Capitalism is the answer

Capitalism is the answer

I was heartened when President Ferdinand “Bongbong” Marcos, Jr. appointed Joel Consing, Frederick Go, and Francis Tiu Laurel to important posts in government. Agriculture Secretary Francis Tiu Laurel ran his family’s multinational fishery and food business. Former Presidential Adviser and current Maharlika Investment Corp. CEO Joel Consing was Chief Financial Officer in ICTSI and, before that, Aboitiz. Special Presidential Economic Adviser and Cabinet Secretary Frederic Go was CEO of Robinson’s Land Corp.

I told myself that their corporate backgrounds give them the managerial skills for execution, and, more importantly, the private sector, pro-market point of view.

However, I also worry that they might think that they can manage government. That with the right people and the right resources, government can be managed to execute for the public good.

Take agriculture, for example. The Department of Agriculture (DA) is surrounded by the usual suspects who will tell the Secretary that to modernize agriculture, all the government needs to do is invest in more warehouses, farm-to-market roads, cold chain facilities, crop subsidies, etc. More money for agriculture will solve the problem. It’s tempting to think that with the right management skills, this can be done.

But there’s a problem. For one thing, more money is never enough for these usual suspects. For another, they assume that the DA is an efficient and clean bureaucracy. In the time of former Agriculture Secretary Proceso Alcala, he was able to double the DA budget but average agricultural output of 1.2% per annum was far below population growth and even below the average during his predecessor’s term.

And — I have written about it before — a graduate study by Melinda Limlengco, formerly of the University of Nagoya, showed that the effect of the DA on increased agricultural output was insignificant. This means that the DA might as well be abolished, and the country’s agricultural output would remain unaffected.

So, what’s the answer?

Capitalism is the answer. Enable an environment in which the private sector will be the ones to build these warehouses, cold chain facilities, infrastructure, modern and scientifically managed farms, etc. To do that, one has to look at the binding constraints on private investment in agriculture and remove those binding constraints.

This is what Energy Secretary Rafael “Popo” Lotilla has done in the Department of Energy. Instead of the government building renewable energy sources of green power, he revised the IRR (Implementing Rules and Regulations) on the Renewable Energy Law to enable 100% foreign ownership of renewable energy projects. The protectionists and Filipino rent-seekers had previous governments reserve RE (Renewable Energy) projects only for “Filipinos” under the 60/40 rule on the pretext that solar, wind, and ocean are “natural resources.” The Justice department opinion that solar, wind, and ocean are sources of kinetic energy, and not potential energy (as in carbon) and not a depletable natural resource, removed a binding constraint.

What happened since then has been a rush of foreign investment in renewable energy. RE projects account for most of the country’s Bureau of Industry-registered projects.

What about agriculture? What are its binding constraints? Land fragmentation and small-scale agriculture. Protectionism and no incentive to change from traditional methods of agriculture. Overgenerous budgets and high tariffs for low value-added commodities — rice and corn — at the expense of higher value-added crops or agribusinesses like poultry and pork production. High tariffs on rice also hurt labor-intensive manufacturing industries because the high price of rice forces wages up and makes our labor costs uncompetitive.

Capitalism is absent in agriculture. Imports are restricted and market forces aren’t allowed to play with quantitative restrictions and high tariffs on agricultural products. Market forces are also restricted in the land market with no one allowed to own more than five hectares of farmland.

The result is that we have small-scale, traditional peasant agriculture with low output instead of modern capitalist agribusinesses. This desire to protect small farmers from change is akin to protecting candle makers from electric bulbs and kalesa drivers from cars.

This economic model of protectionism and Filipino First has been there for more than 50 years. I hope the new DA Secretary doesn’t double down on this economic model.

If capitalism is the answer, then what about NGCP (National Grid Corp. of the Philippines)? Its private greed has caused delays in the completion of transmission projects. But NGCP is the exception that proves the rule. It’s an example of rent capitalism because it’s a monopoly. It should not have been privatized in the first place. (I support its renationalization or partial renationalization through an investment by the Maharlika Investment Corp.)

The problem of the Philippine economy, in fact, is there’s too much rent capitalism and not enough competitive capitalism.

Look at China. They are building leading-edge electric vehicles on the back of competitive capitalism. Sure, the central government and some of their local governments have investments in car companies but they don’t coddle them. They allow as many as 20 car manufacturers to slug it out in the market to drive innovation. They encourage “creative destruction.” They also allow them to accept foreign capital (Warren Buffet was an early backer of BYD Motors) and even list on the New York Stock Exchange.

We, on the other hand, want to keep out foreign capital. Not only are these ownership restrictions in the Constitution but also law. RA 3018 and PD 194 prohibit foreign investment in the rice and corn sectors. Our procurement laws dictate that government must procure supplies from a Filipino supplier even if he’s 20% more expensive! Thanks to a Constitution that mandates “Filipino First.”

In Forestry, we have shunned capitalism. We have relied on the government to do the planting through a P8-billion Tree Planting Program. No surprise that the Commission on Audit declared the Tree Planting program a failure, marked by huge anomalies. During the recent House hearing on Reforestation, it was revealed by a congressman that people would destroy the trees after a period of time to be given additional government payments for planting.

So, what’s the answer? Capitalism in forestry is the answer, as it is in countries like Finland and Germany, where as much as 70% of the forests are privately owned. There’s a need to remove the barriers to more private investments in forestry.

If I have one piece of advice to give to the economic advisers and the recent appointees to the Cabinet, it is this: let the strong force of competitive capitalism do the job. Promote PPPs. Liberalize as many sectors as possible to foreign investment (except those that are national security related) and promote competition. Free the rural land market. Remove the protectionist barriers to trade and let “creative destruction” play out. Invest more in public goods (education, fair and transparent rules, public data, research and development, etc.) but get government out of the way. To do otherwise is to guarantee failure.


Calixto V. Chikiamco is a member of the board of IDEA (Institute for Development and Econometric Analysis).