elite democracy

Seeds of undoing

greek-tragedy-and-comedy-masks

An essential element of Greek tragedy according to Aristotle is for protagonists to carry with them the seeds of their own undoing. Often it comes in the form of “hubris”, man’s feeling of invincibility, which makes him tempt fate, or contest the will of the gods.

The same sense of mortality that comes at the end of each plot seemed to creep in last week as results of internal polling commissioned by the administration and leaked by a Palace insider showed the president’s popularity taking a nosedive as a result of his response to the controversy involving the release of impounded government savings without congressional approval.

DAP or the disbursement acceleration program was hatched by budget secretary Butch Abad, the chief ideologue of the Liberal Party to deal with the embarrassingly sluggish pace at which the economy was crawling at the time, dragged down by fiscal contraction. This was the result of the administration’s own deliberate attempts at house cleaning by scrutinising projects and contracts which were entered into by its predecessor.

The irony is that in a bid to rid the government of the ghost of Mrs Arroyo, the Aquino administration wound up committing the very same act that it accused her of, namely re-aligning budget items out of expediency. During Mrs Arroyo’s presidency, the opposition blocked passage of her proposed general appropriations for a number of fiscal cycles forcing a re-enactment of the previous year’s budget. This enabled her to reallocate spending across departments at will for budgeted projects that had already been completed the previous year.

Mr Aquino faced an entirely different situation but ended up with the same outcome. He had no problem getting congressional sign-off on his proposed annual expenditures, which sailed through in record time. His problem was getting the approved amounts spent. Having applied the fiscal brakes too harshly in a bid to present a clean break with the past, he wound up revisiting it.

The Department of Budget and Management explains how much was spent under DAP and for what purpose, as follows

For 2011-2012, a total of P142.23 Billion was released for programs and projects identified through the DAP, of which P83.53 Billion is for 2011 and 58.70 Billion is for 2012. In 2011, the amount was used to provide additional funds for programs/projects such as healthcare, public works, housing and resettlement, and agriculture, among others. While in 2012, these were used to augment tourism road infrastructure, school infrastructure, rehabilitation and extension of light rail transit systems, and sitio electrification, among others. […]
Of the total DAP approved by OP (Office of the President) for 2011-2012 amounting to a total of P142.23 Billion only 9 percent was released to programs and projects identified by legislators. These were not released directly to legislators but to implementing agencies.

The sad thing about DAP is that even though less than a tenth of it was directed at legislators, the whole program has become tainted as a result of the scandal that broke out involving the funneling of some of this money into bogus NGOs identified by them.

Not only that, but its release coincided with the impeachment of the Arroyo-appointed chief justice, which the Palace had openly campaigned for. It carried the hint of political back scratching. Add to that the contestable basis on which one branch of government allocated its savings to another (from executive to legislative), and you have the appearance of a government that disregarded the rules in pursuit of its political agenda.

To top it all off, the president appeared on national television denouncing his critics, denying the label “king of pork” that grated his good government sensibilities, claiming that he was “not a thief” in a fashion reminiscent of US president Richard Nixon who left office in disgrace. It is truly tragic that, after cruising at an astronomically high altitude in opinion polls, stratospheric compared to his predecessors, he should come plummeting back to earth and be forced to distinguish himself from common criminals in this manner.

To think that this all happened when the government seemed to be getting into its stride. The past year has been particularly productive with the enactment of several reform measures like reproductive health, sin taxes, and universal health care. In addition, there was the uplift in the country’s credit ratings and ranking in the Doing Business Survey, the resurgence of manufacturing investments, and the signing of the peace deal with Muslim rebels. The growth figures for the first half of the year seemed appealing to most outside investors, as well.

With legal challenges left, right and centre seeking to undermine its legitimacy, the government now appears besieged. Previously, one would have been forgiven for thinking that with its recent string of successes, the regime may be able to manage an orderly succession to its hand-picked nominee. But with the Liberal Party’s important figures, Senate President Frank Drilon and Budget Secretary Butch Abad, in the hot seat for their involvement in the DAP, the party seems like a spent force, having lost its moral authority.

Elite bargain

When Senator Jinggoy Estrada angrily accused the administration of hypocrisy for what he claimed was an unfair targeting of the opposition, I expressed doubts that his tirade would inflict any serious damage on the teflon presidency of Mr Aquino. With hindsight, it now appears to have been an effective ploy. Estrada’s complaint was that there seemed to be “no honor among thieves”, that cosy symbiotic relationship among complicit individuals.

What he was referring to was the political bargain that occurs in multiparty democracies within developing states, in which power is alternately shared among various groups of elites. Corruption is tacitly tolerated because it is assumed that each group will commit it once it is their turn to rule. Allowing a group of oppositionists to be singled out for prosecution, to ruin their political careers, is in effect, reneging on this grand bargain. Mr Estrada’s retaliatory response did nothing to protect him from prosecution, but it nevertheless inflicted damage on the administration for its “unfair” actions.

