ARMM

Use your coconut: Of investment gaps and how to fill them (conclusion)

The Philippines has been trying to crack open the investment nut by lifting its competitiveness for such a long time but has not been getting very far. Here’s why.

Continuing on from the first part where we looked at the country’s investment gap of over half a trillion pesos a year, we now turn to the problem of how to fill it and bring unemployment down. The imperative to boost competitiveness is based on the notion that low social returns on investment are due to a lack of opportunities to invest due to poor governance, inadequate infrastructure, and bad local finance.

Government failures caused by macro risks like poor fiscal, monetary and financial policies along with micro-risks including corruption, high taxes and weak property rights lead to a lack of incentives for investing in new ideas. These failures block the supply of innovation and investment. While this forms conceivably part of the problem, it does not necessarily explain the entire puzzle.

A missing piece is the demand not forthcoming from entrepreneurs for existing technology and capital even when it is available due to market failures. Dani Rodrik and Ricardo Hausmann talk about how this comes about when there are significant hidden costs associated with information and coordination. I will try to explain these failures using the coconut analogy.

Imagine that several decades after Robinson Crusoe left the island of Despair, a number of coconut plantations were established. The owners of these plantations were competing for a shrinking share of the coconut trade that existed between several islands in the vicinity. To improve their earnings, they each could find different ways of using the coconut. The process of discovering what types of products could be made comes with a cost caused by free-riders.

The evidence shows that low income countries actually develop first by diversifying their exports. The degree of specialization follows a U-shaped curve with income (diversifying more until reaching about the same level of income as Ireland before specializing). They do this by imitating technology already developed in rich countries. Instead of competing by creating new technology, they find cheaper ways of using existing modes of production in diverse sectors.

This process of “self-discovery” as Rodrik termed it often comes at a cost to the first-mover within a country, a cost which imitators do not incur. This creates a market failure because no one is willing to invest in this process since the information generated by it (“which goods can be produced more cheaply at home”) usually cannot be protected by patents.

This random process of discovery is why such countries as Pakistan and Bangladesh with similar levels of development and competitiveness produce very different products (the former produces soccer balls while the other produces hats). Korea and Taiwan also offer the same lesson (one produces microwave ovens and hardly any bicycles unlike the other). For the entrepreneurs who first ventured into these markets and were protected from the free-riding copycats, huge profits were on offer.

Bailey Klinger and Daniel Lederman have shown that their measure of export diversification, the frequency a country introduces new products into its export mix, is directly related to the height of entry barriers. This is a stunning result since it goes against the prevailing consensus on efficient and well-functioning markets.

Rather than the Global Competitiveness Index cited in the first part of this piece, which is based on subjective surveys, Klinger and Lederman used the World Bank’s Doing Business indicators for measuring barriers to entry which are based on objective measures like the number of days for starting and closing a business. They found that the higher the cost, the greater the returns to innovation from self-discovery.

The barriers in effect performed the role of greenhouses, protecting fragile innovative start-ups from the harsh winds of the free market. This counter-intuitive conclusion robustly supported by the evidence is consistent with the market failure argument. It violates the prevailing theory that increased specialization for poor countries and lowering costs of doing business is the way they should attract investments.

This is also borne out by the development experience of Japan which used “administrative guidance” to encourage many players within emerging industries to consolidate into oligopolies, Korea which offered loan guarantees as a way to subsidize the discovery costs of large diversified business conglomerates, India with its licensing raj which allowed a few pioneering software companies to gain economies of scale without the fear of new entrants, and Brazil which sponsored competitions for innovation with significant exclusive licenses going to the winner.

Klinger and Lederman state that this does not imply that there are no negative effects due to protection. What their study shows is that the positive effects swamp them. This means that rather than justifying protectionism, what it does is build a case for state support for emerging industries. I will have more to say regarding this in a moment.

Moving on to the second form of market failure which is due to coordination costs, picture the island once again. To transport various coconut products to other parts of the area, investments in seafaring ships and the training of sailors are necessary. These complementary investments are needed for an expansion of production to occur. Unfortunately, no one is willing to coordinate with the other inhabitants who live near the shore who could profit from such activities, so nothing happens.

