The Foundation for Economic Freedom:
Role and Tasks in a Milieu of Protectionism
Paper presented by Professor Alexander R. Magno, president, Foundation for Economic Freedom, at the fifth workshop of the Economic Freedom Network, Jaipur, India, 25-28 September 2003


The Foundation for Economic Freedom (FEF) was established eight years ago by individuals concerned over the low level of public appreciation for the dynamism of a free market economy.

The FEF was designed specifically to be an advocacy institution, operating on a low overhead budget, and engaging principally in public diplomacy. At the core of this institution is the Council of Fellows, composed of highly visible and respected business leaders, retired bureaucrats and academic economists.

The Council of Fellows is led by former Prime Minister Cesar Virata and former finance secretary Roberto de Ocampo. The Council includes three former economic planning secretaries --- Cayetano Paderangga, Felipe Medalla and Dante Canlas. The present economic planning secretary, Romulo Neri, is likewise a fellow.

Presently, the President Gloria Macapagal Arroyo’s Cabinet includes, apart from Neri, two other fellows of the FEF. These are Budget Secretary Emilia Boncodin and Labor Secretary Patricia Sto. Tomas. An FEF fellow heads the Philippine International Trade Corporation and the Transmission Corporation, which is tasked with privatizing the power sector. Three members of the FEF are with the board of the Development Bank of the Philippines, including the chairman of the board and the president.

The profile of the FEF Council of Fellows is the institution’s main resource. That profile allows the FEF to call government’s attention to urgent policy issues and commands the public’s attention during vital policy debates.

Over the past 8 years, the FEF has stood as the institution of reference on several policy issues touching on the process of reinventing the Philippine economy from an inward-looking to a trading one.

Liberalization of Oild Sectors

The initial stimulus for establishing the FEF was the great oil price debate that happened during the 1994-95 period.

At that time, the oil industry in the Philippines was nationalized and oil pricing regulated. A levy was collected on oil price sales and pooled into what was called the Oil Price Stabilization Fund. The Fund was, theoretically, a means to moderate sharp price movements in oil due either to currency realignments or instability in the global markets.

In reality, the fund, which was constantly at a deficit especially in the aftermath of the first Gulf War, became a channel for subsidizing oil prices at great cost to public sector finances. While the fund existed, oil pricing became highly politicized. Every increase in pump price was met with large demonstrations and paralyzing transport strikes. No political leader was willing to accept the political cost of obeying market dictate on oil pricing. Subsequently, oil pricing was dictated more by the political balance of power rather than by market forces.

In the 1994-95 oil price debate, government actually raised prices to reflect real world pricing. This was also a necessary step leading to the eventual liberalization of the oil sector. Allowing the artificially low prices to persist would have discouraged the entry of competitive new players in the sector.

The oil price increase, however, provoked the formation of a large coalition of political groups demanding a rollback. The coalition was called Kilusang Rollback (Rollback Movement) and included leftist organizations, trade unions, farmers groups and a large number of prominent clergymen who declared that oil price increases were “anti-poor.” The coalition mounted street protest and called for paralyzing general strikes.

Facing midterm elections in May 1995, the Ramos government buckled under the pressure from the streets. Oil prices were rolled back. As a result, the public sector deficit spiked up by P30 billion and oil imports increased abnormally by 30%. It was clear that artificially priced oil produced not only massive bleeding of public sector funds, it also led to imprudent consumption of an imported and highly polluting commodity.

Through the oil price debate, no one stood up to defend what was an overwhelmingly unpopular decision to allow oil prices to seek their market level. No group confronted the highly politicized pressure from the streets to argue that it was the oil subsidies that were “anti-poor” because they diverted scarce public funds from education and health services that served the lower income groups more. Oil subsidies benefited richer Filipinos who consumed as much as fifty times more gasoline per capita than lower income Filipinos who relied on public mass transport.

It was during this period that the fellows of the FEF decided that there was a need for an institution that would dare take unpopular positions on issues where populism reared its ugly head. There was need for an institution that would address the broad public and insist on taking a longer view of the economic policy issues at hand, a view beyond the short-term political contingencies and beyond the normal public inclination for instant gratification.

Those of similar mind and concern for the quality and reliability of our economic policies began meeting to discuss the feasibility of establishing an advocacy institution. Because such an institution would often stand against what was more popular in the policy debates, it was necessary for this institution to be composed of truly respected intellectuals and public servants. It was also important for the institution to be constantly independent of vested interests.

The Foundation for Economic Freedom was established as a result of those consultations.

