Executive Director's Corner

Does the law serve development

Does the law serve development?

Philippine Daily Inquirer

8:15 pm | Sunday, June 30th, 2013

28 257 81

National laws must support, rather than frustrate, national development.  The laws shall act as catalysts for inclusive, rather than exclusive, economic growth so that “those who have less in life shall have more in law.     ”

Many in the business sector and academe, however, claim that some laws have violated market forces, trampled the right to private property, and discouraged investments, job creation and inclusive growth.  Sadly, many of these laws were fruits of poor legislation made worse by bad implementation whose consequences remain a heavy burden for productivity and competitiveness, especially for Philippine agriculture and countryside development.

This article highlights a few examples.

The Cabotage Law, also known as the Jones Act of 1920 and the primary US maritime law, was passed by the US Congress when the Philippines was still a colony. It has prohibited foreign vessels from serving domestic shipment routes.  Many sectors claim that the law has led to the high cost of inter-island transport.

Meanwhile, the Philippine Inter-island Shipping Association opposed the repeal. It attributes the high cost of shipping to high taxes, lack of cargo volume, high interest rates and inadequate port facilities. Incidentally, a US International Trade Commission study in 2007 estimated that the Jones Act cost the US economy some US$ 3.6 billion to US$ 9.8 billion a year.

Indeed, the costs of transport to Taiwan and Malaysia from Mindanao are cheaper than from Mindanao to Manila. Shipping dry cargo from Davao to Taiwan costs about US$450 per 20-foot equivalent unit (TEU), to West Malaysia US$480 per TEU as compared to Manila, $565 to $680 per TEU.

General Banking Act (Republic Act (RA) 337 of 1948). Section 79 of the Act mandates that the maximum grace period for loans will be three years. This continued for several decades until it was amended by Agriculture and Fisheries Modernization Act in 1997, and implemented by a Bangko Sentral ng Pilipinas (BSP) memorandum circular in late 1999, following incessant advocacies by the tree-crop alliance for decades.

Section 79 states that: “… In the case of loans with maturities of more than three years, provision must be made for periodic amortization payments, but such payments must be made at least annually: Provided, however, that when the borrowed funds are to be used for purposes which do not initially produce revenues adequate for regular amortization payments therefrom, the bank may permit the initial amortization payment to be deferred until such time as said revenues are sufficient for such purpose, but in no case shall the initial amortization date be later than three years from the date on which the loan is granted” (emphasis by the author).

For over 40 years, the Act prohibited lending to long-gestating crops such as rubber (six years gestation), oil palm and coffee (more than three years with traditional clones), and mango (over five years). It is no wonder why, in part, the country lags in tree-crops development in Southeast Asia. Under the Malaysian land schemes in the early 1980s, the grace period for oil palm was five years and for rubber seven years, with interest capitalized.

Sugar Act  (RA 809 of 1952) provides for sharing of milled sugar with 60 to 70 percent to the planter, and 30 to 40 percent to the miller.  Various analysts have questioned the law as it discourages investments by the mills that will fund 100 percent of an investment, say mill modernization, while the planter gets most of the benefits.

In Thailand, when a planter delivers cane, he is immediately paid for the cane with quality premium or discount.  The mill owns the sugar produced. This policy promotes mill investments and modernization.

Banana Hectarage Law (Letter of Instruction (LOI) 58 of 1973 and LOI 790 of 1979). LOI 58 was issued in 1972 that limited Cavendish banana areas to 21,000 hectares for 19 farms of the eight exporter groups. This was amended by LOI 790 which extended the limit to 26,250 hectares for the same groups. These regulated the supply of banana exports.

Over the years, the industry has expanded, and the total area eventually far exceeded the LOI limits. The government of Pres. Fidel Ramos turned a blind eye to the LOI and allowed expansion. Executive Order No. 807 of 2009 issued by President Macapagal-Arroyo finally lifted the cap on banana farms.

The law gave preference to a group of investors and banned new investors. There was a concern that new entrants will destroy the banana market in Japan at that time. This was a case of regulatory capture.  Happily, the law was ignored in later years and allowed the banana industry to expand and create jobs.

The Agri-Agra Law or Presidential Decree (PD) 717 of 1975 provided for credit access to agriculture and agrarian reform beneficiaries (ARB).  It mandated that all banks allocate 25percent of their loans for agricultural credit in general, of which 10 percent of the loans shall be made available for ARB credit.

Over the years, Congress and the BSP have expanded alternative compliance such as: (a) development loans to educational institutions, hospitals, socialized housing, and local government units (LGUs); (b) investment in commercial papers issued by agricultural firms; investment in LGU, agrarian reform and Pag-ibig bonds; and (c) loans for high-value commercial crops.