Taiwan’s experience with the orchid industry is illustrative. When the world price of sugar declined, the state figured that shifting farm production to this high end product would prove beneficial. This required coordinated investments in things like greenhouses and storage facilities which the state encouraged and subsidized. The same type of intervention was performed by Fundacion Chile a partly state-owned enterprise which gave rise to a new salmon exporting sector.

The faltering seaweed industry located mostly in the Autonomous Region of Muslim Mindanao and the nascent industry of coco juice seem to be suffering a combination of the market failure problems discussed above. Our electronics industry which is highly specialized in “screwdriver” assembly operations as South Korea once was could be expanded likewise to incorporate more value adding steps in the manufacturing process.

The usual ways by which governments address these market failures is by offering subsidies to defray the costs of “self-discovery” (by sponsoring contests which award a prize to the best solutions for example), financing high risk ventures at the pre-commercialization phase and coordinating complementary investments in specific areas such as research and development, infrastructure and general training.

Think of it this way: instead of borrowing from foreign governments to pay their suppliers to develop our infrastructure (think broadband and high-speed rail) we should be licensing their technologies and awarding these to local firms which can prove they can use it cost effectively to build what we need. This should also apply to contracts awarded to private firms partnered with foreign companies. They should be conditioned on meeting certain local content requirements. Defense contracts should increasingly source local producers as well.

The Department of Transportation and Communication is already on the right track by seeking to borrow to pay for the build while privatizing the operations and maintenance of certain projects like light railways. In time we could be exporting some of these products and services if we create local expertise. South Korea did this with its ship building industry in the 1970s with Hyundai Heavy Industries becoming the world’s leading exporter within a decade. It did this even as global demand for ships declined.

Where will the government get the money to do all this? From itself, by using the savings remitted by overseas Filipinos and stored with the central bank in the form of foreign currency reserves–an unorthodox view that even the “humbled” former dean of the UP Economics School holds! If the government were to set aside a third of the currency surplus flowing in each year (see previous posts on this) amounting to around fifteen billion dollars to fund these activities and assuming a one-for-one investment multiplier, a total of four hundred and fifty billion pesos worth of spending could be generated annually (adding 4.5% points to GDP growth!). This would fill up to eighty percent of the investment gap.

The need to diversify our exports is already apparent with an inordinately high specialization in electronics posing a huge risk to future growth in the face of uncertainty of demand from advanced economies. It is also clear that despite very benign inflation and low real interest rates, private firms fail to undertake investments that would lift the productivity of their idle capital. This underinvestment problem is why such a large proportion of our workforce remains unemployed or underutilized.

Stimulating demand for innovation and investment by addressing market failures should be the priority. The biggest barrier for the Philippines to adopting such a strategy will not be an inadequate bureaucracy as many of our top bureaucrats are well-informed and educated; it won’t be for lack of funds as a substantial amount of national savings remain untapped; it won’t be for lack of ideas as there is a wide gap between domestic and foreign technology that can be filled.

The biggest barrier will be attitudinal as it would mean countering the development mindset that has dominated for such a long time which is largely donor-driven. Having drunk the policy “cocktail” put together according to their orthodoxies to no avail, giving us the title of being “the sick man of Asia”, it is about time we developed our own recipes for stimulating economic dynamism in line with local conditions. I now leave you with a song about the coconut which should punctuate this final thought.

Seeking Closure

In seeking closure to the 2004 and 2007 elections, which type of book (history or law) should be thrown at the fraudsters first?

The truth has a funny way of coming out regardless of how it is suppressed.

After years of hiding and running from the law, former election supervisor of Maguindanao Lintang Bedol decided to surface last week and attest to what many already knew: that fraud had been committed in the 2004 presidential and 2007 senatorial elections favoring Mrs Arroyo.

