developmental state

What the Philippines Can Learn from Rwanda

How has Rwanda managed to overtake many developing nations in the global race for competitiveness and transparency?

Landlocked, under-endowed, war-ravaged, Rwanda a nation of 10.5 million people has faced a number of challenges, not the least of which was the ethnic strife that led to genocide twenty years ago. And yet it in spite of all this, it has managed to regain stability and posted sustained economic growth averaging 7.4 per cent per annum that has led to improved social well-being over the past decade.

As an indication of its progress, Rwanda has successfully undertaken significant reforms in its regulatory environment. Just consider the following:

So how has a country which suffered many years of war and as much corruption as any other impoverished nation in the past, managed to turn things around?

Well the short answer is they did this through an accommodative political settlement and the help of both conventional and unorthodox institutions and economic strategies.

A troubled past

Rwanda has had a long history of ethnic violence between the two main rival tribes.  From pre-colonial times up to 1959, the pastoralist Tutsis were the ascendant political class over the agriculturalist Hutus. Ethnic differences were exaggerated under colonial rule. In the lead up to independence in 1962, Belgian colonists transferred their support to Hutu elites. This led to mass killings of Tutsis many of whom fled the country.

Two Hutu regimes ruled the country from 1961-94. Having a single-party dominate politics for most of this period did not prevent the nation from succumbing to decentralised rent-seeking and clientelist behaviour. A group known as Akazu was at the apex of this system. It was related to but not controlled by the administration.

Tutsis sought to regain control of the country through an invading Rwanda Patriotic Army. This culminated in the genocide of 1994 by retreating Hutus. After consolidating their hold on the country, the Rwanda Patriotic Front (RPF) established a government of national unity incorporating moderate Hutus, one of whom led the country as its president.

A reformist regime

Although a certain amount of political repression in the guise of preventing a return of “ethnic ideology” has occurred, the coalition governments comprised of all legal parties in parliament being proportionately represented in cabinet (the ruling RPF holds no more than fifty per cent of the portfolios) has succeeded in keeping the nation stable. This inclusiveness along with its program of restorative justice known as gacaca has fostered reconciliation and allowed the country to experience improvements in social and human development not previously seen.

The intrusive intervention of government in everyday life at times borders on social engineering as the government has sought to follow the Singaporean model in both economic and social policy implementation. President Paul Kagame (elected in 2003 and then again in 2010) has been labelled the global elite’s favourite strongman for improvements to public service delivery, particularly in health and education.

Departmental line agencies have been managed through an institution of performance contracts known as imihigo which Tim Kelsall describes as “modern performance agreements supported by a significant component of moral pressure and neo-traditional gloss.” This combination of formal scientific management and homegrown practices has permeated down to the grassroots by roping in local officials and civil servants.

On the economic front, Rwanda has applied a hybrid approach to investment promotion. On the one hand, it has adopted policies and institutional arrangements considered best practice by the World Bank’s Doing Business surveys. Responsibility for managing this has been assigned to the Rwanda Development Board (RDB). But this works in parallel with a more activist approach in industrial policy with the RPF’s holding company, Tri-Star Investments getting involved in joint ventures and start-up companies.

The holding company has initiated many successful ventures with demonstration effects for the rest of the economy. Telecoms is one example. When Tri-Star sold part of its stake in Rwandatel in 2007, it got five to ten times its initial investment in the company.

Because profits from Tri-Star that are not ploughed back into its businesses revert to RPF, the party is financially independent. It uses this to fund its political campaigns without having to resort to political donors. Kelsall explains what this does:

The RPF’s financial solvency obviates the need for party officials to engage in election-related corruption, which in turn allows the party to take a very tough line on corruption among its leading supporters and in the bureaucracy.

Apart from Tri-Star the government has also orchestrated the formation of other funds, the Horizon Group belonging to the army, which undertakes socio-economic projects to produce productive enterprises, and the Rwanda Investment Group, a consortium led by domestic and diasporic elite.

