Transparency and Civil-Society Participation in International Trade Negotiations (A Policy Brief)

Sharon M. Quinsaat

This policy brief was prepared as part of the United Nations Research Institute for Social Development's (UNRISD) study entitled "Global Civil Society Movements: Dynamics in International Campaigns and National Implementation." The Philippine country study examined five contemporary civil society movements that deals with debt, international trade rules and barriers, global taxation, corruption, and fair trade.

Introduction

Like most developing countries, international trade has been a major plank of the Philippine government in its pursuit of macroeconomic growth and development. It is currently a member of two multilateral forums: the World Trade Organization (WTO), the only global international organization dealing with the rules of trade between nations; and the Asia-Pacific Economic Cooperation (APEC), an intergovernmental grouping operating on the basis of nonbinding commitments and open dialogue to facilitate economic growth, cooperation, trade, and investment in the Asia-Pacific region. It is also signatory to the Agreement on the Common Effective Preferential Tariff Scheme for the Association of Southeast Asian Nations (ASEAN) Free Trade Area or AFTA, which seeks to eliminate tariff barriers among the Southeast Asian countries with a view to integrate the ASEAN economies into a single production base and create a regional market.

Alongside these formations are agreements with strategic trading partners, discussed either regionally or bilaterally. In 2005, a Memorandum of Understanding on the Early Harvest Programme was signed between the governments of the Philippines and China, in accordance to the Framework Agreement on Comprehensive Economic Cooperation between ASEAN and the People’s Republic of China. Likewise, the governments of South Korea and ASEAN (except Thailand) signed a FTA in May 2006, which took effect in July 2006. The Japan-Philippines Economic Partnership Agreement (JPEPA), a free trade agreement (FTA) that covers services, investment, human resources development, and other forms of cooperation, was signed on 9 September 2006. As the Doha round of trade negotiations in the WTO is presently under indefinite suspension, more bilateral trade and investments agreements are in the offing. Even countries like Australia and India have jumped into the bandwagon as they are looking into potential EPAs with the Philippines. Similarly, there is a high probability that developed countries will be pushing aggressively for regional FTAs. In response to a widening net of bilateral deals being negotiated by the China-Japan-Korea triumvirate and as an attempt to open up and maintain economic footing in the region, both the European Union and the United States are pursuing expanded trade cooperation through FTAs with ASEAN as a regional bloc or with its individual member-states.

With the proliferation of FTAs and continuing implementation of multilateral, regional, and bilateral accords, all of which impact either positively or negatively on the livelihoods of various sectors, it is appropriate to ask whether mechanisms for transparency and accountability are in place and to what extent civil-society groups are involved in the trade-policymaking process. It should be recalled that during the ratification of the Uruguay Round of the GATT in 1994, civil-society groups criticized the government’s secrecy in its conduct of negotiations. Government consultations with affected sectors took place only when the agreement was already due for ratification, clearly indicating that such exercises were merely perfunctory. In the lead-up to the Ministerial Conferences of the WTO, social movements again clamored for information disclosure and inclusion in formulating and firming up the negotiating strategy of the Philippine government, but to no avail. On the other hand, talks on FTAs have been more surreptitious, with the executive department exercising monopoly of the process and the other branches of government, along with civil society, kept in dark.

In actuality, there are existing means of participation in the process. While the Department of Trade and Industry (DTI) continues to be responsible for the implementation and coordination of trade and investment policies, trade policymaking is done by consensus under the Cabinet-level Committee on Tariff and Related Matters Committee (TRM), which consists of an intricate system of interagency subcommittees and technical working groups, co-chaired by the DTI and the National Economic and Development Agency (NEDA). Each government organization is mandated to consult with the private sector and nongovernment organizations (NGOs) in the various levels of the policy process. Some have gone so far as creating ad hoc bodies for this purpose. For instance, at the DA, a multisectoral task force composed of twenty-eight representatives from farmer groups, industry associations, business federations, nongovernment and peoples organizations, and other relevant government institutions and agencies, was set up in 1998. Called Task Force on WTO Agreement on Agriculture (Re)negotiations (TF WAR), its main responsibility is to consider, develop, evaluate and recommend Philippine negotiating positions and strategies for the new round of negotiations.

But to what extent can civil society influence the substance of these policies, especially when at the top of the tier, crucial information is withheld by the chief negotiators? International trade is under the realm of Philippine foreign policy. As such, negotiations are pursued behind closed doors, by an elite group of experts in entirely secret diplomatic processes. Information is treated as potentially debilitating to negotiating tactics and thus shielded from public scrutiny. In addition, trade by design is a policy domain where only a handful of actors has control in decision making, mostly economic and legal experts. Protective instruments were instituted to shield these organizations from external influence and particularistic interests, and from the conflicts, setbacks and media assault produced by open consultation. Thus, international trade policymaking has been basically technocratic.

Is a Philippine Trade Representative Office the Solution?

Through the incessant Congressional lobby work of a range of NGOs and even business groups, House Bill (HB) No. 4798[1] and Senate Bill (SB) No. 2236,[2] entitled “An Act Creating the Philippine Trade Representative Office, Appropriating Funds Therefor, and For Other Purposes” were filed in 4 October 2005 and 27 March 2006 respectively.[3] The bills are hinged on three pillars of trade and investment policymaking: policy coherence and predictability, transparency, and accountability. It is also guided by the principles of democratic governance. The proposed office shall be among others the principal agency in-charge of strategizing the Philippine trade position based on a national development agenda and the chief representative of the Philippines for international trade negotiations, whether bilateral, regional, or multilateral. In such a set-up, all final negotiating positions would come from this single agency.

This proposition is akin to the Office of the United States Trade Representative (USTR). It actually mirrors the structure of the USTR. Through an interagency structure, it coordinates trade policy, resolves disagreements, and frames issues for presidential decision. It also consists of a private sector advisory committee to ensure that trade policy and negotiation objectives adequately reflect national economic interests.