Time will tell if the damage inflicted is merely a flesh cut, or a mortal wound, but from the perspective of the reformers within the administration, it is a bad omen. Not only has the focus on PDAF and DAP abuse detracted from its policy agenda, it is going to make it difficult to secure votes for what could be unpopular pieces of legislation, particularly in the lead up to the next election when political turncoats will begin sniffing the political winds in search of their new padrino.

The reform constituency often claims that in order to make our political and economic systems more inclusive, we need to eliminate all forms of rent from society. That is we need to generate a clean, accountable and transparent system of governance, and that there will be no trade-offs between pursuing this agenda and pro-poor economic growth. This is in part the fault of the international donor community that has peddled this idea for over a decade on nations with very different institutional foundations.

Reality runs contrary to this notion, particularly if you look at the development experience of the “tiger” economies of East Asia and the “lion” economies of Africa, which are the fastest growing in the world. The tragedy of Daang Matuwid, the good governance agenda of the Aquino administration was that it failed to acknowledge this. It took the economy for granted while hastily conducting a highly charged political prosecution of its predecessor regime.

When the economy started slipping into second gear, it unlocked the floodgates of spending and applied less stringent controls on congressional pork barrel projects than it enforced on its own administrative agencies. It committed an act of “hubris” in thinking that it had succeeded in transforming the political culture of the country. It now finds itself defending a system of rent distribution that its constituents consider anathema to its own brand of government.

It is for this reason that many honest, reform-minded governments get eaten up by the system they seek to change. They often set goals that are too lofty, such as the elimination of corruption within one term of office, or the removal of patronage in favour of a system that observes the rule of law and democratic accountability. In the pursuit of good governance, the perfect often becomes the adversary of the good.

At the end of such a trail is “reform-fatigue”, with a disillusioned electorate turning to corrupt leaders who are able to distribute rents in ways that cater to their local needs. Such leaders are seen to be more competent and effective. This scenario could eventuate in 2016, with many in the reform constituency distrusting the LP and seeking an alternative candidate with a fresh face. This will split their votes and allow a pragmatic populist to gain power.

The scandals that have bedevilled congress and engulfed the president have served only to discourage certain contenders from the opposition to seek higher office, clearing the way for the vice president to consolidate its forces behind him. This means that their votes are less likely to be split along factional lines. And with the vice president’s popularity remaining intact, his lead will simply be unassailable.

The only way for the ruling LP to avoid electoral defeat is for it to deliver rapid, pro-poor growth within the remainder of its term. That won’t be easy, particularly since its formula for producing it, the good governance agenda (captured in its mantra: kung walang kurap, walang mahirap) has already been discredited in different parts of the world where it has been faithfully applied.

Occupied

Restoring a meritocratic society is the goal of the 99 movement in America. Establishing it for once in the Philippines should be our national ambition.

The Nobel winning economist, Gary Becker, whose work on human capital I deeply admire wrote a piece called Deserving and Undeserving Inequality in the blog which he shares with Richard Posner. In it he distinguishes between good inequality (deserved) and bad inequality (undeserved) saying

The great majority of people in different cultures do not object to someone who has made lots of money when they have superior abilities and talents, and they work hard at producing what are considered useful goods or services.

The meritocratic society with upward and downward social mobility would be in Becker’s view the most acceptable form. In this just society, the cream always rises to the top. He cites actors like Tom Hanks and Jennifer Anniston, entrepreneurs like Bill Gates and Steve Jobs, and skilled professionals like transplant surgeons who have grown rich by applying their exemplary talents and skills.

In contrast, Becker poses the problem society seems to have with hedge fund managers who make use of arbitrage (momentary bargains unnoticed by the market) to make huge sums of money. He lumps them together with speculators, Russian oligarchs and monopolists who enrich themselves through unfair, uncompetitive means (the latter two through government fiat).

Becker of course uses human capital theory as his framework for addressing this issue. Under its framework, individuals who acquire knowledge and skill through education and training (one cannot gain it any other way as it cannot be inherited or passed on) deservedly earn private returns in the form of higher incomes over the remainder of their working lives.

A meritocratic society should in Becker’s view reward the investments made by individuals in themselves and not rely on some other criteria. Elitism, the polar opposite of meritocracy rewards individuals for investing in other things (political patronage, social standing or being raised on the right side of the tracks, marrying into the right family, etc). It all sounds rational and justified, which is why Becker says “the great majority of people in different cultures” accept the legitimacy of a certain form of inequality (I have some reservations which I expressed here).

The Occupy Wall Street protests that have spread all around the world is comprised of a disparate set of individuals, but at its core, it is a protest against what is seen as an illegitimate form of social structure perpetuated by a weak central government unable to constrain the greed of corporate elites.

The breakdown of social cohesion has occurred because of what is perceived to be the breakdown of a meritocratic society where one rule seems to apply to the rich who are becoming a new aristocracy while another set of rules applies to the rest.

The teapartiers detest the privilege accorded to the global capitalists/Wall Street at the expense of local merchants and tradesmen/main street, while OWS expresses their distaste mathematically by stating they represent the 99% who play by the rules but have to bailout the 1% who don’t.