The suspended regional ARMM governor Zaldy Ampatuan who is contemplating a life in prison for complicity in the Maguindanao massacre has also implicated Mrs Arroyo last week in a sworn statement.

When such evidence had been suppressed, some anti-GMA stalwarts sought to prod it out of complicit subalterns through a Truth Commission. Now that some of these subalterns have confessed to their involvement, they seem incoherent about the way forward.

Take Sen Chiz Escudero for instance. His proposal for a joint congressional fact-finding committee to determine the real winner of the 2004 presidential elections was echoed by his ex-partymate and vice presidential candidate Loren Legarda who suggested putting the picture of Fernando Poe, Jr her runningmate in Malacanang as a way of “correcting history” if it is proven that he won against Mrs Arroyo in 2004.

Such a move would be frivolous according to the senate president, Juan Ponce Enrile, who believes that prosecuting the case now lies with the Department of Justice whose chief says it is ready to handle it. Creating a separate body to deliberate over the issue would only impede the investigation. The point of Escudero and Legarda is to correct historically the results of the 2004 election, the point of Enrile is to determine criminal liability and prosecute the case against those found liable.

Congressman Ted Casino on the other hand wants Congress to go beyond the issue of who might have won or lost in the 2004 election and look at investigating and perhaps legislating ways to address vulnerabilities in our electoral system to protect it from manipulation in the future. A good point I might add. The problem however is how to deal with an issue that would already be under the jurisdiction of the courts.

Perhaps the best way forward is to expedite the legal proceedings first and then to use whatever evidence, insights or lessons uncovered in the process to inform future legislative proposals. While correcting the record books for posterity might be essential for the people involved, there will be ample opportunity to pursue this in the future. Right now, perhaps we need to let the proverbial wheels of justice turn.

The sooner we can get on with this, the sooner we can move on.

What would a permanent settlement in the south bring?

With today’s formal resumption of peace talks between the Philippine government (GRP) and the Moro Islamic Liberation Front (MILF), I found myself wondering what if the parties finally come to a permanent settlement in the conflict-ridden region in the south of Mindanao. Into its fourteenth year, these talks seem to have been going on for forever and a day. But what if a final deal is forged; what would the future hold for the region?

Like most Filipinos, I have a very sketchy picture in my head of the goings-on down south. Except when news of war and terror attacks hug the headlines, I rarely think about the peace process, I must admit. As an economist, I am aware that the people living in the Autonomous Region in Muslim Mindanao (ARMM) rank the lowest in our country when it comes to per capita incomes and other meaningful indicators such as literacy and child mortality. This is despite the Philippines and foreign donors pouring in massive amounts of aid to support development in the region.

So I decided to do a little research as a backgrounder to this piece. Here are a few pieces of trivia that I found interesting which the average man on the street would probably not be aware of:

  • the ARMM covers a mere 12,288 square kilometers.
  • there are only five provinces covered: Basilan, Lanao del Sur, Maguindanao, Sulu and Tawi-Tawi
  • the total number of inhabitants was 4.12M in 2000
  • although the ARMM capital is in Cotabato, the city did not opt to join the ARMM
  • Isabela City, which is in Basilan also did not join the ARMM
  • the government consists of an executive council comprised of the governor, vice-governor, 3 deputy governors (representing the main ethnic groups consisting of Muslims, indigenous or Lumads and Christians) and not more than 10 cabinet members
  • the regional legislative assembly consists of 24 members, 3 delegates are elected per district
  • all elective officials are elected to serve a term of three years
  • the powers of the legislative assembly are limited and do not cover foreign affairs and immigration, among others, but it can legislate on matters concerning Shari’ah , the law governing Muslims
  • since its inaugural in 1990, the ARMM governors have come from only one party, Lakas-NUCD
  • there have been six governors since 1990; Nuralaj Misuari, the former head of the Moro National Liberation Front was the longest serving ARMM governor serving  from 1996 until 2001 when he was removed from office by Pres Gloria Arroyo and later charged for rebellion
  • Zaldy Ampatuan from the infamous Ampatuan clan was the ARMM governor from 2005-2009 until he was replaced following the Maguindanao massacre.
  • A general cessation of hostilities between the government in Manila and the MILF was signed in July 1997 only to be abolished in 2000 by President Estrada which led to the MILF declaring a jihad (holy war) against the government, its citizens and supporters. A cease-fire was restored by President Gloria Macapagal-Arroyo government which re-started peace talks
  • the last time hostilities broke out was after the Supreme Court ruled in 2008 against the Memorandum of Agreement on Ancestral Domain Aspect of the GRP-MILF Tripoli Agreement on Peace in 2001 (MOA-AD) which sought to expand the ARMM both in geographic scope and in powers (to include control over a police force and natural resources) and create a juridical entity called the Bangsa Juridical Entity (BJE). The MOA-AD would have paved the way for the signing of a Final Comprehensive Compact.

