Investors: Corruption Unnecessary

Michael Alan Hamlin

Posted on May 15, 2008

And there should be one set of rules only…

Doing business in the Philippines successfully doesn’t require investors to offer and pay bribes to political and bureaucratic officials, according to a group of investors and long-term residents I met with earlier this week. Unfortunately, I can’t say much about the meeting or the actual participants since I haven’t been given permission to do so, but they represented an influential group of U.S. and Filipino business people and U.S. officials.

According to Transparency International, the Philippines ranks as one of the most corrupt countries in the world. In its most recent ranking, the Philippines ranked 131 – tied with Yemen, Burundi, Libya, Iran, and Honduras – out of 179. Negative perception of the Philippines explains why it is largely shunned by foreign investors. According to the IMD World Competitiveness Report (subscription required), the Philippines ranks a distant last in FDI inflows to Asia Pacific nations. In Southeast Asia, only Cambodia, Laos, and Burma attract less investment.

While no one doubts that corruption is an issue in the Philippines, the investors I met with suggested that corruption exists because government officials and private-sector executives choose to engage in corruption. They do so because corruption is a necessary evil in their view, or assume it provides at least a temporary competitive advantage. Executives who think this way, the investors implied, are hugely shortsighted.

The discussion came up in the context of competition with other regional investors and recent investment scandals, such as the still uncompleted Terminal 3 of the Ninoy Aquino International Airport and the ZTE-national broadband network. Participants said that they make it clear to government officials and prospective partners that the U.S. Foreign Corrupt Practices Act that makes bribing foreign officials illegal for U.S. corporations is a serious piece of legislation.

But the core message U.S. executives communicate when they cite the Act is that they will not engage in corrupt practices. All of the executives in the meeting have worked in the Philippines for years – some for 30 or more – and have run successful businesses here without engaging in corrupt practices. They are living, walking proof that business in the Philippines can be conducted transparently and honestly.

The U.S. investors do have issues, though. First off, they are concerned that some foreign businesses do brazenly engage in corrupt practices, and they believe that all investors should play by the same ground rules. While honest investors can run successful businesses, corrupt practices by competitors do result in lost opportunities – not just for investors, but for Filipinos and residents who wind up paying the price for corruption.

Part of the price is overall low foreign investment, which means fewer jobs are generated, and far fewer high-paying jobs are created. Low foreign investment means that potential corporate and individual tax revenues are unrealized. As a result, the quality of government services deteriorates. Many of these services are strategic in character – such as education and transportation infrastructure – and can hobble the country permanently.

In the Philippines case, consider this hard reality. Twenty years ago, average per capita income in Thailand and the Philippines was the same. Today, per capita income in Thailand is more than twice that of the Philippines. In three of the last 10 years, the Philippines has failed to attract even $1 billion in FDI. Thailand has always attracted more than $3 billion. In 2006 it received almost $10 billion in FDI; the Philippines, less than $2.5 billion.

One of the participants in the meeting asked why the Philippines perennially trails its neighbors in attracting investment. After all, Thailand is hardly free of corruption and has serious issues of its own – including political instability. That’s not an easy question to answer. Like all disasters, there is no one overpowering reason why Thailand – and other regional countries – have done so much better at generating prosperity for its people than the Philippines.

But there are some things that are clear. Foreign investors are provided extremely attractive incentives, for example, in return for investing in Thailand, creating jobs, and generating taxable revenues. It is hard to imagine Thailand or any other nation in Southeast Asia debating whether it should remove tax incentives for investors while it was trailing the region in attracting investment. Yet that’s exactly what’s happening in the Philippines.

Foreign investment, export receipts, and tourism revenues have provided Thailand significant funds to invest in education and infrastructure. As a result, its universities boast modern facilities and top-notch faculty. Transportation infrastructure is impressive. Bangkok’s new Suvarnabhumi International Airport took a decade to build, but it is open and it replaced an older airport that still puts Manila’s operating terminals to shame.

The bottom line is that for investors that do come to the Philippines, there is significant opportunity. On the other hand, there could – and should – be many more.

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