THROUGHOUT recorded history—and this goes back much farther than we tend to believe, the financial center of the world has been constantly moving. That center is the primary location from which money flows and to which it returns. In a sense, it is the center of trade but not necessarily the center of the goods trade.
Babylon in ancient times was that center and over the millennia has moved westward to Europe and then to New York and America. It is expected that some time in the future, China will become the financial center of the world.
Money moves around the world as a leaf does in the wind. And like the leaf, it is not random movement but one determined by a number of factors.
Governments and its policies are controlled by individuals—mainly legal types who do not have the slightest understanding of money or how it works or why it flows. Even most business people are unqualified to speak about capital flows, and you can see that when they are placed in positions of advising governments.
While it is true that money goes where it can grow through profits, profits are the result and not the cause of capital moving around the globe. Yet, the factors that influence and sometimes control money flows that are specific and easy to understand are ignored.
The typical retail-oriented business owner believes that a successful enterprise dealing with the public requires three things. The doors must be opened on time, the products should be fairly priced and that the company will stand behind the quality of the products. That is all true.
Unfortunately, that is the why the government policy-makers think in terms of attracting investment. You always hear this about the Philippines and why foreign investment should come in. We have a fairly strong, educated, English-speaking work force. The Philippines wants foreign investors and will offer incentives. The economy is good and we are trying to better out infrastructure.
Let’s compare that to a department store. “Our sales personnel always try to be helpful. We want your business and give you the best possible price that we can. We are always trying to improve our stores, merchandize and service.”
So why isn’t the Philippines the global equivalent of SM department stores when it comes to attracting new business?
These are the factors that drive capital movements: currency exchange rates, taxation, labor costs, inflation and interest rates and security, both geo-political and local. Everything else is just a bonus or unimportant. Fancy road shows at five-star hotels with dinner and wine is like the supermarket sending someone to carry your groceries out to the car; nice, but not necessary.
The pundits talk about poor infrastructure and the “ease of doing business” while the government talks of corruption and transparency. But if the Philippines were as corruption-free as Saint Peter himself and it took 20 minutes to process all the papers needed to open a factory, a high taxation rate like we have is a deal killer. So the government offers tax incentives to try to offset corruption and long lines to get your paperwork processed.
However, tax breaks for investment are like a “Buy 1-take 1” sale and that is not a successful business model. Capital wants a low-taxation regime now and forever—not the investment equivalent of a “Three-day Mega Sale.” The Philippines has the lowest foreign investment in Southeast Asia and the highest corporate income-tax rate. Might there be a correction with those two facts? The government does not seem to think so even if foreign money does.
Actually, the Philippines scores well on most of the other factors except security. But “local security” is not just peace-and-order as the government assumes. “Security” for the foreign investor also comes from the confidence that policy is going to be stable.
The administration obviously does not realize it, but the reversal of the mining laws and the cancellation of contracts in other projects are huge in the mind of foreign money.
The reality is that foreign investors are not going to come in if they feel that they are being treated like “probationary employees” that can be terminated at any time and that is what has happened in the last years.
If you look closely at the net 2014 foreign investment numbers, the “surge” was mainly due to foreigners not withdrawing profits. Actual fresh money new investments were down 15 percent.
With the current policies and mindset, the Philippines will continue to be the “sick man” of Southeast Asia in terms of hard foreign investment.
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