The National Development Project, part 3: Renovating the Bureaucracy

This is the third of a three-part series on the Philippine Development Plan 2011-2016.

We have looked at the PNoy government’s development strategy in Part 1 in which infrastructure was seen as the problem to unlock investment and that better governance of projects would work a treat. In Part 2, Re-defining Good Governance, we scanned three possible models for good governance. We concluded that the best approach, the East Asian model, was difficult to emulate but not insurmountable.

In this third part, we investigate specific ways of renovating the bureaucracy along East Asian lines. In part 2, the work of Peter Evans* on the lessons of political institutions and development illuminated much of the discussion. It will also help inform this one.

The task at hand

Finding a recipe for good governance is something that every nation has to figure out on its own as the East Asian experience has demonstrated. There is no ‘one size fits all’ policy. While Evans attests to the importance of establishing minimum levels of probity, he also does not recommend that we attempt this renovation with the bureaucracy universally.

The main focus of capacity building in East Asia has been the economic bureaucracy. The role and scope of this project covers tax and subsidy policy, industry, trade and investment policy, planning and development as well as regulatory policy. In the Philippines, we have to include some enforcement mechanisms as well.

When he announced his presidential bid, PNoy talked about his recipe for countering the calculus of corruption. The two basic ingredients include both carrot and stick. The president has yet to outline basic reforms to put that in action. It is towards informing that agenda, that the following policy recommendations are submitted.

Policy Recommendations

1. Corporatization of Revenue Agencies.

So far the government has been emphasizing the ‘stick’ component of the recipe through schemes aimed at enforcing the law against tax cheats, smugglers and the colluding elements within the bureaus of internal revenue and customs.

Though it has produced some modest returns, it is time to put the next element, namely the ‘carrot’ in place to address long-term improvements in the professionalism of our revenue agencies. This implies tweaking the career and compensation systems working within them.

Corporatization is the way by which the government has been able to pay its agents salaries commensurate to, if not exceeding that of, their private counterparts. Singapore achieved this for its entire bureaucracy, but it is the sole Confucian state to do so. The others achieved it through a combination of salaries, allowances and benefits.

The newly minted GOCC law now provides greater safeguards against abuse done by non-performing companies. It will govern the corporatization of the BIR and BoC. In exchange for the higher compensation, transition into the new agencies must be based on merit and not guaranteed for old bureau officials.

The boards of the new revenue agencies should be allowed to appoint people from among the ‘best and brightest’. Tougher qualifying exams, educational attainments, and past performance should all be part of the selection process. Where posts cannot be filled with existing staff, recruiting externally should be the resort.

2. Economic bureaucracy renovation.

To complement the corporatization of revenue agencies, key elements of the economic bureaucracy have to be beefed up. The Department of Finance, parts of the Department of Trade and Industry, those relating to industry and trade policy and the National Economic Development Agency need to be covered.

The idea is to strengthen and coordinate its policy making capacity. I will have more to say on this below under number 6, but what I would like to pay attention to here is again the recruitment, compensation and performance package.

For the independence of our economic bureaucracy to be secured, requirements for hiring have to be made more stringent. Salaries for managers and executives which might be 2/3 that of their private sector equivalent need to be augmented with benefits and allowances that could cover a more attractive retirement and health package, housing, transport, childcare and education, and communications.

What will they be expected to do that would merit such an upgrade in their compensation and why just target these agencies? Well, under the good governance model of East Asia, the economic bureaucracy is responsible for increasing the flow of investments into and from within the country.

To do that, they need to be adept at wielding both the carrot and the stick to investors. They will also need to be coherent in pursuing a development agenda and in orchestrating it using taxes and subsidies. To make them immune to outside influence whilst engaging with the business community, their rewards including both monetary and non-monetary have to be upgraded.

3. Limitations to presidential appointments.

When the controversy surrounding LTO Chief Virginia Torres a presidential appointee and shooting range pal first showed up, I took the opportunity to advocate for more serious limits to the president’s appointive powers.

I was met with skepticism at first by a fellow contributor to this space, but in the end some kind of consensus was formed. The issue then was cleansing the roster of the past president’s appointees.

