The Rushford Report Archives
Erap's Trip:
Two Sides of Estrada

07/31/2000
The Asian Wall Street Journal

By Greg Rushford


WASHINGTON, D.C. -- Philippine President Joseph Estrada was here last week to deliver a message: He is serious about opening the country's economy and attracting foreign investment. In his meetings with U.S. business leaders and U.S. President Bill Clinton, Mr. Estrada projected just the right amount of gravitas. Sticking to a prepared script, the Philippine leader told business executives at the U.S. Chamber of Commerce that despite what they had read, foreigners "can do business with profit and comfort" in the Philippines.

But there's another side to Estrada, as Filipinos well know. When the president spoke on Thursday at a three-hour gala dinner for the Philippine-American community, he came across as more of a stand-up comedian than a leader with vision. As for extending opportunities for "profit and comfort" to the majority of his citizens, Mr. Estrada showed that he still doesn't get it.

First, the good news. American companies are coming to the Philippines and doing well. America Online set up operations in the Clark Economic Development Zone two years ago with 15 employees. Now AOL employs about 800 Filipinos. At a recent investment seminar held in Northern Virginia's high-tech corridor, AOL Vice President Mike Ritonia spoke about his talented, English-speaking Philippine workforce in glowing terms. "American workers are getting a little spoiled," Mr. Ritonia told the audience. But AOL's Filipinos "show up on time," ready to work, he added.

Other U.S. technology firms are right to consider doing what competitors like AOL are doing. This explains why Mr. Estrada apparently succeeded last week in attracting the interest of tech powers like Oracle Corp. and Cisco Systems Management.

But this isn't a new phenomenon. American companies like Avon, Procter & Gamble, Intel, Texas Instruments and Motorola have been making money in the Philippines for decades, during much worse economic times than the present. Philip Morris recently announced it will spend $300 million on a new factory to export cigarettes around Asia, in partnership with local associate La Suerte Cigar & Cigarette Factory.

Newer investors don't even have to care much about the inefficiencies and government corruption that have long been the biggest obstacles to foreign investment in the Philippines. This is because of something called PEZAs -- Philippine Economic Zones -- that were created by legislation in 1995. Like the duty-free zones at the former U.S. military bases, Clark Field and Subic Bay, PEZAs are wonderful for foreign investors. Set up in a PEZA, and you pay 5% tax on gross income, instead of 32%, and you don't have Philippine tax leeches coming around to shake you down. You can bring in any raw materials and capital equipment you need to manufacture duty free. Then you export happily.

But the success of the special zones highlights the problems with the rest of the Philippine economy. President Estrada has not made the connection that what is good about duty-free zones for foreigners would also be terrific for all of the Philippines and its citizens. Consider the country's poor record of trying to protect domestic industries from foreign competition.

A recent controversy over imported chickens is a great example. Crippled by high tariffs, quotas and high prices for the corn feed they need to eat, Philippine chickens are scrawny and uncompetitive. Accordingly, it's no wonder enterprising Filipinos are tempted to smuggle chickens from the special zones into local restaurants. While consumers love cheap, tasty chickens, Mr. Estrada's government is outraged over chicken smuggling and has gone on a tear to keep imported "hot chickens" away from Filipinos.This doesn't make economic sense. While Mr. Estrada was in the U.S. last week, employees of duty-free shops back home, who want to be able to sell chickens at attractive prices to foreigners, were screaming to Manila newspapers that the crackdown on hot chickens could cost more than 4,000 Philippine jobs.

Why not just make the entire Philippines a PEZA-like free trade zone and let the Philippine people in on the good times? Mr. Estrada doesn't seem to understand the economic logic that cries out for dismantling the protectionist barriers that make Philippine chickens (and a lot of other products) uncompetitive. He has, however, taken an interest in economic issues which involve his friends.Those friends are doing quite well.

The most visible of them is tycoon Lucio Tan, who amassed his wealth during the reign of his friend, former Philippine dictator Ferdinand Marcos. This month, Mr. Tan succeeded in buying out the Philippine government's stake in the Philippine National Bank. This sparked grumblings about "crony capitalism" from the bank's respected minority shareholder Templeton Emerging Markets Group. "We feel it's not prudent for us to increase our holdings in view of the fact that the bank is controlled by Mr. Tan and we feel there is conflict of interest," Templeton President Mark Mobius said in a television interview. Undeterred, Mr. Tan showed up in Washington last week as part of the official Philippine government delegation, standing with officials at a ceremony for Mr. Estrada at the Pentagon.

The Estrada administration has been very good to Mr. Tan and his Philippine Airlines, largely at the expense of the overall economy. Foreign airlines are frustrated because they are not allowed to fly tourists to the Philippines unless they allow PAL to fly the same numbers of people to their home countries. Taiwanese authorities resisted the administration's insistence that they indirectly subsidize PAL by limiting their flights, and twice flights between Taiwan and the Philippines have been completely suspended. Travellers were forced to transit through Hong Kong, and predictably tourist arrivals from Taiwan have fallen. The Philippine government's position: Let the tourists go to Thailand.

The president and his family have been listed as incorporators or board members of 31 companies, 11 of which have been acquired since he assumed the presidency two years ago, according to a report published earlier this month by the Philippine Center for Investigative Journalism. The report called for Mr. Estrada to give a full public accounting of his wealth, an offer to which the president has yet to respond.If Mr. Estrada is concerned about the misperceptions he's creating, he sure didn't let on at Thursday's dinner for the Philippine-American community. After pleasing the crowd with wisecracks, Mr. Estrada turned serious, saying, "I'm here to tell you where the Philippines is headed." He promised to deliver peace to Mindanao, and to counter a "disinformation campaign" against him in the press. He promised to help "especially the poor," and give his country "food security."

But exactly how all these things will be accomplished went unmentioned. The Philippines needs a leader. Right now it has an entertainer.


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