Rent-seeking equals low local investment, high migration—economist
by JEREMAIAH OPINIANO

MANILA (OFW Journalism Consortium)—A WORLD Bank senior economist judged the Philippines as shackled by rent-seekers, dampening appetite for local investment and pushing out Filipinos to seek “happiness” in other countries.

“In the traditional sectors, the rent-seekers are powerful and well established,” World Bank East Asia and Pacific Region senior economist Alessandro Magnoli Bocchi said.

“Well-established in sectors that are strategic because of multiple backward and forward linkages, the conglomerates –by producing expensive inputs– skim rents from the economy and shrink the margins of the potentially most dynamic agents: the small and medium domestic private producers,” Bocchi added.

The result, according to him, is a “low-capital-stock equilibrium,” which means economic agents in the Philippines have no incentive to unilaterally increase investments.

Filling up the slack, Bocchi wrote, are the informal labor market, the performance of non-capital-intensive activities, the services sector, and "unhappy work-seekers" who left the country and send billions of dollars to families back home.

They are what Bocchi labels as making up the Philippine economy's "least protected sectors,” overseas work-seekers included.

Work-seekers' emigration is an effect of their discontent locally when conglomerates are into rent-seeking; companies buy "national labor peace" by offering higher wages to insiders; and when there is still the existence of heavy protections in the formal labor market.

In his policy paper titled “Rising Growth, Declining Investment: The Puzzle of the Philippines (Breaking the ‘Low-Capital-Stock’ Equilibrium), ” Bocchi wrote that the Philippines does not see her domestic economic players increasing investments in the country, thus leading to a slower pace of macro-economic growth and seeing "unhappy" workers leave.

Bocchi observes that Filipino public investment is low (especially in education and infrastructure); the private sector does not see the need to invest (since they are earning anyway); and key corporate conglomerates are into rent-seeking arrangements that enable them to limit economic entry and sell products at high prices.

It is the "unhappy" work-seekers' remittances that keep the economy growing, Bocchi said—not investments from public and private sector, nor investments from those who made a rational decision to invest at low levels (see Figure 1).

Rent-seekers
RENT-SEEKERS, Bocchi said, “also control bank credit and dominate state procurement contracts through political connections.”

“In the Philippines, the status quo has historical roots: the colonial distribution of factor endowments determined the power and incentives of self-interested political constituencies, which, in equilibrium, profit from oligopolistic privileges and perpetuate them,” he added.

Those who will perk up investments will bear short-term costs, which many in the investment community do not want to experience. Even prospective foreign investors stay out of the country, and small to medium-sized businesses remain small and informal, says Bocchi.

He observes that a debt-ridden, low-revenue public sector does not have the means to step up investments, while the private sector settles itself with the status quo —that they are profitable even without adding up their existing investments.

Given what Bocchi calls a "highly-protected business environment" in the country, he says the international private sector is reluctant to settle in the Philippines, so they "stay out".

"(They are) discouraged by a net of privileges and protections, by policy-driven competitiveness shortcomings, and by the lack of resources for education and training," Bocchi wrote.

Data from the Bangko Sentral ng Pilipinas, from 1999 to 2006, revealed that the country's net foreign direct investments reached a low of US$195 million in 2001 to a high of US$2.24 billion in 2000.

The 2006 net FDI figure reached US$2.086 billion in 2006, although a January-November 2007 figure of US$1.864 might not see the Philippines overtake the 2007 net FDI performance.

This net FDI, Bocchi says, went to non-capital-intensive niches in manufacturing (such as chemicals, electronics, and air-conditioning systems) and services (such as business process outsourcing, shipping crew training, and medical research).

Even the services sector does not need to increase its investments faster that the country's gross domestic product growth rates, Bocchi said, yet it is the top-performing economic sector as compared to agriculture and industry.

Low stock
BOCCHI forecasts that export-led services might absorb migrating workers, fearing that the Philippines might experience a plateau in her receipt of remittances –when the number of first- generation overseas workers declines, and the next generations of OFWs remit lower amounts back home.
Bocchi said while the Philippine economy has posted growth, this is “becoming less capital-intensive”.

He noted, likewise, that while overseas workers and the informal labor market remain the main drivers of this growth, these sectors' economic contributions also "lower the penalty for poor policies in both the oligopolistic capital intensive sectors and the formal labor market, thus perpetuating the status quo.”

Philippine monopolies and oligopolies, Bocchi said, find the convenience "to restrict production –and investment– below competitive levels".
For one, these oligopolies' willingness to invest "is inhibited by their concentrated ownership structures and their uncertainties about the stability and duration of government favoritism".

For another, Bocchi says political connections by corporate conglomerates do not only create rents, but they limit economic entry into their sectors and then sell products at high prices.

The corporate elite, while conveniently investing only a portion of its revenues within the Philippines, even "keeps sending considerable portions (of their revenues) offshore," Bocchi said.

Bocchi identified the presence of oligopolies in sectors such as agriculture, transport (maritime and aviation), banking, power, mining, and cement in his policy paper.

As for small players like small- and medium-sized enterprises or farmers who want to venture into expensive high-return crops, these players do not belong to the corporate elite so "the incentives are to stay small and not to become formal," Bocchi says.

Bocchi recommends gradual reduction of elite-capture in strategic sectors through restraining their use of political connections, trimming down their rents through reduced economic protection.

The benefits of reducing elite-capture include market competition, leading to substantial reduction of costs, spurring of investments, and creation of jobs, Bocchi said.

Figure 1

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