Governance and Development

The year of the fund

A fund here, a fund there; funds were everywhere in the news, this year.

Whether it was the Supreme Court’s final ruling on the disposition of the coco levy funds invested in United Coconut Planters Bank or the investigations into the abuse of Congress’ Priority Development Assistance Fund, the misappropriation of the Malampaya Fund or the president’s social fund, funds were all over the news this year.

There is one common thread that runs through all of them: funds set aside for some kind of social or economic development need were used for personal or political motives. It didn’t matter whether they were taxpayer-sourced as in the case of PDAF or revenues from government activity such as the lottery, gambling or mining operations. The fact remains that special purpose funds can be turned into slush funds quite readily.

Perhaps that is the reason Sec Cesar Purisima stated in May this year that the idea of a Sovereign Wealth Fund created out of our foreign reserves proposed by the Bangko Sentral had lost traction and would not be taken up by this administration. It is as if the president intuitively knows that such a fund might be raided by future governments.

Unfortunately, he is busy enough dealing with the mess created by the funds that are already in place, that the setting up of a new one might seem a bit too ambitious. And there has a palpable public backlash against the use of such special purpose funds in the wake of the pork barrel scams, anyway, that such a scheme might face stiff opposition.

At any rate, since these funds have dominated the news this year, then addressing them would probably be the order of the day in the coming year. Let us not forget that in the wake of typhoon Haiyan, a Php 100 billion reconstruction fund was created to speed up the recovery of the most affected regions in the central Philippines, or that following the passage of the sin taxes act, Php 63.6 billion in revenues were generated as of September this year, which should boost the trust fund of the Philippine Health Insurance Corporation.

So let me offer some unsolicited advice (as I often do in this space) on how the government ought to manage these funds.

As a general principle, if we were to retain them (and not co-mingle them with the general government revenue pot as some have suggested), then we have to move away from putting such funds under the sole discretion of an individual and allow for better governance through a deliberating body to consult and provide advice on how these funds should be spent.

With respect to PDAF, this matter has already been settled by the Supreme Court. All forms of pork cannot be allotted to members of congress to dispose of after the general appropriations act has been passed. They would have to identify the need during budget deliberations, and leave it to line agencies to address their requirements through the usual open and competitive bidding process if their proposed budget items are adopted.

Secondly, with respect to the Malampaya fund, a professional board comprised of energy and development experts must be set up to advise the Department of Energy and the president on how to apportion funds available for investment. This board could undertake public consultation through stakeholder engagement.

The proposal of several legislators to use it as a stabilisation fund against power increases could be studied as well. A comprehensive plan publicly available and developed based on the best alternatives available should be put together by this board and recommended to the president. The president could then respond to these recommendations point by point and release an annual report on the status of the fund and its activity.

Thirdly, with respect to the president’s social and charity funds resulting from the revenues from the lottery and gambling corporations of the government, the National Anti-Poverty Commission should be given the role of screening the proposed uses of the funds and advising the president on whether to adopt them. This does not limit the president’s discretion to dispose of the funds as he pleases, but at least he would do so in a considered way, as part of an anti-poverty strategy, and creating an additional layer through the commission would provide a process through which his decisions could be better informed.

Finally, when it comes to the coco levy fund recovered from UCPB and San Miguel, the same process would apply. Only this time, members of the claimant community consisting of copra or coconut farmers and beneficiaries must be represented in whatever body is set up to oversee the fund. This would allow their voices to be heard in the governance of the board that manages their money.

In all these cases, the same basic principle applies, leaving decisions to the sole discretion of an individual, be that the president or local representative sets up opportunities for corruption and cronyism. Allowing a board comprised of major stakeholders to be in charge of filtering ideas, critically assessing options and making recommendations to the executive by releasing a periodic report, and making the government account in a transparent manner the disposition of the funds through an annual statement creates greater probity and integrity into the system.

Perhaps if we could begin to demonstrate better governance in managing these special purpose funds over the next two years, then by the time the president steps down, he would leave behind a legacy of instituting substantial reforms in the way we manage and account for such public funds. These reforms would not only ensure that the money is apportioned based on its intended use, but that such appropriations are part of an overall strategy and plan and not just made willy-nilly based on personal preference or transactional methods.

Spend More, Talk Less

With the release of third quarter GDP figures upsetting all but the most ardent economic apologists for this administration, the time has come for it to re-think its priorities.

image from wallpapers-diq.net

The situation is nearing a critical level. As the whole of Europe is placed on credit watch and as recovery in the US struggles for momentum, the vibrancy in the domestic economy is being sucked out by government’s poor infrastructure spending rate just at a time when it is needed. Cabinet officials throughout the year have been promising a more rapid deployment, but this has so far not materialized.

The incorrigible ‘prophet of boom’ from the Ateneo Graduate School of Business Cielito Habito despite his best efforts at painting a rosy picture for the government has himself acknowledged the third quarter results to be disappointing. Here is how this professor of ‘Aquinomics’ concludes his most recent column for the Inquirer entitled, Is confidence dissipating?

(W)hat worries me most is the possible dissipation of the initial confidence surge that greeted the new administration and led to brisk private domestic investment growth over the past year. With these private domestic investment numbers now apparently slowing down while price increases have been speeding up, the President and his men on top of the economy should keep a close eye on the ball—or risk losing steam altogether (emphasis added).

That’s it—the penny has finally dropped. Only a delusional person would keep insisting that the government is headed in the right direction when it comes to managing the economy. Will this lead to a teachable moment, or will the administration remain antagonized by criticism seeing sinister plots behind them, spooked by shadows and haunted by the spectre of its immediate predecessor?

Throughout the year, the government has continued to fall back on its good poll figures to demonstrate that it has been performing to the satisfaction of the people. Poll figures however may not be a good barometer of the government’s competence in economic affairs given the ‘halo effect’ that has made the administration appear more creditable than it should.

Market analysts have already pointed out and the Bangko Sentral agrees that stimulating greater demand to address the slowdown in growth lies not in the hands of monetary authorities at this point but with fiscal managers. What this means is that the government has to spend more and talk less. Or in the words of Jerry Maguire, it has to “show me the money!

All talk, no action

The government talks profusely about the need to ramp up infrastructure spending in its Philippine Development Plan released early this year (see page 17). “An inefficient transport network and unreliable power supply”  is what has created a poor investment climate according to the Plan. Solving this meant greater spending, but when it comes to actually delivering on this, the government fell short of its rhetoric. Next year’s appropriations will hit a mere 2.5%, when the benchmark for a middle income country such as ours is 5% of GDP.

P-Noy in his first SONA said that the infrastructure build-up would be achieved through public-private partnerships, but nearly eighteen months on and counting, the fulfillment of the now diminished scope of this program remains to be seen. The confidence of the business community will eventually wear thin as Habito suggests if delays persist.

