A Tale of Two Countries

(Borrowed from the Far Eastern Economic Review)

by William McGurn (June 1994)

Editor’s note: While it is true that this is an old article from June 1994, the author William McGurn’s analysis is so spot-on and remains extremely relevant today such that this article seems as if it was written just yesterday. If anything, it is worth noting that the Philippine situation is even far worse now (some 20 years after this article was written) so that whatever the author wrote in 1994 has become even worse in terms of degree. That this article was written in 1994 does not diminish the Truth that this article speaks.

The human costs of protectionism 

Teresa Concepcion had high hopes for her future.

Although her father was only a farmer with a grade-school education, things were looking bright for the new generation of Filipinos. By the time Teresa (not her real name) was born, the country had risen from the ashes of World War II to achieve not only independence and a working democracy but the second-highest standard of living in the Far East after Japan’s. In 1970 she entered a local university. Four years later, degree in hand, she took a job as a social worker supervising day-care centers. That’s when her dreams began to dissolve.

Teresa had expected only a modest salary. Upon entering the working world, however, she was stunned to find out exactly how low wages were, not only in her profession but throughout the Philippines. Her paycheck brought in barely $40 a month. By now she was married and had given birth to the first of three sons. Her husband, a surveyor’s assistant with the Bureau of Land and Natural Resources, made no more than she did. Even such basics as clothing and baby food became more than they could afford. And so, after eight years of incessant financial struggling, Teresa and her husband made a critical decision.

In the summer of 1983, she hugged her husband and three boys–ages 7, 5, and 3–and, with money borrowed from her in-laws, boarded a plane bound for Hong Kong at Manila Airport. At age 33, she was leaving her family behind to begin a completely new career: as a maid

Teresa was not alone. Some 105,000 Filipinas labor in Hong Kong as amahs, or maids. Almost a decade after the People’s Power revolution that toppled Ferdinand Marcos, the plight of these women remains a standing indictment of the Philippine government’s staunchly protectionist economic policies. Like Teresa, the amahs are for the most part smart, relatively well-educated women who found the door of opportunity slammed shut at home. They have college degrees in disciplines ranging from accounting to education, yet they find themselves cooking meals and scrubbing floors for Hong Kong shop clerks and secretaries. Like Teresa, many of them are mothers who are now raising other people’s children while their own grow up without them. Underscoring their predicament is a cruel irony: A generation ago, Filipino families imported Chinese maids.

Today the situation has reached crisis proportions. Within East Asia, disparities in prosperity have led to huge labor outflows, mostly from poorer countries such as the Philippines to richer ones such as Hong Kong, Singapore, and Korea. The maids are only the legal tip of a Filipino iceberg that includes such diverse occupations as nightclub dancers, construction workers, shop clerks, and mechanics. Their growing numbers and negative image have become sensitive issues both at home and abroad. When Teresa first arrived in Hong Kong 10 years ago, there were only 24,800 Filipina amahs at work; now there are more than four times that many, and locals complain that the women occupy the city center on Sundays, their one day off.

In the Philippines, the debased condition of these women has led to legislation calling for an end to the Overseas Worker Program. In 1993, Philippine public opinion was outraged by the death of a Filipina nightclub hostess in Japan whom Japanese authorities said died from hepatitis but whose family claimed she had been beaten. Filipinos are also upset by the virtual identification of domestic with Filipina throughout the region.

The current president, Fidel Ramos, has vowed to reverse some of the longstanding policies that have sent so many Filipinos abroad–a promise that the Philippine people have heard many times before. Ramos’s biggest obstacle is a reluctance among the Philippine establishment to admit that its self-perpetuating economic policies are largely responsible for the country’s descent into poverty.

Over the years, Philippine leaders have ascribed their abysmal economic failure to any number of root causes, including their colonial heritage, Marcos-era greed, and a series of natural disasters. The truth, however, is that the country’s poverty is no accident and the quandary in which Filipina maids find themselves owes itself almost directly to the most pernicious of economic sins: protectionism. For the past 40 years, under the guise of ensuring the country’s economic sovereignty, successive Philippine governments have enacted laws that have discouraged foreign investment, concentrated wealth in fewer and fewer hands, and diminished the standard of living for the average Filipino to the point where less than 50 percent of the country earns a subsistence wage. 

Nowhere is this clearer than in a comparison between the Philippines and Hong Kong, just a two-hour flight from Manila and the destination of so many Filipino laborers desperate for work. Just as the Philippines owes its current status as “the sick man of Asia” to longstanding protectionist policies, Hong Kong owes its stupendous wealth today to an ongoing commitment to open markets and a hands-off approach to business. For the past decade, Hong Kong has boasted an unemployment rate of under 2 percent, and its residents purchase more each year than the Japanese, other Asians, or Europeans. In 1993, Hong Kong’s per-capita income even surpassed that of its colonial protector, Great Britain.

But Hong Kong was no more destined to be wealthy than the Philippines was destined to be poor. If anything, it was a prime candidate for the sort of economic anemia that afflicts the Philippines. Lord Palmerston’s remark about Hong Kong upon its 1842 acquisition by the British–he called it “a barren island with hardly a house upon it”–was a fair description of its seeming promise, and even today its crowded population is spread over an inhospitable terrain that makes it utterly dependent on its neighbors even for basic resources such as water.

If Hong Kong’s natural obstacles to wealth were considerable, the man-made ones were downright staggering. No sooner had the colony begun to recover from the Japanese occupation of World War II than the Communist takeover of the mainland sent hundreds of thousands of desperate refugees to its shores. A few years later, a United Nations-imposed boycott of China saw Hong Kong lose its largest market overnight. Back in the 1950s and ’60s, the experts were not talking about the “Hong Kong miracle.” Back then, they were wondering if Hong Kong would survive.

Hong Kong withstood these pressures primarily by remaining open to foreign investment. While the Philippines and other East Asian nations chose to coddle their industries and put their faith in central planning, Hong Kong forced all its industries to compete with the rest of the world on their own merits and on a completely equal basis. And now, when countries such as South Korea are busy trying to pare down huge bureaucracies spawned by protectionism, Hong Kong is free to do productive business. There are no foreign exchange controls, and foreign companies are free to take their profits out if they choose. Taxes are stable and minimal, with none on capital gains and a flat tax on corporate profits. As Milton Friedman once quipped, “To see how the free market really works, Hong Kong is the place to go.”