While indeed the Philippine Trade Representative Office (PTRO) can remedy the problems emanating from the absence of a clear-cut hierarchy, mandate, and delineation of authority in the trade policymaking structure resulting in what the authors of HB 4798 term as a “tug-of-war” among the different agencies, it may not be able to substantively address the issues of lack of transparency and exclusion of affected sectors and civil-society groups in the trade policymaking process. Some of the reasons are as follows:

1. Under Section 3 of HB 4798 and SB 2236, the PTRO shall be lodged at the Office of the President, and headed by a Philippine Trade Representative with the rank of Ambassador Extraordinary and Plenipotentiary and three Deputy Philippine Trade Representatives, all of whom shall be appointed by the President. This further consolidates the power of the executive, specifically the President, in trade-related matters. If the President espouses a neoliberal agenda, in which key defining characteristics include a technical approach to trade and the exclusion of dissident forces from the arena of policymaking, then the PTRO does not provide a responsive arena for civil society advocating reforms in trade policies that are deemed threatening to the full realization of the President’s economic orthodoxy.

2. The organizational structure of the PTRO is unclear. But it is obvious that like the present set-up with the TRM, it will be dominated by agencies and bureaus from the executive department, which include, among others, NEDA, DTI, DA, and the Department of Finance. What will be the PTRO’s relationship with the House of Representatives and the Senate? HB 4798 and SB 2236 have limited the role of members of Congress to the Advisory Committee for Trade Policy and Negotiations. But it is likewise ambiguous where does this committee fall in the hierarchy of the PTRO. If the PTRO is patterned on the USTR, then it should be emphasized that since its creation, the USTR has maintained close consultation with Congress.

Five members from each House are formally appointed under statute as official Congressional advisors on trade policy, and additional members may be appointed as advisors on particular issues or negotiations. Liaison activities between the agency and Congress are extensive. USTR provides detailed briefings on a regular basis for the Congressional Oversight Group, a new organization composed of members from a broad range of congressional committees. In addition, USTR officials and staff participate in hundreds of congressional conversations each year on subjects ranging from tariffs to textiles. (http://www.ustr.gov/Who_We_Are/Mission_of_the_USTR.html)

The standing of Congress in this proposed body is very important if the issue of transparency and civil-society participation is at stake. To some extent, civil society has leverage in Congress. Through the inquiries, the Congress has become a platform for grievances and a weapon to compel the executive to disclose crucial information pertaining to trade negotiations.

3. The instruments for transparency and civil-society participation in the bills are obscurely phrased. Section 11 of the bills stipulates that the Philippine Trade Representative shall seek information and advice from representatives of the private sector and NGOs working on trade policy on different matters pertaining to international trade. This gives the PTR an option rather than a clear directive to engage these outside actors. Consultation must be enforced.

Likewise, Section 13, which identifies the members of the advisory Committee for Trade Policy and Negotiations, has loopholes that can be exploited by individuals and groups seeking to circumnavigate the participation of civil society in the PTRO. According to this clause, “The Committee shall consist of not more than 40 members from relevant national government agencies, both Houses of Congress and representatives of industry, agriculture, labor, small business, service industries, retailers, and consumer interest. The committee shall be broadly representative of the key sectors and groups of the economy, particularly with respect to those sectors and groups which are affected by trade.” Without explicitly stating which type of groups would compose the Committee, agriculture may likely be represented by sugar millers or exporters, given their history of gaining concessions from the government.

The move to centralize trade policymaking through HB 4798 and SB 2236 may not be a wise policy advocacy if the objective is to make the process transparent or participatory. The Discussion Paper of the Philippine Institute for Development Studies, “Does the Philippines Need a Trade Representative Office?,” should serve as a caveat.

“…The unfortunate result of the current political climate in the Philippines is that the shield that is supposed to protect policy from inordinate public influence does not hold. This is precisely the issue that the United States sought to address with the creation of the USTR. The presumption is that government sectoral agencies have the tendency towards ‘sectoral policy capture,’ such that an independent, non-aligned agency capable of doing a more objective processing economic tradeoffs is needed.” (Pasadilla and Liao 2005, 17)

The Philippine Trade Representative Office will, therefore, further insulate the trade policymaking process and make it a more technocratic matter.

Recommendations

There are attendant consequences to centralization. The way HB 4798 and SB 2236 are currently formulated, the Philippine Trade Representative wields too much power. This is perhaps because it was conceived more as a response to policy incoherence in trade policymaking rather than a solution to non-transparency. In the current schema, civil society can take advantage of multiple power centers. Although the different agencies of government have varying degrees of openness to participation of nongovernment actors, civil society may be able to forge alliances with sympathetic departments. For instance, the DA is supportive of small farmers’ advocacies to protect the agricultural sector. This can be used to pressure the DTI or NEDA.

HB 4798 and SB 2236 can, however, be improved through the following:

1. Achieve balance of power by giving Congress a more keen role in the PTRO

In the organizational structure of the PTRO, a joint executive-legislative council can be put in place instead of just an inter-agency coordinating committee. This shall include members of the House of Representatives and the Senate from the majority and minority, as well as party-list groups. This way, the Congress will also play a key function in the formulation of trade negotiating positions. Likewise, the PTRO is also accountable to the legislature.

2. Clarify the role of the Advisory Committee and guarantee representation

It must be stated clearly the position of the Committee in the hierarchy. Will it be independent of the Philippine Trade Representative? Rather than the Philippine Trade Representative appointing the members of the Committee, it is best if the selection process is left to the different departments and Congress. As stated by Section 13, the Chairman will be elected by the Committee from among the members. Also, impartiality of the Committee should be maintained and thus, its Executive Director should not be appointed by the Philippine Trade Representative.

