A Call for the Revival of Economic Nationalism
by Ernesto “Popoy” Valencia
The basic issue is the economy
In the face of the preoccupation of the global community with the US-led war on terrorism and our own national community’s preoccupation with the same, the continuing depredation of the Abu Sayyaf, kidnap-for-ransom gangs, drug syndicates and robbery bands and charges and countercharges of various forms of graft, destabilization plots and the like, it is necessary to call attention to the crying need to assess the effects of the globalist economic programme the government has been pursuing with increasing intensity over the past three decades.
Although the term globalization is of recent vintage, the economy has long been on a globalizing track that has increasingly opened it to the vicissitudes of international commodity and capital movements, shifted the emphasis of producers to exports, opened the domestic market to imported goods and has made the economy dependent on inflows of foreign capital both for investment and external trade financing.
After a period of limited protectionism characterized by the raising of tariffs, import quotas and foreign exchange controls initiated in 1949 and which developed into the Filipino First Policy under President Carlos P. Garcia, a period that, despite its flaws and shortcomings, stimulated the expansion of the manufacturing sector, the Philippine economy started reverting to free trade and increased openness to foreign capital beginning with President Diosdado Macapagal’s decontrol of foreign exchange transactions and devaluation of the peso.
But it was under the administration of Ferdinand E. Marcos, much of it as a dictatorship, that the satellization of the economy deepened as economic policies gave primacy to expanding exports, especially labor-intensive manufactures that the West needed, removing restraints on foreign investments, stripping off the protection of domestic industries by cutting tariffs and non-tariff barriers and relying on foreign loans and the export of manpower to finance increasing trade deficits.
Foreign debt-dependence also made the economy increasingly subject to structural adjustment conditionalities of International Monetary Fund and World Bank loans which, in tandem with the laissez faire economists who were expanding their academic and government influence, put economic policy-making under free-market prescriptions. Foreign loans secured through the capital markets were also indirectly subject to the same prescriptions as risk assessments which dictated interest rate quotations for country borrowings viewed structural adjustment programs as favorable factors.
In the mid-80s, the basic flawedness of this strategy was revealed with the occurrence of a recession precipitated by a foreign exchange shortage resulting from the failure to service the external debt and raise additional external financing. With the assumption to the Presidency of Corazon C. Aquino, this basic orientation was retained and further tariff reduction and lifting of import controls was undertaken. Again, this led to a recession due to contractionary policies that had to be undertaken because of worsening trade deficit and huge external debt servicing that fed into another foreign exchange shortage. When Fidel V. Ramos succeeded to the Presidency, lip service was paid to attaining Newly-Industrialized Country (NIC) status but no policy reorientation was undertaken. One-sided emphasis was given to the role of exports in creating the phenomenon of the Tiger Economies, ignoring the role of deliberate industrializing strategies, including state investments, import-substitution, industrial targeting and tariff protection.
The Ramos administration rushed into signing up for the 1994 General Agreement on Tariff and Trade (GATT ’94) and joining the World Trade Organization. Ramos also undertook a unilateral and precipitous tariff reduction program much faster than required by the GATT ’94 that opened the domestic market to imports without any corresponding improvement of tariffs for Philippine exports beyond what was already gained under GATT ’94. In addition, while lip service was again paid to supposed “safety nets” for “losers” in the freeing of external trade, little was really done by way of such compensatory steps. Ramos also deregulated foreign exchange transactions further, a step that initially helped the peso to appreciate but which increased the share of unstable foreign portfolio investments in capital inflows, adding another factor of instability to the balance of payments.
After a few years, the laissez faire economists of the National Economic and Development Authority (NEDA) and the propagandists of the Ramos administration claimed that the economy had graduated from its boom-bust cyclical trap and that the Philippine economy was already a “Tiger Cub” or “Emerging Dragon”. The hollowness of the claim was laid bare by another recession early in the administration of Joseph E. Estrada, who did nothing to redirect economic fundamentals, claiming he had inherited “sound” ones. Government economists, who were of the same circle of laissez faire economists that had started to take positions of power beginning with Marcos, of course claimed the fiasco was a regional phenomenon, an “external shock” in their clinical jargon, without explaining why they had put in the first place policies which precisely made the economy more vulnerable to such external shocks.
