Government Investment News Analysis Reforms

Putting consumers first

Ernesto Pernia, director-general of the Philippines' National Economic Development Authority

Retailing and academia don’t normally find their way into the same study but, in the Philippines, there’s good reason why they should. In the archipelago, both areas suffer from the same debilitating malaise – a malaise that’s continually fostered the interests of the few at the great expense of the many. That malaise is called protectionism – a restrictive practice that’s traditionally pawned consumer welfare and education standards for the accumulation of wealth by a corporate elite.

Furthermore, this closed-shop mentality has ensured that the Philippines remains uncompetitive in the global and regional marketplaces, thereby creating a serious deterrent to foreign direct investment (FDI). And in the domestic arena, it’s ensured both limited choice, in terms of retailing, and sub-standard teaching – certainly at the tertiary level of education.

And, if that’s not enough, the public – as a result of these restrictive practices – consumers are made to pay extortionate rates for their retailing and education services. It’s either that, or do without them. In other words, in the grim tradition of protectionism, Filipinos are being given little choice and relatively little value for their money.

Mass retailing in the Philippines is in the hands of a few conglomerates or influential local groups. There are foreign participants, but for them to own the business outright, they need to capitalise it to the tune of at least US$2.5 million.

This is ruled by the 2000 Retail Trade Liberalization Act – a piece of legislation that’s in dire need of liberalising. According to the Act, retail enterprises with less than US$2.5 million capitalisation “shall be reserved exclusively for Filipino citizens and corporations wholly owned by Filipino citizens”. It’s that stubborn big-fish-in-a-small-pond mentality that ensures the pond never grows any larger.

Thus, only higher-end overseas retailers can afford to set up in the Philippines. That’s good, of course, for those with sufficient disposable income to buy brand-name goods; for the rest – well, we guess they’ll have to be satisfied with window shopping.

But what this regulation has done is to effectively repel vast amounts of FDI – the Philippines has one of the most protectionist retail-trade regimes of anywhere in Asia – and that’s probably the prime reason why the government is now looking into specific reforms of the retail sector.

This was revealed last month by National Economic and Development Authority (NEDA) director-general, Ernesto Pernia (photo), who’s proposing a significant reduction in the required paid-up capital for foreign retailing participants.

He wants to see that starter money reduced from US$2.5 million to US$200,000 – and that would buy those foreign retail traders 100% ownership of their ventures. In earlier statements on this issue, Pernia has said that the dual purpose of this reform is to make local retailers “more competitive and they will be forced to be internationally competitive”, as well as to “make the consumers happier”.

This is part of a broader NEDA strategy aimed at liberalising the economy in which the government’s Foreign Investment Negative List (FINL) – a register of sectors where foreign participation is restricted – is to be reviewed. A revised list, which according to Pernia will be “more aggressive” – he wants the FINL “a long list [which] I want to be shortened drastically” – is expected to be compiled before the end of the year.

However, while the proposals with regards to retailing are being welcomed by the Philippine-based chambers of commerce of Europe and Japan – as well as by foreign business leaders based in the country – there’s already resistance.

Predictably, this is coming from local businesses as well as from the Philippine Chamber of Commerce and Industry. They fear, alternately, that a rush of foreign enterprises into the Philippine domestic market will crowd-out local retailers; that the proposed lower capitalisation won’t bring with it improved technology and innovation.

Those, of course, are protectionist arguments and – yet again – they ignore the consumer. The point is, a free market should offer consumers freedom of choice. There shouldn’t be market domination by individuals or groups. And so what the objections are really about is that an infusion of new foreign businesses will put pressure on the high profit margins enjoyed for so long by local retailers.

In short, they’ll need to become more competitive or perish by the laws of the retail jungle. They’ll need to adjust their prices and improve the quality of their goods and serve public demand. If this reform goes ahead, it’ll put an end to price-fixing by local cabals and produce greater value-added for consumers – a more robust and accountable after-sales service for example. In other words, finally, it’ll put the consumer interests of Filipinos at least on a par with business interests.

And as far as improved technology and innovation are concerned, that’s bound to come. These businesses are expanding into the Philipppines – they’re not start-ups. They already operate with greater levels of technology and innovation in their home markets. And those qualities, along with FDI – all dearly needed in a sector that’s plodded on in much the same way for decades – will come; but again, it’ll mean that local retailers will have to be on their toes.

The fact is, the Philippines is paying a high price for its protective practices. In the World Economic Forum’s 2017-18 Global Competitiveness Index, it came seventh out of nine member states of the Association of Southeast Asian Nations (Asean). And FDI fell by 16.5% year-on-year between January and July this year, leaving it trailing behind Asean members, Singapore, Malaysia, Thailand, Indonesia, Brunei and Vietnam.

Now we come to education – and in particular university education, an area where local providers have got away with serving up low standards, for high prices, for ever. Let’s take a look at some harrowing stats.