It is important that the bills require that a proportion of the membership of the Committee should come from the marginalized and underrepresented sectors, various NGOs with known track-record on trade policy advocacy, and the academe.

3. Institute mechanisms for regular open consultation and disclosure of information

While the Philippine Trade Representative draws advice from the Advisory Committee, it must hold regular public hearings on matters that have severe repercussions to majority of the population. In addition, procedures on disseminating crucial information, without compromising the official negotiating strategy, should be set up.

Finally, caution should be applied in portraying the institutionalization of civil-society participation through ironclad canons as a way of democratizing the trade policymaking process. Equally important are the openness of the politico-administrative environment and political culture.

References

Pasadilla, Gloria O. and Christine Marie M. Liao. 2005. Does the Philippines Need a Trade Representative Office?. Discussion Paper Series No. 2005-26. December.

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[1] This was introduced by Representatives Lorenzo R. Tañada III (Fourth District, Quezon), Ronaldo B. Zamora (Lone District, San Juan), Del R. de Guzman (Lone District, Marikina City), Proceso J. Alcala (Second District, Quezon), Rafel P. Nantes (First District, Quezon), Danilo E. Suarez (Third District, Quezon), Emmanuel Joel B. Villanueva (CIBAC Partylist), and Mario “Mayong” J. Aguja (Akbayan Partylist) during the Second Regular Session of the Thirteenth Congress.

[2] This was introduced by Senator Manuel A. Roxas III during the Second Regular Session of the Thirteenth Congress.

[3] It is not the first time, however, that such legislative measure is introduced. In 2002, a piece of legislation to create a WTO Affairs Strategy Office (WTO ASO) was filed by Representative Boboy Syjuco. The WTO ASO, to be lodged at the Office of the President, is to some extent similar to the defunct WTO/AFTA Commission. It has no authority over the trade negotiations.

Strengthening the Philippine Fair Trade Forum as a Quasi-Government Commission on Fair Trade (A Policy Brief)

Zuraida Mae D. Cabilo

This policy brief was prepared as part of the United Nations Research Institute for Social Development's (UNRISD) study entitled "Global Civil Society Movements: Dynamics in International Campaigns and National Implementation." The Philippine country study examined five contemporary civil society movements that deals with debt, international trade rules and barriers, global taxation, corruption, and fair trade.

Introduction

Small and medium enterprises (SMEs) play a significant role in propelling not only local economies but the national economy as well. According to the Department of Trade and Industry (DTI), SMEs constitute 99 percent of the all business entities in the Philippines and contributes 32 percent to the economy. Almost 70 percent of the total labor force is employed in these firms (Department of Trade and Industry [DTI] website; IBON 2005). With such enormous potential of SMEs to contribute to both rural and urban productivity, the government, through the Small and Medium Enterprise Development Council, came up with a blueprint that charts programs to propel SMEs at the forefront of economic development. Alongside the efforts of government to alleviate poverty particularly in the countryside, nongovernment organizations (NGOs) engaged in development work were independently experimenting with providing alternative sustainable livelihoods to marginalized producers and artisans. Among these NGOs are those identified as fair trade[1] organizations, which have silently inched their way in various villages. Fair trade advocates and practitioners have explicit partiality for low-income producers and artificers, providing them with otherwise elusive markets in more affluent countries for their produce and handcrafts. In the Philippines, three decades into the fair trade enterprise and having created a number of enclaves of self-reliant communities, the Philippine Fair Trade Forum (PFTF)[2] was established in 2002. The forum’s mandate was to facilitate access to domestic and international markets of fair trade products[3], function as a hub of information exchange among fair trade organizations in the Philippines, undertake campaigns to raise consumer consciousness regarding fair trade practices and principles, and engage in policy advocacy. To date, fair trade advocates and practitioners continue to grapple with the manner to maximize policy spaces to push forward the fair trade agenda (Cabilo 2006). Preference has been placed on the forum’s consumer awareness campaign to enable member producer-organizations’ goods to advance in the local market. This, however, does not deter members of the PFTF to pursue its policy advocacy commission.

A study examining the PFTF as a representation of the Philippine fair trade movement[4] indicates that some member organizations place equal emphasis on the necessity of engaging in pursuing policy advocacy work. In this way, policies that impinge on the welfare not only of consumers, but also more importantly of small producers and crafts people, especially in this age of increasing economic globalization are addressed from the perspective of adherents of fair trade principles and practices (Cabilo 2006). This, thus, necessitates that the PFTF strike a balance in performing its mandate of engaging in both consumer awareness and policy advocacy. This brief intends to explore possible ways wherewith the PFTF can navigate around the existing policy environment and corresponding institutional structures in carrying out its mission to engage in policy advocacy to advance the fair trade agenda in the Philippines.

Existing Institutional Structure Relevant to Fair Trade

At present, the Fair Trade Division of the DTI’s Bureau of Trade Regulation and Consumer Protection (BTRCP) serves as the lead agency mandated to take charge of matters relating to fair trade. As such, it is tasked as the policy-making body charged with the general administration of trade and consumer protection laws.[5] Specifically, it is mandated to perform the following functions[6]:

1. Oversee the effective implementation of fair trade laws;
2. Provide field officers with operating guidelines on the implementation of laws on trade malpractices;
3. Train field staff on enforcement of fair trade laws;
4. Formulate programs and policies on fair trade laws and other related provisions;
5. Monitor congressional bills and resolutions which directly affect consumers;
6. Conduct regional consultancy on enforcement; and,
7. Prepare position papers on domestic and fair trade related bills and resolutions.

These functions of the BTRCP makes participation of the PFTF in the policymaking process becomes more imperative to influence the direction that the government takes with regard to fair trade. It is pertinent for advocates and practitioners of fair trade to be able to present a more inclusive definition of fair trade, which is particularly significant in forging policies and legislations pertaining to fair trade.

