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Is Vietnam Getting More FDI Inflows than the Philippines, Because of Its Supposedly Better Fight Against Corruption?


Discussing international marketing or world economics with boomer Filipinos can be painful. Some people still believe in the Filipino First Policy. I cite Vietnam as an example of why economic charter change (called econ cha cha) should be done. Some people cite that Vietnam's increase in FDI is because of the fight against corruption. I don't deny Vietnam has a crackdown on corruption. I don't deny that fighting against corruption helps the economy. However, fighting corruption without the proper tools and not having economic development, is useless. Fighting corruption isn't a panacea or cure-all either.  Spanking is part of child discipline, not the whole of child discipline. People who only spank but never teach right and wrong, render spanking ineffective.

Instead, look at Vietnam's economic policy vs. the Philippines' economic policy. Some people blame the following for the Philippines' lack of foreign investments, some things Vietnam also suffers from:
  1. Some people blame the PHP's devaluation. True, the USD to PHP exchange rate today is almost PHP 60.00. However, the recent USD to VND exchange rate is VND 25,424.98. One VND is PHP 436.80. 
  2. Some people blame corruption for the lack of investments. However, General Secretary To Lam's golden steak scandal (read here). To Lam was the security minister at that time (and he also shook hands with the late Benigno Simeon C. Aquino III, while the latter was president of the Philippines). To Lam's golden steak scandal was even done after he and his peers offered flowers at Karl Marx's grave in London. It was often joked about how Vietnam jumps in between Communism and capitalism really quick! 
I wrote an article discussing FDI restrictions between Vietnam and the Philippines. The big difference between Vietnam and the Philippines is how FDI restrictions carry on. There's always a need for restrictions. The Vietnam Briefing gives this briefing on its FDI policy:

Investors from ASEAN, the United States and Europeand countries are increasingly moving capital into projects in Vietnam, because of its highly attractive environment, and strategic business location.

Vietnam allows 100% foreign ownership in most of its sectors, including trading, manufacturing, IT, education sectors and more. For this reason, the country is viewed as being relatively wide open for foreign investors to enter the market and setup an LLC or other type of business entity.

However, a small number of business fields are limited for foreign-investment, and require that a foreign investor form a joint-venture with a local partner. These include:

  • Advertising services;
  • Agriculture, hunting, and forestry related services;
  • Telecommunication services;
  • Travel agencies; Tour operator services; Entertainment services;
  • Electronic gaming businesses;
  • Container handling; Customs clearance services; Auxiliary transport services;
  • Internal waterways transport, rail and road transport services.

There are some economic restrictions that Vietnam needs to revise. For example. the Vietnamese banking laws only allow 30% ownership for banks. Banks belong to the minority of sectors that still require a local partner, despite most sectors in Vietnam allowing 100% foreign ownership. 

A government-imposed 30% cap on foreign ownership of Vietnamese banks is holding back investments in the banking sector of the fast-growing Southeast Asian nation.

Vietnamese lenders have attracted investments from financial companies in Japan and South Korea, but the nation's six largest publicly listed banks have limited headroom to increase their foreign ownership. Five banks already have foreign ownership above 20%, according to data from S&P Global Market Intelligence.

"We believe that foreign ownership of Vietnam financial institutions will continue to be limited to minority stakes, with the possible exception of distressed financial institutions where the government might consider lifting foreign ownership limits. Overall, we believe M&A will continue to be muted if these limits remain in place," Ivan Tan, an analyst at S&P Global Ratings, told Market Intelligence in an email.

The difference is Vietnam's caps are under legislation instead of the constitution. However, the Philippines' economic restrictions are still so hard-coded into the constitution, it's actually difficult to change them. If Vietnam should one day want to get rid of the foolish 30% cap, it will be easier compared to the Philippines. My assumption is because Vietnam still practices socialism, the idea where the means of production are under collective ownership, as well as central planning, that certain sectors are still under such ridiculously low limits for foreign ownership. However, most sectors are free up to 100% ownership. Doesn't this sound like Vladimir Lenin's New Economic Policy (NEP)?

