The raging debate over retail nationalization:
Irreconciliable differences?
By Gina Mission

If the newly launched consumer group Karapatan ng Mamimili (KAMI) had its way, the country’s retail trade industry would have been liberalized a long time ago. Or better yet, it shouldn’t have been nationalized in the first place. On the other hand, Katapat, a mass-based coalition of Philippine retailers and consumers, could only wish the spirit of Christmas brings an enlightening touch for KAMI members to finally comprehend what Katapat secretary general, Jaime Regalario, calls the "fundamentals of economics."

   At the center of this gathering storm are the consumers and retailers, who, both camps admit, will be directly affected by the liberalization of the retail trade sector. Depending on who is talking, the effects of this change are two-fold: Consumer and retailer empowerment through unlimited choices of best goods and services at the most competitive prices, according to KAMI; consumer confusion and retailer dislocation, according to Katapat.

   In contrast, maintaining the industry’s status quo, according to KAMI, leaves a scenario of hapless consumers, constrained manufacturers and suppliers, an uncompetitive retail sector, and cheap labor. Katapat, on the other hand, maintains that the current status of the sector prevents multinational retailers from gobbling up the Filipino entrepreneur.

   The irreconcilable positions of KAMI and Katapat on the issue stem from two bills, namely Senate Bill 153, filed by Senator Sergio Osmeņa III, and House Bill 7602 filed by 12 congressmen. Both bills seek to liberalize the Philippine retail trade industry, which is protected from foreign participation, through Republic Act 1180, also known as the Retail Trade Nationalization Act passed by Congress in May 1954.

   For 45 years, the country's retail trade was the exclusive domain of Filipinos. Recognized for its importance as the "industry of the masses," retailing was the first among all of the country’s industries to be nationalized through RA 1180.

   Katapat defines retailing as the practice of selling products for personal or household consumption. Sari-sari stores (neighborhood corner stores), stalls operated by market vendors, dry goods stores, groceries and supermarkets, hardware stores, drugstores, and the like are all involved in this trade. It is in this sector that the entrepreneurial skills of the Filipinos are showcased.

   "Give any Filipino a thousand pesos and most likely it will be used as start-up capital for a retail business," observes Regalario.

   In addition, the industry, according to Regalario, functions as the vital link between Filipino producers who make the products that are sold in the country and the local consumers who buy such products. This is evident in delivery vans distributing goods to sari-sari stores of any and all sizes.

   Katapat estimates that a total of 3.2 million Filipinos are involved in retail. The group further claims that from 1980 to 1992, retailing accounted for an average of 11.3 per cent of the country's growth domestic products. Small-store sales grew at a faster rate of 18 per cent compared to large outlets at 11 per cent. Single proprietorships, family-run neighborhood stores and market vendors comprise a large 99.4 per cent of total registered retailers in the country. This does not include retailers in the informal sector or the underground economy, who comprise, according to Regalario, 78 to 93 per cent of the industry. In 1991, an estimated 20 per cent of Filipino families derived their income from trade.

   Trade liberalization policies, says Regalario, naturally open up this sector to investments from foreign retailers. Specifically, the two contentious bills, he adds, will kill the local retailers.

Retail liberalization long overdue?

   "It’s about time the retail trade industry was opened up," says Alex Magno, president of the Foundation for Economic Freedom (FEF), a research center for pro-market policy solutions engaged in networking for advocacy, public education and consulting services, at the launching of KAMI at the EDSA Shangri-la Hotel.

   "The liberalization of the Philippine retail industry is long overdue," remarks Robert Sears, executive director of the American Chamber of Commerce of the Philippines (ACCP).

   In contrast, KAMI believes that the bills are pro-poor, pro-manufacturer, pro sari-sari store, and pro-labor. The bills, explains KAMI legal counsel Anthony Abad, propose amendments to Republic Act 1180, which was enacted 45 years ago and which "restricts the operation of retail trade in the country solely to Filipinos." The protectionist flavor of RA 1180, he adds, penalizes the consumers and subsidizes the protected retailers. By opening the retail trade sector to foreign investors, the bills directly address the need for policies in the country that promote international competitiveness.