Creating the Philippine Fair Trade Commission

Based on official government statements, fair trade is understood as pertaining to consumer protection[7] and “fair” competition[8] among firms. This, however, capture only half of the picture of how the fair trade movement defines “fair trade” as fair trade includes producers, SMEs, and other stakeholders in the trading process as well. This variance in how fair trade is articulated is reflected through the various propositions to establish a Philippine Fair Trade Commission.

First among these proposals is that of fair trade practitioners and advocates that has been circulated informally in gatherings of the PFTF. In the course of forging the policy agenda of the PFTF, establishing a Fair Trade Commission was proposed by some PFTF member organizations.[9] The proposed fair trade body is envisioned, first, to document the existing policies and legislations that concern low-income producers and artisans and consumers. Second, the commission is seen to coordinate with various national and local government agencies, as well as NGOs to synergize efforts to implement programs and projects directed to enhance organizational and business development capacities of producers and crafters that will enable them to play a more significant role in bringing about a more equitable global trading regime. In so doing, the proposed Fair Trade Commission will undertake information campaigns on fair trade practices and principles as an alternative way of conducting business that puts more emphasis not only on profit bottom lines but also on environmental and social objectives.

The second proposal is enunciated by the Tariff Commission, which is to create a government body–Philippine Competition Commission (PCC)–to facilitate the review, formulation, and enforcement of the proposed comprehensive Philippine competition and anti-trust policy.[10] This proposal was a result of a two-phase study conducted by the Tariff Commission in 1999 (first phase) and 2001 (second phase). The Office for Policy Analysis and Advice (OPAA) and Competition and Consumers Welfare Administration (CCWA) will be created to undertake the two major functions of the PCC respectively.[11] The Tariff Commission envisions the PCC to “build up a fund of economic and social policy expertise, which… will prove to be an effective knowledge base for policy advice and administration to ensure the development of the Philippine economy as a dynamic and internationally competitive market.” This seeks to integrate industry-specific systems and consolidate all efforts to monitor and enforcement a competition policy in the country. Enforcement of policies is currently performed by four key government offices–the Securities and Exchange Commission, Bureau of Import Services, Bureau of Trade Regulation and Consumer Protection, and the Tariff Commission.

The Tariff Commission proposal finds resonance with the one proposition put forward by Representative Joey Sarte Salceda under House Bill (HB) 116[12]. The Commission’s mandate will center on “facilitating the implementation of the Philippine Competition Act, administering the provisions of the Philippine Competition Act, and generating, providing, and making available to the public information concerning fair trade practices.” A salient function of the proposed commission pertains to protection of both business enterprises and consumers, specifically in the context of engaging in fair trade practices. The bill also details that the proposed body be composed of experts in business, marketing and consumer behavior, economics, and public administration. The apparent lack of representation from other stakeholders in the fair trade movement, specifically producer sectors, is a gap that the PFTF can fill.

The PFTF as a Quasi-government Agency on Fair Trade

With the abovementioned proposals on establishing a Philippine Fair Trade Commission operating under different yet related philosophies, the creation of a quasi-government agency specifically tasked to integrate fair trade (as the fair trade movement defines it) in state policies is seen to be the most appropriate response. A quasi-government body, which may opt to receive direct support from government, has the capacity to operate freely from government bureaucracies that tend to slow down the implementation of programs and projects. It also has the advantage of being able to attract in its ranks the best in the field of both business development and community organizing (in the case of doing fair trade work). These quasi-government agencies also have the flexibility to implement systems and mechanisms that are not impeded by bureaucratic processes, which may facilitate a more efficient monitoring.

In the current context where there is no existing mechanism for fair trade to be integrated in trade policies of the state, the PFTF as the collective representation of the fair trade movement, may fill this void. PFTF member organizations’ experience in implementing alternative livelihood programs–projects that are typically performed by government agencies–complements the government’s efforts in undertaking poverty alleviation programs and projects that benefit SMEs in the countryside. This gives the network an advantage of being familiar with the workings of the state without necessarily being a part of it. Another strength of the PFTF through its membership is its knowledge in introducing the concept and praxis of fair trade coupled with the unique combination of expertise on business development and community organizing. Formed as the policy advocacy arm of the Philippine fair trade movement, the PFTF enjoys a considerable wealth of resources–expertise, finances, a broad network of organizations within and outside the Philippines–by virtue of its long history of engaging in development work and trading. The PFTF was seen as a locus where fair trade organizations can articulate issues and concerns of Philippine-based fair trade advocates and practitioners and consolidate these into a coherent agenda not only within the country but also in regional and international fair trade formations. By virtue of its organizational network, it has the capacity to traverse the local, national, regional, and international arenas. In the local front, it has established links not only with producer and people’s organizations but also with local government agencies and national government line agencies through its member organizations in performing its development and entrepreneurial initiatives. In the national level, it has worked with both government and private sectors in promoting the tenets and practice of fair trade. In the international front, the PFTF’s current membership in the regional fair trade organization–the Asia Fair Trade Forum–and the International Fair Trade Association (IFAT) –the lone international fair trade body with a membership of fair trade organizations from both developed and developing countries–provides the link to the international level where Philippine concerns on fair trade may be lodged.

Transforming the forum into a quasi-government body will also enable it to formalize its structure to include representatives from government and the private sector, which are the targets of existing fair trade advocacy in the Philippines, apart from the existing Board of Directors consisting of representatives from various fair trade organizations. Such an arrangement also facilitates a more productive engagement between government, the private sector, and fair trade advocates and practitioners without creating another state instrumentality that will constitute not only additional bureaucratic structure that will make the advocacy terrain more difficult to navigate for fair trade organizations and other NGOs. This arrangement also makes it possible for the PFTF to opt to raise its own funds from external sources for its operations and work collaboratively with government in implementing complementary programs and access public funds. As such, the PFTF will be able to participate in government processes in policy formulation on matters relating to trade and consumer welfare.