Even this mere recitation of facts brings to light a few important issues regarding the future of the ARMM or whatever entity succeeds it as part of any final peace accord. The first of these is inspired by recent events in the Arab nations of the Middle East and North Africa (MENA). Until recently, the ARMM government has been controlled by local warlords, puppets or vassals aligned with the powers that be in Imperial Manila. They and their local paramilitary armies have served as a counter-weight to the MILF. We have seen the effects of maintaining this policy after two decades: corruption, poor human development, poverty and human rights abuses.

The ARMM leaders so far have all been aligned with the ruling party and not positioned themselves with Islamist or religious ideology for obvious reasons. What should happen once political markets in the region open up and other groups with links to terrorist groups such as Jemaah Islamiyah and Al-Qaida are allowed to join the political fray?

The ARMM leaders so far have all been aligned with the ruling party and not positioned themselves with Islamist or religious ideology for obvious reasons. What should happen once political markets in the region open up and other groups with links to terrorist groups such as Jemaah Islamiyah and Al-Qaida are allowed to join the political fray? Will we see for instance the election of a radical group such as Hamas in Palestine or Hezbollah in Lebanon? Democratic self-governance might be a transitory state leading into a new dictatorship under an Islamist regime. That is the first concern.

The second concern flows from the first one. What would happen to the prospects of economic development once this new entity comes into being? In a blog-piece that I wrote previously comparing the regions of MENA (Middle East and North Africa) and SSA (Sub-Saharan Africa), I observed that MENA has been doing a far better job at creating prosperity compared to SSA. MENA is ruled by and large by paternalistic authoritarian regimes which have used the money from oil revenues to improve living standards without granting political rights to its citizens. What would be the model for development under the new system?

The third and final concern has to do with women empowerment and the rights of minorities. Should the new order result in a regional identity tilted more towards Islamic law and customs, what will happen to the rights of women and minorities under this system. There are of course prototypes in ASEAN for what could happen. Malaysia has adopted a kind of affirmative action policy that favors the rights of the native Malays or Bumiputra who are traditionally muslim. Would the new order adopt the same? What will happen to women’s access to education?

Many of us assume that once the final peace accord is signed, it will solve the security as well as the social and economic problems in the south. I hope I am wrong but it might not necessarily be the case. There could be other complications. Just as Washington looks to MENA and ponders what the new order will bring, so should we look to our own backyard and worry about its future, both for its own sake and ours.

BSAIII action plan on peace and development in Mindanao

Aquino-Roxas Mindanao Peace and Development Agenda

Action Plan on Peace and Development in Mindanao

Peace and Security

Transparent and consultative peace process

Workable peace is possible only if supported by a broad, active and informed peace constituency.