When the president addressed a meeting of the Makati Business Club, a community highly supportive of his candidacy, there was some disappointment over his over-emphasis on the case against former president Gloria Arroyo and his squabble with the Supreme Court. As these businessmen suggest, the risk is for P-Noy to get so focused on prosecuting Mrs Arroyo that he fails to keep his ‘eye on the ball’.

And it requires some doing. To ramp up spending by 2.5% of GDP will require as much concentration as he can muster. In a ten trillion peso economy, this will mean doubling the present effort of 250 billion pesos a year. This will dwarf  the growth of the CCT or conditional cash transfers which cost about thirty billion.

Because the president closed off the avenue of raising revenues through new taxes, he found himself left with no other option but to fund his development plan through private financing. That has proven tricky as well, which is why he now needs to consider a third option.

That third option which I had first written about late last year which then got echoed by no less than the BSP Governor a few months back is for the government to issue infrastructure bonds to the BSP which is at present earning negative returns on its foreign currency reserves.

Better returns

By offering the Bank a better yield, the government would be doing it a favour. Raul Fabella a former dean of the UP School of Economics has lent this proposal his seal of approval. He believes the risk from runaway inflation to be negligible under the proven monetary stewardship of the BSP.

The continued growth of foreign remittances from OFWs makes this option feasible, but if the government needed further convincing, then the following points should help build the case for it:

  1. Infrastructure spending is needed as we face a slowdown of demand from Western economies for our goods and services.
  2. It is the best vehicle for avoiding the ‘Dutch disease’ that afflicts countries experiencing windfall profits from resource booms (in our case, this stems from human not natural resources).
  3. Unlike increased social entitlement spending during a boom which becomes painful to retract at the end of the cycle, infrastructure spending leaves a tangible legacy and productivity dividend.
  4. It will help our exporters remain competitive because the increased spending will lead to a modest rise in inflation which will stem the appreciation of the peso against the greenback.
  5. It will unlock complementary investments by the private sector which is being deterred by poor public infrastructure.
  6. Government failure will be minimized as most transport and power projects can be turned over to the private sector under a PPP arrangement once completed. Revenue earned from transport and power projects would settle the interest and debt owed to the BSP.
  7. It will help prop up employment and growth which will spur increased tax collection.
  8. It will reduce the cost of doing business for most firms, not just exporters.
  9. It will help achieve the government’s growth target of 5-7% in the medium term.
  10. It will fulfill the government’s own development plan and set us on a higher growth plane.

Greater public infrastructure spending not by new taxes, nor by increased external or internal borrowing (as per Mrs Arroyo’s stimulus program in 2008/09), but by tapping our excess foreign currency reserves is not only appropriate, it would be the most effective and innovative way for this government to sustain economic growth through the turbulence in the global economy and beyond.

But we have to get real now. When faced with a possible course of action that is within the feasible set as defined by technocrats, what often prevents governments from acting is not the lack of rational arguments but the incentive problem. What led to this whole debacle in the first place was the administration’s fear of spending that would benefit internal patron-client networks left behind by its predecessor. In other words, politics rather than economics has been driving its decisions.

Making daang matuwid work

In the past we have seen how corruption and rent-seeking have reduced the amount of money available for developmental spending, but now we see how the opposite has reduced that amount even more. In the words of Samuel Huntington, “In terms of economic growth, the only thing worse than a society with a rigid overcentralized, dishonest bureaucracy is one with a rigid, overcentralized honest bureaucracy.”

The challenge for P-Noy is to make his mantra of daang matuwid work for the country rather than against it. Through the discipline and hard work of Filipinos working overseas, the country has a rather unique opportunity to make up for the shortfall in taxes generated internally. The current situation reminds me of the parable of the talents where the honest, but slothful servant dug a hole in the ground to store the talent that was entrusted to him by his master for safekeeping.

The Aquino government is like that servant. It was entrusted with a small but buoyant economy at the beginning of its term. So far, it has managed to keep it afloat, running while standing still, growing on aggregate but shrinking in real per capita terms. At the end of the story, the master reprimands the servant by saying, “To everyone who has will be given, and he will have abundance, but from him who doesn’t have, even that which he has will be taken away.”

That sound a lot like where the economy is heading under the president’s watch. The little that the Philippines had at the start could be taken away from it, while the plenty that our ASEAN neighbours have keeps on growing. It is time this government put its money where its fiscal mouth has been and start showing us the money. From another biblical parable comes the saying, “to whom much is given, much is required.” P-Noy was given a huge electoral mandate back in 2010. It is time he used it.

The halo effect

image courtesy of listverse.com

The halo effect is a cognitive bias first studied by Edward Thorndike in 1920 whereby the perception of one trait (i.e. a characteristic of a person or object) is influenced by the perception of another trait (or several traits) of that person or object. An example would be judging a good-looking person as more intelligent or believing a politician’s policies are good, just because the person appears good.

In the case of President Aquino and his high public satisfaction ratings, there seems to be a substantial amount of this effect taking place. The general impression of P-Noy is that he is honest. This comes from being who he is, the only son of two national heroes. This has translated into very positive sentiment towards the actions taken by the government under his watch.

Part of this has to do with the anti-GMA sentiment or the reverse halo effect. So pursuing cases against his predecessor is seen to be the legitimate thing to do, and rightly so, given the shenanigans that her administration was accused of. It also ties in with the president’s retraction and review of contracts and projects already approved for fear that they would somehow benefit her proxies within certain departments and sub-contracting firms.

But if you look at the outcome of these actions, it becomes immediately apparent, leaving our cognitive biases aside, that the positive evaluations given to P-Noy by the public are probably unjustified.

First of all, with respect to the way in which his justice department has gone after Mrs Arroyo, certain questionable legal manoeuvres have actually undermined the rule of law rather than upheld it. And secondly, with regards to the handling of the economy, the third quarter GDP figures clearly show that the overly cautious due diligence performed on public contracts undermined economic growth rather than encouraged it.

On the first point, I am referring to the use of a joint panel composed of the Department of Justice and the Commission on Elections that investigated allegations of vote rigging in the 2007 elections. This is said to have been anomalous in that a supposedly independent constitutional body such as the COMELEC is not meant to be seen as partial or collaborating with the administration in any way. Also, when their joint findings were published, it took a judge a few hours to read their eight ring-binder document and issue an indictment on Mrs Arroyo.

The undue haste with which such decisions were reached coming on the back of a temporary restraining order issued by the Supreme Court on the hold departure order issued by the DOJ on Mrs Arroyo that was “in effect” despite the dissenting opinion of some justices makes it highly likely that politics rather than due process was observed. This TRO was issued because the legality of the DOJ’s hold order was questionable to begin with.