References

“A National Competition Policy for the Philippines.” Accessed fromhttp://r0.unctad.org/en/subsites/cpolicy/gvaJuly/docs/en9.doc.

Abon, Edgardo. n.d. “State of Play of Competition Policy in the Philippines.” Accessed from http://www.jftc.go.jp/eacpf/06/6_01_02.pdf

Cabilo, Zuraida Mae D. 2006. From North to South: Campaigning for Fair Trade in the Philippines. Unpublished manuscript under the UNRISD research project on Global Civil Society Movements: Dynamics in International Campaigns and National Implementation.

Department of Trade and Industry. 2004. SME Development Plan 2004-2010. Manila: Bureau of Small and Medium Enterprise Development and Japan International Cooperation Agency

“Fair Trade.” Accessed from http://en.wikipedia.org/wiki/Fair_trade

IBON Facts and Figures. 2005. Philippine SMEs Amid Globalization: Going Big Time? Volume28 No.9

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[1] A practice that traces its origins from the North, specifically Europe, fair trade is based on a trading partnership based on transparency and respect that engenders trust between Southern producers and artisans and Northern consumers (IFAT website). This relationship is facilitated by intermediary organizations both from developed and developing countries.

[2] The PFTF was founded by 14 fair trade organizations with the support of the Advocate of Philippine Fair Trade, Incorporated and Oxfam-Great Britain Philippine office.

[3] Fair trade products are those cultivated (food products) and crafted (handicrafts) under non-exploitative circumstances (no children employed as workers, environmentally-sound practices, transparent relations in cases of contracted and sub-contracted work). Among fair trade products produced in the Philippines are handicrafts, organic mangoes, organic muscovado sugar, organic bananas, among many others.

[4] The fair trade movement in the Philippines is composed of producer organizations, intermediate marketing organizations (IMOs), and support organizations. Producer organizations may be farmers or artisans. IMOs, on the other hand, facilitate the export of products and creations of producer organizations while support organizations are nongovernment organizations (NGOs) that provide technical and marketing support and product development services to producer organizations (Cabilo 2006; Redfern and Snedker 2002; APFTI n.d.).

[5] www.dti.gov.ph

[6] http://www.apeccp.org.tw/doc/Philippines/Organization/phorg4.html

[7] Culled from the Department of Trade and Industry’s (DTI) Bureau of Trade Regulation and Consumer Protection-Fair Trade Division webpage.

[8] Tariff Commission’s proposal on crafting a National Competition Policy and HB 116 by Representative Joey Sarte Salceda.

[9] These include the Alter Trade Corporation (ATC), Southern Partners for Fair Trade Corporation (SPFTC), Panay Fair Trade Corporation (PFTC), People’s Global Exchange (PGX), and the Advocate of Philippine Fair Trade, Inc. (APFTI).

[10] http://r0.unctad.org/en/subsites/cpolicy/gvaJuly/docs/en9.doc.

[11] The OPAA will undertake research and analysis on contemporary regulatory/competitiveness issues and advise the PCC while the CCWA will be attending to the administrative functions of the proposed commission.

[12] An Act Creating the Philippine Competition Commission, Regulating and Penalizing Trade Practices that Lessen Competition and Other Anti-Competitive Practices and Conduct, Unlawful Mergers, Acquisitions and Combinations in Restraint of Trade, Unfair Competition, and Appropriating Funds Therefor, and For Other Purposes. This bill was filed during the First Regular Session of the Thirteenth Congress of the Philippine House of Representatives.

Regulating Short-Term Capital Flows (A Policy Brief)

Ronald C. Molmisa

This policy brief was prepared as part of the United Nations Research Institute for Social Development's (UNRISD) study entitled "Global Civil Society Movements: Dynamics in International Campaigns and National Implementation." The Philippine country study examined five contemporary civil society movements that deals with debt, international trade rules and barriers, global taxation, corruption, and fair trade.

Introduction

The series of capital account crises in 1990s (i.e. ASEAN, Brazil, Mexico) highlighted the need for emerging economies to reduce their dependence on foreign capital. There has been a heightened interest, among economic managers, in mechanisms and institutions to effectively manage short-term capital flows, which can threaten and undermine countries’ socio-economic well-being. Capital controls, if effectively used by the state, can be beneficial to the economy in several ways (Singh 2000, 136-1139). They can protect and insulate the domestic economy from volatile capital flows and other negative externalities. Capital account regulation is critical for the enhancement of domestic savings and investment. Imposition of capital controls increases the bargaining power of countries to negotiate with the private sector and multilateral institutions wherein a country asserts its ability to shape economic policy. By influencing the exchange rate, governments can maneuver the terms of trade in order to protect domestic products from external competition (i.e. devaluing exchange rate to boost exports). Capital controls can also help in saving foreign exchange for debt servicing, imports and capital goods. Governments can also generate much-needed revenues through tax-based investment controls, custom duties, and controlled exchange rates, among others. The type of capital controls to be implemented, however, depends on the nature of financial flows and the institution through which the capital is flowing. For instance, capital controls on the banking sector will be different from the non-banking sector (e.g. capital markets) because of their peculiar characteristics and distinct regulatory agencies (Singh 200, 125).

The Philippine government’s liberalization of capital accounts requires reexamination given the unpredictable character of the global financial market. One serious policy error the Philippines Central Bank (BSP) committed before and during the early years of the 1997 Asian financial crisis was the protection of peso to project a strong economy. In parallel to the uncontrolled surge of portfolio investments, BSP purchased large amount of dollars which overvalued the country’s currency. It exacerbated the worsening trade deficit during the period. Thereafter, there was a widespread realization that depreciating the peso was imperative to reveal the real exchange rate. This can be pursued by discouraging short-term capital flows.