Unseating Estrada through a constitutional uprising, Gloria Macapagal-Arroyo did nothing to veer away from the globalist track, this time claiming “poverty alleviation” as a supposed focus, and continued the structural adjustment measures of liberalization, deregulation and privatization.
Well into her watch, the economy is being buffeted anew by the decline of exports that are supposed to fuel growth, record unemployment, the loss of market share of domestic industries to competing imports made cheaper by tariff cuts and other import liberalization measures, slow growth and the continuing devaluation and deteriorating balance of payments that are the harbingers of yet another foreign exchange crisis.
Her economists, who are basically clones of all those who have been authoring the succession of medium-term plans that have been producing recurrent balance-of-payments crises and slow growth, now praise the resiliency of the domestic sector, especially agriculture and services in the face of declining exports. But the domestic sector is exhibiting this strength despite and not because of the priority given to the export sector. Within the domestic sector, it is agriculture and services which are saving the economy because they have not yet been subjected to import liberalization as much as manufacturing. In a word, the Philippine economy is being saved by the continued relative dominance of the domestic sector despite the export-orientedness of past and present development plans and the relatively more-protected position of agriculture and services despite an overall policy that has demonized economic protectionism.
The economy is performing well, say President Arroyo’s economists. We may well ask: How bad does the situation have to be before you admit you have failed? How bad do the economic indicators have to be to prove the erroneousness of free-market economics? At what point will you do the people a favor by resigning?
The fallacy of the free-trade paradigm
Freeing the price system and freeing the market is the axiomatic undergirding of the laissez faire policies championed by successive governments for more than three decades. With respect to external trade, this means withdrawing government interventions that nurture domestic capacity in import substitutes and letting the economy engage only in what it can produce competitively in the face of foreign competition without protectionist shields and what are in demand in foreign markets.
The beguiling theoretical construct for this is the theory of comparative advantage. This theory works well “in theory” but has been disastrous in practice in Third World countries because given the head start of industrial economies in technology, capital accumulation and all the other attributes which makes them subject to the adjective “developed” in the first place, there are precious few commodities that underdeveloped economies can really claim to have an advantage in. An underdeveloped economy that will rely solely on exports without taking the necessary steps to build its industrial base is doomed to chronic trade and balance-of-payments deficits and the resulting cycles of slow growth and recessions because it will, more often than not, import more than what it exports and will be unable to develop productive capacity in the industrial sector where opportunities for greater productivity are potentially higher.
An underdeveloped economy that undertakes free trade in a world populated by developed industrial economies will stay poor, perennially short of capital and subject to the self-interested prescriptions of more advanced economies and the international agencies they control.
Free trade is not free. It is controlled by the community of strong economies. Free trade will work if the economies involved are at the same level of development so that no economy or subset of economies has the advantage. The European Community has worked because of these two factors: the economies involved were relatively at the same level of development and a reasonable timeframe was taken for achieving economic community. The ASEAN has the potential of achieving the same for the members if reasonable allowance is given for the weaker economies and the weaker industries of the participating economies.
Even GATT ’94 concedes this by giving developed and underdeveloped economies differential rates of tariff reduction. Under this treaty, the Philippines was only required to reduce tariffs by 24 percent by 2004. Developed countries were to cut tariffs by 36 percent. The laissez faire economists of the government recommended to Ramos and got him to order a tariff reduction program that was even faster than what the developed were willing to sign up for under GATT ’94. Under the Ramos tariff schedule, tariffs will fall by 65 percent by 2004 from their 1996 levels. This unilateral opening, which laissez faire economists hailed as “visionary”, has delivered the domestic market to foreign producers with no symmetric acceleration of the opening of their own markets.
This illogical and reckless import liberalization accounts for much of the loss of market share of domestic industries to imports and has exacerbated the trade deficits that are at the root of foreign exchange shortage, continuing devaluation, dependence on foreign loans and investments and recurrent recessions. Even some transnationals have relocated to other countries or have regressed from manufacturing to trading because it no longer makes sense to base in the Philippines.
Free trade is not fair even when all economies practice it together because the advantage goes to the more developed economies. Our laissez faire economists have gone further by making the Philippine economy move to free trade faster than treaty commitments, faster that what the United States, Japan and the EU are willing to offer despite their advanced status and faster than what the US has proposed within the Asia-Pacific Economic Cooperation community (which is free trade for underdeveloped countries only by 2020).