This prosperity and freedom are largely the legacy of Hong Kong’s legendary financial secretary, John James Cowperthwaite. During the 1960s, Hong Kong was said to be governed “by the gospel of Adam Smith as expounded by his disciple John James Cowperthwaite.” Arriving in the colony as acadet officer in the civil service just three months after the Japanese surrender and charged with getting the economy back on its feet, Cowperthwaite immediately noted the degree to which Hong Kong’s resilient economy had already recovered without any government help. Cowperthwaite’s strength was that, more than most, he understood that even the most brilliant planner was no match for the collective genius of the market.

Whether it was water–which in those days was always in short supply–or food or energy, Cowperthwaite insisted that the best way around the problem was to allow free pricing among suppliers and to keep the doors open to anyone who wanted to enter. He did his part by keeping taxes low and refusing to spend more than he took in. “I see no reason,” he once said to a request for government to finance lower water rates, “why someone who is content with a cold shower should subsidize someone who is able to luxuriate in a deep hot bath.” Cowperthwaite, in fact, was so distrustful of intervention in the economy that he refused to allow the government to keep statistics on gross national product–on the grounds that if the government kept the statistics they would only misuse them.

This strategy was not simply do-nothingism. At the same time the government was keeping taxes low and spending under control, it embarked on a public housing scheme that would eventually shelter more than half the population. The difference was that Cowperthwaite could afford to do this since he maintained fiscal restraint and resisted calls to subsidize Hong Kong industry or give them any protection.

“Had Cowperthwaite taken the advice or yielded to all those who wanted more government intervention,” says Richard Wong of the Hong Kong Center for Economic Research, “Hong Kong would not have prospered. By keeping Hong Kong open he ensured that it would remain competitive.”

Certainly history has vindicated Cowperthwaite’s judgment. During the 10 years between 1961 and 1971 that Cowperthwaite was Hong Kong’s financial secretary, income grew faster there than anywhere else in Asia. The policy of keeping the door open to imports also fueled an export boom–at a phenomenal average annual rate of 13.8 percent over these years. Real wages increased by more than 50 percent over this period and remain roughly twice those of both Korea and Taiwan.

Hong Kong’s disavowal of protectionism extends to the lack of anti-dumping laws that are used even in the United States to keep competitors out. “Any economist will tell you that when you keep foreign business out you simply hurt your own people,” says Hong Kong treasury secretary and former trade negotiator, Donald Tsang. “All you are doing is cutting your nose off to spite your face. We keep our economy open because it is in our self-interest.”

(Note: Sir Donald “Bow-tie” Tsang went on to be Hong Kong Chief Executive at the time when Noynoy Aquino committed terrible embarrassing diplomatic blunders during the HK Tourist Bus Hostage Crisis.)

If Hong Kong owes its impressive wealth to a conscious political decision not to micro-manage the economy, the Philippines’ pervasive poverty represents the negative version of the same argument. There, a series of conscious economic choices made over the past four decades–especially a hostile attitude toward foreign investors–has allowed local monopolies to flourish at the expense of both workers and consumers.

Some have called it “crony capitalism.” But the preferences enjoyed under this arrangement have little in common with capitalism, and the cronies would lose their protected empires tomorrow if the state weren’t propping them up. The ruling elite in the Philippines has taken a country with a well-educated English-speaking work force and an enviable location smack dab in the midst of the world’s fastest growing market and turned it into an economic basket case.

This took some doing. Providence had bequeathed the Philippines many advantages, including an almost inexhaustible supply of natural resources: gold, iron ore, copper, cement, salt, granite, marble. Its soil was rich and its produce bountiful, including rice, sugar, coconuts, tobacco, bananas, and avocados. In the late 1950s and early ’60s, it was second in Asia only to Japan, and everyone assumed that its future would be as bountiful as its present.

As the World Bank put it in an upbeat report, “By comparison with most underdeveloped countries, the basic economic position of the Philippines is favorable…. |Apart from its~ generous endowment of material resources and high level of literacy, other favorable factors are the growth of the labor force, the availability of managerial and technical skills, the high level of savings and investment, rather good prospects for most of the Philippines exports, and considerable possibilities for import substitution.” The Philippines was considered so successful, in fact, that in the ’60s Manila was sending specialists to Korea to advise them on their development.

But the Philippines never realized its potential. Instead opening the door to foreign investors with the money and the wherewithal to make something of its resources, the Philippines wrapped itself in the cloak of protectionism. Under the guise of nationalism–the country had achieved independence in 1946–the Philippines passed a series of laws limiting what they called “alien” (foreign) involvement in the economy. It started with a limit imposed on alien-owned market stalls in Manila and soon covered everything from access to credit to quotas on imports. By the end of the ’50s, this had evolved into a full-fledged ideology called “Filipino First” that would figure prominently in the presidential elections for years to come.

In 1960, Philippine President Garcia summed up the Filipino First policy as merely “an honest-to-goodness effort of the Filipino people to be master of their own economic household.” His secretary for commerce and industry, Manuel Lim, likewise described the policy as simply an effort to ensure that Filipinos get some share of the benefits flowing to foreign investors. Of course, it was slightly more than this. Although both Garcia and Lim went out of their way to say the Filipino First policy would be fair to outsiders, they both saw foreign involvement in the economy as a “threat” and a cause for alarm. Although the policy was later relaxed somewhat, the emphasis remained on ensuring Philippine “supremacy.”

“It’s the classic mistake for developing countries,” says Richard Wong. “Despite all the populist rhetoric, whenever you make it more difficult for foreigners, all you are doing is taking money from the public and putting it into the hands of the vested interests.”

In the Philippines, protectionism was intertwined with racism. Many of the local entrepreneurs belonged to the country’s sizable Chinese minority, and many of the government regulations attempted to force them from their economic niches. Two of the most infamous regulated participation in retail selling and the corn and rice industries. In June 1954, President Ramon Magsaysay signed “An Act to Regulate the Retal Business,” which was followed by a 1964 measure that tightened the screws even more. The gist of the regulations was that no industry or store could sell directly to the public unless it was Filipino owned; otherwise the business had to sell to a Filipino first. The object was to make sure that Filipinos got a piece of the action on every sale. But in practice, the regulations simply created a middleman who raised the final cost to the consumer. The almost-immediate effects included a precipitous drop in the number of newly registered retail businesses and a sharp rise in general prices.

