Benigno Aquino

The President’s speech

Image credit: Eaglenews.ph
Image credit: Eaglenews.ph

In his new year’s address, President Aquino spoke of the urgency to complete his administration’s good governance agenda alluding to the remainder of his term as the “last two minutes”.

Several challenges faced this year were mentioned including the PDAF scandal, severe weather events and the continuing task of providing employment for our people. Achievements to date were the prosecution of cases against corrupt officials implicated in the PDAF scam, signing of the annex to the framework agreement to end conflict in the South, resilient growth in the face of a regional slowdown, and the granting of investment grade status to the Philippines.

The president mentioned the ongoing tasks needing completion before the end of his term, which are eradicating corruption, solving the skills mismatch in labour markets and providing enough employment opportunities, and bringing about a final peace settlement in Mindanao.

Unfortunately, in seeking to play up the positive achievements under his administration, the president may have undermined his own credibility. The president intoned, “because of good governance, we are destroying the last bastions of corruption, and at the same time, creating more opportunities for our countrymen.”

The last bastions of corruption? As evidence of this, the president cited our improvement in Transparency International’s (TI) Corruption Perception Index moving 29 places up from 134th to 105th place out of 177 countries in the ranking. Actually, TI’s 2013 report shows us at equal 94th place along with countries like Djibouti, India, Suriname and Ecuador (see below).


Of course one can argue that the methodology used by TI necessarily makes it vulnerable to criticism based as it is on perceptions of the country, which can be influenced by the “halo effect”. The real proof of the pudding is  in the actual experience of investors when they try to do business in the country. And here a better yardstick comes from the World Bank’s Worldwide Governance Indicators.

Although the World Bank’s findings show the country’s Control of Corruption score in 2012 recovered from its recent lows, it was still at 33 with 100 being the highest possible. This puts us slightly below what we attained in 2005. I doubt that anyone would regard that as a banner year for beating corruption. It doesn’t suggest that we have limited corruption past the historical mean if you look back at the WB’s time series. We are way below our highest score of 55 attained back in 1998.

WB CoC

As far as providing jobs, the president said, “Through the cooperation of DOLE, TESDA, DepEd, CHED, and the private sector, we are finding solutions to the job-skills mismatch. Therefore, it is not surprising that the unemployment rate decreased this year.” This statement can be questioned. While the unemployment rate recorded for October 2013 was 6.5 per cent, lower than the 6.8 per cent in the same month of 2012, the average for 2013 was 7.1 per cent compared to 7.0 per cent in 2012. Also, it is worth noting that the October estimates excluded the province of Leyte.

It is standard practice in dealing with employment figures to use full year averages to smoothen out the volatility of results. While average total employment rose 0.8 per cent to 37.9 million in 2013 up from 37.6 million in 2012, the number of unemployed people also rose by 2.5 per cent to 2.9 million from 2.8 million during this period. This does not suggest that employment conditions improved much in the last year.

It is likewise hard to know what to make of the administrative statistics the president cites with respect to TESDA’s performance. He compares a study performed by the Department of Budget and Management showing that only 28.5 per cent of graduates between 2006 and 2008 found employment after training to a study performed by TESDA in 2012 that showed that this had increased to 62.4 per cent.

We are not told whether the methodologies used by the two agencies in deriving these results were consistent with each other. Was the length of time the same for both studies (the former was for three years, what about the latter)? How long since graduating were the former pupils surveyed in each study? How were respondents sampled? The seemingly vague language used in the president’s statement does not really help clarify the issue.

The seeming lack of rigour in subjecting the president’s statements to analytical scrutiny opens up his message to criticism. If the premise of his argument appears faulty, then the conclusions and policy direction he derives from them could be discredited as well.

For me, the cherry picking of statistics that favours his arguments simply undermines the very thesis that good governance reforms are in fact working to improve things and are close to their culmination. In our pursuit of the straight path, there ought to be no hint of deception or bias in our analysis of the situation. To be fair, I don’t think it is their intention to deceive us. Perhaps it is a case of the spin meisters not seeking help from technical analysts in proofreading the speech.

Finally, what was sorely lacking in the president’s narrative was a cogent strategy and clear policy direction for the remainder of his term. The president again seemed to resort to rhetorical flourishes, rather than spelling out his roadmap. He has left it to commentators to fill in the blanks for him. This is not what we would expect from a president at this stage of his term. Worryingly, the president’s speech has left us with more questions than answers.

Succeeding Aquino

Political succession is the key to long-term economic growth.

The Philippines has been hailed as a rising star among emerging markets in 2013, but sustaining this strong performance will require a good succession plan for the Aquino presidency. Political succession as it turns out has been a crucial driver of long-term economic growth among emerging economies over the past fifty years.