Now that the GOCC law has in effect dealt with that, it is now high time to revisit the larger issue. From several thousands, I believe the presidential appointments need to be scaled down to several hundreds. That might be hard given the number of boards and government authorities that abound.

I believe the GOCC Commission needs to act like the Civil Service Commission in screening appointments to government boards and heads of GOCCs, just as I believe the CSC should do the same for the line agencies and the NAPOLCOM for the police. Either by convention or by law the president’s appointments should be restricted to his Cabinet and a few cabinet subalterns.

4. Outsourcing much of the Commission on Audit’s role.

Another thing I have been advocating here since the scams involving corruption in the military was uncovered was for the COA to outsource much of its functions to private auditing firms.

This has been the practice in Australia already where the Attorney General’s department merely sets policy and standards with regards to government audits. The actual audits must be done not by ‘in-house’ government auditors who are very susceptible to influence, but by external firms who must be rotated in accordance with the Code of Good Governance adopted by the SEC.

In fact the scope of audits should not be restricted to financial management alone, but to management of risk and occupational health and safety. Private auditing firms already have the capacity for performing this function. They are already subject to professional standards of excellence which if broken lead to the cancellation of their professional licenses.

5. Incentives for Prosecutors of Big Cases.

Catching and prosecuting the ‘big fish’ has been made a priority by this government. Yet, no real sets of incentives have been put on the table for addressing the task at hand.

When hundreds of millions, if not billions, of pesos are involved, the government needs to ensure that its prosecution team have a stake in winning the case. In the private sector that involves sharing in a portion of the damages.

The settlement by the previous Ombudsman in the case of Carlos Garcia demonstrates how difficult it would be to provide a similar incentive structure for the public sector.

If a reward based on a percentage of recovered ill-gotten wealth is instituted, that would have meant rewards to the past Ombudsman for settling the case. Perhaps the reward ought only to apply when cases are prosecuted and not settled out of court.

The Ombudsman and the Office of the Solicitor General (essential generals in the fight) which are given the task of prosecuting graft cases before the Sandiganbayan and Supreme Court respectively need to have more than a kind of altruistic motivation for performing their duties. The need to have protection and financial security.

Paying them higher salaries alone might not be enough to motivate them to exert maximum effort even in very winnable cases. Some sort of sharing in the spoils which would go both to their office and to chief prosecutors and their staff needs to be put on the table.

I know that some will argue that this is the people’s money and that any recovered ill-gotten or plundered wealth needs to be returned 100% to the coffers to fund social programs. This assumes that we are working with incorruptible Confucian super bureaucrats. That is not the case here. We need to live in the real world, not in some ideal fantasy land.

6. Creation of a Productivity Commission.

The importance of having a lead agency within the economic bureaucracy is one lesson learnt from the East Asian experience. This lead agency role was performed by MITI in Japan, the Economic Planning Board of Korea, the Industry Development Boards of Taiwan, the Economic Development Board of Singapore, and the Productivity Commission of Australia.

In the Philippines, I am proposing the creation of a Productivity Commission similar to Australia’s to be under the Department of Finance with direct access to the President. Elements of DoF, the government think tank PIDS, Tariff Commission, National Income Tax Research Center, and DTI need to be brought into this agency or at least made accessible to it.

Its role will be to advice the president on matters relating to government red-tape, taxes and subsidies (including to agriculture), telco, port and aviation policy and industry policy more broadly. A secondary focus could be in housing or economic development and climate change policy.

The commission in navigating the post-WTO environment should do so without engaging in what Evans calls ‘anticipatory acquiescence’ on the one hand by pushing the envelope a la China on protectionist policies when it suits our development goals, but use our external commitments as a shield against regressive private interests on the other hand (for example on sin taxes).

As part of the economic bureaucracy, it should have the same high recruitment and compensation standards as the rest of the economic bureaucracy. This will enable its agents to be immune from lobbying and rent-seeking by private agents.