Much the same thing happened in 1961, when the Philippines passed another protectionist act, this one “Limiting the Right to Engage in the Rice and Corn Industry to Citizens of the Philippines.” Like the retail business law, this one took aim at the Chinese merchant population by decreeing that only Filipinos would be allowed to participate in rice and corn production. This was a big decision, because at the time rice was both the chief staple of Filipinos’ diet and a significant commercial export. In 1960 there had been 6,100 foreigners registered in the rice and corn business, but by the summer of 1962 the executive director of the Rice and Corn Board, E. V. Mendoza, reported that the program had “worked” in running foreigners out.

“Success,” however, was curiously defined. Apart from encouraging fraud–some foreigners simply put their companies in the names of their Philippine wives or friends–it had a disastrous effect on production and prices. Mendoza was correct in noting that by year’s end most of the rice and corn business was forced out of foreign hands. But the price paid by the population for that change was a severe rice shortage. The Philippines went from a country that exported rice to one that imported it, a situation that did not change until much later in the decade when scientific advances introduced a new, “miracle” rice capable of tremendous new yields.

The government’s continuing support of protectionist policies in the face of such abject failures is the reason why Max Soliven, editor of The Philippine Star and the country’s most popular columnist, blasts the Filipino First philosophy as “the pirate flag of convenience for vested interests.”

“Every big foreign investment project,” says Soliven, “is slandered as ‘a scam’ or labeled ‘imperialist exploitation,’ and thus those two cabals of conspiracy, the Old Rich and the nouveau riche, manage to fight off and repel ‘the enemy.'” Filipino First, says Soliven, should really be called “Filipino Last and Always.”

As far back as the early 1960s there were voices raised in warning. In 1962 the president of the Philippine Chamber of Commerce, Alfonso Catalang, went on television to say that Filipino First was shooting the country in the foot. My magazine, the Far Eastern Economic Review, warned that “Filipino politicians seem to favor securing foreign loans instead of inviting foreign capital to come in.” The direct result of such choices were the bloated Philippine monopolies that still stand before us today, protected from foreign competition and unresponsive to the needs of the country.

Although myriad regulations restrict foreigners doing business in the Philippines–foreign banks, for example, have not been permitted to open new branches since 1948–the most effective way of keeping them out has been a law limiting the amount any foreigner can own in a business to 40 percent. At the start of his reign, President Marcos made some moves to open up the economy, but instead of busting the monopolies he merely put his own buddies in charge of them. Nor did things improve with the People Power revolution of Cory Aquino. By 1991 foreign investment in the Philippines totaled only $783 million–compared to about $5 billion for Thailand and almost $9 billion for Indonesia, which is just about as poor as the Philippines.

In many ways, in fact, Aquino only made the situation worse. The constitution drafted by her associates specifically blocks or severely limits access to vast segments of the economy by outside developers, especially in the area of natural resources. Section 12, for example, requires that the “State shall promote the preferential use of Filipino labor, domestic materials and locally produced goods.” In effect, the revised constitution applies the 40-percent limit to all but a few areas. Filipino First is back with a vengeance.

The reason the 40-percent limit is so debilitating is that as long as votes in a company are pegged to the owner’s share, no foreign investor will have control over his money. This is particularly distressing in a developing country such as the Philippines, where the economic climate is uncertain and the risks are already high. Foreigners are unlikely to invest millions of dollars if they don’t have a say over how the money will be spent.

“If I had to name one thing that has hurt the Philippines more than anything else, it’s this 40-percent limit,” says Peter Wallace, an international business consultant and economist who has lived in Manila for many years. “We had a similar problem in Australia years ago–we were resource rich but cash poor. Much of Australia’s development came about because it opened the door to those who had the money to develop, especially in the mining industry.” In testimony before the Philippine Congress, Wallace pointed out that if the Philippines followed Australia’s lead, the country’s abundant resources would finally start paying some dividends.

The development of natural resources is hardly the only area of the Philippines’ economy affected by the lack of foreign capital. The nation’s infrastructure, for example, remains one of the worst in Asia. President Ramos has recently eased the ongoing power shortage that just last summer was responsible for blackouts of 10 to 12 hours a day. But the shortage never would have occurred had the country opened energy development to foreigners. “Making yourself open to foreign investment does much more than bring in money,” says Wallace. “It brings in badly needed technology. It grows your exports. It creates jobs, and it generally also develops a host of industries that pop up to serve the new investors.”

The Philippines’ nationalism has, in fact, managed to strangle every aspect of economic development. Foreign goods remain a luxury that only the protected rich can hope to afford. Recently Philippine Sen. Blas Ople pointed to a study by the government’s own assistant secretary for trade documenting that no less than 167 signatures were necessary to release an imported car from the Bureau of Customs. Ople had a field day when the customs commissioner proudly announced he had greatly reduced the number of necessary signatures: to 50.

The regulatory choke hold is also responsible for a phone system so abysmal that it is an international embarrassment. In a November 1992 visit to Manila, Singapore’s senior minister, Lee Kuan Yew, publicly spoke out against the Philippine telephone company as “an example of a powerful vested interest … which has had a monopoly for 64 years.” He also cited a standing joke that “98 percent of Filipinos are waiting for a phone and the other 2 percent are waiting for a dial tone.” In fact, fewer than 2 out of 100 Filipinos have phones in this nation of 61 million people, and the Philippine Long Distance Telephone Company controls more than 90 percent of the existing 600,000 lines. Their monopoly has been helped along by Supreme Court decisions that shut Eastern Telecommunications out of the market and awarded a contract to PLDT even though its foreign-backed competitor had outbid it by a factor of six.

Comparing the Philippines’ phone system to Hong Kong’s actually provides a thumbnail sketch of how two economic systems produce hugely different results. While the Philippines stagnates with one of the worst phone systems in the world, Hong Kong boasts one of the best: fully digitalized with about 63 phones per 100 population, about double the number of another East Asian powerhouse, South Korea. It is so easy to get a phone in Hong Kong that almost all the colony’s shops have a phone sitting out front that customers can use free. And with new developments in related technology (such as cellular phones) now becoming popular, the government reviewed its telecommunications policy and decided to open up additional networks to increase competition.