   In the absence of competition, says Quirino Marquinez, president of the Consumers Union of the Philippines, in his talk, The Truth about Trade Liberalization, retail trade in the Philippines has been captured by a retail oligopoly composed of a few companies. As of 1993, he continues, the NSO reports a total of 169,808 retail trade enterprises with gross revenues amounting to P331.6 billion. Only the top 0.14 per cent of the population in terms of paid-up capital (above P5 million) captures as much as 25 per cent of industry sales.

   Explaining the rationale of RA 1180, Atty. Abad says: "By prohibiting aliens from operating retail trade businesses in the country, the law seeks to prevent alien dominance, especially Chinese dominance, of retail trade in the country, which was considered a threat to the national economy at that time. Filipino businessmen were generally seen as thinly capitalized, inexperienced, and in need of protection to survive."

   Historically, Abad concludes, the law is a failure. "All the Chinese businessmen had to do was become naturalized Filipinos. So what do we have now? Chinese-Filipino businessmen dominating the retail trade," he remarks. That is why, he adds, we have all these big Chinese-Filipino businessmen abusing their workers and dictating the market prices because they’re protected by law from foreign competition. That is why, he continues, the bills should be enacted into law. "Just the threat of government legislation allowing foreign competition should make these businessmen straighten up," Abad states.

   "The prohibition against foreign entry into domestic retail trade enables local mega-retailers to control the market. Prices, services, and quality of goods do not need to measure up to the world market because the latter choice is not accessible to consumers," Marquinez adds.

   The Retail Trade Liberalization bills propose to allow foreign retail trade enterprises to operate retail trade establishments in the country, "subject to conditions that safeguard the interests of small Filipino businessmen." Specifically, the bills seek to increase competition of the retail trade sector in order to make it "more efficient," and to address seven specific objectives designed to supposedly empower the consumers and improve the market performance of retailers and manufacturers through healthy competition.

   The proposed bills have three salient features. One is the 100 per cent foreign equity feature, which allows up to 100 per cent foreign ownership, at the required paid-up capital of P100 million (Senate version) and P200 million (House version). Another is the two-year investment window feature, which requires a minimum of two years investment for 100 per cent foreign equity retailers. After the two-year period, foreign equity will be limited to 60 per cent.

   The establishment location feature allows foreign retailers to put up their businesses only in cities and municipalities within the national capital region (NCR), and outside NCR, provided they submit a board resolution from the Sangguniang Bayan (municipal council) and to the Secretary of the Department of Trade and Industry (DTI).

   Members of KAMI consider the three salient features of the bills "prohibitive enough." Even Sears, thinks that the "ideal solution would be to open up retail trade at no capitalization or other restrictions." KAMI, however, recognizes that the liberalization of retail trade is expected to have redistributive effects. That is, a thinning out of profit margins for certain types of retailers. But that such "loss" supposedly translates to a "transfer" of "benefits" to consumers, suppliers, and workers.

   "It is understandable that apprehensions arise among those parties likely to be at the losing end of the process," says KAMI’s Marquinez. But such fears, he continues, are baseless since the bills also provide certain safety nets.

   For instance, in addition to the "prohibitive features," SB 153 ensures that small mom-and-pop foreign retailers that cannot contribute new technologies will not be allowed to enter and compete directly with our sari-sari stores and small retailers. It does this by providing that the DTI screen and qualify foreign retailers and allow entry only to those with minimum capital of $50 million in their home countries, with at least five branches or franchises, and a five-year track record in retailing.

   The bill also prohibits the "use of mobile or rolling stores, carts, multi-level and door to door selling. There is a P1 million minimum capital outlay for every branch of a foreign retail trade enterprise. Branches with a capital outlay of less than P5 million shall only be allowed in shopping malls.

   In a position paper, the American Chamber of Commerce claims that the benefits to the Philippine economy and consumers would be numerous if the retail industry is liberalized. Specifically, the paper continues, it will result in lower prices of goods for consumers due to increased competition and the need to attain market share. It will facilitate technology transfer to the local retail industry. It will infuse fresh capital into infrastructure (i.e., construction) and working capital. It will increase sales of Philippine-made products to overseas branches of foreign retailers and increase the number of job opportunities as more and more foreign retailers put up stores in the country.

