Rule of law in the equation of economic recovery

Venice Isabelle Rañosa Research Manager, Stratbase ADR Institute

What started as a public health issue in China in late 2019 has turned into a global crisis that has dramatically reshaped economies and social practices worldwide and will continue to do so in the years to come. While economists predicted a promising future for the Philippines in 2020, that economic outlook has been remarkably reversed after the imposition of various quarantine measures that are more harmful to our economy and less effective in stopping the spread of the virus.

The country’s GDP contracted by 16.5% in the second quarter of 2020, its lowest quarterly growth thus far. The fall has been dramatic compared to the -0.7% recorded in the first quarter. As such, the country is now technically in a recession, after contracting for two consecutive quarters.

Numerous companies have shut down temporarily or permanently, leading to a record-high unemployment rate of 17.7% as of April. Remittances from overseas Filipino workers fell by around 19% in May as economies around the world also faltered. Worse, government resources have been strained by the increasing number of transmissions in certain COVID-identified hotspots. This has forced the Philippine government to borrow more from domestic and foreign sources; the funding to cover the government’s COVID-19 response has reached P9 trillion as of June. The implication for taxpayers: a pronounced increase in taxes in the years to come.

The periodic opening and closing of the economy depending on the COVID-19 transmission will result in demand- and supply-side shocks, making economic recovery slower. As of Aug. 16, there were a total of 161,253 confirmed COVID-19 cases in the Philippines, with 112,586 recoveries, 2,665 deaths, and 46,002 active cases.

Given the recent turn of events, it is no longer practical to rely heavily on the sectors that traditionally drove Philippine economic growth — consumer spending, remittances, industries, and services. It is high time for the country to change its strategy to attract beneficial long-term investments, not just through pro-business policies, but also through good governance and the rule of law. With the inflow of such investments, a domino effect can be realized to sustain increased employment and boost spending. This makes better practical sense as foreign manufacturing companies exit China for more favorable manufacturing destinations.

Long-term foreign investors want stability and sustainability through the observance of the rule of law. They prefer doing business in an environment not only with pro-business policies that will be conducive for their expansion, but also where all stakeholders, most especially government officials, adhere to investment rules and contracts.

More so, a government that “weaponizes’ the law against its critics and tramples on people’s basic rights like the freedom of speech will scare investors away. Empirically, the kind of investors who thrive in a less ideal environment are those engaged in illegal activities such as: gambling, money-laundering, and other shadowy businesses. A very telling revelation is the recent national mobile phone survey conducted by the Social Weather Stations (SWS) which revealed that 51% of Filipinos agree that “it is dangerous to print or broadcast anything critical of the administration, even if it is the truth.” Beyond media, this “chilling” effect will negatively influence the perception of potential long-term investors.

A recent webinar organized by the Philippine Bar Association (PBA) raised this question: Is the government weaponizing the law against the media? Lately, we have seen the shutdown and non-renewal of the ABS-CBN network franchise, the conviction of Rappler CEO and journalist Maria Ressa, and the passage of the highly controversial Anti-Terrorism Law. While Chief Presidential Legal Counsel Salvador Panelo claimed that the Duterte administration does not condone media violence and suppression of information, Far Eastern University (FEU) Institute of Law Dean Melencio S. Sta. Maria, Jr. emphasized that the attacks by the government on the media have been “subtle and overt,”  and are “undertaken using legal processes, like, in effect, making a mockery of these processes.” This is exactly the kind of process that scares off potential foreign investors, especially since such processes are not done in good faith.

Furthermore, a government that lacks direction — one that changes the rules in midstream, deviates from the urgent needs of society and lacks predictability, transparency, and accountability — will fail to attract the interest of potential investors, especially those that are scouting for new hubs in Southeast Asia.

Economic recovery during difficult times is not just about formulating sound economic policies and passing investment laws. Measures such as the Corporate Recovery and Tax Incentives for Enterprises (CREATE) bill will not suffice if investor confidence is absent. Good governance and adherence to the rule of law should be part of the basic formula for economic recovery and growth.

This article was originally published in BusinessWorld. Image Source: Philippine Star/Edd Gumban.

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