halo effect

Tilting at Windmills

Just then they came in sight of thirty or forty windmills that rise from that plain. And no sooner did Don Quixote see them that he said to his squire, “Fortune is guiding our affairs better than we ourselves could have wished. Do you see over yonder, friend Sancho, thirty or forty hulking giants? I intend to do battle with them and slay them. With their spoils we shall begin to be rich for this is a righteous war and the removal of so foul a brood from off the face of the earth is a service God will bless.”

“What giants?” asked Sancho Panza.

“Those you see over there,” replied his master, “with their long arms. Some of them have arms well nigh two leagues in length.”

“Take care, sir,” cried Sancho. “Those over there are not giants but windmills. Those things that seem to be their arms are sails which, when they are whirled around by the wind, turn the millstone.”

[Excerpt from The Ingenious Knight Don Quixote of La Mancha by Miguel de Cervantes, 1604]

This week, the president’s allies in the House of Representatives numbering 188 voted to impeach Chief Justice Renato Corona. This came after a flurry of attacks against the high court launched by the president himself on numerous occasions. The ‘rap sheet’ or articles of impeachment contains allegations previously laid by him before the chief justice in a legal forum where both were present.

They include his voting record as a member of the Supreme Court that seems to favour the former president and now congresswoman Gloria Arroyo which was claimed to have been responsible for the loss of public trust in the institution he leads as shown by its extremely low rating in the SWS public opinion polls. The prefatory statement issues the charge that

Never has the position of Chief Justice, or the standing of the Supreme Court, as an institution, been so tainted with the perception of bias and partiality, as it is now.

It then proceeds to build a narrative to support its case. Beginning with his close association with the former president prior to his appointment to the Supreme Court, his voting record as member thereof before assuming his present role, followed by his acceptance of Mrs Arroyo’s ‘midnight appointment’ to be its chief, and the numerous incidents in which the court displayed its ‘bias’ towards the Arroyos. It is peppered here and there with allegations of improper use of public funds and nepotism.

On the face of it, there seems to be a strong case to be made against the Chief Justice, but whether it can be proven in such a way that would lead to a conviction is another matter altogether. The articles certainly tell a coherent story, but as any legal expert will tell you, in most matters that involve the high court, there are legal merits on both sides. In defending himself, Corona will simply have to recite the legal underpinnings of the high court’s decisions.

It will then appear that Congress (and the president) can impeach any member of a co-equal branch of government simply for making decisions that they find disagreeable. This means war between the executive and judiciary with each side claiming the other overstepping their boundaries and seeking to establish a dictatorship by one branch.

At the moment, the palace has the moral ascendancy. The high court is already viewed with suspicion by the public. Pursuing this case against Corona and by implication the rest of the court that he leads however could place suspicion on the president’s motives because of the Hacienda Luisita ruling which disadvantaged his clan. P-Noy by taking this bold step has highly discounted the risk of losing the moral high ground.

Secondly, most of the accusations save for the one involving Corona’s failure to file a statement of assets, liabilities and net worth (which might not be an impeachable offense based on previous court resolutions) involve decisions made by the entire bench not the chief justice alone.

The high court’s decision to exempt itself from midnight appointments, the creation of a new congressional district that became the seat for Mrs Arroyo’s son, the injunction against the lower house of Congress in hearing an impeachment complaint (its sole prerogative) against the ombudsman appointed by her, the exoneration of one of the justices for plagiarism by a committee comprised of magistrates, the injunction it issued against the secretary of justice’s hold departure order on Mrs Arroyo which it said was in effect despite the non-fulfilment of certain conditionalities were all made by a majority of the court.

Given the collegial nature of this body, the prosecution will have to prove that Corona exerted some kind of influence akin to a Jedi mind trick that forced other justices to side with him against their free will. Either that or Congress will have to impeach all the members of the majority who voted with him for showing bias. That will take some doing. Even if they (by ‘they’ I not only mean the prosecution, but the president) succeed in this (and there are already plans afoot to impeach two other justices), their side could suffer from what economists call the winner’s curse.

Having spent so much time and effort in this game to the detriment of all else (with the economy sputtering to a halt, which is what a 3.2% GDP growth figure represents), there will be hardly enough space for the government to move on policy matters as the legislative process gets tied up with the trial/s. Investor confidence could dissipate (adopting a wait and see attitude) as the country becomes wrapped up in the unfolding political saga. It seems that winning legitimately as in the case of this lawful and constitutional exercise could come at a heavy economic price for the republic.

Thirdly, while the public mood towards the Corona court is certainly non-supportive, it is quite spurious to lay the grounds for an impeachment complaint based on the fact that the accused garners very low esteem from the respondents to a survey no matter how representative it is. To begin with, let us assume for a moment that this low rating is due to the poor quality of decisions rendered by the court.

The articles of impeachment claim that this is because the court is biased in favour of Mrs Arroyo. An alternative explanation is that the justices sitting on the bench are simply not up to scratch and that their legal credentials were not properly screened. This too was asserted in the complaint. But whose job was it to screen presidential nominees to the high court anyway? Shouldn’t they bear responsibility for this outcome, not the appointees?

