common law

The Tyrrany of Cousins

Altruism towards other people of the same blood-line is widely practiced and literally embedded in our DNA. The Hamilton Rule named after the British evolutionary biologist William Hamilton states that we are pre-disposed to behave altruistically to those with with whom we share a greater proportion of genes. This biological imperative to pass on our genetic code to the next generation is quite powerful.

Hunter gatherer societies tended to exhibit a high degree of inter-locking marriages based on kinship. Alliances between tribes were sealed through bridal exchange allowing genes to be distributed across a wider area. This had implications for early rulers and states. As agricultural societies gew within a defined space, its rulers found it more and more difficult to govern independently sufferering what is called the “tyranny of cousins” which puts the needs of the tribe above the rest.

China is credited with forming the first modern state to address this problem. The Qin and Han dynasties (221 BCE-220 CE) instituted a civil service staffed based on a rigorous examinations process. It was tasked with raising taxes used to secure the populace against enemy invasion or domestic exploitation as distinct from local lords who extracted rents from their serfs. China’s political history from then on can be told on the basis of how this tension arose between the state and elite families. Following a few “bad emperors” it eventually succumbed to repatrimonialization.

Medieval Islamic rulers sought to counteract tribal rivalry by erecting a warrior caste made up of slaves. The Mamluk slave warriors and their Ottoman Janissary counterparts were responsible for the administration and protection of Islamic civilization because they acted as a coherent ruling class looking after the broader interests of society and not any one particular tribe. Just as in China, however, the integrity of this institution began to erode over time.

Altruism based on reciprocal relationships rather than kinship played an active role in the modernization of East Asia. The Japanese keiretsus were organized on the basis of inter-locking boards led by former bureaucrats who were parachuted into senior executive positions. Korean chaebols had a reciprocal relationship with state finance and grew into large corporate family-owned entities with high debt-equity ratios. The management style of these conglomerates was based on consensus between parties. Life-time employment was the norm.

In communist China, investors partnered with local Township and Village Enterprises to gain access and participation in China’s economy. Going to bed with local governments protected assets from expropriation for as long as they continued to reciprocate with profitable performance. There was no formal recognition of property rights or an independent judiciary to enforce contracts, just a tacit agreement based on reciprocity and credible commitment based on mutual interest.

Guanxi a term denoting close networks has been behind informal credit markets supplying start-up capital to Chinese entrepreneurs the world over. Again, no formal agreements eforceable through the courts operates here. Trade and credit has been made possible through closely linked networks built on family and kin relations or reciprocal relationships based on one’s honor and reputation.

From trust to contracts

The West took a very different more protracted route. After the conversion of Germanic tribes to Christianity in the sixth century, the church promoted changes to interlocking marriages based on kinship. This tended to weaken in the long-run political and economic ties based on kin selection. They moved away from trust to contracts through the centuries.

In the twelfth century the English common law administered by the king’s court to which subjects could appeal the decisions of local lords established a system known as “the rule of law” to which eventually even the monarch was made subject by the nobles who feared expropriation by the state. Contracts became enforceable and property rights made more secure without the need for personal connections or networks.

Across the English Channel, the Dutch established the first stock exchange in the early seventeenth century. This made corporate management distinct from its owners and spread risk through tradable certificates lowering their average exposure and leading firms (such as the Dutch East India Company) to be less conservative in business expansion. Capital-raising went through an impersonal market rather than through personal networks.

Management in the West tended to be more individualistic than consensual motivated by incentives rather than trust. Short-term, risk-taking behavior leading to rich rewards and bonuses became more prevalent. Maintaining reputation continued to be important, but only in terms of improving one’s value in the impersonal labor market rather than protecting one’s “word of honor” within a tightly knit community.

Where to begin?

The Philippines is obviously stuck in transition. Many formal institutions have been transplanted from the West, but they remain weak and porous to the tyranny of cousins. It has been difficult for a strong central state to emerge where one’s loyalty to the country ends where one’s loyalty to one’s family begins. The thick network of kumpadres, kamag-anak, and kaibigan (now augmented by kaklase, kabarkada and kabarilan) makes it difficulty to determine where to even begin the reform process.

Getting to Denmark” is the problem to be grappled with: how to emulate Scandinavia which has the highest levels of human development and cleanest governments in the world. It almost sounds tautological. In order to gain the living standards of the West, we need to adopt their political and economic institutions including a strong state, rule of law and democratic accountability. If our society had the means to create and maintain such institutions, it wouldn’t be poor to begin with.

Earlier in a separate post, I commented on the preponderance of avowed bachelors or males with no offspring holding sensitive posts in the current government, the president being one of them. This harks back to the time of Mamluks, Jannisaries and Imperial Chinese eunuchs. This is purely coincidental and fleeting in the broad scheme of things.

Prescribing Western-style political institutions again might have its pitfalls. Public finance of parties does not necessarily weaken the influence of campaign donors even in the US where it is practiced. It might dampen but not eliminate it. And, at any rate, the need for donors features more at the national level. At the local level, political and economic dynasties are one and the same.

A majority of seats in Congress is dominated by dynasties including within the president’s Liberal Party (albeit by a smaller majority). Rather than decoupling the political from the economic classes or dismantling dynasties, shouldn’t we like Japan, Korea and Taiwan find a way to make this coupling work for our country by directing it to more productive ventures?

Yes, we can

The problem is not reform incapacity by our leaders. I would argue that under Mrs Aquino, the state exhibited a considerable degree of efficacy in achieving substantial economic reforms under difficult situations. From tax reform to foreign investments deregulation, flexible currency exchange to trade liberalization, wage decentralization to monetary independence, privatization to democratization, the list is quite impressive from a Western perspective.

The problem was that the agenda was perhaps too comprehensive instead of building one reform on the proven success of another. We shouldn’t blame Mrs Aquino for this. Her government was put in an institutional strait jacket by the IMF which today is imposing a heavy burden on some weak European countries. What EDSA-I demonstrated is that the country can achieve a consensus over a broad set of reforms and pursue it diligently.

The difficulty of governing in the shadow of one so revered as Mrs Aquino is much like the dilemma faced by the successor to Apple’s visionary CEO Steve Jobs. His mission now is not to “stuff up” the legacy. The overly cautious approach this breeds could prevent the sort of imaginative thinking that led to success in the first place.

East Asia didn’t buy into the comprehensive reform package that international donors, aid agencies and multilateral organizations were foisting on them. It opted to target areas that were more appropriate for its needs and developed its own recipe based on local ingredients. It caught up with Western living standards and then reformed some of its earlier idiosyncratic institutions which had by then become less useful.

Rather than applying the “second generation” reforms of the augmented Washington Consensus, following the “first generation” reforms tackled by Aquino I, the policymakers in advising Aquino II need to escape the poverty of ideas this represents. They should develop imaginative arrangements that will immediately unlock the productive capacity of our country. Only then can the son escape another sort of tyranny that seems to be afflicting us…the tyranny of low expectations.

Guanxi diagram courtesy of: China Australia consult

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.