Prudent regulations and strong financial institutions are considered the best protection against currency and banking crises. But since these measures may take time to realize, short-term capital controls must be properly established (WBGDF 2000). These controls can accomplish two goals: 1) reduce (but not eliminate) the volatility of flows and 2) reduce (but not eliminate) the discrepancy between private and social returns (Reyes-Cantos 1999). They are appropriate “where financial markets are thin, the private sector’s risk-management practices are underdeveloped, and the regulators’ capacity to supervise the financial sector is limited – in other words, where the conventional defences against systemic risk are not enough” (Eichengreen 1998). The following section is a cursory look at current policies of the government relating to capital controls. Succeeding part discusses the different strategies that the government can adopt in managing capital inflows and outflows. These models throw “sand in the wheels” of global finance which can protect the country from any financial market reversals.

Current Policies on Capital Controls

The government maintains a liberalized policy on external current and capital account transactions. The Arroyo government’s Medium-Term Development Plan (MTPDP) for the period 1999-2004 and 2004-2010 recognize that reliance on volatile capital flows---short term debt and investment--can destabilize the foreign exchange market and the financial system. They, however, have failed to institute policies on capital controls pertaining to the external sector. The documents reveal that country will continue to liberalize and deregulate many of its industries in the future. Government financial reforms focus more on strengthening the regulatory framework and promotion of a market-determined exchange rate. Nine years after the crisis, no significant capital control mechanisms are instituted (e.g. mandatory deposits, taxes on significant foreign exchange transactions) to protect the country from massive capital flight.

In January 2004, BSP eased the rules on dollar investments by allowing foreign investors to recover their dollar investments in the stock market with certain conditions (Ferriols 2004). Learning from the Asian crisis, BSP allows investors to convert the peso proceeds of their stock investments into dollars provided the original stocks were bought with dollars. The dismantling of restrictions on the outflow of dollars from the stock market is envisioned to manage speculative capitals which can cause instability in the peso-dollar exchange rates. Following are the existing government policies relating to foreign exchange transactions and foreign investments (BSP 2005, 2006).

1. PERSONS WHO CAN PURCHASE FOREIGN EXCHANGE FROM BANKS IN THE PHILIPPINES
• Any person or firm can purchase foreign exchange (FX) with pesos from banks in the Philippines for outward remittances to pay for FX obligations to payees abroad provided supporting documents required under Bangko Sentral ng Pilpinas’ (BSP) rules are presented to the FX selling bank. Such obligations may include payment of importations and non-trade FX obligations such as medical expenses incurred abroad, or servicing foreign loans or investments. BSP registration is required for foreign loans or investments before these can be paid/serviced using FX purchased from banks.
• The minimum documentary requirements for the sale of FX by banks, non-bank BSP-supervised entities and their affiliate/subsidiary forex corporations are contained in Circular-Letter dated 24 January 2002 (for payment of import obligations) and Circular No. 388 dated 26 May 2003 (for non-trade transactions).
  
2. RULES ON EXPORTS AND IMPORTS
• Imports of gold in any form is allowed without restriction except for coin blanks, essentially of gold, which require prior BSP approval, and for any article manufactured in whole or in part of gold, the stamps, brand or marks of which do not indicate the actual fineness of gold quality, which is prohibited. Exports of gold in any form is likewise allowed except for gold from smallscale mining or panned gold, which is required to be sold to the BSP pursuant to Republic Act No. 7076 dated 27 June 1991.
• Registration of imports under Documents against Acceptance (D/A) and Open Account (O/A) to be paid with foreign exchange purchased from a Philippine commercial bank is no longer required. Instead, such imports need only to be reported to BSP through banks prior to payment, in accordance with BSP existing rules.
• A person may, without prior BSP approval, import or export, or bring in or out of the country, or electronically transfer legal tender, Philippine notes and coins, checks, money orders or other bills of exchange drawn in pesos against banks operating in the Philippines in amounts not exceeding P10,000.00. Prior authorization from the BSP is required for larger amounts.
• Regarding the amount of foreign currency that a person may bring in or out of the Philippines, there is no such restriction or limit on the amount but a person bringing foreign currency in or out of the country in excess of US$10,000.00 or its equivalent must declare this in writing by accomplishing a BSP Foreign Currency Declaration Form available at the Bureau of Customs desk in the arrival/departure areas of all international airports/seaports. Traveler’s checks in any amount are exempted from such declaration requirement.
3. RULES ON FOREIGN INVESTMENTS
• The registration of foreign/non-resident investments with the BSP is not mandatory. It is required only if the FX to pay for future repatriation of the capital and outward remittance of dividends/profits thereon will be purchased from banks in the Philippines. BSP had delegated to commercial banks the registration of foreign investments in shares of stock listed in the Philippine Stock Exchange (PSE) purchased thru the PSE trading floor.
• Registration will authorize the investor to purchase FX from the Philippine banking system to service repatriation of capital and/or remittance of dividends/profits/earnings from registered investments. The BSP registration document is part of the prescribed documents to support an application to buy FX from banks.
• Basic requirements for registration
• First, as a general rule, there must be an inward remittance of FX, which should be converted to pesos thru a bank in the Philippines as evidenced by a duly accomplished BSP-prescribed Certificate of Inward Remittance (for cash investments) or, proof of transfer of assets to the investee/beneficiary firm in the Philippines (for investments in kind).
• Second, there must be evidence of receipt of the funds/assets by the local investee/beneficiary/seller such as Sworn Certification of such receipt and issuance of shares in consideration thereof (for investment in stock corporations); stockbroker’s purchase invoice or subscription agreement (for PSE-listed shares acquired through the PSE trading floor); accredited dealer’s Confirmation of Sale (for government securities); Certificate of Time Deposit (peso time deposits with tenor of 90 days or longer); and contract (for money market instruments).
• Foreign investments in peso time deposits with banks can be registered with the BSP provided that the deposits were funded by an inward remittance of foreign exchange, which was converted into pesos thru the Philippine banking system. In addition, the time deposit has to have a maturity of 90 days or longer.