Legislative Reforms

The Foundation began operations with a small grant from the Philippine Business for Social Progress (PBSP). That grant has since run out and the FEF has relied on occasional partnerships with other institutions, using a miniscule backroom operation to support the Council of Fellows.

The FEF played a major role in the passage of two key pieces of legislation that helped liberalize the economy.

From 1998 to 2000, the FEF partnered with several groups to assist in the passage of the Liberalization of the Retail Trade Act. The 1954 law that nationalized the retail trade (reserved it for enterprises that were owned by Filipinos) was highly symbolic for the protectionists. A strong lobby funded by the existing retail companies had prevented liberalization for years.

The FEF worked specifically at putting retail liberalization in the Estrada administration’s priority legislative agenda. The FEF’s research staff supported legislators with research findings to help craft the liberalization law. At the same time, the Foundation mounted a nationwide information campaign to convince the people that an inefficient retail system was harming the poor and that increased investments in the retail sector would help bring drown prices through more efficient distribution of goods.

Although protectionist legislators did succeed in inserting provisions that limited entry of foreign-owned retailers through high capitalization barriers and a brief waiting period before liberalization takes full effect, the passage of the law in 2000 was a substantial as well as symbolic victory. It brought new investments into retail despite the limitations and brought down a previous law that was symbolic of the period of intense economic nationalism in the country.

From 2000 to 2001, the FEF concentrated on the passage of the Electricity Power Industry Reform Act. The reform measure was not a popular one with a public that was used to a nationalized system of power generation and distribution. Furthermore, although the National Power Corporation was losing billions annually, the process of privatizing it would require front-end costs for government.

Despite those considerations, President Gloria Macapagal Arroyo kept the power reform act at the top of her priority legislative agenda and the law was passed a few months after she became president.

From 2001, the FEF has been concentrating on governance reforms, specifically the re-engineering of the corruption-prone Bureau of Internal Revenue (BIR). The Foundation provided both research support to legislators and initiated a public information campaign to win support for the restructuring of the BIR to make it more efficient in its work and more resistant to the lure of corruption.

Although there was strong support for BIR reforms from the present government, the enthusiasm of the legislators was not sufficient to move this piece of legislation quickly enough to pass it before election fever set in. Employees of the BIR, fearful of being laid off en masse, opposed the restructuring. Politicians associated with the influential networks of BIR collectors used every technicality in the book to slow down movement of the proposed reform law through the legislative mill.

The FEF continues to lend its weight to the effort to reform our internal revenue system even if there is danger that elections will freeze the process and a new Congress will shelve the bill. The problem of uncollected revenues is a strategic one. The Philippines has suffered a chronic budget deficit that has now caused the public debt to balloon to unsustainable levels.

In between these major campaigns, the FEF has issued public statements on other issues relating to Philippine economic policy. Despite limitations on the institution’s resources, we have tried to keep maintain a high visibility in the public debate concerning the direction and pace of economic development in the Philippines.

The Economic Freedom Index

As indicated be the preceding discussion, the FEF is principally a public advocacy institution rather than a primarily research-oriented organization.

We collate and package information rather than generate baseline data on our own. For our data needs, we rely on existing economic research institutions as well as on information available from like-minded institutions globally. Networking is a very important component of the FEF’s work.

We have had, on several occasions, found great use for the Economic Freedom Index. It is a valuable source of comparative information that helps the FEF strengthen its case in the domestic policy debate.

When the FEF mounted its campaign for the passage of the Retail Liberalization Act, we relied extensively on comparative economic data from collaborating foreign institutions. During this campaign, we attempted to organize existing consumers groups and build a coalition of consumers opposed to the inefficient retail system that victimizers end-used of goods. In this effort, we received significant support from Australian institutions supporting free market policies.

Last year, the FEF produced a detailed paper critiquing the Index and advancing a number of suggestions. That critique was well received and, at this moment, we have very little to add to it.

But we are sure that the solidarity of free market advocates will continue to be important to us.

We face a global situation characterized by a backlash of sorts to the experience, thus far, of relaxed trade and liberalized economies. In the Philippines, to be sure, there continued to be organized political pressure to reverse the gains made the last decade towards building a more liberal and more competitive national economy.

The FEF looks forward to more campaigns in the near future, at the very least to conserve the gains of previous liberalization measures and to stall the resurgent tide of protectionism --- a tide that will compromise our ability to provide a better future for our people.

We will seek out the support of our allies in the Economic Freedom Network in this effort.