The purpose of the second group is to raise capital other than through foreign borrowings to invest in high impact projects of strategic national importance. Without such an interventionist approach, much of the agricultural and industrial transformations currently underway in different sectors of the economy simply would not be happening.

The case of Rwanda demonstrates many similar traits to that of the Northeast Asian developmental states. The RPF led government faced existential threats from the opposition in exile and from a potentially hostile ethnic majority at home just as the South Korean and Taiwanese states did from North Korea and from mainland China. 

These threats have kept the ruling RPF focused on improving social and economic well-being for its citizens to maintain its legitimacy and hold on power. The regime has exercised a capacity for long-range vision and forward planning contained in its Vision 2020 roadmap, free from the influence of rent-seeking, private interests. It has ruthlessly pursued its policies at times through heavy-handed regulations and enforcement of rules.

The low crime, low corruption, low red-tape environment this has fostered was not enough. The RPF has used its clout to address market failures and encourage the adoption of productivity enhancing new technology. Through its holding company and other private-led investment groups that it has brought into being, jobs have been found for talented managers and skilled workers that might have otherwise gone overseas.

The Rwandan experience demonstrates the capacity of poor nations to bring about a system of governance that is relatively competent and free from corruption within a short span of time using home-grown institutions, resources and talent. The extremely harsh and disadvantageous position it faced did not become a hindrance, but rather provided greater incentive for it to go down the road it has followed. Surely, any emerging economy seeking to do the same should take heed the lessons from Rwanda.

Lessons for the Philippines?

The Philippines may have already attained middle income country status, a milestone that Rwanda is still aiming to achieve by 2020, but there are certain elements in Rwanda’s development experience that it can learn from.

  • Financially autonomous political parties:

We have seen how  gaining financial solvency allowed the RPF to govern without fear or favour. This enabled it to take a long-term view in planning and executing its economic development strategy. It enabled it to rule with moral ascendancy and punish erring, corrupt officials, putting an end to the patrimonial, rent-seeking behaviour of its bureaucratic and business elite.

  • Inclusive, participatory governance:

We have already seen how the RPF has shared power with other political parties. The proportion of cabinet appointments follows the same proportion of parties represented in the parliament. In the 2013 elections, an unprecedented 64 per cent of seats were won by women. This is the highest level of female participation in political office anywhere in the world. With this level of representation, laws that uphold women’s rights and promote women’s health and well-being are being enacted.

  • Home-grown solutions:

Although a certain amount of repression of the press and political opposition has taken place, in the guise of preventing ethnic tensions from flaring up once again, such suppression it can be argued would have taken place anyway, given conditions prevailing in Rwanda. Rather than relying on foreign models of governance and economic development, Rwanda has charted its own path. It uses institutions like gacaca and imihigo to bring about restorative justice and better governance.

  • Robust government role:

In promoting economic development, Rwanda didn’t follow the Washington Consensus that simply limits the role of government to creating a level playing field. It followed the example of East Asia, which meant addressing structural issues in its economy through interventionist industrial policy aimed at catalyzing investment in productive sectors in agriculture, industry and services to raise the standard of living of those residing at the base of the socio-economic pyramid. Ironically this has emboldened the private sector to take risks as well, to invest in the future of the country.

  • Political succession.

Many commentators are wondering whether President Kagame intends to step down at the end of his second term in 2017. A third term is constitutionally prohibited. As early as 2012, the ruling party held a conference to tackle the issue of political succession at Kagame’s request. At this early stage, the RPF has begun to look for ways to bring about an orderly succession, but one that does not put in jeopardy the advances made already. It is seeking ways to institutionalise mechanisms for bringing this about.

It would not be right to recommend that the same set of policies be adopted in the Philippines. The message here is that countries need to chart their own developmental path based on the conditions they face. The universal prescriptions of the Washington Consensus are becoming less influential as the balance of economic power shifts to the East. While that may be true, certain key principles can be gleaned from the success of other countries.

