Across the decades: Economic development of the Philippine and Hong Kong

The sustained economic rise of Hong Kong under British colonial rule is one of the most remarkable stories in recorded economic development.

Building on last week’s discussion, I elaborate further on some comparisons in the development of the Philippines and Hong Kong,.

Lessons from comparison. The Philippines is a much bigger country in land, in resources, in people than Hong Kong ever was.

Hong Kong had no hinterland of its own. To exist economically, it had to depend on the world and its immediate neighbors, especially China – for its material needs including food. The world was its own hinterland.

We had land and resources. We had a hinterland on which to depend for our needs.

The stark difference in endowments does not mean that there is little to learn from the experience of Hong Kong. The differences in economic policy adopted consistently by Hong Kong authorities explains why it was enormously successful.

Early Philippine policies. When we attained political independence in 1946 at the end of World War II, we as Filipinos were essentially in control of our own economic destiny.

Of course, it was not that simple. Then, the economy was still highly connected to the US economy. One aspect of independence was how to become less dependent on the economy of the colonial master.

In fact, the independence negotiations had anticipated the need to reduce this economic dependence. It was recognized that the close economic relations with the American economy needed correction through a multi-year period of adjustment.

Original sin. In preparation for this, Philippine leaders wrote the political constitution in 1935 that would govern future independence. They introduced into this document specific provisions concerning how the economy was to be governed. (The amendment or liberalization of restrictions is still a topic of debate that has not yet been corrected until today!)

By being too specific in their desire to micromanage the future, they introduced future rigidities toward thinking about how to manage development in the future. This was the original sin in the development adjustment strategy.

The constitutional provisions focused on areas of the economy that they would reserve mainly for the country’s citizens. They chose to do this by restricting participation of foreigners in critical areas of the economy.

Specifically, the provisions targeted public utilities, the exploitation of natural resources which belonged to all the people or the state, and the ownership of land in the country. The constitution also adopted the citizenship principle of jus sanguinis (that is, citizenship by blood relationship). A consequence of this principle and helped along by strict rules on acquiring citizenship, these provisions made it difficult to attract foreign capital in practice.

A major break in the continuity of the economic policies as ordained and planned for was the Second World War which brought serious dislocation and disruption to the Philippine economy. This event further complicated the tasks of independent nationhood.

Independence and war destruction. The Philippine economy emerged badly damaged by the war. A lot of capital had been destroyed seriously hampering the growth of the economy as political independence took place.

The US and the Philippines redefined the early postwar relationships firstly with a long term trade agreement that characterized a special trade relationship. Secondly, with the payment of war damage as a means of helping in the rehabilitation of the new republic, it tried to help in jumpstarting economic recovery.

The war damage payments were made to private citizens that included Americans who lost their business and property during the war years.

The amount of war damage compensation awarded to American citizens was substantial during the early period of Philippine independence. In part because of the expressed intents of the Philippine independence constitution, a large amount of that money, which could have been reinvested back into the Philippine economy, did not happen since it was repatriated back to America or brought to other countries.

Under normal circumstances, such capital could have continued to operate in the economy by being reinvested. That it did not materialize meant a loss in the future development of the economy.

Although there were American foreign investments that continued to remain in the Philippines then, which was significant compared to that of other nations, the volume did not increase as much over time. What explained this was the direction of economic policies early during the independence period.

The preferential trade agreement enabled adjustments between the US and the Philippines, creating an opportunity for more expansion of that relationship through trade and investments.

However, as it turned out, Philippine economic policies became increasingly inward, favoring mainly import substitution, more restrictive and protectionist during the early decades of independence.

Moreover, these policies were more friendly to investments by Filipino nationals and very selective when proposed by foreign investors. By the end of the first decade, the 1950s, exchange and import controls increased in intensity, encouraged by “Filipino First” policies.

Hong Kong’s policies. During the same period and beyond, Hong Kong’s policies were supported by British colonial rule, making it remain as a free port, with very open economic policies that encouraged industry and commerce. Throughout the period of growth, fiscal, monetary and exchange rate policies were stable and were designed to accommodate the economy’s continuing requirements.

The government encouraged the commensurate growth of public investments in infrastructure in transport, in energy, communications, and public safety. Here domestic private enterprise had many areas of economic participation under government encouragement.

This was highly complemented by a very friendly policy to all business investors. Imports entered the territory free of duty, and so the world was the supply of its food and raw material needs. Low taxes on business and ease of business requirements were paramount.

Under this umbrella of support, manufacturing, services, and finance simply grew. Foreign investments from all parts, especially Chinese capital from many parts of the Asian region, including refugee capital from the mainland made its growth fast and steady over the years.

My email is: [email protected]. For archives of previous Crossroads essays, go to: https://www.philstar.com/authors/1336383/gerardo-p-sicat. Visit this site for more information, feedback and commentary: http://econ.upd.edu.ph/gpsicat/