Philippine Economy and Elections: How Political Cycles Shape Emerging Markets

05/21/2015 10:56 pm ET | Updated May 21, 2016

Soon, the Philippines will be engulfed by an election fever. And in promising emerging markets like the Philippines, electoral cycles are extremely crucial to shaping the short-to-medium term growth trajectory of the country.

In recent years, the Philippines' Gross Domestic Product (GDP) has expanded by about 6 percent annually, and, ceteris paribus, it is expected to maintain similarly robust growth rates for the foreseeable future. But this can easily change if the country falls back into a familiar trap of political instability and leadership paralysis under the succeeding administration.

Political signals are as important as underlying macroeconomic fundamentals in determining how markets -- from domestic entrepreneurs with significant cash on their hands, to multinational corporations in search of new opportunities across emerging markets - hedge their bets. After all, in today's world of 'fiat money', market confidence is heavily tied to government policies, which, in turn, tends to dovetail the priorities of the specific leadership in charge.

After six years of uniquely 'moralistic politics' -- that is to say, the reliance on the language of 'light vs. darkness' to push for good governance and address chronic corruption in state institutions -- under the leadership of President Benigno Aquino, the Philippines is set to choose a new leader. And for both markets and the Filipino electorate, the main concern is: Will the next Filipino leader build on the positive legacy of the current administration and, especially for critics, transcend its shortcomings?

Above all, it is also the time to strengthen the capability of the Philippine state to develop the right conditions for long-term economic development -- beyond electoral cycles.

Policy Cycles

"What [emerging markets'] experiences underscore is that political cycles are as important to a nation's prospects as economic ones. Crises and downturns often lead to a period of reform, which can flower into a revival or a boom," Ruchir Sharma, a leading expert on emerging markets, correctly pointed out in an article for Foreign Affairs. He rightly cautioned against the tendency for leaders in developing countries to succumb to "arrogance and complacency" after an extended period of expansion.

As I pointed out in a piece for Foreign Affairs, Aquino, after enjoying unprecedented popularity in his first three years in office, has struggled to keep the majority of the electorate on his side. From Aquino's inability to convince many people that his anticorruption campaign is indubitably beyond party politics, to his unprecedented criticism of the Philippine Supreme Court and his disappointing handling of various national crises, both domestic and international, critics have raised concerns over the Filipino leader's apparent hubris and lack of political savvy.

But as he entered his lame duck years, a growing number of people have shifted their attention to Aquino's likely successors, ranging from current Vice President Jejomar Binay to Interior Secretary "Mar" Roxas, and rising political star Grace Poe. For long, Binay -- leveraging his populist agenda, and years of seemingly successful management of the Philippines' commercial hub (Makati city) -- managed to stay well ahead of the pack, according to various leading polls. Despite being Aquino's preferred successor, Roxas is yet to achieve consistently high numbers in polls, putting his political viability (to become the next Filipino president) into question.

After pulling off an astonishing victory in the 2013 senatorial elections, where she managed to defeat veteran senators and emerge as the top preferred candidate in the country, Poe is now rapidly closing the gap with Binay. If current trends continue, the 2016 presidential elections are poised to become quite competitive.

Policy Diagnostics and Innovation

The official presidential campaign is yet to kick off, but likely presidential candidates are already jostling for the national spotlight, placing themselves at the center of key policy debates in the country: How to ensure the Philippines achieves 'inclusive' growth? How to protect the Philippines' territorial integrity amid China's rising maritime assertiveness? How to end the conflict in Mindanao and bring about a modicum of rule and law in the country's troubled peripheries? These are among the many questions, which have captured the hearts and minds of the Filipino electorate.

Unsurprisingly, local pundits have also begun to chip in, sharing their views on which candidates they prefer -- and what an ideal candidate should stand for and represent. In a recent forum, organized by Rappler (the Philippines' version of HuffPo), some of the Philippines' most seasoned academics and experts shared their views on what attributes and policies they prefer to see in the next Filipino president. And they were many.

