cronyism

The National Development Project, part 2: Re-defining Good Governance

This is a continuation of Part 1: The National Development Project.

Governance is the cornerstone of the Aquino presidency, and this point is brought out by his development plan. Since Public-Private Partnerships which is the Plan’s centerpiece has been around since the mid-80s under the name Build-Operate-Transfer, better governance of them will provide the only new impetus to growth.

The question now becomes what sort of governance model best suits this strategy?

Peter Evans in an essay entitled Transferrable Lessons? Re-examining Institutional Pre-requisites of East Asian Economic Policies states that there are three alternative models of good governance. He describes them as:

  • The ‘market-friendly model’, best exemplified by the World Bank’s [1993] East Asian Miracle report, which focuses on ‘getting the fundamentals right’. In this model, “government must preserve macroeconomic stability and provide ‘rules of the game’ that are transparent and predictable.”
  • The ‘industrial policy’ model, which is best epitomised by Chalmers Johnson’s classic [1982] study of MITI (Ministry of International Trade and Industry), more demands are placed on economic policy makers…Policies nurturing the general macroeconomic environment must be complemented by “industry-specific policies that push setors most worth pursuing and shift capital out of sectors with declining returns and weak growth prospects.”
  • The ‘profit-investment nexus’ model [Akyuz and Gore, 1996] which shares with the ‘industry policy model’ the idea that policy must do more than simply provide a facilitative macroeconomic environement, but is not as demanding of industry-specific policies. Policies must simply increase the overall level of investment and not necessarily foster certain “sunrise” industries.

The relevant part of the Plan that describes the administration’s governance model is Chapter 7: Good Governance and the Rule of Law. From the elements and the tone of the text, it sounds like that the Plan is using the ‘market-friendly’ model with its four-pronged strategy of eliminating red-tape, pursuing anti-corruption, increasing citizen participation and accountability.

Ensuring a minimum level of probity is consistent with all three models of governance. As Evans states “if developing countries…could achieve the levels of bureaucratic capacity entailed in the ‘market friendly’ model, the additional capacity implied by other models would be institutionally within reach.

That should not be taken to mean though that emulating East Asia requires incorruptible super bureaucrats able to “out-manage their private counterparts from a distance.” As Evans explains,

Minimal norms of probity and competence need to be applied on a general basis, but East Asian reformers did not attempt to transform every ministry. Radical changes were reserved for key economic agancies; routinized behavour and surprisingly high levels of clientelism were allowed to persist in those considered less crucial to the national development project.

If there is any positive thing the economic rationalist theory has contributed to our understanding of governance, it has been the couching of rent-seeking in non-pejorative (or moralistic) terms, according to Evans. Rent-seeking which can take the form of lobbying or corruption is merely a form of profit-maximization on the part of rational agents.

When Mrs Arroyo in an interview at the start of her administration said for instance, that as an economist, she understood that markets did not operate in a ‘frictionless’ environment, she was acknowledging the need for transactions costs. Clientelism is sometimes needed by reformists to ‘payoff’ or compensate those hurt by reforms.

The East Asian countries did not try to reform the entire bureaucracy or weed out rent-seeking in one swoop. They took a different approach:

  • In Japan, the Ministry of International Trade and Industry performed the reformist role, while the Ministry of Agriculture continued to operate along clientelistic lines.
  • In Korea, a bifurcated bureaucracy existed, with the Economic Planning Board taking the helm of development while Construction followed along paternalistic lines.
  • In Taiwan the ruling Kuomintang Party ensured meritocratic appointments to key economic agencies while allowing a “back door” entry for retired military and party members to other parts of the civil service.
  • The pervasiveness of the Confucian ‘super bureaucrats’ in East Asia is a myth save for Singapore where civil servants are paid more than their private sector counterparts.

The Plan seeks to renovate the entire bureaucracy all at the same time. A very noble and ambitious goal, but it is difficult to imagine how this will be achieved given its meager resources and the quality of the civil service pool. This strategy is fraught with risk. Perhaps the biggest risk involves spreading the reform effort too thinly.

Avoiding Capture

A coherent economic bureaucracy was deemed necessary for the state to engage with but avoid capture by increasingly more powerful and wealthy private interests.

Initial conditions fostered the formation of this sort of governance model, namely, an egalitarian society, which was the result of land reform sponsored by the Americans after the War and the external policy environment that allowed market distorting industry and currency policy which was made possible by the US Cold War strategy of propping up capitalist states in the region.

The unlikelihood of duplicating such initial conditions is what causes pessimism with regard to the national development project for late bloomers like the Philippines. Yet, Evans encourages us to resist the fatalism of this view by saying

(w)hat puts East Asian practices out of reach is less likely to be external compulsion than antiipatory acquiescence by developing country governments to perceived constraints.

The rapid growth of China most recently proves that despite its signing up to the World Trade Organization, it has managed to resist measures to prevent it from exercising some of the tools under the industry and profit-nexus models. Singapore demonstrates in fact how the tools have evolved to more sophisticated measures that no longer involve the strong arm tactics applied elsewhere.

The more difficult problem has to do with large inequalities. While concentration of wealth should not necessarily hinder but in fact aid the formation of capital in productive areas, large inequalities have a corrosive function in the policy process.

State capture is what prevented the Philippines in the 1950s and 60s from following a similar path as its neighbors in the region although Malaysia and Singapore managed to avoid this despite having similar disparities among social groups. Here again is what Evans has to say

Entrenched inequality undercuts legitimacy of state autonomy…makes it hard for governments to credibly claim that they represent a national development project. Populist clientelism seems to offer at least a temporary relief to the excluded and close government-business ties which look more like a conspiracy for redistribution upwards than a joint project of national development.

It sounds like he is describing what happened to the country when it opted for a populist clientelist president in the person of Joseph Estrada. The perception was that growth under the elites was only favoring the rich.

Charting a new path

This brings us back to the questions of nepotism and cronyism that have started to emerge even in PNoy’s first year. In a country where only a small group of ruling elites hold much sway over the economy, it becomes difficult to prevent such rumors from floating.

If sanitizing all state agencies from clientelist practices can be ruled out (at least on the ground, despite its being paid lip service), the need to ring fence private rent seeking interest groups from crucial economic policies and infrastructure projects needs to be guaranteed.

That means boosting the capacity of the economic bureaucracy. The Plan which is the first one under the post-IMF oversight period, fails to break out of ‘perceived constraints’ by not examining other more effective governance models.

It remains wedded to the old generic formula of macroeconomic stability, open markets and establishing rule of law which has failed to produce results in places where it has been attempted, namely in Latin America and Sub-Saharan Africa. The challenge now is convincing the policy elite to chart a different path.

To be concluded…go to Part 3: Renovating the Bureaucracy