This is the masochistic tariff schedule that governs our external trade. We have in effect been exporting employment by one-sidedly improving the competitiveness of foreign producers without similar gains for our exporters. Is it a wonder that unemployment has peaked?
Debt and underdevelopment
The economy is trapped in a vicious cycle where imports perennially outstrip exports and foreign loans and investments provide the foreign exchange to cover the trade deficit. Foreign loans in turn require further import liberalization as an explicit or implicit conditionality and so trade deficits keep recurring, requiring repeated chasing of more foreign capital for the foreign exchange they will generate.
There is sufficient national awareness of the heaviness of the foreign debt burden but it is less understood that it is being generated by non-sustainable external trade policy. It is not enough to decry the rising foreign debt and the servicing it requires. Objection to the external debt policy must go to the root cause: the economy’s inability to produce needed capital and intermediate goods and the consequent dependence on their importation. To end the debt trap, the chronic trade deficits must be ended. This cannot be done without ending the free-trade orientation and developing the capacity to produce needed imports, especially industrial producer goods.
The chronic external debt problem has its roots in import-dependence and further worsens the problem because debt servicing further reduces the resources available for expanding the economy while the proceeds from these external borrowings do not generate sufficient additional exports or capacity to reduce imports.
It is not enough to campaign for a condonation of external debt and other improvements in the debt service schedule. While much of the borrowing goes to refinance previous borrowings, the need for external debt is rooted in the unfairness of the trading regime the economy is in. Freedom from external debt cannot be really achieved without being freed from the free-trade paradigm that governs our trading regime.
Industrialization is the way out
The development of our capacity to produce for ourselves the capital goods and intermediate goods that make up the greater part of our imports is the way out of our predicament of slow growth and recurrent recession. Developing these sectors of manufacturing would end the import-dependence that leads to the payments crises that have been causing repeated recessions. In addition, these are the sectors that have higher potential for achieving greater productivity. So, we will reduce the factors causing cyclicality and achieve higher levels of per capita income.
This strategy, called the second-stage of import substitution, is what the previous period of import substitution failed to implement. Import controls and tariff protection and, later, subsidies under various incentive programs, did not go far beyond later-stage processing and failed to shift protection to the upstream sector when this was already called for. The protected sectors therefore remained import-dependent and rising trade deficits became a structural characteristic of the economy.
This second-stage import substitution was what all the successful NICs accomplished along with their aggressive exploitation of export opportunities. This other aspect of their development, which can be easily observed by reading their economic histories, has been ignored by the development economists of the type favored by the IMF and WB and their domestic ideological extensions like the NEDA, Philippine Institute of Development Studies, UP School of Economics and the University of Asia and the Pacific.
This stage is also the phase which China, Vietnam and Malaysia are entering in varying degrees and which will make them the second-wave NICs. The Philippines, for all the supposed “best performer” claims by NEDA, missed out on the first wave and will miss out again on this second-wave because of the free-market underdevelopment economics that dominate policy-making.
Second-stage import substitution requires a shifting of protection to upstream manufacturing, thereby integrating the manufacturing sector. It also requires that whatever tariff reduction undertaken on previously protected sectors must be gradual enough to give them time to survive the adjustment process. If the downstream industries do not survive, the potential markets for upstream industries targeted for development will shrink or even disappear. Furthermore, tariff reduction must be undertaken in the context of multilateral or bilateral agreements that are mutually beneficial and do not sacrifice the imperative of developing capital and intermediate goods capacity-development.
Managing the balance between protection and liberalization
Industrialization requires striking the proper balance between import liberalization and protection. Protection accelerates the development of domestic capacity because it shields the domestic sector from established exporters in other countries that can offer stiff competition because of their lower production costs, which may be due to objective efficiencies or subsidies they enjoy from their respective governments. Protection, in order to be genuinely developmental, must be temporary. Eventual de-protection by the removal of import controls, reduction of tariffs and phasing out of subsidies is also a necessary phase because it, if undertaken in a proper manner, encourages affected industries to become more efficient and competitive with respect to competing imports.
Protection and liberalization should be construed as complementary mechanisms and should be managed over time with the development of both productive capacity and efficiency in mind. It is not correct to argue for permanent or overly prolonged protection. Neither is it correct to liberalize trade in a precipitate, one-way and unilateral manner that will wipe out domestic industries and deliver the domestic market to imports.
