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In Search of Reforms that Work for the Philippines: On the Tiger Road

This article was co-authored by Manila Times' Business Columnist Ben Kritz

Thanks to an impressive macro-economic performance, especially in the last three years, which saw the Philippine emerging as one of Asia's most dynamic economies, the Aquino administration has managed to further solidify its political mandate in the recently-concluded by-elections.

The current administration is set to dominate both houses of the Congress, handing President Aquino significant wiggle room to forge ahead with his reformist agenda. Given the country's long history of discordant and bloody elections, the Aquino administration was also more than happy to see most domestic and international observers describing the latest elections as generally "peaceful" and "credible", despite a cacophony of reports suggesting massive vote-buying, electoral disenfranchisement, and technical glitches tarnishing the automated elections.

Now, with the election headache firmly out of the picture, the Aquino administration has shifted its focus back to the economy and good governance initiatives. And there are good reasons to be optimistic: The first quarter of this year saw another better-than-expected performance by the country, with the Philippines growing by a whopping 7.8 percent -- making the historically-sluggish island-nation the fastest growing economy in Asia.

But Mandate for What?

While the endorsement of the Aquino Administration was anticipated, it is not an unconditional one: Latest reports suggest that poverty and hunger incidence in the country have failed to improve, despite the macro-economic uptick in recent years, while unemployment and job creation figures, quite alarmingly, indicate a large proportion of the population continues to miss out on economic gains. So, quite naturally, the fresh mandate for the Aquino government carries with it some heavy expectations that significant progress will be made in the second half of its term.

Both sides of the political fence -- the Administration and its allies, on one hand, and the not-so-insignificant number of critics, opposition forces, and chattering netizens on the other - generally agree that the problem, broadly defined, is a lack of "inclusive growth" in the country, but there are crucial differences in opinions about the best approach to solving it.

From the Administration's perspective, the problem seems to be largely an institutional one, with 'good governance' initiatives at the heart of raising market confidence, ensuring political stability, and sustaining recent macro-economic gains. From the opposition's point of view, however, the problem is a much larger structural one, demanding nothing less than a comprehensive overhaul of the Philippines' political and economic environments - in turn, requiring not only political will, but also fresh, heterodox thinking anchored by innovative policy approaches.

Thus, while the recent elections seem to have endorsed the Aquino administration agenda, or at least this is how its allies wish to interpret recent developments, it is far from clear whether the government's current strategy is the optimal formula to bridging the gap between a climate of encouraging politico-economic stability, on one hand, and glaring developmental deficits, on the other. And this is precisely where the notion of "reform" continues to be an elusive and contentious concept, with President Aquino having barely three years to consolidate a lasting legacy for the country.

The Reform Debate and its Discontents

Fundamentally, the opposing perspectives, having accepted that inclusive growth is yet to be achieved, are based on different views of what the real causes of the economic and social bifurcation in the Philippines are.

The broader, systemic view is essentially legalistic: That the country's 1987 Constitution -- enacted during the late President Corazon Aquino -- is fundamentally flawed, providing for an ineffective system of government that perpetuates transactional, dynastic political power as well onerous restrictions on foreign investment. The effect, as the argument goes, is to have allowed the rise of an entrenched oligarchy holding both political and economic power, to the detriment of the larger part of the Philippine population. In short, in the parlance of renowned economists Acemoglu and Robinson, the constitution incubates the Philippines' "extractive" institutional attributes.

In contrast, the current administration's view is that systemic problems have less to do with the constitutional framework, but instead rooted in rent-seeking practices, which have plagued the Philippine state since its very inception - in turn undermining political order and economic growth. Rather than overhauling the Constitution, Aquino has fairly consistently asserted, eliminating bureaucratic red tape and corruption in government agencies, improving the peace and order situation in the country, and developing basic infrastructure are a more practical path to achieving the "inclusive growth" that has so far proved elusive.

Why We Need a New Discussion

While both point of views have some merit and are supported to at least some extent by scholarly research, neither is clearly a sure recipe for success, and both overlook a number of important conceptual and practical issues. There has been an admirable enthusiasm for generating ideas for reform, but the uncertainty of their potential results suggests that the would-be reformers may not be asking the right questions.