Had these actions been undertaken by Mrs Arroyo while she was running the country, the protests from civil society regarding the “creeping authoritarian” nature of her government would have occupied public discourse. But because it was attempted by the meek and mild administration of the “benign one” there does not seem to be the same level of public indignation, although the result is the same—if upheld, it would grant vast powers to the state to curtail individual freedoms.

If we turn to the second point, on economic governance, the promised economic take-off billed as a public-private partnership by the president did not take place. Instead the economic deceleration has been rather remarkable in a region that is seeing quite robust growth despite the downturn in Europe and the US. The government which was prepared to take the credit for positive growth in agricultural output in the first half when early rains produced a bumper crop is now shifting the blame for poor production on storms both natural and man-made.

Public construction continued to show weakness despite the government’s promise to fast-track the roll-out of resources in response to the slump in the first half. Even with the announcement of a “stimulus” to deal with the effects of the EU debt crisis, there still appears to be little traction on this front. All hopes are pinned on the fourth quarter, but as the country’s chief statistician has pointed out, to attain even the lower end of the government’s modest growth target range for the full year, the economy would have to expand at a pace rarely seen.

In attributing the weak economic performance registered this year, there are certain factors that lie outside the government’s control (storms and financial crises overseas) which have to be acknowledged, but a portion of it definitely lies within its sphere of influence (public construction spending). It is clear that external factors did dampen growth, but the government’s action or inactions dampened it even further.

Again, had this occurred under Mrs Arroyo, the government would have been pummelled. Hounded by questions of legitimacy, it was her economic credentials that proved her only saving grace. Now that the government is run by someone whose electoral mandate is unquestioned, his now sullied economic credentials don’t seem to be much of a problem.

To counter the cognitive bias associated with the halo effect on the part of an evaluator, “blind-fold” tests or blind experiments are often administered where the person rates a product based on its actual attributes or performance, not on the subject’s perceived reputation. Respondents are often surprised with the results when they remove their blindfolds. I wonder what would happen if a poll was conducted that used the same principle in evaluating the performance of our presidents.

If faced only with the indicators of success and not the name of the person being rated, what marks would be given this president? What the government under him did this year countered its aims of fostering good government, rule of law and economic growth, but somehow its acts of commission and omission get glossed over and given a positive spin. Not only that, but the public by and large is willing to accept the message given them that all is well. So it seems the halo effect can cover a multitude of sins.

Defying Gravity

Faltering growth prospects for the economy and paralysis over how to kick-start big infrastructure projects do not seem to have dampened public support for the president.

Its economic managers remain fixated on ‘fiscal consolidation’ (a euphemism for shrinking public works expenditures to close the fiscal gap) as its roll-out of PPP (public-private partnerships) hits yet another snag with a new ‘review’ announced by the government. The confusion over how to proceed with its centerpiece program demonstrates how that it entered office armed only with platitudes and no real plan.

Yet even as punters from multilateral institutions, ratings agencies and think tanks alike place a down-side risk to the country’s growth prospects, the poll numbers of the president have headed upward. This strange phenomenon needs some explaining. How has P-Noy been able to defy gravity with his public approval ratings?

Some would point to his campaign against corruption as the source of such levitation. Yet, the same reason was given when his poll numbers were slipping early this year. The explanation was that as the public became familiar with so much corruption occuring in high places their faith in government collapsed. So why is the opposite happening now?

Perhaps it is because previously the pursuit of justice seemed to be going nowhere; whereas now, with the help of a few unexpected whistle-blowers, it seems to be heading in the right direction. That is one plausible explanation.

Another comes from the notion that growth and development do not necessarily go together and that despite sinking growth figures, the government has attended to the material needs of the populace through such programs as the CCT or conditional cash transfers.

Indeed one can characterize the government of P-Noy as following the script laid out by the Washington Consensus of promoting macroeconomic stability (to the detriment of growth) while providing social safety nets (to buy-off public support) and pursuing good governance (despite setbacks in providing public infrastructure).

In fact, some are pressing P-Noy to take advantage of his high popularity to pursue charter change and maximize the liberalization agenda by opening up the remaining sectors of the economy reserved for local participation and ownership. No less than the leaders of both the Senate and the House concur in this. As I pointed out in a previous post, the president is right to be a little wary of this move (although his reasons may differ from mine).

Others would have him go the other way and review the existing liberal trade and investment policies that have been in place for the last three decades as the country’s manufacturing and exports base suffers from a strong peso and seems highly concentrated within a few sectors, import dependent, and without much depth.

The PPP conundrum is emblematic of this confusion. P-Noy’s government started out with complete faith in private markets to ‘get prices right’, but it seems to be coming around to Sec Roxas’ belief that the public sector can do better. His proposal for the state to finance and build the projects itself, and then sell them off to the highest bidders to operate and manage would be a complete turnaround from the president’s previous position.

The idea behind Mr Roxas’ plan is that to get the ‘right price’ the government should use its access to cheap capital that is not available to private firms. That makes perfectly good sense, but the problem with his proposal is that government has not been known to be an efficient producer of public works projects. This could wind-up making the government penny-wise, pound foolish in the end.

A third way was actually proposed by me in another earlier post. The idea would be for the government to access cheap capital and create a fund that would either partner or loan these out to projects for either infrastructure or regional development needs. This would allow the cost of financing and construction to be lowered by leveraging the advantages of both public and private institutions achieving the best of both worlds.

This approach I must admit is hardly original. It was applied by South Korea in promoting industrial development through partnering with the private sector during its fast growth phase of development (see Alice Amsden’s book Asia’s Next Giant). The emergence of light and heavy import substituting industries which supplied export-oriented manufactures owed much to this strategy.

The economic bureaucracy there was a master at engaging in entrepreneurial self-discovery by importing licenses to operate foreign technology and then auctioning them off to private firms while at the same time providing them with sovereign guarantees and cheap project financing (I recommended a similar approach through an innovation fund which the government could create by borrowing some of the excess dollar reserves of the Bangko Sentral).

Indeed the government cannot live on macroeconomic stability and social insurance alone. For its growth trajectory to shift upwards, it will need to have a credible employment and industry strategy. Its PPP program was touted in P-Noy’s first state of the nation address as the vehicle for achieving this. In addition, the government will need to foster innovation and investment.

Let us hope that the administation finally gets to find a set of workable arrangements to get its pipeline of projects off the ground. Defying gravity with its poll numbers is one thing the government can do at the moment, but keeping developmental projects suspended in the air is something the nation simply cannot afford.

