BeST Consensus

The Binary World of James Robinson: a rebuttal to Why Nations Fail

He came at the invitation of the Angara Centre for Law and Economics to present his ideas from the book Why Nations Fail which he co-authored with Daron Acemoglu. This pair along with Simon Johnson had originally published back in 2001 an article in the American Economic Review entitled The Colonial Origins of Comparative Development: An Empirical Investigation.

Their book could be seen as an essay expounding on the themes uncovered by their earlier research which credits economic development to the institution-building conducted during the colonial era between the fifteenth and nineteenth centuries. It begins by drawing our attention to the differences between Nogales, Arizona and Nogales, Sonora, towns on opposite sides of the US-Mexican border.

The basic thesis of the book is that nations with institutions that promote greater inclusion in both political and economic spheres prosper while those that foster extractive or predatory policies wind up becoming impoverished and backward. The seminal moment in history, according to the book, happened in England back in 1688 during the Glorious Revolution.

For those not familiar with this event, I provide a brief background here. The basic argument goes a little like this: security of ownership and property rights is essential to investor certainty; investor certainty is needed to foster capital markets, and a set of political checks and balances that guarantee this is best suited for capitalism to flourish.

These principles were essentially what The Glorious Revolution was supposedly fought on and why the Industrial Revolution subsequently took place first in Britain, rather than in Continental Europe. The rights and ideals that Englishmen fought for were transplanted to their American colonies and became the basis for the American declaration of Independence in 1776.

Acemoglu, Johnson and Robinson (AJR) sought to prove empirically that institutions mattered to development. Previously, it was argued that climate and geography had a lot to do with it, i.e. that the industrious, temperate, northern states of Europe were more prosperous than the sluggish states in the southern Mediterranean and the tropics.

AJR sought to dispel this using colonial history. Why was it that not all colonised countries developed along the path of the United States? The difference lay in institutions. Their article demonstrated that in places where diseases led to high mortality rates among early European settlers, and where consequently hardly any permanent settlements were planted, centuries later, the lack of institutional legacy was found to be significantly correlated with low development.

The main lesson was that geography was not destiny, and that even history was not destiny. Less developed nations could begin adopting the institutions that promoted greater inclusiveness and discard extractive policies that left them in squalor. This dove-tailed with the agenda promoted by Washington on good governance, as it searched for a way to rescue the failed Washington Consensus from repudiation.

What came about was the augmented consensus that said free markets and good governance promote economic growth and development. After decades of telling less developed countries to shrink the role and capacity of the state and let markets rip, they were now saying that government needed to be strengthened once again.

The liberal democratic states of the West act as an ideal to which other societies need to aspire to. No other path leads to sustainable economic growth other than this. Just as Calvinist preachers of old would proclaim that no one cometh to the Father, but by His Son, these economists present a case that no other path leads to economic Nirvana, but through the Market (with Institutions performing the role of the Holy Ghost).

This rather binary view of the world is actually contradicted if you go deeper into the colonial history of the Americas which is what John H. Elliott did in Empires of the Atlantic World: Britain and Spain in America 1492 to 1830.

Here he wrote that it was actually the exclusionary racial policies fostered by the English settlers that led to greater social cohesion among settlers around Enlightenment principles of individual rights and liberties, which in turn led to greater independence and prosperity.

Meanwhile in the Southern hemisphere, the Spanish settlers had an “organic conception of a divinely ordained society dedicated to the achievement of the common good” which was “more inclusive rather than exclusive in approach”. The granting of rights both economic and political to natives consisting of mestizos, creoles and freed slaves led to a mixed-race society prone to greater divisions than existed in the North.

The irony here is that a more inclusive colonial policy led to greater exclusivity as subsequent societies were stratified and organised into “pigmentocracies” which made it harder to achieve the egalitarian principles espoused by the Enlightenment. In the Philippines, the outpost of New Spain, the situation was worse in that apart from developing this multi-racial caste-like system, the facility of a common language was not provided as it was in the Americas.

