Making the Philippines Investment Friendly for Growth and Employment: Policy Reforms to Address the Binding Legal Constraints to Investments

To guide us in this study on legal barriers to investments, we use a basic investment framework with the perspective that institutions are the deep determinants of growth. In this regard, our framework discusses the interconnection of the Coase theorem, the credibility of commitments, the hold-up problem, and the existence of effective third-party enforcement mechanisms.

The study also adopts the approach of identifying the binding constraints on investments and proposes solutions—in the real world, second-best solutions are more effective, to these binding constraints.

We do not re-invent the wheel, so to speak, as we identify the binding constraints, given that we are guided by numerous studies done in recent years.

In general, we find that the binding constraints can be categorized into two sets: the sources of hold-up (which take different forms—in logistics, in rules, in planning, etc.) and the lack of a favorable institutional and legal environment, specifically, the weak third-party enforcement mechanisms, to address the occurrence of hold-ups.

We likewise analyze governance and judicial constraints. Both are indeed critical constraints, but the challenge is how to introduce practical, incremental reforms, as we recognize that there is no silver bullet to solve the obstinate problems besetting our institutions.

We diagnosed several crucial sectors or industries, which other academic studies have identified as sources of bottlenecks or big economic distortions. In some areas, the binding constraints on investments remain, such as in maritime transport and port operations, property rights and land market. The binding constraints are addressed through various means—through legislation as well as through administrative and operational reforms.

In some areas, like the aviation industry and the practice of foreign professionals, the constraints are non-binding. In aviation, key reforms (e.g., in Clark) have been put in place, and it is now a matter of consolidating and using the rules to maximize the gains. In the practice of professions, the rules per se (e.g., the Constitution) are not the problem, given the existence of reciprocity agreements, international treaties and similar arrangements.

All told, the study sets directions for a reform agenda, structures the issues for open and public debate, and identifies the benefits and costs of choosing the political and institutional mode by which reforms can be adopted.

In the process, the study puts forward two sets of reforms. As a preview, we enumerate the sets of reforms that this study wishes to highlight:

The first set pertains to the reforms that enhance the legal, institutional environment to prevent or bypass holdups and establish credible commitments and thus safeguard investments.

Under this rubric are the following reform proposals:

  1. Incorporation of external arbitration clauses into contracts or settlement of disagreements in relation to contracts involving government through international courts and government’s immediate enforcement of decisions.
  2. Fleshing out of non-spatial economic zones or “islands of good governance” to insulate investment/business activities from bad governance.
  3. Establishment or strengthening of specialized courts (breach of contracts, dispute with regulatory agencies, interpretation of applicable law and regulation in relation to labor and commercial transactions) to improve efficiency of judicial process, promote fairness, and minimize politicized judicial decisions.
  4. Transparency or access to public information.
  5. Investment ombudsman responsible for investment aftercare service.
  6. A reorientation of mindset on economic and judicial thinking that redefines nationalism and that promotes the perspective of law and economics.

The second set of reforms is sectoral and policy-oriented (as distinguished from oriented towards institutions , and it addresses the major obstacles to growth and investments in general. Some of the reforms are directed at the main binding constraints; others consolidate or sustain the reforms already obtained. This second set of reforms consists of the following:

  1. Land administration that delineates property rights of government and private persons.
  2. Regulatory innovations to remove the logistical bottleneck relating to ports and maritime transport.
  3. Review of the Electric Power Industry Reform Act (EPIRA) to plug the loopholes or gaps relating to cross-ownership, supply contracts (lock-in period), and the design of the privatization strategy.
  4. Measures to address market failure, especially information asymmetry, on foreigners’ practice of professions in the Philippines.
  5. Prevention of flip-flopping and consolidation of air transport reform (e.g., on route design, traffic rights, infrastructure).

Read the Executive Summary (in .PDF, 10pp.) or the full text of the “Making the Philippines Investment Friendly for Growth and Employment: Policy Reforms to Address the Binding Legal Constraints to Investments” (in .PDF, .57pp.).

 

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