Meanwhile, the Philippines, while a democratic country, isn't losing the fight because it lacks teeth in fighting corruption. Some attribute Noynoy's economic success to the fight against corruption. However, Per Se of the UP School of Economics also points out Noynoy's weaknesses:

Benigno Aquino III: president, 2010 (July) to present. The FDI flows during Noynoy’s term have been relatively higher. He has brought in so far $4,300.2 billion of FDI flows, the equivalent of $2,150.1 billion average per year. (Note: The dollar weakness also affects the amount of the FDI flows.)

FDI flows are likely to be higher going forward in the Noynoy Aquino presidency. With investment grade rating and continued sound macro fundamentals, the Philippine economic record is likely to be much better.

However, that potential will be capped unless he improves the FDI climate in the country through direct reforms dealing with FDI policies. He appears to be under an illusion that the move to change the restrictive provisions to foreign investments in the Constitution would not make a big difference. Unless his mindset changes on this point, Aquino’s future performance on this account will not be spectacularly much better.

Noynoy had his success but it's important to look at where he also failed. Sure, there are good economic policies under Noynoy. However, we need to think that the Philippines' problem isn't soley corruption. The problem of the slogan, "Kung walang corrupt ay walang mahirap." is but a half-truth. True, corrupt officials are a problem and they can destroy economic gain. Corrupt officials may soon pass protectionist laws for their own benefit. However, the real problem behind the lack of investments isn't government corruption but the overwhelming FDI restrictions, hardcoded into the "beloved" 1987 Constitution of the Philippines.

List A: Foreign Ownership is Limited By Mandate of the Constitution and Specific Laws 
No Foreign Equity
  • Mass media, except recording and internet business
  • Practice of professions, except in cases specifically allowed by the law following the prescribed conditions therein 
    • Professions where foreigners are not allowed to practice in the Philippines, except if the subject to reciprocity as provided in pertinent laws. 
    • Corporate practice of professions with foreign equity restrictions under pertinent laws. 
  • Retail trade enterprises with paid-up capital of less than ₱25,000,000.00  
  • Cooperatives, except investments of former natural-born citizens of the Philippines 
  • Organization and operation of private detective, watchmen or security guards agencies
  • Small-scale mining
  • Utilization of marine resources in archipelagic waters, territorial sea, and exclusive economic zone as well as small-scale utilization of natural resources in rivers, lakes, bays, and lagoons
  • Ownership, operation, and management of cockpits
  • Manufacture, repair, stockpiling, and/or distribution of nuclear weapons
  • Manufacture, repair, stockpiling, and/or distribution of biological, chemical, and radiological weapons and anti-personnel mines
  • Manufacture of firecrackers and other pyrotechnic devices 
Up to 25% Foreign Equity
  • Private recruitment, whether for local or overseas employment
  • Contracts for the construction of defense-related structures 
Up to 30% Foreign Equity
  • Advertising 
Up to 40% Foreign Equity
  • Procurement of infrastructure projects in accordance with Section 23.4.2.1(b), (c), and (e) of the Implementing Rules and Regulations (IRR) of RA. 9184
  • Exploration, development, and utilization of natural resources
  • Ownership of private lands, except for a natural-born citizen who has lost his Philippine citizenship and has the legal capacity to enter into a contract under Philippine laws. 
  • Operation of public utilities
  • Educational institutions other than those established by religious groups and mission boards, for foreign diplomatic personnel and their dependents and other foreign temporary residents, or for short-term high-level skills development that do not form part of the formal education system as defined in Section 20 of Batas Pambansa (BP) No. 232 (1982)
  • Culture, production, milling, processing, trading except retailing, of rice and corn and acquiring, by barter, purchase or otherwise, rice and corn and the by-products thereof, subject to a period of divestment.
  • Contracts for the supply of materials, goods, and commodities to Government-Owned and Controlled Corporation (GOCC), company, agency or municipal corporation 
  • Operation of deep-sea commercial fishing vessels
  • Ownership of condominium units
  • Private radio communications network 
List B: Foreign Ownership is Limited for Reason of Security, Defense, Risk to Health and Morals, and Protection of Small and Medium Scale Enterprises 
Up to 40% Foreign Equity
  • Manufacture, repair, storage, and/or distribution of products and/or ingredients requiring Philippine National Police (PNP) clearance: 
    • Firearms (handguns to shotguns), parts of firearms and ammunition therefor, instruments or implements used or intended to be used in the manufacture of firearms; 
    • Gunpowder;
    • Dynamite;
    • Blasting supplies;
    • Ingredients used in making explosives:
      • Chlorates of potassium and sodium;
      • Nitrates of ammonium, potassium, sodium barium, copper (11), lead (11), calcium, and cuprite;
      • Nitric acid;
      • Nitrocellulose;
      • Perchlorates of ammonium, potassium, and sodium;
      • Dinitrocellulose;
      • Glycerol;
      • Amorphous phosphorus;
      • Hydrogen peroxide;
      • Strontium nitrate powder;
      • Toluene; and
    • Telescopic sights, sniper scope, and other similar devices. 
However, the manufacture or repair of these items may be authorized by the Chief of the PNP to non-Philippine nationals; provided that a substantial percentage of output, as determined by the said agency, is exported. Provided further that the extent of foreign equity ownership allowed shall be specified in the said authority/clearance (RA No. 7042 as amended by RA No. 8179). 
  • Manufacture and distribution of dangerous drugs 
  • Sauna and steam bathhouses, massage clinics, and other like activities regulated by law because of risks posed to public health and morals, except wellness centers
  • All forms of gambling, except those covered by investment agreements with Philippine Amusement and Gaming Corporation (PAGCOR)
  • Domestic market enterprises with paid-in equity capital of less than the equivalent of US$200,000
  • Micro and small domestic markets that involves the following: 
    • Advance technology as determined by Department of Science and Technology (DOST) 
    • Endorsed as a start-up or start-up enablers by Department of Trade Industry, or DOST
    • Employ at least fifty (50) direct employees with paid-in equity capital of less than the equivalent of US$100,000