Authentic economic nationalism must have a vision of basically self-sufficient and at the same time efficient industrial economy.
The domestic sector must be the principal sector
The deep dive in exports this year and the expected absence of growth even for the next due to the global slowdown that has been exacerbated by the terrorist attacks on the US has forced the government to look at the domestic sector for growth this year and the next. This should be the occasion for realizing the basic flaw in an export-dependent strategy for growth.
The export market is inherently more unstable and harder to predict. The global economy has become more unstable because of the greater integration of national and regional markets in an international trading system wherein national and regional shocks easily disrupt global demand. It is more difficult to predict the international market not only because it is becoming more unstable but because it is not possible to account for the range of policy changes that competing economies can undertake to affect our share of foreign markets. In the global economy, not only firms but countries compete to improve export sales. It is true that the market is bigger but this is offset by the great number also of competing firms and countries.
The domestic sector in comparison is easier to predict and manage. Data on market developments are easier to come by and process. The domestic sector has the advantage of being more susceptible to government policy. The government can change tariffs, subsidies, interest rates and even demand through fiscal and monetary instruments that can cover the entire economy, specific sectors and even specific firms. In contrast, we can easily see the patent ineffectiveness of repeated devaluations to help exports in view of the fact that similar devaluations are also undertaken by competing economies. What happens is an endless cycle of round after round of devaluations that benefit those who import our exports but do not really significantly alter market shares.
Export-dependence pushes the economy into harmful policies in the drive to be globally competitive. To drive down export prices, it becomes necessary to compete with other countries in keeping production costs low even at the cost of sacrificing labor standards, destroying the environment and, in the case of devaluation, imposing hardships on the domestic sector. It justifies, repressive policies because of the need to match the policies of the governments of competing economies which are willing and able to impose such policies on their population.
Taking the domestic sector as the principal engine of growth does not mean that export opportunities should be neglected. It only means that export promotion should be secondary to the stimulation of domestic demand and the domestic market-oriented production. We can consider the example of China that has been vigorously expanding markets and yet continues to depend primarily on the domestic sector. It is a good part for this reason that China has maintained a high growth rate of output despite the repeated shocks that have put other economies in crisis.
‘Filipino First’ in investments
The economy is in reality fueled by domestic investments. Data shows that Filipino investors far outdo foreign investors in contributing to the development of productive capacity. Ironically, this has remained true despite the patent bias in government focus and pronouncements in favor of foreign investors. Foreign investors are given considerable government attention and media coverage while Filipino projects, especially of the vast number of medium and small entrepreneurs who contribute so much collectively to the building of capital stock and generation of jobs, are given secondary attention or, worse, even subjected to neglect, extortion and discrimination.
The stimulation of Filipino capitalism, whether in the form of corporations, cooperatives, partnerships, single proprietorships and informal enterprises, must be given priority over foreign investments for many reasons. The biggest opportunities for stimulating investments still lie in encouraging Filipino entrepreneurship. The savings ratio of the economy is still low and has plenty of room for improvement. But simply exhorting Filipinos to save is not enough if the opportunities for investment and entrepreneurship are not enhanced by giving Filipino entrepreneurs the necessary policy environment. Filipino capital is also by its nature a lot less likely to leak abroad unlike foreign investors, especially transnationals with global operations and perspective.
Foreign investments must be encouraged only where there will be benefits that will accrue that will not be otherwise available. Foreign investors can be useful in developing export markets, introducing needed technology, pioneering in new products and complementing domestic capital. They should be subjected to incentive structures that will only limit them where they can make the necessary contributions. Let us also encourage foreign investors in forms that are less likely to remit profits and repatriate capital after taking advantage of immediate opportunities. We should encourage foreign enterprises with longer time horizons such as those undertaken by individual immigrants who decide to invest their savings here.
It is not correct to have an open door policy to foreign investments that will give them all the rights of Filipino investors.
Development hinges to a great extent on the employment of advanced technology. Sixty percent of the growth of economies that have developed comes from technological development. On 40 percent is attributable to the increase in the stock of machinery and equipment and the employment of more manpower.
It is important that both government and private sector engage in research and development (R&D) that will access available technology, both foreign and domestic, develop new technology and accelerate the transfer of technology from the originators to the domestic sectors that should benefit from them. Government policies should encourage R&D in the acquisition, generation and transfer of technology. Programs and subsidies should be designed that will speed up the technological modernization of the whole economy.