Also, the fact that the ‘bias’ explanation fits the narrative that the palace weaves makes it credible in the minds of the public in search of meaning behind events, but it does not necessarily make it true. Impeaching the Chief Justice based on his voting record on cases that affected Mrs Arroyo suffers from the law of small numbers. ‘How many cases does it take to prove that someone is biased?’ you might ask. Well that is precisely the problem. We cannot really use statistics to prove it one way or another. Of course an impeachment trial is more political than legal, which will make the outcome a product of naked power rather than a triumph for the rule of law.

The foregoing analysis lays down the reasons why I believe the impeachment of Renato Corona is more about the administration tilting at windmills than pursuing what it calls ‘reform’. The meaning of that word has become so mangled in its usage by the government that it has been equated to sending Mrs Arroyo to jail.

In the narrative of the palace, the president is the chivalrous knight who has come to rescue the nation, which is the helpless damsel in distress, from the villains of the republic, Mrs Arroyo and her ilk. It makes for wonderful imagery and rhetorical flourishes, and anyone or any institution that strikes a discordant note upsets the psychological balance derived from this plot and deserves to be called an Arroyo sypathiser.

Yesterday, the Chief Justice began to weave a narrative of his own. He spun it as I said above an encroachment by the executive on an independent judiciary, a creeping dictatorship through legal and constitutional means (alluding to the method used by Ferdinand Marcos). It is quite ironic that the son of the twin icons of democracy should be accused of making such an audacious attempt at witling it down.

Our minds naturally seek coherence. This makes us susceptible to several cognitive biases. This is often achieved by creating causal relationships. The entry of P-Noy into the 2010 presidential race after the death of his mother—it was all pre-ordained (based on hindsight bias). His elevation to the highest post in the land was to serve one purpose, and that is to send the villainous Mrs Arroyo to the dungeon beneath his palace (based on confirmation bias). From there, the nation will achieve its destiny of greatness (halo effect).

Unfortunately, reality is not quite as neat. The real world is much more complex and random as our minds would wish it to be. The successful prosecution of Mrs Arroyo and her minions by itself will not move us any closer to the rule of law or to economic deliverance. These things are achieved through actual hard work and good fortune. In fact, the real reforms that could move the country closer to these ideals can be achieved in spite of Mrs Arroyo and the high court.

The fact that many of them will now be delayed due to the impeachment trial means that we are actually farther away from achieving our potential than we were before. The words ‘downgrade’ and ‘catch-up’ are once again on the lips of credit rating agencies. As it turns out, the very windmills that the government seeks to joust with in its anti-corruption drive are the very mechanics of government that help deliver bounty to the nation.

Unfortunately, P-Noy and his allies have made up their minds. This court which has upset them once too often in their ‘quest’ can do no right, just as the knight leading the charge against it can do no wrong. The same goes for Renato Corona and his sympathisers. They believe the president is out to get them, and that this impeachment trial is a vendetta masquerading as a crusade against injustice by the high court.

How much longer will the nation be captivated and spellbound by the romance of these cognitive illusions? How much longer will people ‘dream the impossible dream’ as the country languishes at the bottom of the heap? Someone has to play the role of Sancho Panza and unmask the romanticism woven by both sides for what it really is: a farce.

Spend More, Talk Less

With the release of third quarter GDP figures upsetting all but the most ardent economic apologists for this administration, the time has come for it to re-think its priorities.

image from wallpapers-diq.net

The situation is nearing a critical level. As the whole of Europe is placed on credit watch and as recovery in the US struggles for momentum, the vibrancy in the domestic economy is being sucked out by government’s poor infrastructure spending rate just at a time when it is needed. Cabinet officials throughout the year have been promising a more rapid deployment, but this has so far not materialized.

The incorrigible ‘prophet of boom’ from the Ateneo Graduate School of Business Cielito Habito despite his best efforts at painting a rosy picture for the government has himself acknowledged the third quarter results to be disappointing. Here is how this professor of ‘Aquinomics’ concludes his most recent column for the Inquirer entitled, Is confidence dissipating?

(W)hat worries me most is the possible dissipation of the initial confidence surge that greeted the new administration and led to brisk private domestic investment growth over the past year. With these private domestic investment numbers now apparently slowing down while price increases have been speeding up, the President and his men on top of the economy should keep a close eye on the ball—or risk losing steam altogether (emphasis added).

That’s it—the penny has finally dropped. Only a delusional person would keep insisting that the government is headed in the right direction when it comes to managing the economy. Will this lead to a teachable moment, or will the administration remain antagonized by criticism seeing sinister plots behind them, spooked by shadows and haunted by the spectre of its immediate predecessor?

Throughout the year, the government has continued to fall back on its good poll figures to demonstrate that it has been performing to the satisfaction of the people. Poll figures however may not be a good barometer of the government’s competence in economic affairs given the ‘halo effect’ that has made the administration appear more creditable than it should.

Market analysts have already pointed out and the Bangko Sentral agrees that stimulating greater demand to address the slowdown in growth lies not in the hands of monetary authorities at this point but with fiscal managers. What this means is that the government has to spend more and talk less. Or in the words of Jerry Maguire, it has to “show me the money!