This is the difficulty of using colonial history to prove or disprove that institutions matter in the way attempted by the authors of Why Nations Fail. They do matter, but in different ways, which is the point I highlighted previously in this column (see here).

Secondly, there is the anomaly of the benign dictators of East Asia and the desarollista states of Latin America. Robinson has taken the view that the East Asian growth formula, what is termed the BeST Consensus (BeST consisting of Beijing, Seoul and Tokyo), represent a unique moment in history that cannot really be duplicated or sustained.

Peter Evans disputes this saying that just because the East Asian miracle emerged from a unique blend created by the Cold War policy of the United States, it does not mean that we cannot distil a few basic principles and emulate them today. Just because these states were predominantly autocratic does not mean that weak democratic states cannot adopt the policies that made them succeed in fostering rapid industrialisation (see here for a deeper discussion).

What’s more is that both Germany and the United States, late industrialising Western nations after Britain and France, followed the same industrial policies a century earlier. It was just that after scaling the development wall, they felt the need to “kick the ladder” away to prevent others from following them up because not doing so would disadvantage them.

In Latin America, the record of developmental or desarrollista states of the 1970s and 1980s in Brazil and Mexico is more spotty than in Chile but nonetheless more successful than in Africa or South Asia as these countries made their way into middle income status ahead of countries like Malaysia, Indonesia and Thailand. This is the evidence that Robinson conveniently sidesteps.

Another point James Robinson makes in the book and in interviews is that collective action, which he equates to people power, is key to expanding opportunity for people if the system is closed. He cites the experience of the Philippines and of the Middle East a la Arab Spring to underscore his point. Again, the use of people power is problematic. Why?

Well as Elliott points out, people power features in Spanish colonial traditions as well because

(b)y the laws of medieval Castile the community could, in certain circumstances, take collective action against a ‘tyrannical’ monarch or minister.

Cortes in fact used this against governor Velasquez who ordered him to survey and not to invade the territory of Montezuma in the Yucatan peninsula. It was based on the notion of a social contract between the prince and his subjects which if broken gave the right of the governed to say, “I obey, but I do not comply” (se obedece pero no se cumple).

From time to time, commoners or comuneros resorted to acts of dissent bordering on revolution. But these were simply seen as a way to get the authorities to the bargaining table. Once their grievances were heard and the tyrannical laws or ministers were replaced, they would go back to living as loyal subjects of the monarch. Direct democracy rather than representative democracy ruled until very late in the piece, which left them with very little in terms of a genuine parliamentary tradition.

This swinging of the pendulum from uprising to dictatorship and then back again is exactly what we are witnessing in Egypt today. The problem with equating collective action, i.e. people power, with greater openness, is that the relationship does not always hold.

Finally, let me address the fallacy that only the Anglo-American form of capitalism works well. Francis Fukuyama is right to point out that this is not the only successful Western model that exists. Scandinavia demonstrated another path, which did not require revolts against oppressive monarchs. Theirs was more along the lines of an enlightened, benevolent monarch based on egalitarian religious rather than secular beliefs.

What I hope to point out through this discussion is that the world that we live in is more complex, more multifaceted than what Robinson tries to portray. While it is easy for him to be parachuted into the Philippines to spread his brand of institutional economics, we don’t necessarily have to buy into his whole message.

I agree that the Philippines needs greater openness and participation in political and the economic life, and that collective action to widen the sphere of participation probably needs to be organised, because elites won’t surrender their privileges willingly, but that is as far as I would go.

We don’t need a whole theory based on a faulty or perhaps selective reading of history to back this up. We have seen how people power can be hijacked or used for narrow political ends. We need to guard ourselves against simplistic arguments that say unseating this corrupt ruler here or that autocrat there is going to bring about nirvana for us. Institution-building is not accomplished by this alone, but through a sustained, deliberate, evolutionary process.

The social innovation of Oportunidades and Bolsa Familia more widely known as conditional cash transfers which have been credited with reducing poverty in Mexico and Brazil were not developed by the World Bank or the IMF.