More specifically, the legalistic view, in its diverse forms, focuses on reconfiguring the form of government - not the political system -- from its present unitary presidential system to a federal parliamentary government, while at the same time dropping/relaxing constitutional restrictions on foreign investment and ownership. Empirical evidence to support this "grand formula" of parliamentarianism, federalism, and full economic liberalization, however, is somewhat contradictory.

One of the most comprehensive and cutting-edge studies of parliamentary versus presidential systems and unitary versus federal systems was carried out by researchers at Boston University between 2003 and 2007, and in two1 separate papers2, the researchers concluded that parliamentary and unitary systems have better results in a range of metrics in the areas of state capacity, economic policy and performance, and human development. On the other hand, a number of European researchers have found that federal systems are more likely to encourage policy innovation and accelerated development -- but with the interesting caveat that ambition for higher office is common among office-holders at the state and local levels.3 Not to mention, the legitimate fear that a federal system in the Philippines is tantamount to a carte blanche for local dynasties and warlords to do as they wish.

In terms of the call for economic liberalization, the evidence appears even less supportive; in a number of authoritative studies, the conclusion is that it is the country's own absorptive capacity -- defined variously as its domestic ability to create capital, institutional stability, macroeconomic strength, and efficiency in applying technology transfers --- rather than legal limits on investment that determine its ability to attract foreign direct investment.4
While the conclusions of research on economic liberalization tend to support the Administration's view that institutional rather than structural initiatives are a more likely path to creating inclusive growth, facts on the ground suggest a distinct set of constraints. Assuming Aquino's efforts are bearing fruit, there is now a clear deadline for significant improvements: In 2015 -- just over 18 months from now -- the ASEAN Free Trade Area (AFTA) agreement will come into full effect, eliminating most tariffs on trade within the 10-nation Southeast Asian bloc; 2015 will also mark the end of the US-backed Millennium Development Challenge, with the Philippines' performance in eight broad areas being a significant determining factor in future development aid.

In short, Aquino's institutional approach faces a significant time-constraint, and it is far from sure whether there will be any significant 'trickle down' of the recent boom any time soon, while the vagaries of the constitutional approach -- a point not lost on the Filipino president himself -- make it impracticable at best. Realistically speaking, 18 months is simply not enough time to implement wholesale changes in the system of government, nor would the impact of increased investment -- making the big but doubtful assumption that (a) relaxation of constitutional restrictions on foreign ownership and (b) liberalization would, ceteris paribus, be consequential -- be likely to be noticed within that timeframe.

In this light, the right "reform debate" should ideally evolve from correlative references to academic work to a discussion closely examining the Philippine context, featuring less invasive, short-term, consequential solutions for economic inclusiveness and capacity building.

Although there is no shortage of ideas, perhaps even too many to go around, facts on the ground suggest that we are yet to raise the right questions.

Endnotes

1 J. Gerring, S.C. Thacker, and C. Moreno (2005), "Centripetal Democratic Governance: A Theory and Global Inquiry". The American Political Science Review, 99(4), pp. 567-581.

2Gerring, et al. (2009), "Are Parliamentary Systems Better?" Comparative Political Studies, 42(3), pp. 327-359.

3 C. Kotsogiannis, and R. Schwager (2005), "On the incentives to experiment in federations". Journal of Urban Economics, 60(3), pp. 484-497.

4See B.A. Blonigen, and J. Piger (2011), "Determinants of Foreign Direct Investment". National Bureau of Economic Research Working Paper 16704, January 2011; K.E. Meyer, S. Estrin, S.K. Bhaumik, and M.W. Peng (2009), "Institutions, resources and entry strategies in emerging economies". Strategic Management Journal, 30(1), pp. 61-80; D. Toulaboe, R. Terry, and T. Johansen (2009), "Foreign Direct investment and Economic Growth In Developing Countries". Southwestern Economic Review, 36, pp. 155-170; and J.P. Walsh, and J. Yu (2010), "Determinants of Foreign Direct Investment: A Sectoral and Institutional Approach". International Monetary Fund Working Paper WP/10/187, July 2010.

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