Commission on Growth and Development

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.

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