They were experiments conceived by indigenous policy makers who were thinking ‘outside the box’. The East Asian industrial policies responsible for creating economic prosperity and convergence were pursued against the advice of international economists from the IMF and the West. Japan’s Ministry of International Trade and Industry sought to deceive their Western minders that they were complying when in fact they were doing their own thing.

Similarly if the Philippines were to find its way in the world, it will have to be by taking into account its own unique blend of ideas, capacities and institutions. It won’t be by applying some universal one size fits all formula promoted by a Western economist armed with some statistical regressions, a few case studies and a loose reading of history.

Since the era of Martial Law we have had technocrats sing from the same hymn sheet as their Western counterparts while ironically supporting a system that undermined the very principles they were espousing. We need to be smarter and wiser this time around.

We need to accept that the world is not a binary system, comprised of dummy variables that say you are either inclusive or exclusive, free or unfree, open or closed. We need to admit that we live in a multi-polar world, where things are not as clear cut, as some experts would have us believe, and that many paths lead to development. Ours in fact still needs to be found.

Is the Good Governance path a dead end?

Is the “markets plus good governance” formula indeed the enlightened way to economic Nirvana that its adherents say it is?

Warning: I am following Paul Krugman’s tradition of labeling some of my posts ‘a bit wonkish’. Some of the succeeding material might be a bit taxing, but for those who persevere, the results can be quite rewarding.

The Fork in the Road

During his first state of the nation address, President Noynoy Aquino or PNoy told us that the country faced a fork in the road. On the one hand was the destructive path of evil tread by the Inglorious Beast, on the other was the righteous path of good governance that he the Benign One would lead us down.

Nearly one year on and it seems the righteous path is headed nowhere with allegations of BFFism floating around, corruption and smuggling continuing unabated, and a government that cannot seem to spend its own lean budget in a timely manner.

Despite these setbacks, the Palace continues to put up a brave face. PNoy after all has become the new poster boy for Washington’s policy consensus having been endowed with a grant by the US Milennium Challenge Corporation to pursue its Milennium Development Goals to halve poverty.

This follows the Philippines belated exit from the IMF emergency loan program. The ADB for its part turned on the tap by partly financing the expansion of the Conditional Cash Transfers program, the government’s flagship project for ending poverty. Meanwhile private investments were being sought to fund the government’s public infrastructure program.

The present seems to echo the 1950s and 60s when the country was held in such high esteem by international donors during the last “big push” towards development. We can of course see what that era of donor dependency produced when it culiminated with Ferdinand Marcos’s debt driven boom and crash of the 1970s and 80s.

The Righteous Path

The 1990s saw the rise of economic fundamentalism among policy circles the world over. The precepts of this view bordered on religious zeal. The high priests and prophets of this pseudo-religion proclaimed that there was but one model, the Market.

All those on the path to the Promised Land had to be guided by the Invisible Hand of the Market. Thou shalt have no other models before me was the first commandment. The Philippines under the yolk of the IMF had to follow these strictures. We soon found that the Market could be very exacting and vengeful. Many of the vulnerable, “uncompetitive” and at risk sectors would fall by the way-side and suffer from its discipline.

Despite all the pain that followed from swallowing this bitter pill, the economy did not grow sufficiently fast enough to deliver our people from the clutches of poverty. Why our leaders cried, has the Market abandoned us? We found more and more of our countrymen being led into exile, into servitude abroad. Where have we fallen short? they asked.

Then from on high came the answer.

In the 2000’s, a new covenant was sealed. We were now told that we needed an intercessor to mediate on our behalf. That Intercessor was called Institutions. For the magic of the Market to come into our lives, we needed to repent of our evil ways and follow the path of Good Governance. To convince us, the apostles of the new covenant showed us this sign (click to zoom):

From the pages of the IMF’s journal Finance and Development, Kaufmann and Kraay sought to demonstrate that good governance is the path through which all nations need to pass to get to economic salvation. It shows by implication that countries which have adopted Western standards of governance flourish economically, and countries that have shunned them tend to have floundered.