It is curious to see how the OWS protest that began in NY mutates as it travels to each city throughout the world deriving a local “strain” in each place. In the Philippines, which has witnessed a high level of social inequality, there has not been a similar groundswell of support outside the usual suspects of BAYAN MUNA and other groups who coalesce under anti-American imperialist banners.

The reason being I think that the broad sections of our society by and large aspire towards a meritocracy and see their lack of social mobility as either the result of divine providence or misfortune. The masses have not coalesced around a universal sense of rights and entitlements that has taken hold in the West perhaps because they still depend on ties of patronage from local elites.

The state has had a long history of either colluding with or acceeding to our elites. They have given concessions to the “peasantry” whenever popular movements have challenged their ascendancy but withdrawn them when the threats have passed. Charismatic populist leaders like Ramon Magsaysay and Joseph Estrada sought to appease them, not undertake reforms aimed at genuine social restructuring.

The only time when the state sought to weaken the landed elite by expropriating their assets was under Martial Law. Even then there were limits to what it could do as it sought to make its authority legally and constitutionally binding in the eyes of the world. The problem was that once it had weakened any challenge to its authority, nothing prevented the regime from plundering as well.

The lack of accountability under Martial Law made the state susceptible to a new form of super-sized impunity. This was not inevitable though as in the case of East Asia with their benevolent dictators. Had Mr Marcos fostered a new meritocracy in both the bureaucracy and the wider economy, things might have been different.

His wife Imelda widely reviled for her pompous display of wealth had actually promoted a meritocracy in the arts. Through her sponsorship of young scholars and aspiring artists through competitions and venues for the demonstration of their capabilities, she enabled a flowering of talent that was not based on birth or privilege. This is the one legacy for which she can be rightly credited.

If only the same thing had happened in the technology sector where innovation and risk-taking could have been encouraged, instead of the crony capitalism that created a new elite not based on productive but predatory activity, the Marcos years might have come out smelling a bit better.

Contemporaneous with the Marcos era, during the 1970s and 1980s, Brazil and India embarked on a policy of giving birth to technology firms. The state agencies that were engaged in this “midwifery” role were not perfect, but as discussed by Peter Evans in his book Embedded Autonomy, despite their imperfections, at the end of the 1980s they still had something to show for it.

After seeing efforts at producing local operating systems and PC clones flounder, Brazil’s IT sector survived by specializing in financial automation for their banking sector (emblematic of this were companies like Itautec of the Itau Banking group). In India, state investments in skills produced manpower to work in systems integration services combining hardware and software engineering which became their strength. Today some of these Indian firms have successfully expanded their operations overseas (Mahindra Satyam and Tata Consulting Services are prime examples).

Korea which was most successful in fostering growth of this sector focused on the assembly of computers, consumer electronics and semiconductors through concessionary loans and state sponsored and financed research and development. In 1989 Samsung and IBM signed a co-licensing deal allowing them to tap into each other’s portfolio of patents. Today IBM no longer makes PCs, but Samsung is challenging Apple for the handheld tablet market.

Brazil of course was under a military dictatorship during this period. India was except for a brief period in the 70s a rambunctuous democracy like the Philippines is now. Korea was still being ruled by an autocratic president. In other words, the type of political system did not prevent the sorts of policies needed for promoting a meritocracy from emerging in productive sectors.

This was Pres Marcos’s greatest moral failing: neglecting the national development project and engaging in pure predatory behavior. The “Freedom Constitution” that followed his fall sought to put a system of checks and balances in place to restrain the executive has unfortunately not produced a meritocracy either. It simply revived the old aristocracy to power which has picked up where it left off prior to Martial Law by engaging in booty capitalism.

The weakness of the judicial system has served to deny a system of justice to the dispossessed and the poor. So unlike the Occupy Wall Street protesters who camp outside the headquarters of the global elite, our own version of the downtrodden live in slums outside the gated communities of local elites. They are forced to work in the informal sector without legal entitlements such as social security, healthcare or retirement funds, for the most part having acquired very little in the form of human capital.

The present dispensation is beset with many challenges all around which include fostering good governance and promoting economic growth. These projects will take time to bear fruit. While it is seeking to free the poor from local patron-client relationships through social insurance programs, it eventually needs to buckle down to the difficult task of generating employment through industrial promotion strategies and policies.

Having fostered the emergence of the electronics and business process outsourcing industries in the interim, the government faces the more difficult task of expanding the scope of these industries in the international division of labor (what Evans terms the role of “husbandry”) into more value added activities.

It would be good if aside from producing the domestic equivalents of Tom Hanks and Jennifer Anniston (a legacy of our showbiz, pop mentality from the Imeldific years) we could also foster the development of our own Bill Gates or Steve Jobs (the burgeoning industries out of Silicon Valley of course received tremendous government support through the defense industry).

Globalization was meant to usher in a kind of meritocracy among nations in the division of labor. What the experience of emerging countries has shown is that to rise to the top, state involvement in the development of industries is necessary. The ultimate goal should not be to one day attract a greater share of foreign companies to our shores; the national ambition should be to one day join our brothers in emerging markets in buying out foreign companies within their own shores.

Perhaps it is this vision that should occupy our hearts and minds as we look to the future.

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