02/04/2014 06:32 pm ET Updated Apr 06, 2014

The Privatization Dilemma: Regulatory Crisis in the Philippines and Emerging Markets

To privatize, or not to privatize -- this is a fundamental question facing the Philippines, and many other similarly-situated emerging markets, which face increasingly unaffordable public services after decades of aggressive privatization. Many are beginning to ask whether the state should (once again) play a more central role in providing public welfare, ensuring that market forces are agents of competitive production rather than regulatory manipulation.

Amid public outcry over alleged regulatory capture in the Philippine electricity sector, which saw leading legislators calling for a rigorous assessment of electricity prices, many were horrified to discover how little has been invested in preventing oligarchic collusion in key national industries.

The head of the Philippine Energy Regulatory Commission (ERC), Zenaida Ducuis recently told an investigating panel in the Philippine Congress: "[We are] undermanned. We have only more than 400 people in our plantilla, but insofar as our [electricity] spot market division is concerned, we only have 4 personnel under our plantilla." In short, the Philippine government didn't even bother to make sure that the privatization of crucial public services such as electricity wasn't going to translate into an oligopolistic nightmare. No wonder, many are turning their attention to other heavily de-regulated sectors such as water and hydrocarbons -- wondering whether any real market competition exists.

In the Philippines, where a tiny elite overlords quasi-democratic institutions and swallows much of the recent economic gains, people are beginning to realize the perils of privatization, especially in absence of effective regulatory oversight. Equally, however, they are also suspicious of the state, which has been a hub of corruption and incompetence for almost a century.

An Ideology Under Question

There are no easy answers to the public welfare crisis, which is ravaging many developing countries in the 21st century. Much of the previous century saw how command-economies and state-led capitalism -- unquestionably responsible for reviving war-ravaged economies, and spurring massive expansion in world economic output -- could eventually fall victim to a vicious combination of inflationary spiral, productivity stagnation and budgetary crisis.
It was against this gloomy backdrop of stagflation in the North and debt crisis in the South that Britain's "Iron Lady," Prime Minister Margaret Thatcher, so self-confidently invoked the notorious "There Is No Alternative" (TINA) dictum. What followed over the following decades was an antithesis of governance: De-regulation, privatization and cruel dismantling of welfare states across the world. The end of Cold War simply accelerated this process.

The notion of redistributive welfare lost its appeal. Few could rationally contemplate a return to the nostalgic years of relative stability in employment and state benefits. But more than three decades into this relentless war against the "social" state, most people are yet to enjoy the promise of equitable prosperity under market-dominated capitalism, which has been anchored by a "minimalist" state, whose primarily job is to ensure secured property rights and the stable supply of labor for global capital.

When the combined wealth of the top 85 richest people equals that of 3.5 billion poorest people on the planet, many are wondering whether we are returning to the late-19th century "Gilded Age" of anarcho-capitalism. In the Philippines, the increasing retreat of the state and the integration of the domestic economy into international markets have reinforced an oligarchic system, which makes the country among the most unequal societies on earth.

21st Century Welfare

Amid popular-democratic pressure, however, what has emerged across the world, especially among emerging markets such as the Philippines, is a residual-palliative welfare system, which has sought to preserve a modicum of social cohesion amid increasing integration of national economies into global markets.

"Over the last three decades, many have moved to downsize or dismantle [welfare systems], shifting from comprehensive coverage towards more individualized models -- 'targeted' or 'means-tested' -- and from decommodified provision of goods and services to a greater emphasis on cash benefits," wrote Lena Lavinas in the New Left Review recently, sketching out the contours of 21st century welfare systems. "Rather than recognizing needs, it concedes 'entitlements,' and instead of ensuring equal access to public goods, it offers rewards in exchange for the fulfillment of obligations -- the quintessential coinage in this sense being 'workfare.'"

A cornerstone of this new model of welfare provision is the so-called Conditional Cash Transfer (CCT) scheme, which has spread from Latin America to the rest of the developing world. CCTs are popular for three reasons: They are relatively cheap to fund and administer; they project an image of a caring government amid the vicissitudes of market reforms; and target the most vulnerable sectors, which desperately seek social mobility and could be mobilized for populist movements.

But in terms of their actual impact on poverty-alleviation and social mobility, CCTs have proven to have a minimal impact. In fact, as Lavinas' magisterial essay illustrates, the CCTs have provided governments an excuse to decouple from commitments, which have proven to be more critical to poverty-alleviation, equitable distribution of wealth and social mobility. Historically, investments in health and education of the general population, coupled with effective land reform programs, were central to sustained economic development, especially among newly-industrialized economies in East Asia. A similar pattern has been observed in other developing regions such as Latin America.

Progressive taxation underpinned massive welfare programs, which enabled large-scale infrastructure projects and helped establish robust consumer markets across the world. But the CCTs, which have transformed many indigent sectors into critical government constituencies, provided a cover for regressive taxation. In effect, the new welfare model enabled the perpetuation of an economic system, which primarily benefited the top-tier of the society, while keeping the least privileged sectors at bay. The biggest victims are the middle classes, which have largely played a pivotal role in democratic transition and stability across the world.

Meretricious Growth

On the average, people's purchasing power has been rising, and state-led capitalist societies such as China have lifted most of their population out of extreme poverty. But access to many basic services is far from guaranteed. With the exception of some countries in a largely left-leaning Latin America, where populist governments have tried to put an end to centuries of concentrated growth, almost all other regions of the world are experiencing growing inequality.

Since the 1990s, the Philippines -- today one of the world's fastest growing economies -- has gradually transitioned towards a market-economy. The banking sector was liberalized, state-owned enterprises were privatized, most trade barriers were eliminated and public services were transferred into private hands. Yet, average real wages have stagnated, poverty rates have remained in the double-digit territory, and unemployed rates have even increased during the recent boom times. For many critics, the price of water and electricity have become increasingly inaccessible, while big oil companies can allegedly dictate market prices without much regulatory scrutiny. In short, the state has withdrawn, the private sector has taken over, but old problems persist -- or have been exacerbated.

As a result, many progressive thinkers are seeking a renegotiation of state-market relations: The aim is to establish a system, which is neither hobbled by state inefficiency, nor exploited by market ruthlessness. As Walden Bello, a leading Filipino intellectual and legislator, told me recently:

The root cause of the [electricity] crisis is a privatization scheme that was not well regulated so that it replaced government control of energy generation and transmission with oligopolies in generation and distribution -- and with cross-ownership between the two sectors -- that have aimed for maximum profit at the shortest time possible and with the least investment possible.

For Bello, the withdrawal of the state form the electricity sector was "too fast" and driven by a misguided ideology, which simplistically assumed "private management of energy and market forces would result in a more efficient energy sector."

It is important that the Philippines and many other emerging markets begin to review the wisdom of recent market reforms, especially those in the realm of public services, on which majority of the citizens precariously depend. In essence, privatization is not necessarily a negative phenomenon, especially when the state has proven ineffective in sustaining its age-old obligations. But any privatization process should prevent co-optation by regime insiders/oligarchs, especially when we speak of basic public services like electricity, water and oil. This means that there should exist empowered, independent regulatory agencies to ensure competitive bidding processes, deter intra-industry collusion and punish related violations. Otherwise, privatization will only come at the expense of the greater majority.

This is why the Philippines doesn't need less of a state; it needs a strong, autonomous state more than ever. The way forward, as Bello contends, is an approach that "encourage[s] both partnership and a balance between government and the private sector, with checks on both by the civil society via the institutionalization of surveillance and consultation mechanisms." It's high time for the Philippines to do some regulatory soul-searching.