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Wednesday, April 8, 2015

The fallacy of PH’s $6.2-B FDI



LIKE the emperor who wore no clothes, PNoy seems to believe the overly rosy picture painted by his economic managers that his administration had achieved record-breaking foreign investment growth. This despite widespread evidence that Filipinos aren’t really better off today than when he took over almost five years ago.
In a recent speech before big business, PNoy bragged that the country achieved a record high $6.2 billion in foreign direct investments (FDIs) in 2014.
“The year 2014 was a banner year for net FDI, reaching an all-time high of $6.2 billion, 65.9 percent higher than what we received in 2013,” he told business leaders at the 4th Annual Euromoney Philippines Investment Forum.
PNoy pointed out that this was proof of “the tremendous amount of confidence the global community has developed for the Philippines.”
For PNoy’s economic managers, the country’s robust performance in attracting foreign investments was the result of continued strong investors’ confidence in the Philippines’ solid macro-economic fundamentals.
They explained that FDIs are used to finance construction of new facilities, especially in manufacturing, or for the expansion of existing foreign business operations in the Philippines. FDIs are supposedly long-term and job-generating. Thus, they consider FDIs a more reliable barometer of foreign investors’ confidence in the economy of a certain country.
But if foreign capital is indeed pouring into the country more than ever before, why have job numbers remained stagnant over the past few years? Why has the number of unemployed Filipinos in 2014 remained at the same high level?
Why has the country’s manufacturing sector – one of the biggest generators of jobs – continued to decline during the PNoy’s administration?
According to government data, the unemployment rate in Philippines averaged 8.90 percent from 1994 until 2014. Last year’s unemployment rate of 6.6 percent was only slightly lower than the previous year’s (i.e. 2013) figure of 7.3 percent.
But based on the Social Weather Station (SWS)’s unemployment survey, which uses the internationally-accepted definition of “unemployment,” the annual average unemployment rate in 2014 was 25.4 percent. This isn’t much better than the 2013 annual average of 25.2 percent.
It’s not surprising then that the country still has the highest unemployment rate among members of the Association of Southeast Asian Nations (Asean), according to a 2014 International Labor Organization (ILO) report.
Meanwhile, the manufacturing sector in the Philippines has steadily dropped over the past two decades. From 25 percent in the 1990s, the country’s manufacturing output has fallen to 21 percent in 2010.
Even government data shows that the manufacturing sector has failed to create enough employment to absorb new entrants to the labor force. In terms of employment contribution, the manufacturing sector is one of the smallest providers of jobs. Worse, the share of the manufacturing industry to total employment has declined from around 11.3 percent in the mid-1970s to about 8.33 percent in 2012.
So what’s wrong with PNoy’s record-breaking FDI braggadocio? A lot.
It appears PNoy has adopted the mindset of global aid agencies like the World Bank and International Monetary Fund to focus on increasing the “quantity” of the FDI instead of its “quality.” In the words of an international think tank, the country’s development policy appears to have been reduced to “maximize FDI and everything else will follow.”
That over-simplistic view is misleading because it mistakenly assumes that increasing the FDI flows into the country will result in commensurate developmental benefits like increased employment and income, technology transfer, etc.
To elaborate, FDI is generally defined as money invested by a private sector firm outside its home country where the amount exceeds ten percent of the foreign firm’s voting stock. FDI also includes buying an enterprise in another country (i.e. mergers and acquisitions), reinvesting earnings of a foreign-owned enterprise in the host country (or non-repatriated profits), and parent firms extending loans to their foreign affiliates (i.e. intercompany borrowings).
The problem with this definition, however, is that it tends to measure money flows rather than real investments in plant and equipment. Not all FDIs by foreign investors constitute real capital that creates jobs and income. Hence, the composition of FDI is of utmost importance in determining whether or not it will have a positive effect on a country’s economy.
In the case of the Philippines, for instance, the non-job generating FDI (like reinvested earnings and intercompany borrowings) constitutes almost two-thirds of the total FDI for 2104. Of the remaining one-third, PNoy’s economic managers didn’t say how much of it was real capital.
To accurately determine the real positive impact of FDIs, it should be measured mainly on the inflow of real capital to “greenfield” investments, or investments in new factories, facilities and plants built from scratch. But this will require a drastic policy shift in Malacañang.
That’s unlikely to happen, especially with a president who is obviously more concerned about a “record” level FDI headline to prop up his increasingly discredited and unpopular administration.

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