UPDATE:

DOTC Sec Roxas’ recent announcement of a five year plan involving 380 or 426 billion pesos (depending on which paper you read, the PDI or Business Mirror respectively) sheds more light on the new policy direction.

Essentially, a couple of things came out of the press release. The first is that aside from the PPP vehicle the government will be entertaining other conventional ways of financing infrastructure projects including overseas development assistance, foreign loans and items in the national budget. The second is that the Chinese contract to construct the NAIA to Pampanga rail line has now been superseded by a fast-rail project which will extend to Clark instead of Mabalacat.

These two moves by Mr Roxas clearly indicate a stronger more interventionist role for the state on offer from the one originally envisioned by the president. While P-Noy was only interested in handing infrastructure projects to the private sector, standing back and watching it work its magic, the DOTC secretary is willing to roll-up his sleeves and seek a better bargain or boot out in this case a poorly performing contractor to deliver a much better outcome.

His promise of a scorecard for his 5-year plan underscores the managerialist aspect of his approach to strategic projects in contrast to the laissez faire attitude of the president. The 90 billion a year average spend represents almost 1% of annual GDP. If he is able to roll this out on time, it will help provide a much needed stimulus to the economy at a time when the global economy goes through an adjustment to slower growth.

It makes me wonder what his rival Vice Pres Jojo Binay will now seek to do in order to outshine Mr Roxas. Will he adopt the proposal of Councilor Lagman of Quezon City and push for a 1% real property national tax as proposed by some fiscal experts to fund a national social housing program? Will he push for the creation of a housing department? Time will tell.

Where’s the beef? On the missing “spoils” from P-Noy’s second US trip

Does good governance mean good economics?

In an earlier piece last week meant more to mark the 39th anniversary of martial law in the Philippines, I tried to downplay expectations regarding the “spoils” that P-Noy’s US trip would bring describing the situation there as dire and nearly on the boil.

As P-Noy was to deliver a report to the World Bank, Mr Olivier Blanchard, Chief Economist of the IMF gave an uncharacteristically downbeat outlook for the world economy saying that the global recovery had stalled, revising forecasts of growth down to 4 from 5% (a more significant slowdown for advanced economies with growth prospects halved from 3 to 1.6% and less drastic cuts for emerging economies whose growth prospects decline slightly to 6.1 from 6.4%–the Philippines has seen its growth prospects slashed from 6-7% down to 4-5%).

Sure enough, on the day he arrived back from the US, the Dow Jones plunged nearly 400 basis points undoing the Federal Reserve’s measured response to prop up confidence. This was in reaction to what has been going on in Europe where Italy, the third largest economy received a credit downgrade from S&P and where a Greek default on sovereign debt looms. Meanwhile the Washington elite remained at odds over how to keep the government running with a measure to keep the lights on until November 18 passed literally at the eleventh hour.

With that as an unfitting backdrop, the president remained upbeat upon planting his feet back on home soil. Unlike his more recent trip to China which was expected to yield 2-7 billion dollars worth of investment of which 1.3 billion dollars was realized in firm commitments and cost the Filipino taxpayer 25 million pesos (a return of 52 dollars worth of investment for every peso spent), there were no numbers to be quoted this time around.

The president instead spoke of the keen interest and enthusiasm of US investors who were “lining-up” to come to the Philippines. Strange that the president did not even mention the figure of $15 million over the next four years the only firm commitment to come from Pepsi to be invested in developing a coconut juice processing facility.

That after all would be good news for the struggling farmers the intended beneficiaries of the Marcos era’s coco levy fund which was meant to provide them support in exporting their crop, but instead went to a bank which then lent to the fund’s manager, P-Noy’s once estranged uncle, who because of that now owns a controlling stake in San Miguel the food and beverage giant thanks to the high court’s ruling earlier this year.

So why the omission, which is so uncharacteristic of arrival statements; could it be because the spoils of this trip are so meager when compared to the nearly 25 million pesos spent on it? It would depict it as representing less value for money by producing a mere 6o cents for every peso spent.

This should not detract from the overall mission of the trip which according to the president was fulfilled by him reporting to the World Bank the advances of his administration this past year and greeting the Filipino community there. There was also the side trip to credit agencies to try and convince them to boost the ratings of the country. After all, the budget deficit no longer seems to be a problem with a surplus reported in August bringing the cumulative deficit for the year to be 85% below its ceiling, right?

This is what the president trumpeted as a success in his drive to stamp out corruption. In the spirit of transparency and openess, which were the themes of the Open Government Partnership that P-Noy inaugurated at the Waldorf Astoria (which incidentally means more foreign trips in the near future to Brazil, Chile, UK, Tanzania and Latvia), the Palace should have at least acknowledged that perhaps the Americans were in no position given the state of their economy to be exporting their capital and jobs to countries like the Philippines.

Never gonna happen

That transparent recognition of the state of affairs of course was never going to happen, for the simple fact that doing so would expose the president to accusations of junketing which given the nature of his presidency is something his entourage wants to avoid. For if the question were really to be asked, what would be the real urgency of making this trip to the US a second time in a row within the space of a year, what would be the answer?

His remarks at the World Bank was like that of a star pupil performing a didactic exercise of parroting his tutor. His visit to Fordham University was a sentimental journey mirroring his mother’s footsteps (similar to his visiting an ancestral hometown in China). His co-inaugural of the OGP lent legitimacy to an initiative sponsored by the World Bank which has struggled to make itself relevant.

Finally, his trip to the IMF was unnecessary given that the Philippines exited their program right before he entered office. The only point of this trip it seems was to highlight the advances of his young presidency in proving that “good governance is good economics”.

Unfortunately, the jury is still out on that. For one, the US haul was a pittance compared to the Chinese catch. And China has not really been deterred from investing because of perceived corruption or lack of openness. In fact, China’s development spending in emerging countries devoid of any concerns about corruption in the recipient nation is the main reason why western aid agencies have been struggling to maintain their relevance.

That and the fact that their anti-poverty programs have proven to be inconsequential. So much so that they have jumped on the bandwagon in supporting ideas developed independently by their clients. Programs such as Bolsa Familia which is now called “conditional cash transfers”. Yet as shown in an earlier post, the Philippines could have funded its own variant of this scheme without resorting to multilateral financing.

Second, the “interest” from US companies to invest was sparked not because of a greater sense of openness but from the relative advantages the Philippines has in a couple of areas. One is in the form of coconut plantation; and, two is in the form of a call center industry that has grown from strength to strength even during the period in which corruption supposedly reigned.

Now before you start arguing that the austerity exhibited by P-Noy in his travels is in stark contrast to the “impunity” demonstrated by his predecessor, let me say first of all that this habit of constantly bringing up ex-president Gloria Arroyo as the benchmark for this president’s conduct in office is not really very useful (although I am sure her supporters would be happy to have that conversation). I would prefer to think he should set the bar much higher.