Sufficient safety nets for locals?

   Katapat’s Regalario and his group, however, are not convinced. "Under these trade liberalization bills and its supposedly ‘prohibitive features’, the likes of Walmart, JC Penney, Sogo, Watson's Drug Store chain, True Value Hardware chain and other foreign retail giants will be able to enter the Philippine market 100 per cent through an investment of a mere $10 million, while preventing the medium foreign retailers, who can possibly create a healthy competition, at the same time, " Regalio points out. Quoting a 1995 issue of Fortune Magazine, he says that only 20 mega-retailers control the retail trade industry in the world. The same article, he adds, concluded that there cannot be a global market that is equal – there will always be both winners and losers.

   In 1998 alone, Regalario continues, Walmart earned $140 billion, more than the entire economy of many Asian countries. "How can there be competition when 80 to 90 per cent of the market has already been controlled?" he asks. The Filipino retail traders, he alleges, will never have a niche in this "so-called global market" – not because the Filipinos are lazy but because "the government is inefficient."

   "How can Filipino consumers be competitive when we have high costs of production because government does not support a capital industry?" Regalario asks. Philippine industries, he explains, are basically import-oriented. There are no capital industries, which explains why only 20 to 30 per cent of Philippine products are Filipino. It is for this reason that Katapat believes Philippine products cannot compete in the global markets. "We are trapped in a cycle that does not promote economic development," he remarks.

   As Regalario says, because of the country's worsening agricultural industry brought about by government failure to provide sufficient subsidies, irrigation systems, post-harvest facilities and farm-to-market infrastructure, our cost of food continues to spiral upward. There is never food security, he adds.

   In turn, this sparks a popular clamor for wage increases. To compensate for the additional cost of labor, employers have to increase prices of goods. This then leads to uncompetitiveness in the arena of globalization. As a result, shops close down and workers are retrenched.

   For the government to sustain its "comatose economy," says the Katapat leader, it will have to borrow money from international banks. "And when it does, it will have to work by the mandate of its loaners," he says.

The real reasons for retail liberalization

   At the November 30 Bonifacio Day rally, Katapat alleged that this is the real reason why the government, through its officials, wants to liberalize the retail industry.

   "Liberalization of retail industry is included in the Letter of Intent (LOI) submitted by the government as a commitment to the International Monetary Fund as one of the conditionalities of the release of $1.34 billion in loans to the government," Regalio said at the rally. While this allegation has been strongly denied by government officials, they have never shown evidence to the contrary. As Regalario pointed out, to this day they have never revealed to the public the full text of the LOI.

   Furthermore, Regalario alleged that while the entry of foreign retailers may initially reduce prices through predatory pricing, it will also wipe out competition in the process. Once competition is dead, prices will naturally be pegged at the whim of these mega-retailers, just like what happened with the liberalization of the Philippine oil industry.

   Predatory pricing, according to Regalario, is a reality that is being used extensively to gain market share. He cites the case of the United States where retail firms have been going bankrupt at the rate of 17,000 per year since 1991, "often because of the practice."

   "South Korea, which as early as 1981 prepared and put into place safety nets for opening the retail trade to foreigners, suffered the same fate. And so did Mexico, Canada and other countries which liberalized their retail trade industry," he adds.

   The $10-million capital investment, he assails, is a pittance to these mega-retailers. "Figures show that there is no movement in our forex as a direct result of foreign investment – only from the remittances of overseas foreign workers (OFWs). What these giant retailers will do – just like they did in other countries - is to borrow the $10 million from local banks and use the same as their capital. Whatever profits they incur, they will ship back to their own country to form part of their hedge funds," he explains. "With their hedge funds several times larger than all the resources of our country, which local bank will ever dare refuse to loan to these giant retailers?"

   Katapat believes that liberalization of the retail industry, aside from killing local entrepreneurs, will only make the country a dumping site for foreign goods. "The problem that all capitalists are faced with now is overproduction. They need to find new markets. Liberalization is not about an equal playing field. It is about capitalist countries looking for more markets for their oversupply of goods," says Regalario.