Some speakers talked about the necessity to fight corruption, weaken political dynasties, and deepen the Aquino administration's reform agenda, while others talked about the necessity to review the country's trade and industrial policy, putting an end to decades of mindless economic liberalization. There was also an emphasis on instituting a successful land reform in the Philippines' desperately poor and feudalistic rural regions. Gladly, there was also some discussion with respect to merit and competency of state officials.

But as always, I didn't hear much about the necessity of strengthening the autonomy and capability of state institutions in the country. Similar to the United States (the Southeast Asian country's former colonial master), the public discourse in the Philippines tends to portray the state as a mostly disruptive institution, which should largely be kept at bay. In short, there is some element of what I call "soft libertarianism" in the Filipino public discourse -- although nothing close to Tea Party-like 'anti-state' rhetoric.

This is quite strange, mainly because chronic corruption, the proliferation of political dynasties, and the lack of inclusive growth in the country has a lot to do with the absence of modern state institutions in the country.

The Missing Debate

Throughout its history, the Philippine state has been at the mercy of a local oligarchy as well as foreign powers. The Philippines' high corruption levels -- similar to those in rapidly developing economies like China and Indonesia -- are primarily a symptom of a deeper problem than the main cause of the development debacle in the country.

In the absence of capable and decisive state institutions, high- and low-level officials -- the 'flies and dragons' in Beijing's lexicon -- have usurped public resources and received huge kickbacks with de facto impunity; meanwhile, powerful political dynasties -- utilizing clientlelism and ethnic/clan-based loyalties to mobilize the electorate -- have acted as parallel state institutions. There is a glaring absence of an impersonal, autonomous Philippine state that will prioritize the collective national interest above particularistic interests.

Despite having one of the freest and most vivacious media in the world, and years of intensive investigation under the Aquino administration, the Philippines is yet to hold a single high-level corrupt officials to account. It is a country of delayed court proceedings, a bickering legislature, and, above all, weak executive agencies.

Lacking policy autonomy and capability, the Philippine state has also struggled to develop the necessary deterrence capability to protect its territorial integrity. No wonder, the country seems to be running out of options in defending its claims in the South China Sea, and has had to rely on allies and international legal instruments, as an overbearing China consolidates its claims in the area. The Philippine economy has also paid a price: The inability of the Philippine state to impartially enforce well-defined property rights as well as provide basic infrastructure and affordable utility costs has allowed a narrow circle of elite to dominate the national economy.

In his magnum opus "Political Order and Political Decay", Francis Fukuyama brilliantly shows how 19th century United States largely resembled many of today's developing countries such as the Philippines, where corruption, political patronage, and clientelist politics chipped away at the very fabric of democratic institutions, giving way to a predatory "Gilded Age" in the world's first modern democracy.

But thanks to the intellectuals and activists of the "Progressive Era" (1890-1920), the empowerment of federal government agencies in the early-20th century, and the positive impact of industrialization, the U.S. was able to gradually build a modern state institution, which transcended the vagaries of electoral cycles and created the necessary conditions for the emergence of an energetic, democratic 'middle class society' in the mid-20th century.

The Philippines' predicaments have little to do with some supposedly innate, national culture. After all, culture pertains to habits and practices, which were developed in response to certain conditions in the past, but gained regularity and value overtime. But cultures are as malleable and dynamic as human beings. What emerging markets like the Philippines should experience is what economists Daron Acemoglu and James Robinson call "institutional drift": The alteration of age-old practices (vaguely described as 'culture' or 'institutions') due to shocks and/or agency-driven change by relevant sections of the society.

As the Philippines confronts new challenges, both domestic and international, and the Filipino populace, especially the youth, becomes more aware, conscientious, and reform-minded, the country may finally discover its own "Progressive Era". But it will also need to develop modern state institutions to effect long-lasting change, and provide the right conditions for sustained economic development; otherwise the country will forever be at the mercy of personalistic politics and electoral cycles.