Considering the way the RPF developed its Vision 2020, opened up participation of women, included its political opponents in a cabinet that advises the president, and managed the bureaucracy through formal and informal contracts, what changes could the ruling Liberal Party make that would improve the way it governs under President Aquino? More importantly, how could it ensure that the positive changes it makes continue beyond 2016 when he steps down?

Gridlock or greed – a rejoinder

Randy David in his weekly op-ed column for the Inquirer wrote an entry called Between Gridlock and Greed. In it, he constructs a dichotomy between dysfunctional idealism and perverse pragmatism. He writes:

It is difficult to say which is preferable: a party-based politics that sometimes results in governmental gridlock, or a money-based politics that runs smoothly on pork barrel privileges.  America today illustrates the deep-rooted dysfunctions of the former, while the Philippines showcases the perverse pragmatism of the latter.

Prof David’s thesis is that although the gridlock of the US is the price that it has to pay for being a mature democracy, it is still preferable to our situation where the costs of greed in the form of bad policy exceeds the benefits it generates by way of smooth working relationships.

In my view this a false dichotomy. The opposition between gridlock versus greed is in my view not only flawed on the grounds that the United States is a poor example of the former, it is flawed because it assumes that greed or self-interest does not lead to gridlock.

The dysfunctional party-based politics Prof David refers to is the ongoing fight on Capitol Hill over what to do with the government’s fiscal debt and deficits. Tea Party conservatives who comprise the budget hawks, were unyielding to both Democrats and fellow Republicans and forced a temporary shutdown of services by the US government.

In the weeks leading up to the government shutdown, Speaker Boehner was put in an embarrassing position by this minority bloc. What occurred was a breakdown of party discipline, with recalcitrant members refusing to abide by the decision of their leaders. This does not just occur in the Republican Party alone–some members of the Democratic Party, the so-called “Reagan democrats” have on occasion crossed the aisle to side with their conservative counterparts on social issues like gun control.

If this is what Prof David meant by party-based politics, I am afraid that the example does not hold up well. Contrast that with party-based politics in the Westminster system, where there is strict adherence to platforms and positions within parties. Does such strict adherence to party discipline lead to gridlock?

I would use as an example the Gillard Labor government in Australia which was in power from 2010-13. It led a minority government, meaning the ruling the Labor party forged an agreement with the party of the Greens and a few independents to form government.

Some said that this would lead to gridlock. In fact the government of PM Julia Gillard has been shown to be the most productive, passing nearly all of its proposed bills including three budgets on time. I am afraid the problem is more nuanced and complex than the way Prof David poses it in his dichotomy.

The US example actually proves that greed can create gridlock. The wishy-washy Republican house leadership was due to Speaker Boehner wanting to keep his position. He was compelled to pander to the whims of the minority tea party caucus out of self-interest, which trumped the national interest.

In the Philippines, the spending program in the first semester of 2011 was not disbursed on time because the government was afraid that much of it would go to waste. For this reason, growth was held ransom to gridlock. If in the US one tenth of one percent of GDP is the projected cost of a temporary shutdown, in the Philippines, GDP halved from 7 to 3.5 per cent due to fiscal contraction. DAP was the solution, which pandered to self-interest and greed..

In Prof David’s analysis, there is a continuum from feudalism to modernity, and progress proceeds along a linear path from one end of the spectrum to the other. The Weberian state (named after Max Weber) is held up as the ideal against which all others must be measured.