Beyond all the theoretical and statistical explanations, however, the painful human costs of the different economic strategies pursued by Hong Kong and the Philippines are dramatically illustrated by the booming growth of domestic helpers in Hong Kong. A generation ago, middle and upper-class Filipinos were likely to have poor Chinese as amahs. Today the situation has flip-flopped. Thousands of desperate Philippine women just like Teresa Concepcion–college educated and with children of their own–are forced by circumstances beyond their control to go abroad and work as domestics. The ones who are lucky go to Hong Kong. Many go to the Middle East or other parts of Asia, where the work is even more demanding and the environment even more difficult.

Despite their relative good fortune, their life in Hong Kong is not an easy one. According to a survey by Asian Labor Update Research, some 40 percent of these maids work 14 to 15 hours a day and 30 percent work 16 to 17 hours a day for a standard monthly wage of $415, much of which is sent back home. If they are “lucky,” as is Teresa, they have an “amah’s room” off the kitchen–a non-air-conditioned eight-foot-by-six-foot cell barely big enough for a twin bed. Less fortunate amahs sleep on a couch or share a room with the younger children of their employers.

Life on the bottom rung of society has its other problems as well. Filipinas often report that the Chinese look down on them and treat them harshly. Indeed, one of the colony’s biggest companies, Hong Kong Land, recently tried to bar them from sitting on its grounds on weekends when they congregate with their friends in the center of town.

Occasionally, their work may even prove fatal. One Filipina, Pascuela Destas, gave her life for her 5-year-old charge by pushing him out of the way of an out-of-control bus. But saving the life of her employers’ son meant that Destas left her own three boys back in the Philippines without abreadwinner.

Although life in Hong Kong may be difficult, the maids agree on one thing: It is better than being in the Philippines. Thirty-eight-year-old Eppie Cruz is typical. Ten years ago she received her B.S. in accounting from the Philippines’ University of the East. After her graduation, she came to Hong Kong to work as a domestic to support her sisters back home. “Of course we would like to stay in the Philippines if the opportunity was there,” says Eppie. “But the jobs are here.”

Eppie is wearing a Giordano blouse, a popular brand in Hong Kong roughly equivalent to the Gap in America. In the Philippines, she says, it would cost three times as much as it does in Hong Kong. The same goes for her Sony Walkman. Back in her tiny room, she has a telephone, an air conditioner, a JVC television, and a host of minor appliances that are standard in Hong Kong but would be regarded as luxuries in the Philippines.

Or consider 49-year-old Cora Alanunay. Cora is the mother of six children–two of whom are with her in Hong Kong, also working as domestics. One son, Ramon, is working in a hospital in Saudi Arabia. She came to Hong Kong shortly after she was widowed and needed work, and like her friends she is impressed by Hong Kong’s commercial openness and the opportunity it breeds. Although Cora makes only a minimal wage in Hong Kong, it’s far more than what another son makes back in the Philippines as a bank executive.

The incentives are as clear as they are heartbreaking. Today Teresa Concepcion’s children are 16, 14, and 12. Since leaving the Philippines nine years ago, she has seen her boys and her husband just once each year for a few weeks’ holiday. Yet she has little choice. Her salary of $520 per month is 13 times what she could hope to make in the Philippines, and each month she mails half of it back home. Like other Filipina exiles in Hong Kong, Teresa stoically accepts the trade-offs: “I constantly remind myself how important it is to send back the money to them. Otherwise I would get depressed thinking about the kind of work I’m forced to do.”

These amahs are not alone. Ever since the Philippines started its Overseas Employment Program in the mid-1970s, hundreds of thousands of Filipinos who would otherwise have stayed at home have gone into exile to provide for their families. They have also provided for their country. Last year, the 4.5 million Filipinos working abroad helped bail out their country’s cash shortages by sending home an estimated $2.5 billion in foreign exchange-more than the revenue from a number of important Philippine industries, including tourism.

Having inherited an economy that so demeans productive workers, President Ramos has moved to open up the banking system and, most recently, has vowed to fulfill promises to sell off state enterprises. But the problems remain formidable–particularly the protectionist constitution that walls off investment in any number of areas and a Filipino First legacy that endures. Perversely enough, at a time when the Philippines ought to be out begging for multinational investment, a major argument in the national legislature against the privatization of firms such as Petron Oil is that they may be bought by foreigners.

Ramos, too, for all his stated intentions to the contrary, is not above playing the old games. Back in 1975, Imelda Marcos erected pretty white fences so that the delegates to the annual IMF/World Bank meeting would not have to be offended by the sight of the very poor they were supposed to serve. Last year on May Day, President Ramos announced plans to close the Smoky Mountain garbage dump–long a favorite of foreign reporters looking for a symbol of the Philippines’ crushing poverty. The thousands of scavengers who eke out an average $3.00 per day picking through Smoky Mountain’s waste for anything they can sell, use, or eat are upset that the government is once again taking away what little livelihood they have. The Philippine poor will be forced to move out of sight, if not out of poverty.

And in Hong Kong, Filipina mothers and daughters continue to pay a devastating social and economic price for the protectionist schemes of their government. Most of these women started out with big dreams; Teresa Concepcion thought that with her college degree she’d have a fulfilling career in the Philippines, not a job scrubbing floors in Hong Kong. Today she just wants to go home. “I’d like to return to the Philippines in two or three years,” she says, “maybe to farm with my husband.” Even if she is lucky enough to do so, it will mean her children will have grown up without her. What kind of protection is that?

William McGurn is a senior editor at the Far Eastern Economic Review.

Here's how bad the level of FDI has been in the Philippines when compared to the rest of ASEAN.

Here’s how bad the level of FDI has been in the Philippines when compared to the rest of ASEAN.

Tale of Two Countries

Making the economic comeback w/ higher private FDI

Dr. Gerardo Sicat

(taken from the Philippine Star – originally published: 13 June 2012)

by Dr. Gerardo Sicat

As economic opportunity knocks on the country, the question is how to maximize the gains for the social and economic good.

“Two needed market reforms.”

There are two market reforms that can bring us to the front ranks of high growth countries. These reforms concern, first, the attraction of private foreign capital in critical sectors of the economy and, second, the improvement of flexibility of the labor market to create greater employment.

I have written extensively on these topics on previous occasions. I will try to introduce new arguments in support of these reforms as much as practicable. (Today, I discuss FDI policy.)

“Broadening the capital base of the economy.”

The improvement of the flow of private foreign capital has to do with the liberalization of the constitutional restrictions on foreign capital.