7. Limitations to the scope of rent-seeking.

As highlighted by Evans, rent-seeking did continue to a surprisingly large extent in East Asia even as their economic bureaucracies forged ahead with many productivity enhancing measures.

Traditionally the agriculture or construction departments were used by reformist governments to engage in clientelism with their constituents usually ex-military men, party mates or in the case of Taiwan, former residents of the mainland.

This makes the task of emulating them within reach for countries like the Philippines where the practice of paternalism is embedded in our culture. This means that while the areas of rent-seeking are limited on the one hand, it will continue nonetheless and will be an essential part of governing.

The purists will argue against pork barreling and the dispensing of largesse through the PCSO, PAGCOR, DPWH, DOA and so on, but we must remember that a certain amount of populist clientelism is necessary. We have to take a balanced view of things. If it helps the executive push for more substantial reforms, then the area of rent-seeking will gradually diminish.

Conclusion

The long road to economic development has many twists and turns. Perhaps what PNoy’s government has to acknowledge is that sometimes the shortest distance between two points is not a straight line. An understanding of the lessons of good governance in East Asia is essential for appreciating this fact.

Without the ability to withstand rent-seeking on the part of private agents in the sphere of economic policy, the national development project never advances very far. The need for a solid economic bureaucracy is the first step in emulating the ‘fast-paced growth’ these nations experienced.

The ‘carrot and stick’ approach articulated by PNoy at his presidential bid announcement needs to be further developed into meaningful policies. So far the Philippine Development Plan only covers very generic non-targeted approaches. Zeroing in on the economic bureaucracy and some key enforcement agencies is needed.

The road ahead is fraught with risk. Our country did not start off with the auspicious initial conditions of an egalitarian society that our East Asian brothers had. Regardless, a path is laid out before us that makes it attainable despite initial infirmities. If we have faith and confidence in our abilities and not succumb to fatalism, we may at least further the project of nation-building along the way in the years ahead.

* Evans, Peter (1998). Transferrable Lessons? Re-examining Institutional Pre-requisites of East Asian Economic Policies, Journal of Development Studies 34 (6), p.21.

Doy Santos aka The Cusp

Doy Santos is an international development consultant who shuttles between Australia and the Philippines. He maintains a blog called The Cusp: A discussion of new thinking, new schools of thought and fresh ideas on public policy (www.thecusponline.org) and tweets as @thecusponline. He holds a Master in Development Economics from the University of the Philippines and an MS in Public Policy from Carnegie Mellon University.

  • Emmanuel Doy Santos

    An important distinction is that Commissioners have fixed terms that are not co-terminus with the President. They can retain a greater level of neutrality in their decision, and would be less prone to political interference.

  • Superb series. This corporatization scheme for revenue producers is a little confusing to me. Is the intent to enhance revenue growth? I am looking at a Customs bill of P548 for some documents received from the US. For documents, no resale value. In my mind, that is theft, not undertaking what corporations do, provide value at a price. If the goal of Customs is revenue, how do you prevent them from throwing up more red tape and magic charges that defeat what I think should be their real purpose, fostering a robust and secure trade industry. Not revenue generation.

  • GabbyD

    whats the difference between neda and the productivity commission, in australia?

    • The NEDA is not an economic policy making agency. It merely does development planning and project evaluation. Australia’s ProdCom is tasked to look into policy proposals. For example it recently did one that looked into the most efficient means of climate abatement.

      • GabbyD

        so the prodcom ISNT a policy making agency EITHER.

        they study policy and make recommendations. like the CBO of the US, or the council of economic advisors.

        neda does study policy too right? at least thru pids, among others.

      • PIDS is a separate government funded think tank, not part of NEDA. ProdCom acts as an independent body which is tasked with undertaking policy analysis and advice. That’s still part of policy making. The CBO and CEA are close analogies.

        • GabbyD

          paderanga is the head of the board of trustees of pids.

          i think the head of neda gets that job.

          my point is this: i dont understand what you want. why what you want isnt already in place.

        • A think tank does not really have the stature as a commission. Ed Angara in fact proposed junking PIDS. In my view, it actually needs to be beefed up.