The proper benchmark

Before questions of efficiency and effectiveness are raised, it is important to cross the threshold of appropriateness. How appropriate was it to make the trip at all? If as the president says it was important to send a message about the reforms undertaken by his country, then perhaps it would be pertinent to look at Indonesia’s example. The president of Indonesia the only other Asian country in the steering group of the OGP has trodden the path that P-Noy has just embarked on.

After the anti-corruption campaign started under Susilo Bambang Yudhoyono’s first administration, Indonesia has clearly effected a change in its image abroad. It is sometimes accorded “BRIC” status with  gross capital formation as a ratio of GDP about double and foreign direct investments several multiples of that in the Philippines in recent years. This was another successfully home grown program not driven by donors, the main reason it went from being seen as a basket case after the fall of Suharto to joining the Group of 20 nations.

Yet after accomplishing all this, its president felt no compelling reason to preach the virtues of his nearly decade long administration to other world leaders choosing instead to send a “trusted aid” to the event. Our president on the other hand felt so convinced that his administration after just over a year in office was performing sufficiently well that he saw the need to share his country’s “success story” with people abroad.

Unlike the case of Indonesia where the anti-corruption campaign supported growth, the Philippine government’s attempts to rein in corruption seem to have detracted from that growth as the latest four quarters of GDP reporting have shown (ironically it is in the area of growth where the Philippines over the last decade has not performed too badly against its southern neighbor–but never mind that, lest this statement of fact be interpreted as me giving “props” to the previous dispensation).

While it is understandable for the president acting as Salesperson-in-Chief to present a positive image abroad of our country and his administration, it is equally important for that image to be translated into tangible results over a sustained period of time. Only then will the image correspond to reality. Until then, we can only keep asking, “Mr, Presidentwhere’s the beef?*

*Fresh from his US trip, the president rushed off to Japan for four days. The contrast between the East Asian and North Atlantic nations could not be more stark with one billion dollars expected to be signed off with a taxpayer’s bill amounting to 20 million pesos.

Towards a Strategic Development Road Map (Update)

The following is a matrix of the Strategies contained in the government’s Philippine Development Plan 2011-16  plotted against the five key results areas under the Cabinet Cluster system of the Aquino Cabinet.

The five themes include: 1) Good Governance and Anti-Corruption, 2) Human Development and Poverty Reduction, 3) Economic Development, 4) Security, Justice and Peace, and 5) Climate Change, Adaptation and Mitigation. This was contained in Executive Order 43: Pursuing our Social Contract with the Filipino People Through the Reorganization of the Cabinet Clusters.

The strategies under each theme were taken from the Philippine Development Plan 2011-16. In some cases, the actual targets were contained in it or some other announcement such as the renewable energy target. Some targets we are actually proposing here based on the intent of the PDP and other statements by the government. Some targets remain ambiguous or require quantification, but at least a measurement indicator is identified here.

This should form the basis for a periodic review of the government’s progress in meeting its official development plan and agenda. In the future, we will be revisiting these targets to hold this government to account. Comments on the construction of the matrix are quite welcome. Feel free to point out things that are missing or need to be revised.

Scorecard of Social Contract and Philippine Development Plan 2011-16 Targets

UPDATE:

Good governance targets

I chose to go with the World Bank’s Good Governance indicators because the government has adopted its whole philosophy of economic development from the Washington Consensus. It is only but fitting that it should benchmark itself against the indicators set by this Washington-based institution.

In setting the targets for the nation, I had to benchmark our rating with our East Asian neighbors. For instance under control of corruption, the Philippines and Indonesia were at 27.1 and 28.1 respectively, China and Vietnam were at 36.2 and 36.7, Thailand was at 51, and Malaysia was at 58.1 back in 2009. Hong Kong and Singapore were in the 90s.

It is only but fitting that we try to break into the range of Thailand and Malaysia. So I said we need to be achieving above 50%. I used a similar approach with the other indicators in this area.

Human Development and Poverty Reduction

Most of the targets found here were lifted from the government’s plan. The only target which I had to set on my own was the HDI target. To do this I simply projected the current trend from 2005 to 2010.  The target of reaching a 0.65 value for HDI means we would catch up to where Thailand and Sri Lanka were back in 2010.

All the other targets dealing with poverty reduction, literacy, land reform and distribution, Pantawid Pamilya recipients, housing and reaching the MDG targets were all based on official published documents by the government.

Economic Development

Most of the targets came from official published documents by the government. The only targets where I took the liberty of setting were the fiscal spending targets, but even there I took the policy pronouncements contained in the PDP into account.

For example, the PDP stated that its Medium Term Expenditure goal was to “substantially increase productive expenditures and catch up with the accumulated deficits in these areas.” It also noted that in 2007, the average expenditure on education among our Asian neighbors was 3.9% of GDP. To “catch-up” and make up for our accumulated deficits, we would need to at least match that spending, which is reflected in the target.

Aside from education, the PDP also made mention of our infrastructure spending which is woefully inadequate when compared with that of China, Vietnam, and Thailand which spent upwards of 7, 8 and 14% of GDP over the last decade. The 5% target was based on the World Bank’s recommended level for a middle income country such as ours. In other words, it was a modest but reasonable target in light of our regional peers’ spending.

The targets for achieving higher rankings in the World Economic Forum’s Global Competitiveness and World Bank’s Ease of Doing Business reports are self-explanatory. You can see by reading their most recent editions the countries in whose proximity we would be landing if we achieved the targets.

The consumer welfare and agricultural productivity targets are yet undefined and merit further discussion.

Security, Justice and Peace

The target for achieving political stability was arrived at similar to the other good governance targets already discussed above. The defense modernization target assumes that the government has a revised plan for this and will be working towards achieving 100% of it by the end of its term. Finally, the press freedom strategy and target, I had to personally add given the silence of the PDP on it. I based this on PNoy’s policy pronouncements at an AFP conference call. I further believe the Human Rights Commission should seek to publish official statistics in the area so that we can aim to bring that figure down.

Climate Change, Adaptation and Mitigation

The targets for reducing environmental damage and casualties are yet undefined but flow directly from the strategies outlined in the PDP. The rest of the targets contained here are from official published statements by the government, including the renewable energy target.

Why the Need for a Scorecard?

It has been nearly three months since the cabinet reorganization was announced, and yet it seems no further developments were made towards fleshing out the social contract in terms of major strategies and targets, which the EO that created it envisioned.

That is the reason why we have taken this bold step towards developing this strategic development road map. Of course, nothing would please us more than to see the government announce something similar. When it does, we will be sure to revise the document to reflect it.