These restrictions deal with provisions of the constitution with respect to special sectors of the economy: land, natural resources and public utilities. In terms of the corporate framework, the restrictions are summed up in the “60-40” equity rule favoring Filipino over foreign capital participation.

The policy as it stands permits all foreign investments to come to the country except those that are specified in Foreign Investments Negative list. This list enumerates specific economic activities where foreign equity is either limited or banned. But direct incentives to promote specific investments rest mainly with the BOI, further constrained by the restrictive economic policies pertaining to foreign capital.

“President Aquino’s position on the ‘60-40’ rule?”

It is unfortunate that when asked pointedly during the talk that he gave before the alumni group of US business schools recently, President Aquino replied that he felt more “nationalistic” on this issue, implying that he does not intend to work to amend this provision.

The President can speed up economic growth by directing more foreign direct investments to the country through the liberalization of these provisions. The question cannot be put aside. New investors will always ask the same fundamental questions, and they compare our answers with what other countries do. Why not simply do away with the issue?

Nationalism has been used as main cover of the standard argument in support of these restrictions. While indeed the economy has grown, because of the limitations imposed by this policy, the nation’seconomic growth has been limited and less inclusive.

The benefits of development have been confined to a smaller segment of the population. In this respect, the policies have hampered growth, thereby reducing employment and productivity at home.

“Wide gaps in investment needs.”

Today, the big gaps in services exist in public utilities, transportation, and infrastructure. Despite our good natural endowments, there is also under-investment in the natural resources industries and in agriculture.

These are sectors in which the involvement of private foreign capital leaves much to be desired. Energizing private foreign capital to invest in these sectors would imply providing greater leeway to allow foreign capital to move into these sectors.

“PPP participation is narrow.” 

A most noticeable aspect of the PPP (public-private partnership) projects is that there is limited participation of private foreign capital in them.

Many of the infrastructure projects require huge financing and also a high level of technical capacity of the main contractors. And private foreign capital is in search of good investment projects because of low world demand.

A liberalization of the rules regarding the constitutional restrictions – which could only be amended by a concerted effort to deal with the issue through constitutional amendment – would line up more players to the PPP infrastructure projects pipeline of the government.

A consequence of this provision is that foreign capital will seek Filipino partners to do their job well. In their homeland, Filipino enterprise can leverage their contributions to the projects even if in the process they allow a larger proportional inflow of foreign capital and foreign expertise to get the job done.

Solving the infrastructure problems of the country has a sizable impact on raising the country’s economic productivity, thus accelerating the growth of the whole economy. The sooner the better.

“Raising Philippine international competitiveness.”

A perverse outcome of the “60-40” investment rules in the availment of BOIinvestment incentives is that we have promoted relatively weak national firms in the domestic economic sector. This is a setback since we are entering a new stage of competition within the larger free trade ASEAN market.

The best evidence of this can be found in our department stores, grocery shops, and in the hardware and construction supermarkets of the country. Goods that are made in other ASEAN countries can be found that give us tough competition. Our locally made products tend to be more expensive in these stores and sometimes suffer from comparison.

These are products produced for home consumption and for the domestic market. Sometimes we find products that they produce which we do not make at home. The countries that have welcomed foreign direct investments with less restrictive conditions compared to us.

The joint venture enterprises and FDI owned companies in these other countries have managed to encourage firms that produce goods that are of high quality under competitive international pricing. These products could have been produced in the Philippines but the foreign investors had moved to the other countries where they located their factories.

“Integrating the industrial export sector with the domestic economy.”

Another perverse consequence of the “60-40” is the disconnect that exists between the domestic industrial sector and the export sector. The export sector imports raw materials to process them for export.

Our record in industrial export has been reasonably successful. However, we have not developed greater depth in domestic industrial sector because of restrictive policies on joint ventures. The result is that there is very low domestic procurement ratio for industrial export firms.

There are not enough world class FDIs and domestic firms that produce for the local market. The foreign investment promotion laws have segregated domestic enterprises with the enterprises that produce for exports.

This is unlike in Thailand, Malaysia, and now, also in Indonesia and in Vietnam! PEZA-located firms prefer to buy their inputs from world supplies rather than from domestic firms because the latter do not have competitive sources of supply if they exist at all in the domestic economy.

Of course, the evidence for this is simply that PEZA has succeeded more in inviting foreign direct investments compared to the BOI. And PEZA has only a more recent history compared to that of the BOI which dates back to 1967.

* * *

* * *

The author’s email is: gpsicat@gmail.com. Visit this site for more information, feedback and commentary: http://econ.upd.edu.ph/gpsicat/

Dr. Gerardo Sicat is an economist who advocates bringing in more FDI and MNC’s as a means of increasing the number of jobs in the Philippines by removing the anti-FDI provisions in the economy that have caused the Philippines to remain poor and unable to provide jobs to its people.

 

It’s all about Competition

sgp

Competition forces you to shape up, or ship out!

It is well-known that the concept of healthy and fair competition has the effect of an “invisible hand” that essentially results in benefits and improvements for everyone.

We CoRRECTors and other advocates of Constitutional Reform do not subscribe to the idea that human beings have to be saints so that things will get better. Humans are fallible and make mistakes. Instead, it is clear that when people have to compete, that’s when people improve: because competition forces people to shape up or ship out. Whenever there is healthy competition, unscrupulous behavior ensures that one’s competitors will eventually win. When there is competition, lousy service and lousy products lose out as consumers prefer to buy the better products & services.

CoRRECT™ – Constitutional Reform & Rectification for Economic Competitiveness & Transformation is really all about Competition, Competitiveness, Competence, and Choice.

Let us review the Three Point Agenda:

1) Economic Liberalization

Companies compete against other Companies for Employees

With economic liberalization, we allow more investors into the economy, whether they be foreign or local. It is very possible to have local players comprised of talented local Filipino technology gurus (who unfortunately do not have their own cash) who are supported and funded by foreign venture capitalists’ seed money.

We will have more foreign investors and foreign companies coming in – instead of having to send Filipinos abroad to work for foreign companies in foreign lands – so that Filipinos can earn and learn (foreign multinationals often have good skills and personnel training programs) while being with their families, and not needing to work as migrant workers and OFW’s abroad.

With more economic players, there is more competition. Companies will compete against each other and will thus be forced to provide better goods and better services to the end consumer. Simple Law of Supply and Demand: Companies will be forced to compete against each other in hiring the best employees, dangling higher wages or benefits just to attract applicants to choose to work for them and not for a competitor.