Rather than a dichotomy, I would prefer a typology of development along the lines of Paul Hutchcroft, where you have state strength on one continuum and society’s prime motives on the other. The US is an example of a laissez-faire, regulatory state in which the state is weak compared to business groups whose prime motive is to seek profits under a rational-legal system. Gridlock as one conservative commentator George F Will points out, is not just a feature of its system, it is built in to it.

typology of states

The Philippines on the other hand is a patrimonial, booty capitalist state where the government is susceptible to capture by the elite, who operate on the basis of monopolistic rent capitalism and patronage. To complete this typology, we could consider China, Japan from the 1920s-70s, South Korea, Taiwan and Singapore, developmental states able to co-opt the business elite to serve their nation building agenda, as well as Malaysia, Indonesia and Thailand, bureaucratic states able to withstand pressure from society, but relatively more patrimonial.

Rather than defining progress in terms of a linear path to modernity, I would rather we look at where the Philippines can position itself in the future. The problem is that there is hardly any leader or party at the moment who is thinking in these terms. They either operate on the basis of survival, or seek to shape the Philippines in the image of its former colonial masters in one go.

Often, reformers realise that because they can’t attain that lofty goal, it is better to use patronage to further their agenda. This is where David’s dilemma comes into play. Is it alright to keep that system of patronage in place, to use it for good, when the next government could undo whatever advances are made using that same system?

What is missing is a coherent plan and cohesive party which mobilises a constituency behind that agenda. If Philippine politics had this, it wouldn’t matter if some forms of patronage still remained in some quarters. They would be minimised by virtue of the fact that everyone was on board. The plan, the constituency and party discipline would keep them in check.

 

That Vision Thing Redux: Wang-Wang Culture

In tackling wang-wang culture, has the president left something big out?

The president in his new found role as Sociologist in Chief spoke at his second State of the Nation Address about his vision for a nation free of what he described as a culture of wang-wang (blaring sirens symbolic of entitlement and abuse of privilege). His use of vernacular terms since his inaugural address in getting his message across has won him praise from even handed critics all around.

Those familiar with the business of vision building tell us that leaders should be adept at crafting a story or narrative that creates a sense of shared meaning and purpose for their followers. In this case, PNoy was delivering the “red meat” to his core constituents, those that saw in him the moral authority to bring about change to the culture of impunity that prevailed under the former dispensation.

Having recommitted his government to that cause, PNoy entreated his listeners to give him and the government he leads a pat on the proverbial back, to acknowledge its endeavors at fulfilling this corporate dream. That already seems to be the case. In fact as Mahar Mangahas points out, PNoy’s administration is the most popular one since public polling began (the distinction to be made is that this applies to his government as opposed to his person which is receiving the same treatment from the public as presidents past).

While the president’s speech was rightly praised by some for its lofty rhetoric, it has by the same token been criticized for being short on actual policy substance or consistency. When I say “some”, I mean respected commentators like economist Solita Monsod, sociologist Randy David and businessman Roberto De Ocampo to name a few.

Monsod criticized PNoy for failing to at least mention in passing his roadmap for delivering his vision, the Philippine Development Plan and for perhaps unwittingly committing intellectual dishonesty with leaps of logic and faulty use of statistics in attributing many positive developments to his good government agenda.

David goes even further and questions the roadmap itself for following the same orthodoxies and applying new buzzwords such as “inclusive growth” as a mantra without even a slight attempt to tweak these orthodoxies given their dismal record. The absence of the PDP in the president’s speech according to Monsod belies a view either on the part of the president or his men that it will have any impact on our development.

Indeed while the PDP projects a growth rate of 7-8% for the country in the next five years, the actual budget planning follows a lower set of growth assumptions of 5-6% in forecasting its revenue and spending plans. This exposes the roadmap as an aspirational one, where the budget figures show the real picture.

The need for tweaking

A strange quarter to find a critique against the business community came from one of its own in the person of De Ocampo who picked up the cudgels for competition policy given the doubling of locals in the Forbes billionaire club and the risk that such powerful business interests could swamp any attempt by this government to create a level playing field, citing the PPP program as one potential fatality.