Indeed though it sounds tautological the very simple and coherent nature of this message, a message that puts it all on our ability to be born again to a re-awakened sense of right and wrong, has enamored most of our elders in the political and business community. Even Mrs Arroyo claimed to tread on this path, but she had stumbled along the way. In 2010, Mr Aquino pledged to bring us back on it.

We would soon be joining the rich club with his slogans like Kung walang corrupt, walang mahirap (no corruption, no poverty) and Daang matuwid (the Righteous Path). PNoy was singing from the same hymn book of the new Washington Consensus (Markets + Institutions = Economic Nirvana).

The real Fork in the Road

The development experts, who had once written us off, welcomed us back in the fold like a Prodigal Son. In his first year in office, PNoy relaxed on spending thinking that we had already been saved and that through the grace of the Market we would soon be rolling in the clouds along with our richer ASEAN neighbors who had already passed on to the other side.

Such a seductive world view, with everything tidily falling into place–that is until you consider the Inconvenient Truth from the real world. It turns out that things don’t necessarily follow according to the message. Take a look at this contradicting sign courtesy of Mushtaq Khan from the UNCTAD’s Discussion Papers (the UNCTAD being the IMF’s poorer cousin).

It draws on a similar data set that Kaufmann and Kraay used covering indicators of good governance and economic well-being from the 1990s predominantly. We find that countries can actually be grouped into three: the rich ones (circled in the upper right-hand corner), the poor ones (circled in the bottom left-hand corner), and the ‘convergence club’ countries (circled in the upper left-hand corner).

From the chart we can see that the members of the converging economies (on the upper left-hand corner) advanced economically first before improving institutionally. In fact the convergence club performed on average just as poorly on the corruption scale as the diverging economies (on the lower left-hand corner).

(Update: Although the regression line is upward sloping, indicating a positive correlation between anti-corruption and economic growth, an analysis of the three clusters of countries comprised of rich, poor and convergence club members reveals the direction of causality to flow from growth to control of corruption, not the other way around)

Indeed if we examine the economic histories of the convergence club members, we will find that they did not adhere strictly to the ‘righteous path’ of Markets plus Institutions. Japan, Korea and China developed not by relying on the Invisible Hand of the Market alone, but by wielding the Visible Boot of the State to coordinate, reward and punish industry players in accordance with their rational industrial policies.

Instead of relying on impersonal contracts under the Market framework, they used informal contracting under different guises, the keiretsus, chaebols and guanxi, to create secure property and contract rights to protect investors in strategic sectors within their economies. These institutions did not come from Western capitalism but were home grown. Indeed the alternative of implementing Western-style rule of law throughout the system would have been beyond their reach at the time they were emerging.

Chalmers Johnson who documented the rise of industrial policy in Japan by studying MITI the lead agency of its industrialization, wrote that

(a) part of the MITI perspective is impatience with the Anglo-American doctrine of economic competition. After the war MITI had to reconcile itself to the occupation-fostered market system in Japan, but it has always been hostile to American-style price competition and anti-trust legislation. Sahashi likes to quote Schumpeter to the effect that the competition that really counts in the capitalist system is not measured by profit margins but by the development of new commodities, new technologies, new sources of supply, and new types of organizations.

What this points to is the fact that rather than the fork in the road being a choice between the Righteous Path of good governance versus bad governance, the decision we are faced with is whether we continue down the same old road of the (new) Washington Consensus or change course and move more towards the BeST Consensus (Beijing, Seoul and Tokyo Consensus) bearing in mind that no other country has successfully traveled down the path of the former into the promised land.

A wake-up call

So is the good governance path a dead end? If we are to look at economic history, the answer seems to be a resounding YES. Unfortunately, the tribe of PNoy seems to have fallen head over heels for it. They will not accept any deviation from this course. The eunuchs and high priests surrounding him are all advising their leader to stick to their teachings.

Who can blame them? The gospel they have accepted is a truly seductive one. It does not require us doing our homework, building home grown institutions consistent with channeling resources into more producitive activities. It fits with our fatalistic, religious upbringing to rely on someone or something external to deliver us from evil.

