? The problem with the 60-40 arrangement is that FDIs are stuck with the following provisions:
  1. FDIs must first find Filipino partners before they can start registering their businesses. 
  2. After finding a Filipino partner--the FDI is only allowed to own 40% of their net profits. Profits must be split with the Filipino partner who can own up to 60%. I don't see that as a fair business practice as Garcia says it would be.
I could also imagine what if the Philippines hosted an ASEAN party. Now, think about it that we're in Club Filipino. We have members of other ASEAN countries arriving. They're getting excited to try Filipino food. Okay, there are a few modifications because some ASEAN countries may send Muslim delegates. We know certain food isn't allowed in Islam. Now, the party has just begun. However, Filipino representatives are entitled to more portions of food than the ASEAN delegates to the Philippines. Who in the right mind would want to go to such a stupid party? If I were the ASEAN delegate--I think I'd personally write down how unfair the Philippines is during the ASEAN party. There's food for everyone but foreigners were only allowed to have a plate that's 40% full from the buffet. Talk about the absurdity of the rule. It's one thing to require people to fall in line at a buffet for proper distribution. It's another thing to have unfair distribution. 

The "rationale" behind 60-40 is just stupid

I could compare the 60-40 arrangement not just to overpriced rent but to a Get Rich Quick scheme (read here). The term itself is pretty much self-explanatory. Though, I'd like to think of it as doing anything to make a quick peso without doing much of an effort. You can think of a scheme where you sell counterfeit toys at astronomical prices. There are also Ponzi schemes and Pyramid schemes. You may think about selling cryptocurrency so you can run away with people's hard-earned money. I think 60-40 is pretty much nothing more than a legalized Get Rich Quick Scheme. 

Overpriced rent is well, overpriced. The price must justify the outcome. If people pay higher rent--they should get better services. The same goes with 60-40 as to why it's a legalized Get Rich Quick scheme. It's pretty much nothing more than a con job where a Filipino investor (with blessings from a protectionist government) offers to become the partner of an FDI wanting to do business in the Philippines. However, the FDI only gets to keep 40% of their profits. The Filipino partner tries to get rich quick fast by keeping the 40%. It's very different from a Filipino lessor (take note I'm not in favor of selling lands to foreigners) who slowly but surely builds up his or her wealth via a foreign lessee. The FDI rents the space without the need for a Filipino partner. The FDI gives the necessary legal documents (such as a passport), a contract of lease is signed, and the registration can begin. The Filipino partner may not get rich quick fast but such practices can build better wealth. 

Malaya Business Insight

I still think of this cruel caricature by the late Neil Doloricon of the IBON Foundation. I can't find IBON Foundation to be worth taking seriously (read here). Here, Doloricon is suggesting that when FDIs invest--they will run off with all their profits leaving none for the economy. However, basic accounting will tell us that FDIs only get rich based on net income after taxes (read here). Anybody who has passed through accounting will know that profits are based on everything after taxes. You get the gross income and then the net income before taxes. The deductibles include stuff like the cost of goods sold, salaries, utility expenses, and the like which can be seen in the chart below.


Image by Sabrina Jiang © Investopedia 2020

FDIs will keep their profits. Yes, but only net profits after taxes. Think about the chart above and think about who's getting paid. The FDI's Cost of Goods Sold may involve paying local suppliers and local transport services. The FDI may have been paying local gasoline stations, local raw materials suppliers, local workers, and a lot of local businesses. Other expenses such as marketing and promotions may have a local Filipino advertiser to advertise to Filipinos. Receipts have been issued which means that the Filipino businesses where the FDI availed of services and supplies are now having taxable income. It also means that Filipino businesses now have the money they must carefully manage. Now, FDIs are also required to carefully manage the money they have gotten if they expect to get rich. The FDIs had to pay all their expenses (or risk losing trust) and their taxes (or risk violations) before they have their net income--the basis for whether or not they become rich or not. 

In reality, the 60-40 arrangement proves you can't be trusted. Nobody wants a lessor who's unfair and greedy. Who would want a lessor who keeps increasing the rental fee without just cause? It's one thing to raise the rent in times of inflation or every five to ten years. It's another thing to keep increasing rent without reason. It's another thing if a lessor demands 60% of the net profits of the lessor. As mentioned, it's nothing more than overpriced rent. Nobody would want to rent in a space where the cost is so high and the service given is so badly done. Tenants would want a space where the price is right. If the cost of rent is high then the place should be worth the rental. If not, it's like eating a spoiled rotten meal sold for more than what it's worth. Can you imagine paying PHP 1,000.00 for a rotten meal that will give you diarrhea? No thanks, I'd eat in a place that serves affordable food that's healthy and delicious.

It's because wealth building isn't meant to be fast. One reason why some people lose a lot of money in stocks is that they don't invest long-term. Instead, they decide to do the day trading (which Charlie Munger calls a speculative orgy). I tried using a day trading simulator and realized I could've been broke at the end of the day (read here). The same goes for lessors who charge overpriced rent. They want to get rich quick fast. Only a fool would want to rent a space that's overpriced and the lessor is a really mean person. Any smart tenant would get out of such a space. The same applies to FDIs. Why would they want to rent in a country where they must give up 60% of their net profit to a local partner? It would be rather stupid. Sure, they will bring back 100% of their net profits but it's net profits after taxes. Sure, receiving monthly rentals, instead of 60% of the tenant's net profits, is slow but if managed well, it will build wealth over time.

If we want to make the Philippines a good country to invest in--remove the 60-40 provision entirely. After all, there are still rules that FDIs need to follow. Rules like Fair Competition Act, environmental laws, and labor laws, are applied to every investor whether they are local investors or foreign investors. 

References

Books

"From Third World to First--The Singapore Story: 1965-2000) by Lee Kuan Yew
Harpers Collins Publishers

Videos

"The Singapore economic model - VPRO documentary - 2009"  by VRPO Documentary (September 8, 2018)
"Ex-chief justice warns PH will be a 'colony' if foreign capital limits are lifted" by Trisha Billones (January 29, 2018) 

"LEE KUAN YEW TALKS ABOUT THE FAILURE OF MAOISM AND DENG XIAOPING’S SHIFT TOWARDS CAPITALISM"
http://correctphilippines.org/lky_mao_deng/

"[OPINION] Duterte’s Cha-Cha reverses gains of EDSA" by Teodoro Casino (March 02, 2018)

"The Underachiever: Ukraine's Economy Since 1991" by Pekka Sutela (March 09, 2012)

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