  • I will assume direct responsibility for the revival of the peace process with the MILF.
  • I will reconstitute the peace panel with men and women of integrity who will directly report to me. There was a time when the peace process was doing well until the Arroyo Government began to use the peace negotiation as prop to political survival. I will see counsel from peace advocates like former OPAPP Secretary Deles, Peace Panel Head Afable and former Notre Dame University President, Fr. Mercado to put back on track the credibility needed in the peace process.
  • I will ensure the participation of various Mindanao stakeholders – Muslims, Lumad, Christian settlers – in the negotiating panels and working groups;
  • I will create a niche for the participation of other Muslim “gatekeepers” particularly traditional and LGU leaders, MNLF, the Ulama, Bangsamoro civil society.
  • Request the Bishops-Ulama Conference to submit a report on the results of the consultations it conducted in the aftermath of the failed MOA-AD; likewise with all known civil society organizations and academic institutions which undertook similar consultations or researches in the past year, such as the University Network on the Mindanao Question led by the UP School of Law, the Consortium of Bangsamoro Civil Society, the Philippine Council for Islam and Democracy, and the Al Mujadilah Foundation.

The results of all these processes should be collated, with key points of agreement and contention identified for inputting into the peace mechanism, as appropriate. On this basis, a mechanism should be devised for these groups to participate in the continuing dialogue on and monitoring of their recommendations.

MNLF

  • I will immediately convene the Oversight Committee on the Organic Act on Muslim Mindanao (RA 9054) and complete a review and assessment of the implementation of the law. I will issue an Executive Order reviving/extending the function of the Oversight Committee, which was last convened before 2004 and which never completed its task, and impose a deadline for the completion of its work.
  • I will order the Department of Foreign Affairs, with the Office of the Presidential Adviser on the Peace Process (OPAPP), to give a report on the tripartite review of the GRP-MNLF Final Peace Agreement and cull the “immediate doable” measures that government can undertake.
  • I will order an inventory of the backlog on assistance to MNLF rebel returnees, as the basis for determining the requirements and timetable for addressing the gap and closing the existing program, while a new program is crafted in cooperation with concerned LGUs and approximating the international standards on DDR (Disarmament, Demobilization and Rehabilitation) of former combatants.

Indigenous People

  • We will review the recent appointment of the Commission to ensure they are in accordance with the law and rationalize the NCIP plantilla to professionalize the bureaucracy to do its mandate under the law, including the delineation of ancestral domains (AD) and support the development of the Natural Resource Management Plan (NRMP).
  • I will work with IP communities and all land and resource-management related agencies for a thorough review of all Certificates of Ancestral Domain Titles (CADTs), Certificate of Ancestral Land Titles (CALTs), and Certificates of Free Prior and Informed Consent (CFPICs) issued towards weeding out those issued defectively, fast-tracking decisions on all pending applications, and providing support for development and implementation of the ADRMP for areas covered by CADTs.
  • I will ensure basic education, health, and sanitation facilities and services for IP communities.
  • I will look into the immediate situation of security of IP communities in areas of ongoing armed conflict.

Internally Displaced Families

Families displaced by conflict will receive full support to be able to return to their communities of origin, if they so desire.

  • I will put up a compensatory fund which will provide shelter, food and livelihood assistance to enable the estimated 30,000 internally displaced families to return to their homes.

Lawless and Criminal Elements

I will dismantle private armies and take a firm hand against all forms of lawlessness

  • I will ensure the prosecution of all identified perpetrators of the Ampatuan massacre. I am aware that the families of the victims and witnesses of the crime are vulnerable to harassment as well as bribes to weaken the case. I will ensure that families of the victims and witnesses of the crime will receive adequate protection and support as they work for justice.
  • The Maguindanao massacre was not just a local Maguindanao problem. It was abetted by the national government with government policies and resources. DND should submit immediately the result of its investigation and inventory of the arms and ammunition confiscated from the Ampatuans and identify civilian and military leaders responsible for the build up of arsenal of the Ampatuans.
  • I will revoke EO546. Never again will public funds be used to support and maintain a private security force.
  • KFR incidents are national security concerns. I will commit full budgetary support to PACER in establishing and implementing an anti-kidnapping strategy in Mindanao; provide full support for the filing of charges against suspected perpetrators, including full protection for released victims and their families.
  • Under my watch, I will ensure that all security forces will be insulated from partisan politics. I will implement the Defense Reform Program started by former DND Secretary Nonong Cruz which aimed to build a professional AFP. A professional AFP along with a professional PNP committed solely to defend the constitution and uphold the law is the key to the dismantling of private armies and implementing the gun control. All forms of excuses for self-protection can be abandoned only when citizens trust state security forces.
  • We will aim to improve the ratio of security forces to our growing population.
  • All appointments in the AFP and PNP will be based on merit and performance.
  • Forces on the ground will be provided with adequate provisions, equipment and training to be able to discharge their duties effectively.