 If these restrictions were more into legislation than the constitution, one wouldn't need to have the 2/3 vote as stated in Article XVII in the 1987 Constitution of the Philippines. If these were mostly legislation rather than hardcoding them, the Philippines, like Vietnam, could've taken better advantage of companies fleeing China. Vietnam has adjusted a huge amount of excessive restrictions by legislation over the more tiresome constitutional amendments which would require this:

AMENDMENTS OR REVISIONS

Section 1. Any amendment to, or revision of, this Constitution may be proposed by:

The Congress, upon a vote of three-fourths of all its Members; or

A constitutional convention.

Section 2. Amendments to this Constitution may likewise be directly proposed by the people through initiative upon a petition of at least twelve per centum of the total number of registered voters, of which every legislative district must be represented by at least three per centum of the registered voters therein. No amendment under this section shall be authorized within five years following the ratification of this Constitution nor oftener than once every five years thereafter.

The Congress shall provide for the implementation of the exercise of this right.

Section 3. The Congress may, by a vote of two-thirds of all its Members, call a constitutional convention, or by a majority vote of all its Members, submit to the electorate the question of calling such a convention.

Section 4.Any amendment to, or revision of, this Constitution under Section 1 hereof shall be valid when ratified by a majority of the votes cast in a plebiscite which shall be held not earlier than sixty days nor later than ninety days after the approval of such amendment or revision.

Any amendment under Section 2 hereof shall be valid when ratified by a majority of the votes cast in a plebiscite which shall be held not earlier than sixty days nor later than ninety days after the certification by the Commission on Elections of the sufficiency of the petition. 

This is where the Philippines has its big weaknesses. That's why economic charter change is needed. It doesn't matter even if all the corrupt politicians are shot the next day--the economic policies still need to change. No amount of fighting corruption will increase FDI if economic restrictions are still ridiculous! 

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