While lip service has been paid to “safety nets” for sectors affected by import liberalization, the mechanisms for modernizing distressed sectors so they can survive liberalization have been deficient. Whether already distressed or not, producers should be provided with information, guidance, easy credit and monitoring for technological modernization. The government should expand and improve the system of extension services for helping our industries to modernize their equipment and production techniques.
The proponents of globalization are seriously wrong in their logic that opening to foreign competition and leaving things to the free market will modernize domestic sectors and make them efficient simply by force of circumstance. Quite often, domestic sectors, especially agriculture, do not have the means to upgrade their production techniques by themselves. Markets left alone do not always achieve the requirements of development. The government must intervene, and actively, to stimulate the technological modernization of the economy, especially for the most backward sectors that have been left behind by the technological leaps that have taken place in the global economy.
In the long run, a vigorous domestic R&D sector must be the source of modern technology for the economy. Imported technology is useful. But it creates a new dimension of dependence on importations. Filipino R&D must be the main technological engine of the economy, without losing initiative in accessing what is useful in overseas technology. R&D institutes and enterprises must be promoted as a vital component of an industrializing economy.
Developing our human resources
Development cannot be achieved without a labor and managerial force that has the needed skills and values. Workers, employees and managers must not only have marketable and productive skills. They must be invested with development and industrializing values: a work ethic, business ethics, social responsibility and nationalism, among others. A nation is not built simply by people who can produce the needed goods. It is built by people who have a strong sense of national identity, social purpose and an appreciation for the norms of civilized behavior. For this reason, education should not be reduced to simply imparting marketable skills. Education must produce good citizens who must have a sense of nation building as a mission.
Despite residual strengths, our system of producing our human resources, the educational system, has deteriorated over the years. The capacity backlog in the public primary and secondary school system has persisted over the years. Standards of teaching and academic performance have gone down. Graduates are deficient even in the minimum basic skills required for simple economic production. There are many reasons for this.
Government spending for education has not been adequate, despite a Constitutional stipulation that education should have the highest share in the budget. The government agencies that have watch over education have been remiss in their duty to maintain the quality of Philippine education. In the era of privatization, the system of state schools has been targeted for privatization. State schools have been subjected to de facto privatization by subjecting them to the rule of financial self-sufficiency, meaning they must fend for themselves individually with diminishing subsidies.
The private school system has outstanding examples but they are in the main outside the reach of ordinary students from low-income families because high academic standards require resources that mean high tuition fees given the commercial character of private education. Most private institutions, although they are free to raise fees, cannot really raise standards (and therefore tuition fees) without pricing themselves out of the market. Coupled with weak government supervision, this means that most students either do not finish college or are graduated from diploma mills.
Education should not be an industry governed mainly by the profit calculations of investors. The government should restore the traditional priority given to the public school system. Standards of performance for all schools should be raised. The private educational system must be supported by programs, subsidies and other incentives and subjected to regulation that will raise standards while keeping education affordable to those who want it.
Planned market economy
The economy must be governed by an industrializing plan that will structure rewards and penalties for economic actors towards achieving NIC status. The experience of development planning all over the Third World points to the superiority of a market economy that is directed by government with both command and suasive means towards achieving the objective of industrialization. Development without industrialization is an illusion. Abolition or over-restriction of the private sector has denied experiments with planned economies the dynamism in accumulation, innovation and entrepreneurship the private sector provides. It is market economies under dirigiste states that have achieved the dream of industrial status and the drastic reduction of poverty.
The upcoming rounds of negotiation under the World Trade Organization, APEC and ASEAN presents the government, the private sector and our people in general with the challenge to rectify the costly policy mistakes that have kept the economy from an autonomous development path leading to industrialization.
With this statement, we call for the revival of the economic nationalist crusade pioneered by the National Economic Protectionism Association in a way cognizant of the fact and lessons of economic history since its inception. We call on all Filipinos concerned with the way the economy and government economic plans have so far failed to achieve development and poverty reduction to bring their collective and individual geniuses to bear in this historic imperative. All around us, neighbor economies that used to trail in development have now left us behind and more are about to leave us behind. Let us find the will to redirect our economy and society so that coming generations may look back at our time and say that their forebears not only tried but succeeded in bequeathing them a nation worth inheriting and a society not only worth dying for but living in as well.
26 Oct 2004