Filipino workers will see that more jobs also means higher wages, with the highest wages going to the most competitive, skilled, and hardworking workers. Many workers will thus seek to improve themselves and compete against others, by learning new skills, and making themselves more attractive to employers in order to command higher wages.

Compare a situation that has an abundance of competition versus a situation that has a lack of it.

Without competition, you end up with lethargy & laziness. You end up with Despair. People feel resigned to the fact that no matter what they do, they’ll continue to earn low wages and they can’t find alternatives. And when they try to go into business, they also realize they don’t have much capital to begin with (and with the 60/40 constitutional provisions, generous foreign venture capitalists and angel investors are nowhere to be found) and even if they do, they may find that while there are many people, only a few have jobs that pay them enough to allow them to afford whatever it is they’re selling.

Clearly, competition is better. Economic Liberalization ensures competition, and economic competition improves our economic lives as wages improve.

The Philippines’ OFW problem is really nothing but a serious manifestation of the obvious lack of competition in the economy and lack of companies and jobs, forcing Filipinos overseas either as overseas workers, or as full-fledged emigrants.

When jobs are scarce in a country, people are forced to look for jobs overseas.

2) Region-based Decentralization (Evolving Federalism) 

Regions Competing Against Other Regions in attracting Investors

With Region-based Decentralization, the regions will be empowered to make their own economic and business-related decisions so that they themselves can decide how they want to attract investors to come over and set up companies in the regions.

Instead of a centralized unitary single monolithic entity such as Imperial Manila, we end up with empowered autonomous Regions who can compete with each other in trying to best attract investors and businesses. Whether it be by providing lower taxes or creating better policies, or it could even be by simply improving the efficiency of their own regional bureaucracies, the simple point here is that by making the empowered Regions compete with each other, they are forced to improve themselves in order to attract economic opportunities and businesses because in turn, the more businesses go to regions, the higher their revenues, the better the region’s infrastructure, and the more respectable the region’s leaders become.

If certain regions succeed in making themselves richer by successfully attracting so many investors and multinational companies as well as national companies originally headquartered in Manila, since they are autonomized and empowered to keep a bigger share of the tax revenue that they collect and are also empowered to make their own regional decisions, they may even decide to raise the salaries of their own government employees and leaders, thus making it unnecessary to resort to graft and scraping little kickbacks just to decently raise families. Regions will compete against each other and thus try to lessen their inefficiencies, lessen corruption, lower taxes, improve infrastructure, etc.

Competition clearly improves things, not just in a corporation versus corporation type of competition but also in a region versus region type of competition.

3) Parliamentary System

Parties competing against other parties to provide better results

In the current Presidential System, there is no real competition based on competence and platform. Instead, the competition is based on name-recall and popularity: both of which are irrelevant when it comes to delivering results.

But in a Parliamentary System, real competition that makes sense happens.

It’s a competition of Party versus Party (as opposed to personality versus personality).

In parliamentary systems, there is intra-party competition where the best members move up to the top, the best one becoming party leader. Parties also compete against each other on the basis of platform and performance

Notice also that in Parliamentary Systems, party leaders (who are in the running to become Prime Minister if their respective parties win majority of all seats or if their parties form coalitions where they have the most seats within the coalition) campaign using the pronoun “We.” They speak more collectively about their party’s platforms and their party’s past performance by always referring to “Our Party” or “My Party” unlike in Presidential Systems where presidential candidates use the pronoun “I” all the time.

Parties will be forced to compete against other parties by presenting their platforms to the public and showing that their platforms are more responsive to the needs of the people. More importantly, parties will be forced to compete against each other by choosing the best members among themselves to be the senior members of the party, the best of whom will be the party leader.

In a Parliamentary System, unlike in a presidential system, the Prime Minister and his majority bloc are always in competition against the Leader of the Opposition and his minority bloc. Active Debates ensue. The Leader of the Opposition tries to show that the Prime Minister does not know what he is talking about. The Prime Minister, on the other hand, must always be on his toes to show that indeed, he does know what he is talking about and has the facts to prove his point…

In a parliamentary system, there is an intense system of competition where the Majority’s “Government Cabinet” is always being challenged by the Minority’s “Shadow Cabinet.”

In a Parliamentary System, the competition between the Opposition versus Government during parliamentary debates ensures that the Government is on its toes

The Minister of Finance from the Government Majority is always on his toes and must always prove himself as the Shadow Minister from the Opposition Minority always challenges him and questions his decisions. In fact, since every single decision that the Minister of Finance makes within the Ministry of Finance regarding budget and other concerns is always done in the presence of the Opposition Shadow Minister of Finance, everything is above board, everything is transparent.

In a Parliamentary System, the Majority Government faces off in a highly competitive confrontational seating arrangement against the Minority Opposition

In fact, even the seating lay-out of a Parliamentary System (particularly the Westminster and Spanish systems) force the Majority and the Minority to face-off against each other in a face-to-face debate. The Government side sits on one side of the parliament hall directly facing the Opposition who are on the other side. Compare that with the Philippine legislative chambers’ seating lay-outs where all members of the House of Representatives and even the Senate all face the front where the presiding officer (Senate President or Speaker of the House) is seated.

There is no real sense of “competition” between the two sides. As such, this obvious issue of the physical seating lay-out in the legislature is also why there is a very poorly-developed sense of party cohesion in the Philippine setting. If the Philippines shifted over to a Parliamentary System where the seating lay-out features direct face-to-face confrontation between Majority versus Minority, this institutionalized competition between both sides will actually force the development of an improved party system: It will force parties with similar philosophies and platforms to coalesce or merge and prevent the proliferation of too many fractured mini-parties, while it will cause parties with very different ideas to become distinct as far as their platforms and policy proposals in concerned.

Most of all, forcing Majority and Minority to face-off in debates as a result of such a seating layout fosters the kind of greater competition that results in higher transparency and lower corruption.

In such a system, you don’t need to hope and pray that your government’s leaders are extremely honest people. Instead, the competition between the Minority Opposition and the Majority Government keeps them honest, as the Minority-Opposition essentially keeps close watch over the Government’s dealings and decisions. The Majority-Government, on the other hand, will try its best to ensure that it is able to deliver on its promises and thus enable it to gain the trust and confidence of the voting public for the next general elections.

