In a previous column, we reported the study of United Nations Conference on Trade and Development (Unctad), the international agency monitoring the flow of foreign direct investment across the globe, on the FDC flows this year. Their World Investment Report 2020 (June 2020) gave a dire forecast on FDI flows: decline by up to 40 percent from the 2019 aggregate value of $1.54 trillion, and a further decrease of 5 to 10 percent the following year.
Together with the assessments made by the IMF and World Bank on the recessionary trends worldwide, the Unctad projection of plunging FDI flows clearly collides with the belief of some policy-makers in the executive and legislative branches that the way forward is to open up the economy so that more FDI will come in. These policy-makers believe that the full opening up to foreign equity of the few service areas (e.g., land market, telecoms, media) and the passage of the law reducing the corporate income tax will seduce foreign investors to come in and help stimulate the economy.
Where will the FDI come from given the gloomy economic environment? And should a few come, can they help resuscitate a flattened Philippine economy in a substantial way in order to engineer Philippine economic recovery in 2020-2021?
The reality is that if FDI do “come”, they will arrive mostly in the form of “pledges.” The problem is that these pledges need a time lag of one to three years before they are transformed into productive investments, assuming that these investments are not of the speculative type. Look at the big time gap between the Chinese and other investors who made commitments to the government’s build-build-build program and the delays in the implementation of quite a number of infra projects, especially those supposedly being bankrolled by the Chinese.
But there are other worrisome developments that our policy-makers, especially those ensconced in their comfortable desks at DTI and Neda, should worry about. The global production system, which is largely based on the global value chains (GVCs) developed by the multinationals, is crumbling or being ruptured by a “perfect storm.” Unctad summarized it in one sentence:
“At the start of a new decade, the global system of international production is experiencing a perfect storm, with the crisis caused by the Covid-19 pandemic arriving on top of existing challenges arising from the new industrial revolution (NIR), growing economic nationalism and the sustainability imperative.”
As pointed out in earlier articles, the global system of international production is a product of the efforts of the multinationals to farm out or subcontract internationally the production of different parts, components and processes that make up various products sold in the market such as mobile phones, garments, shoes and so on. It is estimated that up to 80 percent of global trade is really trade between and among subsidiaries and subcontractors of the MNCs. This is why Pascal Lamy of the World Trade Organization baptized these products as goods “Made in the World.” Of course, WTO contributed to the development of this made-in-the-world trading system by pushing for the adoption by member countries of uniform trade and investment liberalization measures.
The problem is that the government economic technocrats, past and present, have been trying to latch on to the international production system as the Philippine route to development—with spectacularly limited success. The original four Asian tigers (Hong Kong, Singapore, South Korea and Taiwan) attracted most of the FDI in the 1970s-1990s. At the same time, these countries succeeded in climbing the industrial ladder and in nurturing home-made MNCs with their own GVCs such as Samsung, Acer and so on.
And then China came in in the 1990s and edged out everyone in attracting FDI. Factory Asia, a product of the global production system, has been transformed into China-led Factory Asia. And to the consternation of American, Japanese and European policy-makers, China, like the four Asian tigers, succeeded in building up their own industrial base and forming their own MNCs, which have their own GVCs such as Huawei, Tencent and so on.
Now Unctad is saying that the international production system is being ruptured by a “perfect storm” made up of the NIR, economic nationalism among major economic powers and the requirements of climate change mitigation and adaptation.
The “new industrial revolution” or NIR refers to the technology revolution sweeping the world, which the Davos’ World Economic Forum baptized as the Fourth Industrial Revolution. Artificial intelligence, robots, Internet-of-Things, 3D printing (additive manufacturing), cloud computing (big data analytics) and an endless flow of technology innovations are changing the way products are made, outsourced and moved. The steps in making a product have become fewer, the distance/length by which outputs from different steps or production stages are assembled has been reduced, and the need to outsource production to far-flung countries in order save labor and other costs has declined. Even in China, the NIR is a major source of social tension because technology-driven growth is not creating jobs for all.
One outcome from the FIR is “re-shoring.” Some MNCs from Europe and America are now recalling production work such as labor-intensive assembly of certain parts outsourced to Asia because this can be done cheaply in their home countries with the adoption of labor-saving and other technological innovations.
Moreover, some products coming on stream in the market are designed to have fewer parts or components. For example, the internal combustion engine for a traditional car has more than 2,000 moving parts, while the electric vehicle (EV) has only 20 parts!
And these EVs are rising in number worldwide because they are part of the global response to the challenge to reduce GHG emission in order to protect Mother Earth from catastrophic climate change or global warming. Under the Paris Agreement of 2015, countries and industries are being asked to take the sustainable path by supporting industrial production processes that are less dependent on fossil fuels and are respectful of the environment. One way of doing this is to shift to high-tech processes that are less dependent on the international production outsourcing system.
Finally, there is the raging US-China trade wars, which are giving the WTO officers sleepless nights. The two refuse to submit themselves to the WTO discipline, which is supposed to be one pillar of stability for a global economic order based on the international production system.
Worse, the US-China conflicts are happening in other places of the globe, for examples, British exit from the EU. On the other hand, the EU itself has become protectionist and has established a tighter system of screening FDI, which enables the Union to issue an opinion if an investor is a threat or not to the Union.
This economic protectionism is now fanned by the uncontrolled spread of the Covid-19 pandemic. Governments, in their effort to preserve industries and jobs in their respective countries, are spending stimulus funds to save these industries. Five decades of globalization has failed to wipe out the spirit of nationalism among countries.
In sum, the international production system that the MNCs have developed under several decades of free-wheeling globalization is being rocked by this “perfect storm.” One wonders what is the response of our policy-makers in the executive and legislative branches to this storm?