The Propinoy Project began as an attempt to hold the government to account for its electoral promises. Now that the government has officially laid down its official policies and plan for its term, it is but fitting that we assess its future performance against its own targets with objective baselines and independent and reliable sources.

This matrix as detailed as it is cannot capture the complexities at the implementation or operational level. We leave that to the community service organizations who are partnered with various agencies to monitor. At least at the strategic level we can look at this scorecard to assess whether the government is doing the right things (and doing them right!) at the operational level to achieve its strategic goals.

That Vision Thing Redux: Wang-Wang Culture

In tackling wang-wang culture, has the president left something big out?

The president in his new found role as Sociologist in Chief spoke at his second State of the Nation Address about his vision for a nation free of what he described as a culture of wang-wang (blaring sirens symbolic of entitlement and abuse of privilege). His use of vernacular terms since his inaugural address in getting his message across has won him praise from even handed critics all around.

Those familiar with the business of vision building tell us that leaders should be adept at crafting a story or narrative that creates a sense of shared meaning and purpose for their followers. In this case, PNoy was delivering the “red meat” to his core constituents, those that saw in him the moral authority to bring about change to the culture of impunity that prevailed under the former dispensation.

Having recommitted his government to that cause, PNoy entreated his listeners to give him and the government he leads a pat on the proverbial back, to acknowledge its endeavors at fulfilling this corporate dream. That already seems to be the case. In fact as Mahar Mangahas points out, PNoy’s administration is the most popular one since public polling began (the distinction to be made is that this applies to his government as opposed to his person which is receiving the same treatment from the public as presidents past).

While the president’s speech was rightly praised by some for its lofty rhetoric, it has by the same token been criticized for being short on actual policy substance or consistency. When I say “some”, I mean respected commentators like economist Solita Monsod, sociologist Randy David and businessman Roberto De Ocampo to name a few.

Monsod criticized PNoy for failing to at least mention in passing his roadmap for delivering his vision, the Philippine Development Plan and for perhaps unwittingly committing intellectual dishonesty with leaps of logic and faulty use of statistics in attributing many positive developments to his good government agenda.

David goes even further and questions the roadmap itself for following the same orthodoxies and applying new buzzwords such as “inclusive growth” as a mantra without even a slight attempt to tweak these orthodoxies given their dismal record. The absence of the PDP in the president’s speech according to Monsod belies a view either on the part of the president or his men that it will have any impact on our development.

Indeed while the PDP projects a growth rate of 7-8% for the country in the next five years, the actual budget planning follows a lower set of growth assumptions of 5-6% in forecasting its revenue and spending plans. This exposes the roadmap as an aspirational one, where the budget figures show the real picture.

The need for tweaking

A strange quarter to find a critique against the business community came from one of its own in the person of De Ocampo who picked up the cudgels for competition policy given the doubling of locals in the Forbes billionaire club and the risk that such powerful business interests could swamp any attempt by this government to create a level playing field, citing the PPP program as one potential fatality.

If you look at why the government is unable to shore up its finances, it is largely because self-employed entrepreneurs and professionals and large dominant family-based corporations have successfully avoided paying their fair share of taxes. In a previous post, I cited the figures of the BIR and a study performed by finance economist Renato Reside that showed that the combined losses from non-tax compliance and abuse of fiscal incentives as well as watered down sin taxes could easily close the budget deficit of 286 billion this year.

Having trained his guns on the wang-wang mentality in government, particularly at his predecessor who according to Mangahas led the most unpopular government since public polling records were kept, the president went a little too easy on the well-heeled classes when he identified a glaring inaccuracy in their collective tax payments.

In fact this follows his performance at the Makati Business Club while he was still running for the highest office when he vowed to avoid raising taxes. The president appealed to them at his SONA however to take his honest attempts at creating public faith in government as an assurance that their tax payments would be used properly which he hoped would lead them to be more forthcoming in declaring their taxable incomes.

The problem may not lie just in appealing to a sense of common values. It might actually require in De Ocampo’s words “structural adjustments” a fancy word for fundamental changes in policy and approach. For example, the businesses that now avail of incentives from the BOI and PEZA while failing to follow-through on their investment commitments need to have their tax privileges stripped from them.

Tighter policies and enforcement means renovating our economic bureaucracy. A lack of teeth in enforcing the terms of fiscal incentives led to the failure of the import-substitution industrial policies of the 1950s and 60s. Just as an aside, my father who was in the banking industry in those days would later recount to me how he would often see the head of one bank bringing in sacks full of money after auctioning the import licenses issued by the Central Bank to supposed importers of capital goods meant for industrial production. It went instead to importers of finished goods who made a killing by avoiding tariffs on those items.

Today, the same sort of things is undermining our export promotion strategy where supposed exporters in our business parks and economic zones are able to avoid paying taxes, customs and duties while at the same time selling up to 50% of their output to the domestic market. This is outrageous because it creates an unfair advantage for them against smaller and medium sized competitors.

The real righteous road

Instead of taking a half measure by targeting abuse of authority in government alone, the president needs to focus as well on rent-seeking by private interests. Indeed if you stacked up all the alleged stolen wealth uncovered in the last twenty years, this would not hold a flame next to the amount of rents the business elite have been able to extract from the state during that time. Both are two sides of the coin, except that the latter form of wang-wang is legal, while the former is illegal.

At the risk of being lumped together with the “move on” crowd, I have to say that if the president wants to eliminate wang-wang culture in its entirety, he needs to broaden his vision and take the full-measure of targeting this culture wherever it may reside, be it in the corridors of power or the board rooms of our country’s business elite.

This is not about being forgetful of the sins of his predecessors; it is about being mindful that there are even larger sins being committed by powerful interests that are going on unnoticed. These same interests are able to switch allegiances with the changing tide of public opinion in the political arena.

It is easy to flog a dead horse. It is harder to go after the more prevalent and persistent forces that are alive and kicking. The president needs to take his carefully crafted vision of a country rid of wang-wang culture and turn it into a more comprehensive strategy. He will obviously need to take a balanced and considered approach as he doesn’t want to spook the horses so to speak.

The very essence of the social contract or grand bargain is to maintain the sources of growth, but to allow the more productive sectors to contribute an increasing portion of the proceeds of that growth to help the underclasses who lose out of the growth for whatever reason.

Walking the walk

Talking the talk is one thing, but if he wants to walk the walk, he might have to start with his own family interests. The Hacienda Luisita case could turn into a powerful device for demonstrating his commitment to the righteous path if the government is successful in fulfilling the true letter and spirit of the CARPeR law which would mean distributing land titles to the tillers of the Cojuangco estate. This would set PNoy apart as a leader who remained true to his word.