If you look at why the government is unable to shore up its finances, it is largely because self-employed entrepreneurs and professionals and large dominant family-based corporations have successfully avoided paying their fair share of taxes. In a previous post, I cited the figures of the BIR and a study performed by finance economist Renato Reside that showed that the combined losses from non-tax compliance and abuse of fiscal incentives as well as watered down sin taxes could easily close the budget deficit of 286 billion this year.

Having trained his guns on the wang-wang mentality in government, particularly at his predecessor who according to Mangahas led the most unpopular government since public polling records were kept, the president went a little too easy on the well-heeled classes when he identified a glaring inaccuracy in their collective tax payments.

In fact this follows his performance at the Makati Business Club while he was still running for the highest office when he vowed to avoid raising taxes. The president appealed to them at his SONA however to take his honest attempts at creating public faith in government as an assurance that their tax payments would be used properly which he hoped would lead them to be more forthcoming in declaring their taxable incomes.

The problem may not lie just in appealing to a sense of common values. It might actually require in De Ocampo’s words “structural adjustments” a fancy word for fundamental changes in policy and approach. For example, the businesses that now avail of incentives from the BOI and PEZA while failing to follow-through on their investment commitments need to have their tax privileges stripped from them.

Tighter policies and enforcement means renovating our economic bureaucracy. A lack of teeth in enforcing the terms of fiscal incentives led to the failure of the import-substitution industrial policies of the 1950s and 60s. Just as an aside, my father who was in the banking industry in those days would later recount to me how he would often see the head of one bank bringing in sacks full of money after auctioning the import licenses issued by the Central Bank to supposed importers of capital goods meant for industrial production. It went instead to importers of finished goods who made a killing by avoiding tariffs on those items.

Today, the same sort of things is undermining our export promotion strategy where supposed exporters in our business parks and economic zones are able to avoid paying taxes, customs and duties while at the same time selling up to 50% of their output to the domestic market. This is outrageous because it creates an unfair advantage for them against smaller and medium sized competitors.

The real righteous road

Instead of taking a half measure by targeting abuse of authority in government alone, the president needs to focus as well on rent-seeking by private interests. Indeed if you stacked up all the alleged stolen wealth uncovered in the last twenty years, this would not hold a flame next to the amount of rents the business elite have been able to extract from the state during that time. Both are two sides of the coin, except that the latter form of wang-wang is legal, while the former is illegal.

At the risk of being lumped together with the “move on” crowd, I have to say that if the president wants to eliminate wang-wang culture in its entirety, he needs to broaden his vision and take the full-measure of targeting this culture wherever it may reside, be it in the corridors of power or the board rooms of our country’s business elite.

This is not about being forgetful of the sins of his predecessors; it is about being mindful that there are even larger sins being committed by powerful interests that are going on unnoticed. These same interests are able to switch allegiances with the changing tide of public opinion in the political arena.

It is easy to flog a dead horse. It is harder to go after the more prevalent and persistent forces that are alive and kicking. The president needs to take his carefully crafted vision of a country rid of wang-wang culture and turn it into a more comprehensive strategy. He will obviously need to take a balanced and considered approach as he doesn’t want to spook the horses so to speak.

The very essence of the social contract or grand bargain is to maintain the sources of growth, but to allow the more productive sectors to contribute an increasing portion of the proceeds of that growth to help the underclasses who lose out of the growth for whatever reason.

Walking the walk

Talking the talk is one thing, but if he wants to walk the walk, he might have to start with his own family interests. The Hacienda Luisita case could turn into a powerful device for demonstrating his commitment to the righteous path if the government is successful in fulfilling the true letter and spirit of the CARPeR law which would mean distributing land titles to the tillers of the Cojuangco estate. This would set PNoy apart as a leader who remained true to his word.

What would bolster his case even more is if he gets rid of his style of dealing with his KKK (classmates, friends and cronies) and instituted a true meritocracy in his team. Finally, he needs to strengthen the economic bureaucracy by instituting reforms in the way it is staffed and resourced.