Governance

Performance Incentives

Setting National Policy: Performance- and outcome-driven over-investments in education, health, and employment interventions.

  • I will match every peso invested by 4th and 5th class LGUs in basic education, maternal and child health care and potable water and latrines.
  • Moreover, I will provide additional support to performing LGU’s so they can fast track filling the gaps in attaining targets for their education, health and sanitation programs. In education I will support LGU efforts to attain 100% basic education enrolment, lowering dropout rates and increasing completion rates.

Transparent and proper use of public funds

I will ensure that all fund releases to all LGUs will be transparent and its utilization fully accounted for.

  • I will support DBM’s effort started by former Secretary Emilia Boncodin in regularly publishing and disseminating all releases to the LGUs.
  • I commend COA for their fearless reports which exposed politically sensitive cases such as the Jocjoc Bolante fertilizer scam. I will ensure adequate support to state auditors for proper and accurate audit reports. And their reports will not end in filing cabinets. The OP will take the necessary action on irregularities in the COA reports.

Free and honest elections

I will ensure free, honest and orderly elections.

  • I will release the Mayuga Report to make public the findings on the role of the military in the controversial 2004 elections.
  • On the next ARMM election in 2011, I will install measures that will hold paramount the will of the people of ARMM. The military and the police will remain strictly politically neutral. They will ensure that the election is clean, orderly and peaceful.

Development

Infrastructure

To transform Mindanao into modern agricultural center and the nation’s food basket.

I will address infrastructure gap in farm to market roads, irrigation and post harvest facilities.

Corollary to this, to substantially reduce post-harvest losses, post-harvest facilities will be provided to Mindanao corn, coconut and rice farmers while processing facilities will be made available to coastal fishers and aquaculturists.

Additional irrigated farms will raise cropping intensity and hence productivity contributing in the process to the attainment of the goal of self-sufficiency for specific commodities and bolstering export-competitiveness for others.

  • During my term, I will improve its total road network by bringing its current paved road ratio closer to the national average. This will lower transport costs and post-harvest losses.
  • Corn driers will be priority of DA under my watch. Every 1,000 hectares of corn land will be serviced by at least 1 corn drier.
  • Irrigation coverage will be expanded. Mindanao has about 700,000 hectares of farms that need irrigation. We will expand irrigation facilities to service half of the area by the end of my term, subject to sound cost-benefit analysis.

Public Investment

In areas of Mindanao where private investors are hesitant to invest due to high risk and uncertainty, my administration will establish state enterprises that will partner with potential private investors or extend guarantees to them to spread the risks. The purpose is to generate investments in these areas as a way of jump-starting economic activities and providing employment opportunities so direly needed in these communities. This will be the government’s direct assault on breaking the vicious cycle of lack of jobs, resulting to greater poverty, in turn partly fuelling the conflict, leading to lack of investments and lack of jobs.

  • Among my priority will be government investment in the development of the Halal Industry. This, first and foremost, will answer the essential need of Filipino Muslims for access to food and non-food products that is consistent with their faith. This will also enable local producers, Muslims and non-Muslims, to partake of the multi-billion dollar world halal market.
  • I will encourage investments in our energy sector to tap more diverse sources of power and lower the cost of energy in the long term. In the short term, I will support moves to mitigate the effects of the power crisis such as:
    • Leasing power barges
    • Contracting additional generating capacity through cooperatives and private utilities
    • Allowing the National Grid Corporation of the Philippines to use ancillary services such as the contracting of back-up generating capacity
    • Promoting demand side management

[Archived from the official campaign web site of President Benigno S. “Noynoy” Aquino III]

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