The Times Higher Education (THE), a London-based weekly magazine that produces, in association with Thomson Reuters, the annual THE World University Rankings – the global benchmark index for rating universities – ranks only one Philippine university in its 2018 listing.

That university is the University of the Philippines (UP) which, world wide, is placed at 801-850 out of 1,102 uni-institutions. Furthermore, out of 298 universities ranked across the whole of Asia, from the Middle East to the Far East, UP comes in at 201-250.

So let’s put that result into perspective. Close neighbour, Hong Kong, has just eight universities – six of which are ranked by the THE. They are: University of Hong Kong, 5th in Asia (40 globally); Hong Kong University of Science and Technology, 6th (44); Chinese University of Hong Kong, 11th (58); City University of Hong Kong, 12th (119); Hong Kong Polytechnic University, 17th (182); Hong Kong Baptist University, 49th (401-500).

This is a resounding indictment on academia in the Philippines as well as on generations of education planners who’ve sought to ignore the need for competition in their universities. They’ve allowed a business-first approach to tertiary education and, more cynically, have paid little more than lip-service to providing universities that can give the very best of education to their students.

Again, protectionism is at the root of the problem and the consumers – students and their parents – have been ill-served. Just as with retailing, this is the result of putting profit margins ahead of excellence. It’s also the result of poor supervision bordering on negligence by the Commission on Higher Education (CHED) – the government agency responsible for public and private tertiary and graduate education in the Philippines.

There’s no shortage of universities in the archipelago; currently, there are more than 160 of them – that’s to say institutions that use the word “university” in their title. More than 70% of these are in the private sector. But quantity is no substitute for quality and the pursuit of profits has long eclipsed the pursuit of academic excellence right across the university landscape.

As with retailing, this sector has a low international appeal. It’s low both in terms of overseas-student intake (international students in Singapore, for example, account for about 20% of university graduates; compared to a foreign-student intake at UP of just 1% ), or in attracting foreign academics – particularly in the fields of science and technology on which the country’s future economic development, in no small part, relies.

Moreover, Pernia believes that a higher quotient of foreign academics in the country’s universities will greatly improve Philippine higher education standards.

The buck for this malaise must stop at the door of the CHED. Indeed, it’s difficult to understand what this commission has achieved of late in terms of improving university standards.

In January, CHED executive director, Julito Vitriolo, was dismissed from his post by the Ombudsman for administrative offences of grave misconduct, gross neglect of duty, incompetence and inefficiency. In August, formal charges of graft were filed against him for allegedly allowing a state university to erroneously issue students with diplomas and transcripts of record.

Meanwhile, CHED Chairperson, Patricia Licuanan, is hanging on to her job despite being asked by President Rodrigo Duterte to resign in line with his 22 August 2016 circular asking all officials appointed by his predecessor, Benigno “Noynoy” Aquino to step down to give him a free hand in dealing with official corruption and to allow him to implement reforms.

Last December, along with Vice President Leni Robredo, Licuanan was asked to stop attending Cabinet meetings. In short, the CHED is proving to be increasingly ineffective as a steward of higher education in the Philippines and is in need of radical reform itself. And that, we believe, should start with the removal of Licuanan. The CHED comes directly under the Office of the President; thus, if she refuses to voluntarily resign, she can be fired – and given the state of university education in the Philippines we believe she should be. That, after all, is supposed to be her responsibility.

The CHED is in disarray. It’s all very well turning out huge numbers of graduates – and the Philippines has one of the highest levels of these of anywhere in Asia – but those degrees and diplomas need to be internationally competitive; which they’re not.

There’s absolutely no excuse for the Philippines trailing other Asean members with the number of universities that make it onto the THE index. Among these countries, Singapore has two (ranked, 22 and 52); Thailand has 10; Malaysia, nine; Indonesia, four.

That’s not the fault of the students. Filipino youth have no problem learning and acquiring knowledge – they’re as bright as any, anywhere. The problem – and it’s a serious one – is at the delivery end; there simply aren’t enough professors of the required standard teaching in Philippine universities.

The CHED and the administrative boards of the universities, therefore, need to raise their game or be held to account. Anyone, it seems, can open up a university in the Philippines – you don’t even need to be registered with the government to do so; accreditation with the Philippine Accrediting Association of Schools, Colleges and Universities – endorsed by the Department of Education – is optional. There are no effective checks and balances to guarantee the highest standard of education delivery by these institutions.

And so; whether shopping for in-store retail products or a place of learning, the choices for Filipino consumers are severely restricted. Thus, searching reforms in these areas is essential. To allow this malaise to continue will only further handicap the economy and restrict the country’s development.

If the price of preventing that is to ease foreign participation in the retail sector – thereby attracting more FDI – and to re-energise the CHED by removing tired officials and making tertiary education institutions accountable to their patrons then, that’s a small price and one worth paying.

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