A developmental state requires lead agencies that are engaged with but at the same time insulated from the influence of powerful business interests to prevent them from abusing the system. It is one thing to name and shame a group of delinquent taxpayers or to announce a policy of monitoring investment commitments, but the agencies concerned need to have sufficient resources to go out and conduct thorough audits on their clients.

A change in the wang-wang culture in all its shapes and forms requires not only a revamping of our moral and spiritual furniture as a nation, it will require a fundamental renovation of our economic strategy and bureaucracy. The president can leverage the cult of his personality to push for solid long-lasting reforms in this regard. That is if he would only recognize where the true wang-wang culture resides.

Revisit the original series: That Vision Thing starting here.

The LABAN-Liberal rivalry

Remnants of the progressive struggle are locked together in a dance of mutual political survival.

As the news dailies ran stories on the increased scrutiny being placed on the presiden’ts pals, some within the movement that elected him have begun to voice some reservations or outright indignation at the way he has handled the situation so far. Following the Luneta incident and the firing/resigning of Secretary Jose De Jesus, many cannot reconcile the behavior of their “white knight” towards those in his camp that have not acquited themselves all that honorably.

It will one day make for an interesting study to look at the rivalry between the Balay and Samar factions, or what I would like to call the LABAN-Liberal rivalry. Although as Manolo Quezon once put to me commitment to political parties has yet to take root in the Philippines, these parties come close to approximating such a tradition. They were borne out of the struggle against martial law and the two opposing poles of how to bring it to an end.

To understand how or why the Aquinos behave in relation to these rivaling camps, you have to first go back in time to the 1970s, to 1978 when the imprisoned Ninoy Aquino was “abandoned” by the LP and left without a party to run in the parliamentary elections scheduled that year. Having none of the stalwarts of the party like Jovito Salonga or Gerry Roxas to provide a stiff challenge to Marcos, Ninoy turned to more junior people. This is how LABAN was formed.

Explaining the Aquinos

The man who helped create the name, Lakas ng Bayan, the late Alfonso Policarpio, in his book Ninoy: The Willing Martyr coined a very poignant phrase to capture the mood of the Aquinos during this period of their struggle. A caption of a photo of Ninoy and Cory standing together during his military trial reads, a time when so few cared. This perhaps is one of the reasons why the Aquino children have gravitated more to the Samar group, the ones that had supported the “Noy-Bi” ticket. They had been there during their darkest days. To quote a once popular beer ad iba ang may pinagsamahan.

Secondly, one has to go to the early days of the first Aquino presidency to discover why PNoy took the unpopular decision to support his close friends. In The Aquino Management of the Presidency: In the Face of Crisis (1992) published by the presidential management staff, one finds a vivid recount of those early days from the point of view of palace insiders. According to the document, Cory convened her cabinet on July 9, 1986 to assess the aftermath of the “Manila Hotel incident” the first coup of her several months’ old presidency. After their deliberations, Presidential Spokesman Rene Saguisag was quoted saying

In hindsight (Minister of Local Governments), Nene Pimentel was correct about removing the incumbent local chief executives and replacing them with OICs. Had the duly elected Mayors of Metro Manila been retained, they would have been able to mobilize in support of the Marcos loyalists. There would have been a greater likelihood that the government would have fallen.

In response to a reporter’s query on why he had not accepted in full DOJ Sec De Lima’s recommendations in the aftermath of the “Luneta incident” regarding Mayor Alfredo Lim and Usec Ricardo Puno, PNoy gave a very cryptic remark about sticking with your allies because of counter revolutionary moves to unseat them. Using the preceding bit of history you can easily decode his message.

This siege mentality on the part of PNoy can also be understood by recalling that Noynoy was ambushed and nearly perished in 1987 during the “God Save the Queen” rebellion staged by renegade RAM soldiers that nearly toppled his mother from office. His appreciation for allies and the need for self-protection led him to the firing range where he no doubt established strong bonds with his shooting buddies.