Policy Options and Recommendations

Control on Inflows

Controls on inflows must be implemented to maintain the country’s autonomy in monetary policy. This can be accomplished by imposing ceilings on investments and loans, implementing capital gains tax, setting minimum period of stay or applying reserve requirements for incoming investments. By practice, controls on inflows are easier to implement than controls on outflows. Nonetheless, they have been proven effective only if applied in the short-run as preemptive and corrective measures. Otherwise, they can become distortionary and be subject to the arbitrary behavior of market players.

Chilean Unremunerated Reserve Requirement (URR)

The Chilean capital controls strategy is instructive. In June 1991, the country introduced what became known as an unremunerated reserve requirement (URR) or encaje on new capital inflows. These restrictions aimed to reduce inflation brought by the surge of capital in 1980s and maintain export competitiveness. A rate of 20 percent was applied to all portfolio capital to be held in a non-interest bearing account with the central bank for up to one year. A year after, the rate was raised to 30 percent for foreign currency borrowing except by corporations. By August 1992, the rate was applied to all transactions. The rate was lowered to 10 percent in June 1998 before being zeroed out in September 1998 (Ariyoshi et al. 2000). The government also imposed a stamp tax of 1.2 percent for short-term foreign lending with a maturity of one year or less. The country experienced an impressive 8.5 percent average annual growth during the period encaje is in place.

The Fabella Proposal

UP School of Economics Professor Dr. Raul Fabella’s proposed a “time-graduated capital gains tax” to target foreign and local speculators in stock and real estate market (Fabella 1998). It aims to minimize, if not totally prevent asset bubble formation. The proposal can be summarized as follows:

1. A capital gains tax of 100 percent of all capital gains in excess of the 91-day T-bill rate if the stock or real property is sold in less than a year after purchase

2. 70 percent of capital gains in excess of the 91-day T-Bill rate compounded two years if the sale is done between the first and second year of purchase

3. 50 percent of capital gains in excess of compounded 91-day T-Bill rate r(1+r)(1+r) if the sale is done after the 2nd and 3rd year of purchase.

4. a flat 15 percent capital gains tax thereafter

Stiglitz Proposal

World Bank Chief Economist and Nobel Prize Laureate, Joseph Stiglitz, suggested a limit on the extent of tax deductibility for interest in debt-denominated or foreign-linked currencies. This is to discourage too much dependence on foreign borrowings and resolve the country’s problem on short-term indebtedness. It must be noted that Chapter 7 section 34B of the National Internal Revenue Code of the Philippines provides for the deduction of interest expense from one’s gross income. As explained by Reyes-Cantos (1999:22), “the amount deductible shall be reduced by an amount equal to a declining percentage of interest income subjected to final tax. The rate is 41% starting 1998, 39% for 1999, and 38% for 2000. A further downward adjustment of the rate can therefore be put into effect for the interest expense on foreign currency-denominated loans” (Reyes-Cantos 1999,22).

International Tobin Tax

The Tobin tax (inspired by a proposal by former Yale University professor and Nobel Laureate James Tobin) is essentially a permanent, uniform, ad valorem Global civil society organizations have used the tax to achieve two fundamental goals: 1) curb speculative short-term capital flows in the foreign-exchange market which produce volatile exchange rates, and 2) increase the national macroeconomic and monetary policy autonomy of global economies. It is important that the tax be implemented in the regional level (i.e. ASEAN or EU) to prevent capital from going to tax-free territories. Tobin tax was first promoted by the United Nations Development Program (UNDP) during the preparations for the 1995 World Summit on Social Development, held in Copenhagen, Denmark. But the unfavorable response of Washington to the proposition stalled any UN plan to seriously scrutinize the proposal. Several studies have proven the feasibility of the tax (Kaul and Langmore 1996, Patomaaki 1999, OXFAM GB 2001, Griesgaber 2003) transactions tax on international foreign exchange (forex) transactions. The percentage of tax being imposed is inversely proportional to the length of the transaction (i.e., the shorter the holding period, the heavier the burden of tax). For instance, a tax of 0.25 percent implies that a twice daily round trip carries an annualized rate of 365 percent; while a round trip made twice a year, carries a rate of 1 percent. Hence, for a tax rate of 0.1 percent or $1,000 per million dollars sold, it could cost a daily or weekly speculators tax of 10 to 50 percent on their investment.

Control on Outflows (Malaysian strategy)

Controls on outflows should be implemented whenever the country has to contend with dwindling foreign exchange reserves and speculative attacks on currency. This should only be utilized during the height of a financial crisis. The classic example of this strategy was made by the Malaysian government. Malaysia’s controls on capital outflows were implemented to safeguard the gains of the country prior to the 1997 financial crisis. The surge of capital between 1990 to 1993 forced Malaysian authorities to put temporary restrictions on speculative inflows in 1994 which, unexpectedly, led to the rise in dollar interest rates and decline in capital inflows. To safeguard the economy from further financial instability, capital outflows controls were installed by tightening monetary policies, slashing government expenditures and postponing the implementation of mega-projects. Several measures allowed a progressive reduction in interest rates without affecting the exchange rate or inducing capital flight. The strategy includes fixing of the ringgit to 3.8 to a dollar, repatriation of ringgit held abroad, ending of offshore trading in ringgit instruments, retention of the proceeds of sales of Malaysian securities in the country for a year, payment in foreign currency for imports and exports, among others (Lamberte 1998). Capital controls in Malaysia introduced two benefits. First, it ensured greater policy autonomy in lowering interest rates. Second, capital controls provided the economy elbow room to pursue economic adjustments and accelerate structural reforms necessary for sustained economic recovery (Masahiro and Takagi 2003,13).