Critics argued that the PD failed to improve credit access for farmers.  Since agricultural financing remains risky, the PD leaves banks with little flexibility in making optimal portfolio decisions. The situation forces them to pass on the cost of higher credit risk back to the farmers and other borrowers.

RA 10000 of 2010 amended the law. The new law retains the mandatory credit allocation. The law rationalizes the modes of compliance. Apart from direct compliance, alternative compliance is also provided.

They are:  (a) wholesale lending to and/or investments in accredited rural financial institutions (RFIs); (b) bonds that are declared eligible by the Department of Agriculture (DA) in consultation with the Department of Agrarian Reform; (c) loans for construction of infrastructure that will benefit the agri-agra sector; as well as (d) loans to the National Food Authority (NFA) and NFA-registered warehousemen, millers and wholesalers.

The BSP will accredit the bank-RFIs while the DA will accredit the non-bank RFIs such as cooperatives and others.

There is no proof yet that the law has helped in rural poverty reduction. In many aspects, the important elements for lending are missing: viable market-driven projects, good infrastructure, research and development, extension services, well-organized producers and good governance.

Coconut Preservation Act. Under RA 8048 of 1995, the cutting of coconut trees is banned except when permitted by the Philippine Coconut Authority (PCA). The exceptions include: (a) the tree is at least 60 years old; (b) the tree is not productive; (c) the tree is severely diseased or pest-infected; (d) the tree is damaged; (e) the coconut land shall have been approved for conversion to non-agricultural uses; (f) the coconut land shall be used for other agricultural-related activities; and (g) the tree would cause hazard to life and property.  Another is the planting of the equivalent number of coconut seedlings.

Landowners feel that the law actually violates the right to private property. If a landowner feels that he must cut the low-yielding trees for alternative agri investments, why should he need a permit from the government?

Temporary Restraining Order (TRO).  The issuance of a TRO has caused high economic costs due to delays in project implementation.  A case in point is the connector between the South Luzon Expressway (SLEX) and Southern Tagalog Arterial Road (STAR) Tollway in Batangas, which was severely delayed due to right-of-way problems. This does not happen in China and Vietnam where infrastructure construction is faster as all the lands are owned by the government. Indonesia has also issued a decree on the subject to expedite infrastructure development.

What happened to SLEX’s service level when a group of “enlightened” lawyers filed a case against the Philippine National Construction Corporation years ago? The  toll fee was reduced and the SLEX maintenance deteriorated.

Foreign Ownership. The Constitution reserves to Filipino citizens the ownership of certain industries: education, media, utilities and exploitation of natural resources.

The grant of exclusivity to nationals may look good to some sectors, but it has also led to fewer choices for the consumers. In some industries, the service standards of local firms are not as good compared to benchmarks, which are usually the foreign-run companies. Limiting ownerships to locals can also lead to elite capture.

Squatting.  Under RA 7279 (the Urban Development and Housing Act of 1992) or the Lina Law, landowners must find a relocation site before they can ask squatters in their property to move out.

Certainly, the law has many unintended consequences. First, private land owners who inherited lands or saved money to purchase the land are disenfranchised. Is it not that the right to private property is enshrined in the Constitution? Has anyone challenged this Law? Also, what have the local governments done to address the lingering squatters issue?

Courts and legislators may not be all competent to judge in many cases the economic impact on society of legal decisions. They may favor a person or a group but their decisions affect the common good of society. To address these concerns, students of law must take courses on economics of regulation and cost-benefit analysis. For the courts, they must consult experts to help them understand the impact of law on economic development. This is already standard operating procedure in developed countries.  But sadly, not here.

Oversight committees set up to review these laws lose sight of public good intentions amidst conflicts of interests and self serving short term priorities. Somebody should be able to flesh out who benefits from these laws, and in like manner, indirectly show why they still exist despite their bad economic rationale.

Are retrogressive laws our weakest links to forge ahead for inclusive growth and be able to catch up with the national progress  earned by our Asean neighbors the past decades?

Quo vadis?

No doubt, lawmakers and the courts have the best intentions when they craft or interpret the laws that affect economic development.

But sometimes in the past, the laws enacted or court judgments have had a negative impact on development and, as a consequence, the people. This is partly the reason we are now lagging behind our Asean neighbors.

There needs to be a balance between good intentions and an awareness of potential negative practical consequences on development. The law must help boost development, not impede it.

(The article reflects the personal opinion of the author and does not reflect the official stand of the Management Association of the Philippines. The author is the executive director of the Center for Food and AgriBusiness of the University of Asia and the Pacific. Feedback at [email protected] and [email protected].  For previous articles, please visit map.org.ph)