   Retail trade liberalization proponents argue that the entry of foreign players will promote local exports. But as Regalario says: "This comic argument is pathetic, for it shows that our lawmakers do not understand what national interest means. These foreign retailing giants cannot be compelled to carry Philippine products, or to promote the commodities produced by our manufacturers, since they are intricately intertwined with suppliers in their home countries."

"There’s never a guarantee in a free market"

   Besides, both bills do not require that foreign retailers distribute local goods. Even Sears admits that "world-class Filipino manufacturers [might] be able to compete" in a liberalized retail trading. As Sears concedes, "There’s never a guarantee in a free market." Not even better labor, better services, cheaper goods, and all the other upside that competition is supposed to bring. He explains: "It’s the market, the consumers that determine every move in a free market economy."

   Refuting Marquinez’s indirect allegation that the people opposed to the bills have vested interests to protect, Regalario says that the local retail market has one of the lowest profit margins in Asia, and perhaps the entire world, owing to the large number of market players. "There is no oligopoly in the business, but there would certainly be, once these legislators allow RA 1180 to be mangled," he declares.

   The truth, he counters, is that Marquinez is just passing the buck. It is actually those who are in favor of the bills who have vested interests to protect. Senator Osmeņa, he says, is one. "He is married to Betina Lopez whose family is into property development. The Lopezes own the Rockwell complex in Makati. They have built up the Rockwell Shopping Center which invited only foreign retailers to rent business space. Can you imagine what will happen to that property if SB 153 is not passed?" Regalario asks.

   In addition, Regalario says that what is actually happening is that there is a glut in real estate properties in the country. "Do you think Henry Sy, John Gokongwei, and the Ayalas depend on their retail business? They invest almost all their money in property development. SM only uses 11 per cent of its malls for its own retail business. The rest is being rented out to other retailers. The truth is, these people need foreign retailers to rent all the shopping malls they invested their money in. Do these KAMI members really think these rich people care about what happens to the Philippine retail trade sector?" Sy, Gokongwei and the Ayalas own the top shopping malls of the Philippines.

   Even Alex Magno, Regalario says, has a vested interest. "His own organization – the Foundation for Economic Freedom (FEF) is funded by the US Agency for International Development. Mahar Mangahas, FEF’s chair, stands to benefit in the passage of the bill as most of his Social Weather Stations’ clients are multinationals. More retail players means more clients for his organization," Regalario said.

How can you afford even cheap goods when you’re unemployed?

   One of the basic economic fundamentals, Regalario states, is that income creates consumption. The daily minimum wage in Metro Manila is P223, while the daily cost of living is P436.98. Against this is an annual unemployment rate of 8.9 per cent, and still rising. The number of unemployed Filipinos stands at 10 million.

   "With these figures, can Juan dela Cruz - never mind the Magnos, the Mangahas, the Marquinezes, and the Abads – afford all the ‘cheap goods’, granting they be cheap in the first place, that the mega-retailers flood the local market with?" Regalario asks.

   "But how do you explain these things to Senator Ramon Revilla, or Senator Robert Jaworski?" he continues. Both senators, a former movie actor and basketball star, respectively, are known to have supported the Senate Bill. "How do you explain this to Congressman Ralph Recto, who obviously doesn’t have the intelligence of his father?"

   The Philippine membership in the World Trade Organization, which was approved in December 1994, warranted a shift in the country’s economic policy from protectionism to free market. Furthermore, the ASEAN Free Trade Agreement stipulating a lower tariff for products going in and out of the country will become fully operational by 2003. The wise and rational move, according to Sears, is to "prepare the Philippine economy for the inevitable competition." Marquinez agrees, adding that the country’s economy should also "recognize and develop opportunities that will be opened through liberalization and not protect the narrow sectoral interest of a few mega-retailers."

   Racing against time, President Joseph Estrada has certified the bills as "urgent". The hopefuls expect the bills to be passed within the year. But Regalario and his group say that such a target is "too ambitious," adding that Katapat has been aggressively campaigning throughout the country against the bills’ passage since late last year.

   As Regalario outs it: "If they think they have the people’s support when the latest survey of the Social Weather Stations and the Pulse Asia clearly showed that 86 per cent of the people are against retail trade liberalization, they have another thought coming."


Seven specific objectives of the Retail Trade Liberalization bill:


CyberDyaryo | 1999.12.02