  • J_ag

    Firstly I would like to commend the author for his work in his three part series. However there are a few serious misconceptions that must be corrected. His statement quoting Raul Fabella that this country is net lending country to the world has to be qualified.

    The country primarily remains to be net capital importer. We import capital through long term and short term investments and debt. The total debt (PRIVATE AND PUBLIC) that the country owes IN A FOREIGN CURRENCY
    plus the contingent debt on government guarantees of foreign currency debt far exceeds the total dollar reserves that the country owns.

    Most of the foreign exchange reserves in Euro, Yen and Dollar are parked in low yielding foreign sovereign debt.

    The country owes foreign denominated debt to both resident and non- resident lenders.

    We are predominantly a dollar reserve based economy. The task of the BSP is to slowly bury the use of the peso as the main reserve currency.

    Hence the BSP cajoles the financial markets to store almost Php 1.5 trillion in the BSP’s Special Deposit Accounts. Otherwise the dollar could collapse to Php 35 to $1 or lower destroying the income of millions of families dependent on dollar earnings and export companies earnings and cause a huge contraction in the economy.

    That is how imbalanced the country’s economy has become.
    Financial liberalization does not proceed symmetrically with trade liberalization. The former could destroy the latter.

    Hence say goodby to the peso and forget about raising productivity just like Greece.

    • UP nn grad

      How serious is this imbalance? That gap — P44 to 1 versus P35 to $1 — promises a lot of money to be made to those on the right side of the trade, so what’s to stop a couple of my “raider” gurus (unpopular with Mahathir) from gaming the Philippine peso?

      [You know, at P35 to one, a turbo carrera gets easier to afford. Noynoy can use some of the unspent campaign funds that are unaccounted for (and untaxed).]]

    • GabbyD

      seriously? thats a 20+% undervaluation. how did u get that number?

  • You can tell from the evaluation of the Makati Business Club that they fully subscribe to the Western model of good governance when they laud PNoy for creating macroeconomic stability and promoting investor confidence:

    http://propinoy.net/2011/07/03/makati-business-club-gives-its-assessment-of-the-aquino-administration/comment-page-1/#comment-13630

    The investments that have been flowing in though have been lopsidedly concentrated in the real property and development sectors. In a few years, we might see a correction or an asset bubble. This is because our economic bureaucracy has not been focused at encouraging those with capital to invest in other sectors.

    Clearly, without an active bureaucracy willing and able to push these fat cats out of their comfort zones, this imbalance will continue and could lead to a collapse in the property sector within the term of PNoy. As Raul Fabella points out, the Philippines is now a net lender to the world. Our capital is actually providing jobs elsewhere.

    http://www.bworldonline.com/content.php?section=Economy&title=Subsidies-to-state-firms-double&id=34127

    Without a developmental state, the financial reserves of the nation will flow out. The invisible hand needs help from the visible boot to direct some of this outflow domestically into more productive and sustainable sectors.

  • GabbyD

    what does corporatization mean? how does it increase the salaries of its workers?

    • GOCCs are exempt from the Salary Standardization Law. Their salary scale can exceed the limits set in it. That is why the GOCC law was enacted since a lot of boards set compensation and benefits policies that rewarded executives even when the companies were not turning a profit.

    • GabbyD

      ok. but what does corporatization mean? how will it raise the salaries of the people in them?

      • The SSL provides a salary cap in effect. GOCCs normally pay their employees higher salaries than the scope of the law. They set their own compensation and benefits packages.

      • GabbyD

        ok. so the plan is to turn the BOC or the BIR into a GOCC?

        if the only problem is the Salary cap, why not just exempt them?

        in other words, what more does corporitization do, other than be exempt from the cap?

      • Yes, exemption is another possible option. In fact, one option would be to exempt DoF, parts of DTI and NEDA as well as the Ombudsman and Office of SolGen.

        The problem with that is that the DoF Sec would be paid more than the President. Then there is the problem of other agencies demanding they be included in the exemptions.

        Corporatization would be a more well-defined process since it is already established and the justification is that these agencies are meant to be turning a profit like PAGCOR, although they sometimes lose money too like PNOC.