A study conducted by Tim Kelsall for the Overseas Development Institute of Britain comparing the growth experiences of countries in the rapidly growing regions of Southeast Asia and sub-Saharan Africa has found that,

Contrary to currently fashionable ideas about ‘inclusive institutions’ and ‘golden threads’, (we find) that crucial to combining succession with growth is the embedding of policy-making in strong institutions of one of two types: 1) a dominant party with a tradition of consensual decision-making and leadership succession, or 2) a strong, organic bureaucracy, effectively insulated from changes in political leadership.

Sub-Saharan Africa, which today is the fastest growing region in the world, did experience respectable growth rates in the 1960s and 1970s. What prevented this region from sustaining its economic performance in the long-run was the failure of many countries to manage political succession well.

The same could be said of the Philippines. From the 1950s to the 1970s, the country experienced solid economic growth rates averaging between 4.9 to 6.4 per cent (see table below). Of course this was still well below the growth of Malaysia or Singapore, but it was respectable, nonetheless.

Source: NSCB

The 1980s spelled the end of this sustained growth as the Marcos regime, which had been in power since 1964 collapsed. The upheaval began with an international debt crisis and the assassination of Senator Beningo Aquino, Jr in 1983. “Ninoy” as he is popularly known was returning from exile in the United States where he was granted furlough by the regime to undergo heart surgery, after spending close to 8 years in prison. The then leader of the opposition was hoping to convince President Marcos to accept a power-sharing deal that would allow for a smoother transition to democracy.

Unfortunately, due to the ill-health of the former dictator (he was not totally in command of the situation), the conciliatory offer was not taken. Instead, the death of Senator Aquino led to massive street demonstrations and the eventual fall of the Marcos regime. They say that authoritarian governments offer a tradeoff: higher economic growth, in exchange for a higher risk of economic collapse when they fail to manage succession smoothly, and that is exactly what happened.

The 1980s saw a diminution of growth to 1.8 per cent. This was lower than the population growth rate, meaning per capita incomes retreated during this decade. The transition from Ferdinand Marcos to Corazon Aquino was marked by a series of coups, natural disasters and a power crisis. It is clear from the chart above that the Philippines never fully recovered from the trauma of this fall until the 2000s when growth averaged 4.8 per cent, roughly where it was in the 1960s.

Of course, the political transition was not the only factor that influenced economic growth during this period. The country was also making a transition away from protectionist industrial policy towards a more liberal economic position. The former had played into the hands of crony capitalists under the Marcos regime. Much of the debt that was accumulated during this time was illegally siphoned off. That was economically unsustainable.

Political economists Emmanuel De Dios of the UP School of Economics and Jeffrey Williamson of Harvard took a candid look at the possible factors that could have been responsible for us deviating from our upward path since the 1980s. They list the following as possible candidates:

  • political instability at a critical time in the 1980s
  • a subsequent failure to exploit the move of Japanese manufacturing FDI [foreign direct investments] into the region
  • an institutional weakness benign in the pre-1982 past but made more powerful since
  • some liberal policy package that penalized manufacturing when it was already on the ropes
  • emigration surge in the 1980s that stripped the work force of industrial skills
  • some massive Dutch Disease created by subsequent huge emigrant remittances.

They conclude that no single factor determined the outcome, but that all of them may have come together to create a ‘perfect de-industrializing storm’. I tend to agree with their findings although, the originating event is clearly the political instability that occurred as the dictatorship was in its death throes. The fact that Marcos or his party did not have a succession plan to manage a transition locked the country into a path of low growth in the subsequent decades.

Whatever the cause or causes of this, the authors acknowledge that the resulting pattern of growth has been less than ideal:

The path followed has led to a new stable equilibrium where a largely liberalized trade in goods coexists with a recurrent current account surplus built on remittances and strong (skill‐intensive) service‐sector exports. The peso is under steady pressure to rise in real terms, which leaves little room for (lower‐ skill) manufacturing to compete and expand. A considerable rise in the investment rate—still low by East Asian standards—would relieve the current account pressure for real appreciation and create more jobs. But the low investment rate may be part of an equilibrium where capital requirements are low simply because a significant share of the urban labor force is already abroad. [emphasis added]

In the first half of the current Aquino presidency, growth has averaged 5.8 per cent, close to where it was in the 1970s. Severe weather and economic conditions globally are not expected to knock it off its current path. As noted above, the trajectory is due to a combination of income flows from abroad and investments in the modern services sector. This has led to the criticism that it is not broad based.

A number of factors however seem to be lining up that could spell an end to this current “equilibrium”. The first is the slow but gradual demographic transition which could lead to an “economic sweet spot” where labour demand exceeds supply. A debate among technocrats is currently underway as to when exactly we will reach this tipping point. Central bank officials predict this could be as soon as 2016, while the more conservative economic development agency estimates for this to happen in the 2020s. I foreshadowed this debate in a post from two years ago.