What would bolster his case even more is if he gets rid of his style of dealing with his KKK (classmates, friends and cronies) and instituted a true meritocracy in his team. Finally, he needs to strengthen the economic bureaucracy by instituting reforms in the way it is staffed and resourced.

A developmental state requires lead agencies that are engaged with but at the same time insulated from the influence of powerful business interests to prevent them from abusing the system. It is one thing to name and shame a group of delinquent taxpayers or to announce a policy of monitoring investment commitments, but the agencies concerned need to have sufficient resources to go out and conduct thorough audits on their clients.

A change in the wang-wang culture in all its shapes and forms requires not only a revamping of our moral and spiritual furniture as a nation, it will require a fundamental renovation of our economic strategy and bureaucracy. The president can leverage the cult of his personality to push for solid long-lasting reforms in this regard. That is if he would only recognize where the true wang-wang culture resides.

Revisit the original series: That Vision Thing starting here.

The Power of One

Assessing PNoy’s freshman year: the good, the bad and the ugly

In numerology, the number 1 bears singular importance. The first, the start, the origin of anything bears significance and meaning in the sense that it opens up possibilities, it sets the scene, and it leads the way. The level of anticipation and anxiety is always highest at the start.

The mistakes and lessons, the first impressions and achievements all have lingering effects. So it is with the first year of PNoy’s administration: the learning curve, the birthing pains and the wall of public expectation he has had to scale was close to insurmountable.

Comparisons and contrasts

In assessing his first year, the problem of finding an appropriate yardstick has been highlighted before. For those that attempt it by way of contrast, PNoy has done a remarkable job in his first year simply by not being Mrs Arroyo. Some similarities can be drawn with his mother in that she too had to sort out a lot of problems left behind by Mr Marcos and high expectations on the part of the people.

Others like me have drawn some parallels between PNoy and Estrada in the way the president went about managing factions within his cabinet. Some have questioned the president’s work ethic. ‘Do nothing’ was a constant line of attack presented by his detractors.

The question here is, had PNoy not succeeded Mrs Arroyo, how would his first year have been measured? Corollary to this is, had PNoy not been an Aquino, how would we perceive or rate him? The nation treats PNoy almost like an older brother or ‘kuya’. His being the son of ‘Tita’ or Auntie Cory makes an objective assessment difficult because of kindred ties and the ‘halo’ effect.

Factoring out the ‘noise’

Then there is the problem of events outside the evaluatee’s control, or the noise factor. The worsening global economy emanating from the Eurozone, Japan and MENA as well as from the US, have been used to explain the weakening foreign investor confidence in the Philippines.

As Ben Diokno rightly points out, our relative performance to some of our ASEAN neighbors allows us to factor out the ‘noise’ in that our peers in the region all have experienced the same global slowdown, but as the first quarter data shows, they were able to increase their levels of foreign direct investments, while we saw ours shrink.

We need to bear this in mind whenever we hear officials justifying the slowdown in our economy by citing global affairs or cyclical factors like the elections of 2010. We might be maintaining growth in an absolute sense, but in a relative sense, we might fall behind our neighbors in the region. We therefore need to determine whether this poor performance relative to them is due to some of the things the administration is doing or failing to do.

Progress made

Having said that, I would first like to focus on the positive things I believe the administration has done. This would include both its tangible and intangible achievements. I will start with the tangibles.

The introduction of universal kindergarten in public schools which studies show provide long-term learning benefits, the reduction of hunger most recently attributable to the conditional cash transfers program which is really designed to address intergenerational poverty and not fix the unemployment problem in the near term, and the reform of government corporations and debt management which have led to meaningful savings for the government are all worth a positive rating.

With regard to intangibles, the confidence engendered by the government which has led to private domestic firms releasing pent-up demand for capital goods and the greater trust or faith in government leaders are two things that this administration can be congratulated for. If the government can continue to make inroads in these areas it will have done a tremendous service to the Filipino people.

Needs improvement

On the needs improvement column, I would have to cite firstly the government’s handling of its legislative agenda. Both the scope and the pace at which it has been pursuing this have serious flaws. The absence of the FOI and RH bill among its priority measures for instance was a major failing. The fact that it took nine months for it to hammer out its agenda led to meager legislative trophies in the first year.

Secondly, our response to China’s emerging role in the region as a superpower to counterbalance the US our traditional ally has been all over the place. First, we sided with China unnecessarily in not attending the Nobel Prize conferment ceremonies for one of its leading dissidents. Then, in handling the Spratlys issue, we engaged in sabre rattling by sending out a navy vessel into disputed territory, again unnecessarily. A more considered and strategic foreign policy is required.

Thirdly, in prosecuting cases against Mrs Arroyo and her allies, many will assail the efforts of PNoy as unsatisfactory or timid, as several church and citizen’s groups have done. Personally, I would not consider this too much of a problem, but I know that many have that expectation. So what I cite as a failure by this government is its inability to manage such high expectations. More importantly, I would like to see greater safeguards and economic measures put in place to ensure that the Ombudsman and Solicitor General’s office are well resourced to perform their functions.

Sharper focus required

Finally, I would like to cite areas that deserve sharper focus by this administration. These are things that the administration needs to prioritize if it is to make a lasting impact. The first has to do with its development strategies contained in the Philippine Development Plan 2011-2016. As I have stated in a three part series, entitled the National Development Program, there are serious gaps in the Plan that need to be addressed.

Secondly, in its first year, the government has shown serious shortcomings in its budget plans and execution. Having had a head start by way of Congress’s early approval of their budget, the government should have done better at releasing its funds for infrastructure projects. The practice of forced savings due to off-target collections also has to be addressed. This cannot continue as per the ratings agencies reports if the nation is to keep to its growth trajectory.

Thirdly, in generating much needed employment, this government has to start thinking ‘outside the box’ if it is to keep up with the growing workforce. PPP’s or public-private partnerships are an existing tool already wielded by preceding governments. For it to have a successful employment program, the administration will have to develop a robust industrial policy. To do that it needs to reshape the economic bureaucracy as I have pointed out here.

Looking back, moving forward

A periodic performance appraisal is always necessary for any government to benchmark itself against the undertaking it has given to the people, to celebrate successes and take stock of where it needs to improve or devote more attention to.

The first year of any government is always the hardest. Unexpected roadblocks and landmines often litter its path. The ability of any regime to survive its first year relatively unscathed or even stronger than before usually is a good indicator of the caliber of its leaders.

We will have to say that the government despite all the sound and fury has survived relatively intact. The remaining five years will contain many twists and turns. Hopefully, the correct lessons from its first year will help inform these remaining years. For this reason, it is important for citizens to remain as engaged as they have been during this first year as we here at Propinoy are determined to be.

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.