The results of the alternative path trodden by the convergence club are evident for anyone to see. Singapore, Malaysia, Thailand and even Indonesia are heading down that road. The Philippines needs to wake-up to this reality. It needs to gain “a re-awakened sense” alright, not of right and wrong, but of self-empowerment and self-determination. That is the very essence of people power after all.

BFFs, NO! Developmental State, YES!

For all its talk of good governance and economic reform, PNoy’s government seems to be struggling at both. It needs a circuit breaker to change its current trajectory.

Last week, two surprise announcements were made. Well perhaps one was a surprise, the other was to be expected, but shocked a lot of people nonetheless. The first had to do with the resignation of Jose “Ping” De Jesus as secretary of the DOTC (Transport and Communications). The second was the less than stellar growth rate recorded in the first quarter of the year of 4.9%.

According to “Mareng Winnie” Monsod, Ping De Jesus her former colleague in Cory Aquino’s cabinet resigned due to his distaste for the shenanigans of his assistant secretary, Virgie Torres, a political appointee and shooting buddy of the Benign One himself. It appears that Mrs Torres who was already on the nose for two scandals involving her alleged abuse of authority was causing interference in the way Sec De Jesus wanted to run things at the department.

What’s more is that the DOJ Sec Leila De Lima, another highly esteemed member of PNoy’s cabinet had recommended suspension for Mrs Torres pending investigation of her latest infringement. What broke the proverbial camel’s back for Sec De Jesus, was PNoy’s decision to just ask Torres to go on leave for awhile, disregarding the DOJ’s recommendation.

A pattern emerges

This case mirrors the treatment of Sec Jesse Robredo, a highly decorated public official. In that instance another shooting buddy of PNoy in the person of Ricardo Puno was appointed undersecretary and was preventing Robredo from running the agency effectively. Despite the Luneta debacle involving Puno, who again was found liable by the DOJ secretary for mishandling the rescue of hostages, PNoy once again came to the aid of his BFF (best friends forever!).

At some point surmises Mareng Winnie, Robredo and De Lima might follow De Jesus and leave the PNoy administration.

It could not happen at a worse time as the economy seems to be slowing as a result of government underspending by a magnitude of 70 billion or three and a half conditional cash transfer programs in the first quarter alone. This according to the nation’s chief statistician NSCB Sec Gen Virola dragged the growth of the economy down from 5.1% supposedly to 4.9% effectively causing the NEDA to rethink its growth forecasts for the year.

Despite the approval given by Congress before the start of the year and the zero based budgeting approach instituted which presumably cleansed the roster of projects of wasteful anomalous spending, the current administration still found itself stumbling at the gate with a review of costings delaying its spend. Senator Ralph Recto a former NEDA director general says, “Use it, or lose it.”

Unfortunately, these two events are just symptomatic of a dysfunctional state and set of institutions that continue to hound the Philippines.

The BFF phenomenon

Ferdie had his cronies. Cory had her kamag-anaks (close relatives or Kamaganak Inc), Eddie had his fellow generals. Erap had his drinking kumpadres, Ate Glo had her husband’s classmates, and Noy has his shooting barkada (update: or Kaibigan Inc as the Inquirer has put it). It’s a BFF phenomenon replicating itself with each successive administration. Despite their rhetorical flourishes, they just can’t help but stick to the same playbook.

What’s the reason for this?

Well it goes to the heart of what institutions are about, which in economic theory is all about reducing transactions costs. Let me break it down for you…

In a nation like the Philippines, where business transactions are lubricated through personal relationships and kinships, using close friends and connections are one way to minimize costs associated with screening and monitoring business contracts, partnerships and joint ventures.

So it is in running a government, the sheer size of it makes it necessary for the one appointing to efficiently select appointees to help him share the burden. So often the shortest possible route to that is appointing BFFs.

The use of personal ties does not always lead to dysfunction. In post-war Japan where the top graduates from the premier law schools were often recruited into the economic bureaucracy, a member of an incoming “cohort” would often rely on school ties to forward his or her career. In fact, companies were wont to recruit graduates from the same universities mainly because of the close connections they had with public servants in these powerful agencies.