Simultaneous Controls on Inflow and Outflow (Chinese strategy)

China managed to shield its economy from the 1997 Asian financial crisis because of its strict capital controls (Singh 2000, 144-145). These mechanisms provided the country a foreign exchange reserves totaling $150 billion, $40 billion trade surplus and a $40 billion capital account surplus at the end of 1998. Interest rates in the country were significantly reduced during the crisis period. The Chinese government maintained a fixed exchange rate and independent monetary policy. Emphasis was made on attracting long-term investments (i.e. FDIs) and curbing portfolio and other short-term speculative inflows. Key elements of controls on inflows include the universal requirement for registration and strict criteria of approval. All inward FDIs must seek approval from relevant state agencies. Investors can only open foreign exchange capital accounts in designated banks sanctioned by the government to engage in foreign exchange activities. As for the outflows, there was a tight control over the use of foreign exchange. All outward FDIs must be registered. All their incomes need to be repatriated back to China within six (6) months of the end of fiscal year of the host country. Foreign exchange required for offshore business operations can be kept after obtaining approval of Chinese authorities. Chinese residents were not also allowed to borrow from foreign banks and other financial institutions. They are not also allowed to open personal foreign exchange accounts abroad.

Conclusion

The above-cited measures are not necessarily mutually exclusive. The challenge is to come up with a policy design that incorporates their paramount strengths in different contexts. It must be emphasized that they should only “complement and not supplant” other reform measures like sound prudential regulation and consistent monetary and fiscal policies (Reyes-Cantos 1999,25) . The government must “reduce it dependence on foreign capital, rapidly enlarge domestic savings and use its domestic resources judiciously” (Sta. Ana 1998, 110). Admittedly, there is challenge of striking a balance between reducing the inflow of portfolio investments and encouraging the entry of foreign direct investments (FDIs), which are more permanent and more beneficial to the economy.

Sequencing and timing are important in short-term capital regulation. It is recommended that the Philippine government follow the footsteps of China in managing the entry and exit of foreign capital. At present, the Philippine government can pursue the above-cited capital controls on inflows. It is imperative that they are instituted before a financial crisis. Implementing the mechanisms otherwise may be detrimental to future investments. Controls on outflows, however, must be applied only in times of speculative attacks on the country’s currency. Similarly, they must be “time-bound” since they should only act as corrective measures.

Overall, the implementability of the proposed measures hinges on the administrative capacity of the government. It must be noted that Malaysia’s capital controls proved to be successful because of the presence of strong regulatory institutions. In similar vein, the Chilean strategy could not have been effective without the earlier reforms implemented by the government such as the restructuring of banking system, enacting fiscal policies for budget surpluses and reduction of public debt.

References

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Bangko Sentral ng Pilipinas (BSP). 2005. Frequently Asked Questions on Foreign Exchange Regulations. www.bsp.gov.ph/downloads/2005/faq/fxregulations.pdf, accessed on 10 March 2006.

Bangko Sentral ng Pilipinas (BSP). 2006. Frequently Asked Questions on Exchange Rate. www.bsp.gov.ph/downloads/2006/faq/exchange.pdf, accessed on 24 September 2006

Eichengreen B. 1998 Capital controls: capital idea or capital folly?. Available from http://elsa.berkeley.edu/users/eichengr/policy.htm. Accesed 8 August 2006.

Fabella, Raul. 1998. The Tyranny of Fundamentals: The Crisis. Paper presented at Philexport Forum, Philexport, Philippines, 4 November.

Ferriols, Des. 2004. BSP Eases Rules on $ Investments. Philippine Headline News Online, January 26, 2004. http://www.newsflash.org/2003/05/be/be002708.htm. accessed on 21 November 2005.

Griesgraber, Jo Marie.2003. Where do we go from here? In Weaver, James, Dodd, Randall and Baker, Jamie (eds.) Debating the Tobin Tax (New Rules for Global Finance). New Rules for Global Finance Coalition, Washington D.C..

Kaul, I. and J. Langmore. 1996. Potential uses of the revenue from a Tobin in tax in Mahbub ul Haq, Inge Kaul and Isabelle Grunenberg Ed., 1996, The Tobin Tax. Coping with Financial Volatility, Oxford University Press, New York and Oxford.

Lamberte, Mario B.1998. “Currency Crisis: Where Do We Go From Here?.” In Human Development Network, Who’s Afraid of Capital Controls?, Human Development Network, Quezon City.

Masahiro Kawai and Shinji Takagi.2003. Rethinking capital controls:the Malaysian Experience. PRI Discussion Paper Series (May 2003).Japan Ministry of Finance.

Oxfam Great Britain. 2001. Time for a Tobin Tax? Some practical and political arguments http://www.oxfam.org.uk/what_we_do/issues/trade/trade_tobintax.htm accessed on March 11, 2006.

Patomäki, Heikki.1999. The Tobin Tax: How to Make it Real (Towards a Socially Responsible and Democratic System of Global Governance).Helsinki: Network Institute for Global Democratisation.

Reyes-Cantos, Jessica. 1999. Regulating Short Term Capital Flows. Action for Economic Reforms, Quezon City.

Sta Ana, Filomeno S. III. 1998. “The Need for Bolder Steps to Regulate Capital Flows”. In Sta Ana, Filomeno S. III (ed.), The State and the Market: Essays on a Socially Oriented Philippine Economy. Action for Economic Reforms, Quezon City.

Singh, Kavaljit.2000.Taming Global Financial Flows (A Citizen’s Guide).Citizens International, Malaysia.

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