The second factor is the gradual build-up of foreign reserves in excess of our external obligations, which is driving up the peso and convincing monetary and fiscal officials to consider setting up a sovereign wealth fund to address the investment gap that is hindering job creation. I have been advocating for this wealth fund as early as 2010.

The third factor is the “systemic vulnerability” from external threats to our national sovereignty and security, particularly from China, which could motivate the development of a national agenda towards building a better, stronger economy, to face these challenges from abroad. The same sense of vulnerability from both external and internal threats was what motivated Japan, Korea, Taiwan, Singapore and Malaysia to forge a national developmental agenda.

The key to all of these factors in producing the desired outcome is the ability of our political system to fashion a solid policy making capability from one of two sources: either through stronger political parties or a professional economic bureaucracy insulated from political interference. The continuity of a sound, stable policy making capacity with the ability to set the national agenda allows for considered, adaptive economic policies despite a number of political successions. This is the crucial element that would ensure sustained, rapid growth in the long-run.

Some further reading:

  1. The new Philippine political architecture: a blueprint for strengthening political parties.
  2. The national development project: Renovating the bureaucracy

 

Pork is the new GMA

The organizers of the Million People March know what they are doing.

They know that for their protest movement to attract the broadest base of support and have the greatest impact, it would have to limit its concerns to as few as possible. This basic insight into the inner workings of interest groups was first highlighted in the Logic of Collective Action, a book by Mancur Olson. Although his findings from the 1960s have recently been weakened by more recent studies, the core of the thesis still holds.

Why do groups like the NRA (National Rifle Association) and the Tea Party movement in the US wield so much power and influence over governments in driving policy debates? It is all due to the specific nature of the issues they have in mind. For the NRA it is the freedom to own guns, for the tea party it is to lower government debt and deficit. The greater the level of specificity, the greater the potency.

Having too long a laundry list of demands and positions would simply cause their adherents to splinter and their message to get diluted or hijacked. This is perhaps what happened to the Occupy movement. While it raged on for a while, the inchoate nature of the protest action and the wide disparity of calls among its adherents eventually caused its energy to dissipate.

That is clearly something that the MPM wants to avoid.For this reason their emphasis on unity and limiting the number of demands to just three–to abolish pork, account for pork, and prosecute pork abusers–is important. That’s it. Just scrap pork. Anything else beyond that is a distraction, as far as they are concerned.

It is not that they don’t see other policy prescriptions as valid. Their statement acknowledges the need for a broader conversation later down the track to determine what would replace pork, but for the time being, people’s attention and energy have to be focused on the single task at hand, which is to rid the national government’s budget of different forms of lump sum, discretionary spending, which is how they have defined pork.

But even with the three points that they have outlined, there apparently was still room for confusion. Shortly after releasing their unity statement, the MPM organisers had to issue a clarification that they were not supporting calls for the president to resign or be impeached over the release of the DAP (Disbursement Acceleration Program), a stimulus package initiated in late-2011, which the Palace had put together from its underspent budgetary allotments earlier in the year.

Because legal and fiscal luminaries had claimed that the DAP had violated provisions of the constitution over how savings could be re-aligned and spent, and because some of it had been channeled to legislators as Priority Development Assistance Funds (aka pork), many had construed the MPM’s earlier remarks as potentially supporting calls for impeaching the president. To prevent its message from being hijacked, the Scrap Pork network had to make it clear that they were not going to use their rally in Makati as a staging ground for ousting Mr Aquino.

The president for his part has tried to lay the blame back on Mrs Arroyo claiming she had raided the Malampaya Fund to the tune of close to one trillion pesos and had directed some of that amount to Ms Janet Napoles, who is now facing charges of plunder for her role in the whole conspiracy. This staggering amount that was allegedly misappropriated, only serves to remind protesters of the potential for fraud and plunder in the future.

This is why the MPM and Scrap Pork Network cannot fathom why the Palace insists on the appropriateness of the DAP and of maintaining budget rules around off-budget funds like that of Malampaya. While the president keeps acting like it is 2005 when the anti-Gloria movement raged, he has to recognise the fact that pork is the new GMA, and that people have moved on and are tired of him blaming her all the time.

If he does not do so, then he risks alienating protesters and losing legitimacy and public trust in his administration. He will be increasingly seen as part of the problem rather than part of the solution. At the moment, the MPM and Scrap Pork network haven’t turned on him, but they could easily do so, especially if new revelations emerge of other questionable dealings. Already, his aunt, Tingting Cojuangco has alleged poll fraud in 2013 that involved military and palace officials with his tacit approval.

Though President Aquino may be trying to draw lines of distinction between him and his predecessor, such allegations are slowly blurring those lines. Though they may later be proven to be unfounded, allegations of fraud have a way of unsettling voters and investors. Just as the country has gained the trifecta of investment status upgrades from the three major credit rating agencies, and when the need to drive deeper reforms is becoming urgent in the final years of his presidency, Malacañang cannot afford to have such destabilising forces at play.

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