Todai Law School, University of Tokyo: has one of the most powerful of school cliques in Japan. Alumni are well-placed in the upper echelons of government, banking and industry.

The term they used for this was gakubatsu or school cliques which are ensconced in the upper echelons not only of government, but banking and industry. Within this batsu, is the Todaibatsu, or the “bastu of all batsus” which refers to alumni of the University of Tokyo Todai Law School, whose education features a heavy dose of public administration, more like political science, and economics.

This mixture of a merit based appointment and school/class based loyalty system enabled these bureaucrats to work cohesively and professionally, which in turn permitted policy to be developed independent of local as well as international pressure or influence, to strengthen economic policy and manage public-private cooperation.

The developmental state model

In his widely celebrated book on the powerful Ministry of Trade and Industry, MITI and the Japanese Miracle, the late Prof Chalmers Johnson outlined how the Japanese bureaucratic model worked

The first element of the model is the existence of a small, inexpensive, but elite bureaucracy staffed by the best managerial talent available in the system…they should be educated in law and economics, but it would be preferrable if they were not professional lawyers or economists, since as a general rule professionals make poor organization men…

The second element of the model is a political system in which the bureaucracy is given sufficient scope to take initiative and operate effectively. This means, concretely, that the legislative and judicial branches of government must be restricted to “safety valve” functions…to intervene in the work of the bureaucracy and to restrain it when it has gone too far…

The third element of the model is the perfection of market-conforming methods of state intervention in the economy. In implementing industrial policy, the state must take care to preserve competition to as high a degree as is compatible with its priorities. This is necessary to avoid the deadening hand of state control and the inevitable inefficiency, loss of incentives, corruption, and bureaucratism that it generates.

The fourth and final element of the model is a pilot organization like MITI. The problem here is to find the mix of powers needed by the pilot agency without either giving it control over so many sectors as to make it all-powerful or so few as to make it ineffective.

What Johnson was describing is basically the East Asian economic model based on the developmental state or the BeST Consensus (BeST stands for Beijing, Seoul and Tokyo). The Commission on Growth and Development in its findings covering the factors that gave rise to rapid and sustainable growth gave a tip of the hat to the fourth element. Its term for this is “reform teams”. According to the report

The business of “feeling for stones” in fast-growing economies was often carried out by highly qualified technocrats in small, dedicated “reform teams”. Singapore had its Economic Development Board, Korea its Economic Planning Board, and Japan its Ministry of Trade and Industry.

Reform teams were not burdened with adminstrative duties, but they were given direct access to the top of the government. Malaysia’s Economic Planning Unit reported directly to the prime minister. Taiwan, China’s…Council for Economic Planning and Development, reported directly to the president. Indeed, several future heads of government sprang from their ranks: the second chairman of the Council later became president of the country.

From this unique position…the reform teams helped coordinate the government’s efforts and overcome administrative opposition and inertia.

Although technocrats unchecked by political forces can fail to balance economic with political and social concerns, political forces unchecked by technocratic knowledge can be disruptive.

In the Philippines, the closest resemblance to a “reform team” is the NEDA which creates the revolving five year medium term plans and screens development projects. The latest roll-out is the Philippine Development Plan 2011-2016.

Unfortunately, while the director general of this agency does sit within cabinet, his stature is often relegated to a planning or “secretariat” function. We also witnessed in the case of Sec Romulo Neri how the clout of the NEDA chief could get superceded by political players and personalities outside of government.

The NEDA in its original design was meant to perform the function that the cabinet cluster under EO#43 sets out to do. Under this over-arching framework, the NEDA’s sole job is to act as secretariat for one of the clusters, on economic development leaving social development, climate change, governance and justice to be handled by other lead agencies.

The Philippine reform experience

If we look at our own track record at performing economic reform, the reform teams have traditionally been held by players close to the president, a Joe Almonte under Mr Ramos or a Joey Salceda under Mrs Arroyo.  Love them or loathe them, the reforming credentials earned by their presidents (whether you agree or disagree with the type of reform is immaterial) can be credited to them and the teams that worked with them.

