Dutch India Company

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