The National Development Project, part 2: Re-defining Good Governance

This is a continuation of Part 1: The National Development Project.

Governance is the cornerstone of the Aquino presidency, and this point is brought out by his development plan. Since Public-Private Partnerships which is the Plan’s centerpiece has been around since the mid-80s under the name Build-Operate-Transfer, better governance of them will provide the only new impetus to growth.

The question now becomes what sort of governance model best suits this strategy?

Peter Evans in an essay entitled Transferrable Lessons? Re-examining Institutional Pre-requisites of East Asian Economic Policies states that there are three alternative models of good governance. He describes them as:

  • The ‘market-friendly model’, best exemplified by the World Bank’s [1993] East Asian Miracle report, which focuses on ‘getting the fundamentals right’. In this model, “government must preserve macroeconomic stability and provide ‘rules of the game’ that are transparent and predictable.”
  • The ‘industrial policy’ model, which is best epitomised by Chalmers Johnson’s classic [1982] study of MITI (Ministry of International Trade and Industry), more demands are placed on economic policy makers…Policies nurturing the general macroeconomic environment must be complemented by “industry-specific policies that push setors most worth pursuing and shift capital out of sectors with declining returns and weak growth prospects.”
  • The ‘profit-investment nexus’ model [Akyuz and Gore, 1996] which shares with the ‘industry policy model’ the idea that policy must do more than simply provide a facilitative macroeconomic environement, but is not as demanding of industry-specific policies. Policies must simply increase the overall level of investment and not necessarily foster certain “sunrise” industries.

The relevant part of the Plan that describes the administration’s governance model is Chapter 7: Good Governance and the Rule of Law. From the elements and the tone of the text, it sounds like that the Plan is using the ‘market-friendly’ model with its four-pronged strategy of eliminating red-tape, pursuing anti-corruption, increasing citizen participation and accountability.

Ensuring a minimum level of probity is consistent with all three models of governance. As Evans states “if developing countries…could achieve the levels of bureaucratic capacity entailed in the ‘market friendly’ model, the additional capacity implied by other models would be institutionally within reach.

That should not be taken to mean though that emulating East Asia requires incorruptible super bureaucrats able to “out-manage their private counterparts from a distance.” As Evans explains,

Minimal norms of probity and competence need to be applied on a general basis, but East Asian reformers did not attempt to transform every ministry. Radical changes were reserved for key economic agancies; routinized behavour and surprisingly high levels of clientelism were allowed to persist in those considered less crucial to the national development project.

If there is any positive thing the economic rationalist theory has contributed to our understanding of governance, it has been the couching of rent-seeking in non-pejorative (or moralistic) terms, according to Evans. Rent-seeking which can take the form of lobbying or corruption is merely a form of profit-maximization on the part of rational agents.

When Mrs Arroyo in an interview at the start of her administration said for instance, that as an economist, she understood that markets did not operate in a ‘frictionless’ environment, she was acknowledging the need for transactions costs. Clientelism is sometimes needed by reformists to ‘payoff’ or compensate those hurt by reforms.

The East Asian countries did not try to reform the entire bureaucracy or weed out rent-seeking in one swoop. They took a different approach:

  • In Japan, the Ministry of International Trade and Industry performed the reformist role, while the Ministry of Agriculture continued to operate along clientelistic lines.
  • In Korea, a bifurcated bureaucracy existed, with the Economic Planning Board taking the helm of development while Construction followed along paternalistic lines.
  • In Taiwan the ruling Kuomintang Party ensured meritocratic appointments to key economic agencies while allowing a “back door” entry for retired military and party members to other parts of the civil service.
  • The pervasiveness of the Confucian ‘super bureaucrats’ in East Asia is a myth save for Singapore where civil servants are paid more than their private sector counterparts.

The Plan seeks to renovate the entire bureaucracy all at the same time. A very noble and ambitious goal, but it is difficult to imagine how this will be achieved given its meager resources and the quality of the civil service pool. This strategy is fraught with risk. Perhaps the biggest risk involves spreading the reform effort too thinly.

Avoiding Capture

A coherent economic bureaucracy was deemed necessary for the state to engage with but avoid capture by increasingly more powerful and wealthy private interests.

Initial conditions fostered the formation of this sort of governance model, namely, an egalitarian society, which was the result of land reform sponsored by the Americans after the War and the external policy environment that allowed market distorting industry and currency policy which was made possible by the US Cold War strategy of propping up capitalist states in the region.

The unlikelihood of duplicating such initial conditions is what causes pessimism with regard to the national development project for late bloomers like the Philippines. Yet, Evans encourages us to resist the fatalism of this view by saying

(w)hat puts East Asian practices out of reach is less likely to be external compulsion than antiipatory acquiescence by developing country governments to perceived constraints.

The rapid growth of China most recently proves that despite its signing up to the World Trade Organization, it has managed to resist measures to prevent it from exercising some of the tools under the industry and profit-nexus models. Singapore demonstrates in fact how the tools have evolved to more sophisticated measures that no longer involve the strong arm tactics applied elsewhere.

The more difficult problem has to do with large inequalities. While concentration of wealth should not necessarily hinder but in fact aid the formation of capital in productive areas, large inequalities have a corrosive function in the policy process.

State capture is what prevented the Philippines in the 1950s and 60s from following a similar path as its neighbors in the region although Malaysia and Singapore managed to avoid this despite having similar disparities among social groups. Here again is what Evans has to say

Entrenched inequality undercuts legitimacy of state autonomy…makes it hard for governments to credibly claim that they represent a national development project. Populist clientelism seems to offer at least a temporary relief to the excluded and close government-business ties which look more like a conspiracy for redistribution upwards than a joint project of national development.

It sounds like he is describing what happened to the country when it opted for a populist clientelist president in the person of Joseph Estrada. The perception was that growth under the elites was only favoring the rich.

Charting a new path

This brings us back to the questions of nepotism and cronyism that have started to emerge even in PNoy’s first year. In a country where only a small group of ruling elites hold much sway over the economy, it becomes difficult to prevent such rumors from floating.

If sanitizing all state agencies from clientelist practices can be ruled out (at least on the ground, despite its being paid lip service), the need to ring fence private rent seeking interest groups from crucial economic policies and infrastructure projects needs to be guaranteed.

That means boosting the capacity of the economic bureaucracy. The Plan which is the first one under the post-IMF oversight period, fails to break out of ‘perceived constraints’ by not examining other more effective governance models.

It remains wedded to the old generic formula of macroeconomic stability, open markets and establishing rule of law which has failed to produce results in places where it has been attempted, namely in Latin America and Sub-Saharan Africa. The challenge now is convincing the policy elite to chart a different path.

To be concluded…go to Part 3: Renovating the Bureaucracy