Following in that tradition, I formed the view that the person best placed for this role would be Mar Roxas, the president’s failed vice presidential running mate. Although EO#43 has been branded a power play on the part of the opposing faction to “cluster out” the incoming chief of staff, I believe that it has the exact opposite effect. A reforming team requires a strategic “helicopter view” of the world.

Had the E.O. pigeonholed the chief of staff like it has the NEDA chief, the occupant would be unable to move out of this administrative strait jacket. Perhaps the strongest suit of Mar is his being a former DTI secretary, which puts him in good stead with the various industry groups and the economic bureaucracy. Given his skill sets, he should be able to drive a number of key reforms across all five cabinet clusters.

It is reported in today’s Inquirer that his rivals within the office of the Executive Secretary want Mar Roxas to take the DOTC secretaryship supposedly to keep him away from the Palace. Given the shambolic state that the administration currently is in, with its rookie student council style of governance, the presence of a veteran like Roxas might help steady the ship and keep it on course.

Conclusion

If the government of the Benign One ever hopes to dig itself out of the rabbit hole it has dug itself in, now is the time to do it. It will have to show its reformist credentials soon. The paternalistic state was one where BFFs thrived. It was compatible with the misplaced faith in “the Market” to deliver its citizens into the promised land of economic prosperity wherein the state played a diminished role.

As inconsistencies between the outcomes of this model and what it predicts has become apparent, perhaps our leaders will realize that the responsibility for charting our own path lies in our hands and not that of foreign aid donors and advisors. Perhaps this “re-awakened sense” of self-determination is the vision lacking in all our plans.

Why all this talk of ‘institutions’ is rubbish

The Philippines is a place where development theories come to die.

This was the case in the 1950s when import substituting industrial policy or ‘picking winners’ was all the rage among development experts. The country was held up as a model of correct development planning and policy. It did not take long for us to prove that there was a flaw in this method which was that infant industries never grow up without a competent and powerful bureaucracy to direct and monitor them.

In the 1960s we flirted with liberalization, but it was a constant battle between the nationalists and internationalists that never seemed to go anywhere. Then in the 1970s the debt fuelled growth bubble came to town. The notion that underdevelopment was caused primarily by a lack of savings or capital would be fixed by borrowing externally. We also decided to emulate our ASEAN neighbors by imposing a more authoritarian model but to no avail.

In the 1980’s the bubble burst, and the country went into a steep recession followed by political upheaval. From the mid-80s we sought to steer away from the cronyism that came with authoritarian rule with varying success. We tried a Western liberal formula of economic stabilization, deregulation and privatization. It seemed to work in Eastern Europe but failed miserably in chaotic Russia. Our own experiment with it tended to emulate the latter.

The 1990s saw a rapid acceleration of trade openess with tarrifs going down faster than our external commitments to the world body, the WTO, required. We began to see more stable growth and saw poverty decline somewhat, but the growth was not fast enough to lift millions out of poverty in contrast to our rapidly developing neighbors in East Asia. These nations adopted a different formula, the BeST consensus (BEST stands for Beijing, Seoul, Taipei) which used a combination of liberalization and government intervention to strengthen their export industries.

In Latin America a resurgence of anti-capitalist regimes in country after country resulted due to the epic failure of neoliberal policies instituted earlier. The Washington elite that had peddled their development theory of open markets began to revise this paradigm. The new Washington Consensus tried to explain its earlier failures by declaring that markets needed the right set of institutions to function properly. Getting institutions right was required for markets to get prices right.

So we went down that road. Since the early 2000’s our business and political leaders have been spouting words like “rule of law”, “good governance” and “property rights” in keeping with the new consensus. It was all talk of course, but despite the fact that we suffered from weak institutions, the economy seemed to grow at a faster clip during the decade just as countries like China and Vietnam seemed to do without adopting Western legal and political institutions.

