Political succession is the key to long-term economic growth.
The Philippines has been hailed as a rising star among emerging markets in 2013, but sustaining this strong performance will require a good succession plan for the Aquino presidency. Political succession as it turns out has been a crucial driver of long-term economic growth among emerging economies over the past fifty years.
A study conducted by Tim Kelsall for the Overseas Development Institute of Britain comparing the growth experiences of countries in the rapidly growing regions of Southeast Asia and sub-Saharan Africa has found that,
Contrary to currently fashionable ideas about ‘inclusive institutions’ and ‘golden threads’, (we find) that crucial to combining succession with growth is the embedding of policy-making in strong institutions of one of two types: 1) a dominant party with a tradition of consensual decision-making and leadership succession, or 2) a strong, organic bureaucracy, effectively insulated from changes in political leadership.
Sub-Saharan Africa, which today is the fastest growing region in the world, did experience respectable growth rates in the 1960s and 1970s. What prevented this region from sustaining its economic performance in the long-run was the failure of many countries to manage political succession well.
The same could be said of the Philippines. From the 1950s to the 1970s, the country experienced solid economic growth rates averaging between 4.9 to 6.4 per cent (see table below). Of course this was still well below the growth of Malaysia or Singapore, but it was respectable, nonetheless.
The 1980s spelled the end of this sustained growth as the Marcos regime, which had been in power since 1964 collapsed. The upheaval began with an international debt crisis and the assassination of Senator Beningo Aquino, Jr in 1983. “Ninoy” as he is popularly known was returning from exile in the United States where he was granted furlough by the regime to undergo heart surgery, after spending close to 8 years in prison. The then leader of the opposition was hoping to convince President Marcos to accept a power-sharing deal that would allow for a smoother transition to democracy.
Unfortunately, due to the ill-health of the former dictator (he was not totally in command of the situation), the conciliatory offer was not taken. Instead, the death of Senator Aquino led to massive street demonstrations and the eventual fall of the Marcos regime. They say that authoritarian governments offer a tradeoff: higher economic growth, in exchange for a higher risk of economic collapse when they fail to manage succession smoothly, and that is exactly what happened.
The 1980s saw a diminution of growth to 1.8 per cent. This was lower than the population growth rate, meaning per capita incomes retreated during this decade. The transition from Ferdinand Marcos to Corazon Aquino was marked by a series of coups, natural disasters and a power crisis. It is clear from the chart above that the Philippines never fully recovered from the trauma of this fall until the 2000s when growth averaged 4.8 per cent, roughly where it was in the 1960s.
Of course, the political transition was not the only factor that influenced economic growth during this period. The country was also making a transition away from protectionist industrial policy towards a more liberal economic position. The former had played into the hands of crony capitalists under the Marcos regime. Much of the debt that was accumulated during this time was illegally siphoned off. That was economically unsustainable.
Political economists Emmanuel De Dios of the UP School of Economics and Jeffrey Williamson of Harvard took a candid look at the possible factors that could have been responsible for us deviating from our upward path since the 1980s. They list the following as possible candidates:
- political instability at a critical time in the 1980s
- a subsequent failure to exploit the move of Japanese manufacturing FDI [foreign direct investments] into the region
- an institutional weakness benign in the pre-1982 past but made more powerful since
- some liberal policy package that penalized manufacturing when it was already on the ropes
- emigration surge in the 1980s that stripped the work force of industrial skills
- some massive Dutch Disease created by subsequent huge emigrant remittances.
They conclude that no single factor determined the outcome, but that all of them may have come together to create a ‘perfect de-industrializing storm’. I tend to agree with their findings although, the originating event is clearly the political instability that occurred as the dictatorship was in its death throes. The fact that Marcos or his party did not have a succession plan to manage a transition locked the country into a path of low growth in the subsequent decades.
Whatever the cause or causes of this, the authors acknowledge that the resulting pattern of growth has been less than ideal:
The path followed has led to a new stable equilibrium where a largely liberalized trade in goods coexists with a recurrent current account surplus built on remittances and strong (skill‐intensive) service‐sector exports. The peso is under steady pressure to rise in real terms, which leaves little room for (lower‐ skill) manufacturing to compete and expand. A considerable rise in the investment rate—still low by East Asian standards—would relieve the current account pressure for real appreciation and create more jobs. But the low investment rate may be part of an equilibrium where capital requirements are low simply because a significant share of the urban labor force is already abroad. [emphasis added]
In the first half of the current Aquino presidency, growth has averaged 5.8 per cent, close to where it was in the 1970s. Severe weather and economic conditions globally are not expected to knock it off its current path. As noted above, the trajectory is due to a combination of income flows from abroad and investments in the modern services sector. This has led to the criticism that it is not broad based.
A number of factors however seem to be lining up that could spell an end to this current “equilibrium”. The first is the slow but gradual demographic transition which could lead to an “economic sweet spot” where labour demand exceeds supply. A debate among technocrats is currently underway as to when exactly we will reach this tipping point. Central bank officials predict this could be as soon as 2016, while the more conservative economic development agency estimates for this to happen in the 2020s. I foreshadowed this debate in a post from two years ago.
The second factor is the gradual build-up of foreign reserves in excess of our external obligations, which is driving up the peso and convincing monetary and fiscal officials to consider setting up a sovereign wealth fund to address the investment gap that is hindering job creation. I have been advocating for this wealth fund as early as 2010.
The third factor is the “systemic vulnerability” from external threats to our national sovereignty and security, particularly from China, which could motivate the development of a national agenda towards building a better, stronger economy, to face these challenges from abroad. The same sense of vulnerability from both external and internal threats was what motivated Japan, Korea, Taiwan, Singapore and Malaysia to forge a national developmental agenda.
The key to all of these factors in producing the desired outcome is the ability of our political system to fashion a solid policy making capability from one of two sources: either through stronger political parties or a professional economic bureaucracy insulated from political interference. The continuity of a sound, stable policy making capacity with the ability to set the national agenda allows for considered, adaptive economic policies despite a number of political successions. This is the crucial element that would ensure sustained, rapid growth in the long-run.
Some further reading:
- The new Philippine political architecture: a blueprint for strengthening political parties.
- The national development project: Renovating the bureaucracy