In the presidential system, the decisions made by presidents and their cabinets often tend to be done behind closed doors, without any observation or scrutiny unlike in a Parliamentary System where the intense competition between Majority Government and Minority Opposition blocs forces the opposition to scrutinize the Government in the minutest detail.

Knowing this, it is thus no wonder that countries using parliamentary systems dominate the top ranks of Transparency International’s CPI listing (Corruption Perceptions Index) of the Least Corrupt Countries of the world, while presidentialist countries (and semi-presidentialists and dictatorships) dominate the bottom tiers.

In a Parliamentary System, there is Competition everywhere. There is Competition among parties and competition within parties.

Among parties, the parties try to outdo each other by executing policies better and producing better results than their opponents, and presenting better planned projects, better planned policies, and better platforms and manifestos to the general public.

Within parties, party members compete against each other to show who embodies the party’s principles and who is worthy to move up the ranks and eventually take on important roles within the party and within government in case the party wins a majority and forms the government.

A lousy debater who cannot articulate his thoughts properly, cannot think on his toes, has poor knowledge of history, poor knowledge of geopolitics, poor knowledge of policy, poor knowledge of economics, etc can never rise up the ranks in a parliamentary system. In a parliamentary system, the higher you go, the more exposed you will be to heated debates and intense scrutiny by the opposing side.

Not everyone in a party can do this. And certainly, because of this, not everyone aspires to become a party leader (and therefore only a select few ever really aspire to become Prime Minister).

Becoming a Prime Minister, a deputy prime minister, a minister, or some other senior member is clearly not for the faint-hearted and especially not for the weak-minded. To be a Prime Minister, you must be better at debates than your own party mates. You must be the “go-to-guy” or “go-to-gal” that everyone relies on when there is a difficult question. You must know all the relevant facts and figures in order to support your statements and often, you will not have notes or teleprompters helping you out when you extemporaneously respond to questions during debates and Question Time. There is no such thing as “Teka muna, tanungin ko muna advisers ko” in parliamentary debates.

The parliamentary system is all about healthy competition. It’s the kind of competition within parties that ensures that the best and most competent member in a party becomes its leader.

Competition between Minority bloc versus Majority bloc ensures that Corruption is kept very low as scrutiny of government is very intense.

Competition between Parties ensures that parties come up with solid platforms and solid plans of action.

Clearly, competition forces the best in everyone in a parliamentary system.

Sadly, the Philippines is presidential, that’s why we continue to be mired in mediocrity.

 

In Summary…

CoRRECT™ is all about COMPETITION.

1) Economic Liberalization:

Competition among corporations and companies creates more jobs, increases wages for employees, and creates better goods and services for consumers/clients/customers.

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2) Evolving Federalism:

Competition among regions ensures that regions try to outdo each other in attracting investors, coming up with better policies, streamlining their bureaucracies, improving their infrastructure, etc.

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3) Parliamentary System:

Competition among political parties and blocs ensures that the public ends up with better parties, higher quality politicians, competent leaders, and the direct competition between Opposition Shadow Cabinet versus Government Cabinet means greater scrutiny of decision-making & budget concerns, thus drastically reducing/minimizing corruption and influence peddling.

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About the Author

OrionOrion Pérez Dumdum comes from an IT background and analyzes systems the way they should be: logically and objectively.

Being an Overseas Filipino Worker himself, he has seen firsthand how the dearth of investment – both local and foreign – is the cause of the high unemployment and underemployment that exists in the Philippines as well as the low salaries earned by people who do have jobs.Being Cebuano (half-Cebuano, half-Tagalog), and having lived in Cebu, he is a staunch supporter of Federalism.

Having lived in progressive countries which use parliamentary systems, Orion has seen first hand the difference in the quality of discussions and debates of both systems, finding that while discussions in the Philippines are mostly filled with polemical sophistry often focused on trivial and petty concerns, discussions and debates in the Parliamentary-based countries he’s lived in have often focused on the most practical and most important points.

Orion first achieved fame as one of the most remembered and most impressive  among the winners of the popular RPN-9 Quiz Show “Battle of the Brains”, and got a piece he wrote – “The Parable of the Mountain Bike” – featured in Bob Ong’s first bestselling compilation of essays “Bakit Baligtad Magbasa ng Libro ang mga Pilipino?” He is the principal co-founder of the CoRRECT™ Movement to spearhead the campaign to inform the Filipino Public about the urgent need for Constitutional Reform & Rectification for Economic Competitiveness & Transformation.

 

Crucifying Cruz

Neal H. Cruz at center: He is anti-Foreign Investment, anti-Constitutional Reform, but he is sipping Foreign Wine with pro-Foreign Investment, pro-Constitutional Reform Speaker Belmonte

After reading the article written by Neal Cruz last October 17, 2011  titled Cha-cha will let foreigners grab our lands, I couldn’t help but have the urge to reply to some of the claims made by Mr. Cruz on the aforementioned article.  Had not he been so serious about the claims he had made, I could have easily dismissed it but with the amount of vitriol he likes to throw against the “evils of foreigners” and other assorted nationalist rah rah, I felt I really needed to write this as a response.

In his article, he writes that the proposed ChaCha or Charter Change, which aims to amend provisions of the current 60/40 ownership restrictions placed on foreign investors, will allow foreigners to “grab land from the Filipinos.” Despite not having anything to back this statement up, for him it is a fact simply because it stirs nationalism in the hearts and minds of Filipinos against the much-dreaded “evil white man” and when most of the populace has to deal with the harsh realities of life, nothing is more comforting than the nationalistic wails of “Pinoy Pride” or “the Philippines belongs to Filipinos only.”

Let me explain why his statement of foreigners “grabbing” all the lands here is both dubious and ridiculous. Vietnam and China, both countries who have really large foreign investments, allow foreigners to fully own 100% of any company set up in these countries. Section 8 of Article 2 on the 1996 Law of Foreign Investment in Vietnam states that a foreign investor is defined as “An enterprise with one hundred (100) per cent foreign owned capital means an enterprise in Vietnam the capital of which is one hundred (100) per cent invested by foreign investor(s).” Clearly this states that any foreign company who wants to invest in Vietnam can invest with 100% foreign ownership. As per land ownership, Section 1 of Article 5 of the Vietnamese Law on Land states that “Land belongs to the entire people with the State as the representative owner” meaning that land ownership lies in the hands of the State, which then leases the land (or sells time-bound “land-use rights”) to foreign investors. That’s because the two countries aforementioned follow the principles of Georgism, which states that anything that is not created by man, in this case the earth, cannot be owned.  No evil white man grabbing land there.