Where it began

During my undergraduate days at university in the late 80s and early 90s, there was not a single instance that I can recall when an economics professor uttered the word “institution” in class in relation to development. It was only when I entered grad school in the early 2000’s that the topic became vogue.

It became vogue because of “new evidence” that revealed its value. I remember reading “the evidence” found by a group of economists that wherever European explorers had dropped anchor and settled permanent communities on exotic shores, those communities developed into more vibrant economies many decades and centuries later compared to those that did not have that “privilege”.

The assumption made by the authors (who made names for themselves in the field and subsequently advised multilateral institutions like the World Bank) was that where these colonizers settled, they brought with them habits, practices and customs from the old world. These rules or “institutions” persisted even when they departed.

Unfortunately, I do not buy that idea. Let me tell you why:

First of all, there are good habits, and there are bad ones. Take for example Spain and its colonies. Many of the “institutions” exported by the Iberian power have not been supportive of development in the Hispanic world. Many studies have shown that former colonies who inherited the legal system of Spain and France have not progressed as much as those influenced by Anglo-Saxxon common law.

Ok, so you say, well, let us take the case of England. Its former colonies seem to be doing well. Think of the United States, Canada, Australia, Singapore, Malaysia and Hong Kong. Even India which despite languishing economically for decades since independence still managed to keep its railway lines functioning throughout the subcontinent following the habits of the Brits who count on their trains running on time. Doesn’t this prove the thesis, you ask.

Well, that’s my second point. In the case of the British Empire, it was not so much that they brought sound rules and practices with them. It was the fact that the Crown invested heavily in its colonies, nearly as much or even more than it had taken from them. You might take the establishment of a port or a walled city as a proxy for institutions, or you might see them for what they really are–public investment.

Lord Clive the baron who helped establish colonial rule over India and ran the East India Company, the world’s first multinational company put it succinctly, that it was “absurd to give men power, and to require them to live in penury.” The effective governance and riches of former British colonies are due to their willingness to devote an appropriate amount to the public purse.

This leads me to my third point, you cannot expect to have rule of law without the requisite investment. It does not occur out of “a re-awakened sense of right and wrong” or by appointing close relatives and bossom buddies to sensitive posts. We can already see where that is heading as dysfunctionalism within the PNoy Palace has claimed its first major scalp.

Implications

The current thrust of the Aquino government is to bring about Western styled institutions ‘on the cheap’ by not looking at new revenues to boost its capacity to operationalize them. In its first year, it hopes to achieve better governance while simultaneously shrinking the size and capability of the state. Instead of funding its own development by raising revenue, it relies on donor funding from external agencies and foreign governments.

That is fine if you want to wait for manna from heaven, but as the saying goes ‘heaven helps those that help themselves.’ So as a result of the unsustainability of its current model of development, it is faced with three distinct options:

  1. give up on good governance altogether in the short term, focus on growth, and then return to this down the track when it can afford to do so,
  2. go for good governance full throttle but with the accompanying investment (and by implication, raising taxes), or
  3. take a more pragmatic and targeted approach in moving the good governance agenda forward.

What I mean by the third option of using a targeted approach is that it will have to identify the forms of corruption that are tolerable (benign), and others that are not (malignant) and focus on getting rid of the latter. This is where it gets tricky. For those that take a “purist” moralistic stand on the issue and cannot countenance a return to the inglorious ways of the diminutive one, the choices are even more constrained.

So in answer to those that keep spouting words like “good governance” and “rule of law” on the one hand without factoring in the cost and accepting the need for higher taxes on the other, I say “hogwash: either put up, or shut up.” Institutions aren’t built simply out of an altruistic sense or moral revival. They are built with common sense pragmatism. The kind exhibited by Lord Clive all those years ago.

To use the RH debate as an analogy: you cannot expect people to have less children through abstinence alone; government needs to invest in reproductive health to provide better options. Just as in that debate, this one is about our willingness to produce other options aside from relying on “a few good men.”

So until we get our fiscal priorities right, I am afraid that all this talk of building institutions is just plain rubbish.

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