Thirdly, to understand the accommodation of Binay’s faction within cabinet, one has to go back to the local government elections of 1988. In the book From Marcos to Aquino: Local Perspectives in the Transition in the Philippines (1991) by Ben Kerkvliet and Resil B Mojares, one gains a “street-level” view of the rough and tumble world of politics immediately following EDSA I.

The OIC’s appointed by Interior Minister Nene Pimentel were made to defend their positions a mere 18 months after their appointment. Many of them were novices (like PNoy’s inner circle) but had replaced long-standing provincial and municipal warlords. The strategies for bringing the fruits of people power to the grassroots as observed by Kerkvliet and Mojares in the book either took the form of a hard-line approach or a soft, conciliatory one.

To illustrate their point, they turned to the experience of one OIC governor in Central Luzon, a PDP-LABAN member (in the interest of full disclosure, that man was my father Noli), who had employed the soft approach in the face of repeated assassination attempts. After the election, he along with many of Pimentel’s party had been decimated through the ballot either legitimately or illegitimately . In contrast, Mayor Binay whose house was strafed with bullets in the run up to the elections survived by employing tough ward politics in Makati.

The social experiment involving the soft and hard approaches and the lessons learned from that period help to define the philosophy of the PDP-Laban to this day. The Pimentels themselves have suffered at the hands of “dagdag-bawas”. Like some battle-weary revolutionaries that later get accused of employing the same tactics that they had once raged against, the idealism of these players has been tempered by real world events. PNoy knows this, and he knows he can count on them when the going gets tough.

Where to from here?

Finally we ought to consider where this rivalry is likely to lead. Having formed a coalition ticket back in 1992 (Salonga-Pimentel), will its current incarnation be counter-productive or supportive of the president’s agenda?

Vice president Binay with his vast experience in providing effective government service at the local level and who has had one year to settle into his new role might have a head start. DOTC Sec Mar Roxas might struggle at first. He has never been in this type of role before, nor does he have a technical background.

The handing over of the DOTC to a politician may not necessarily have been an astute move from the policy angle given the pricing and subsidy schemes that it involves. Being more sensitive to public opinion with regard to fare rate hikes might cost the government more than it can afford.

On the other hand, both the housing and the transportation and communications portfolios rely on private financing; and both involve projects that are labor intensive and employment generating. Their managerial abilities in moving investments through the project pipeline and securing local content for projects will determine their success at generating employment. Here perhaps Mar Roxas will have an advantage having worked with big investors at the DTI.

The developmental state’s dual role

If we are to use the developmental state as a model for what the Philippines should be striving towards, then apart from delivering services to the socially disadvantaged, the other, and often neglected role of the state, which is to channel resources to the more productive ones, has to be attended to. The growth sectors of the economy are after all the main sources of additional taxes used for expanding redistributive programs.

If one looks at the Philippine Development Plan, the main objective of which is to generate faster, deeper and broader growth, one finds a succinct diagnosis of the current situation:

Low growth is due to low investment and slow technological progress because of inadequate infrastructure, as well as glaring gaps in governance. Narrow growth, meanwhile, is largely attributed to lack of human capital formation among the poor and the failure to transform output growth to job creation.

To address this, the Plan aims to unlock investments in infrastructure through PPPs and better governance frameworks and re-distribute the growing revenues from a more productive economy through social development. If one looks at the 2011 budget, this intent is backed up to some extent by an increase in allocation to the secretaries of transport and communication (of about P14 billion), education (about P20 billion) and social welfare and development (about P20 billion).

To manage these resources and implement the Plan well will require dedication and perseverance from all the president’s men. Let us hope that this rivalry within his cabinet produces the kind of healthy competition or constructive engagement required to produce positive outcomes. If it doesn’t, it could spell the end of the people’s faith in their brand of governance.

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.