Skyline of Hanoi, capital of Vietnam

Although his claim that marginalized local folks will “run out of land” if we allow the “evil white man” to own lands in the Philippines due to the country’s small size and ever-increasing population sounds academic to some, it is false since there are other countries that are smaller with lesser land area that allow foreign ownership of lands yet their citizens are neither “marginalized” nor “evicted” from their lands to pave way to foreign ownership. Singapore, which is a lot smaller compared to the entire island of Luzon (Singapore, with a total land area of 778 km2, is even smaller than Marinduque, which has a land area of around 963 km2), allows foreigners to own land under the 1973 Residential Property Act which states that “The Act seeks to strike a balance between giving Singaporeans a stake in the country by being able to buy and own residential properties at affordable prices, while attracting foreign talent by allowing permanent residents, foreign companies and limited liability partnerships that make an economic contribution to Singapore to purchase such properties for their occupation.” Yet you never hear of any “oppressed” or “marginalized” Singaporeans who cannot own land. Seems like there is something so special about the Philippines that makes “evil white men” want to grab all the land.

Adding more fuel to his “Pinoy Pride” ultra-nationalism is his statement about “European settlers grabbing the lands of Amerindians and confining them to reservations”, as nothing is more dreadful than instilling the thought that evil foreigners are out to get your land and have their way with the local women, despite being historically inaccurate. When the first batch of Europeans arrived in 1492, this vast land now known as America was not owned by the Amerindians as a nation as there was no “Amerindian or Cherokee” nation that existed during the time, despite claims made by these sponsors of White guilt. The land was inhabited by several Indian nations such as the Cherokee, Iroquois, Apache, Mohawk and others who among themselves fought for land ownership. Historical facts be damned in the name of “Pinoy Pride.”

This is the result of very little investment (foreign or local), resulting in very few jobs…

And his claim that the 40% limit of foreign ownership of companies and utilities here in the Philippines is for the “benefit” of the Filipino people is ludicrous as the results has proven to be detrimental to the Filipino people. Looking at utilities alone, the Philippines ranks as having the highest power rates in Asia, and among the highest power rates in the world. Why? Because power generation is monopolized by the state-owned NAPOCOR , which then provides little or no competition to other foreign/local energy generation firms which then gives little incentive for NAPOCOR to generate electricity at lower prices through the use of less fossil fuel/coal dependent means such as geothermal and hydroelectric power as they do not have to compete in the consumer market with lower power rates and value-added services, which is the very essence of competing companies in free markets. This in turn allows them to sell electricity at fixed rates to various electric providers, who in turn have the liberty of overcharging for their services as there is no one else competing with them. As a result, many Filipinos have to suffer as foreign investors are hesitant to set shop in the Philippines due to the high energy costs which in turn keeps most of the population jobless and local businesses too have to struggle with the high power costs to keep themselves operational and the regular Juan Dela Cruz has to endure paying high electric bills.

Another example is the Internet. According to SpeedTests.net, the Philippines ranks 121st in terms of internet speed (Average download speed/download rate) at 787 kbps (0.8 mbps) or 98 KB/sec, lower than its Southeast Asian neighbors(Malaysia at 1269kbps or 159kb/sec, Singapore at 4078kbps or 510kb/sec, Thailand at 3529 kbps or 441kb/sec) Want to know why? Since foreign investors have limited ownership and because foreign ISP’s cannot invest in the Philippine market, which also allows them to invest in the technology for high-speed internet, the populace is left with a few major internet providers who are free to jack up internet prices or provide cheap internet but with terrible service as these companies have no competition in the local market. I don’t think the average Filipino wants to pay higher electricity or live with mediocre internet connection all in the name of “Pinoy Pride.”

His third to the last statement made about Petron’s sale to ARAMCO smacks of his ignorance on the free market system. Free markets work through the basic law of supply and demand, which states that when the demand is low and the supply is high, prices are low and vice versa. By allowing the government to intervene, which is what he wants through price controls, this creates an artificial demand as lowering prices for the sake of the “poor” masa only allows for more demand, and when supply can’t keep up, you eventually run out of supply, the end result being long bread lines, just like in communist countries such as the USSR in the late 1980’s.

It is true and sad that most Filipinos cannot afford the means to buy housing and their own land, coupled with the skyrocketing costs of commodities and other necessities. But the solution does not lie in big government, corporate monopolies and autarky. By keeping out foreign investors and kicking them out, which at the end of the day is what Mr. Cruz wants, it will only worsen the plague as there will be no new jobs generated and we’ll end up with high costs of products & services and more poverty. Without a lot of lucrative job opportunities for local employees, it destroys both the ability of the local economy to grow through the multiplier effect and social mobility, meaning the ability of those who want to move up the financial food chain to do so, thus leaving us no choice but having to rely on our overseas workers for their dollars.

Looking at our more successful neighbors like Singapore, one of their formulas for success is by allowing foreign investors to invest in the country with 100% ownership and removing the protectionist and ultranationalist policies that were in place. As a result, Singapore is among the wealthiest nations in Asia and has truly gone “From Third World to First” alluding to the title of Lee Kuan Yew’s book on Singapore’s success. As the late Paramount Leader of China, Deng Xiaoping once said: “It doesn’t matter if it’s a black cat or a white cat, if it catches mice, that’s a good cat.”

In the age of globalization and advancing technologies, where whole economies are intertwined by free trade and the world is made even smaller by the internet through e-commerce, there is simply no room for such ultranationalistic backwardness. But unfortunately, many of the likes of Mr. Cruz will still push for over protectionist policies and kick out people who will bring further wealth to the country all in the name of “Pinoy Pride” or “Brown Power.

Too bad it neither puts food on the table nor buys the clothes on your back.

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About the Author: James Aron Mangun, known simply as James or “Jim” to colleagues, is a former BPO English Trainer in several companies and now a freelance BPO consultant/businessman who regularly visits political Philippine blogs and websites to offer his two cents on current events/affairs.

He is an ardent believer of the free market system and is an avid fan of Ludwig von Mises, Ayn Rand, and Milton Friedman. He currently runs the Mangun On Markets website with his father John where they offer advice/tips to people interested in investing in the PSE. You can visit his site at http://www.mangunonmarkets.com

 

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