All talk, no action

The government talks profusely about the need to ramp up infrastructure spending in its Philippine Development Plan released early this year (see page 17). “An inefficient transport network and unreliable power supply”  is what has created a poor investment climate according to the Plan. Solving this meant greater spending, but when it comes to actually delivering on this, the government fell short of its rhetoric. Next year’s appropriations will hit a mere 2.5%, when the benchmark for a middle income country such as ours is 5% of GDP.

P-Noy in his first SONA said that the infrastructure build-up would be achieved through public-private partnerships, but nearly eighteen months on and counting, the fulfillment of the now diminished scope of this program remains to be seen. The confidence of the business community will eventually wear thin as Habito suggests if delays persist.

When the president addressed a meeting of the Makati Business Club, a community highly supportive of his candidacy, there was some disappointment over his over-emphasis on the case against former president Gloria Arroyo and his squabble with the Supreme Court. As these businessmen suggest, the risk is for P-Noy to get so focused on prosecuting Mrs Arroyo that he fails to keep his ‘eye on the ball’.

And it requires some doing. To ramp up spending by 2.5% of GDP will require as much concentration as he can muster. In a ten trillion peso economy, this will mean doubling the present effort of 250 billion pesos a year. This will dwarf  the growth of the CCT or conditional cash transfers which cost about thirty billion.

Because the president closed off the avenue of raising revenues through new taxes, he found himself left with no other option but to fund his development plan through private financing. That has proven tricky as well, which is why he now needs to consider a third option.

That third option which I had first written about late last year which then got echoed by no less than the BSP Governor a few months back is for the government to issue infrastructure bonds to the BSP which is at present earning negative returns on its foreign currency reserves.

Better returns

By offering the Bank a better yield, the government would be doing it a favour. Raul Fabella a former dean of the UP School of Economics has lent this proposal his seal of approval. He believes the risk from runaway inflation to be negligible under the proven monetary stewardship of the BSP.

The continued growth of foreign remittances from OFWs makes this option feasible, but if the government needed further convincing, then the following points should help build the case for it:

  1. Infrastructure spending is needed as we face a slowdown of demand from Western economies for our goods and services.
  2. It is the best vehicle for avoiding the ‘Dutch disease’ that afflicts countries experiencing windfall profits from resource booms (in our case, this stems from human not natural resources).
  3. Unlike increased social entitlement spending during a boom which becomes painful to retract at the end of the cycle, infrastructure spending leaves a tangible legacy and productivity dividend.
  4. It will help our exporters remain competitive because the increased spending will lead to a modest rise in inflation which will stem the appreciation of the peso against the greenback.
  5. It will unlock complementary investments by the private sector which is being deterred by poor public infrastructure.
  6. Government failure will be minimized as most transport and power projects can be turned over to the private sector under a PPP arrangement once completed. Revenue earned from transport and power projects would settle the interest and debt owed to the BSP.
  7. It will help prop up employment and growth which will spur increased tax collection.
  8. It will reduce the cost of doing business for most firms, not just exporters.
  9. It will help achieve the government’s growth target of 5-7% in the medium term.
  10. It will fulfill the government’s own development plan and set us on a higher growth plane.

Greater public infrastructure spending not by new taxes, nor by increased external or internal borrowing (as per Mrs Arroyo’s stimulus program in 2008/09), but by tapping our excess foreign currency reserves is not only appropriate, it would be the most effective and innovative way for this government to sustain economic growth through the turbulence in the global economy and beyond.

But we have to get real now. When faced with a possible course of action that is within the feasible set as defined by technocrats, what often prevents governments from acting is not the lack of rational arguments but the incentive problem. What led to this whole debacle in the first place was the administration’s fear of spending that would benefit internal patron-client networks left behind by its predecessor. In other words, politics rather than economics has been driving its decisions.

Making daang matuwid work

In the past we have seen how corruption and rent-seeking have reduced the amount of money available for developmental spending, but now we see how the opposite has reduced that amount even more. In the words of Samuel Huntington, “In terms of economic growth, the only thing worse than a society with a rigid overcentralized, dishonest bureaucracy is one with a rigid, overcentralized honest bureaucracy.”

The challenge for P-Noy is to make his mantra of daang matuwid work for the country rather than against it. Through the discipline and hard work of Filipinos working overseas, the country has a rather unique opportunity to make up for the shortfall in taxes generated internally. The current situation reminds me of the parable of the talents where the honest, but slothful servant dug a hole in the ground to store the talent that was entrusted to him by his master for safekeeping.

The Aquino government is like that servant. It was entrusted with a small but buoyant economy at the beginning of its term. So far, it has managed to keep it afloat, running while standing still, growing on aggregate but shrinking in real per capita terms. At the end of the story, the master reprimands the servant by saying, “To everyone who has will be given, and he will have abundance, but from him who doesn’t have, even that which he has will be taken away.”

That sound a lot like where the economy is heading under the president’s watch. The little that the Philippines had at the start could be taken away from it, while the plenty that our ASEAN neighbours have keeps on growing. It is time this government put its money where its fiscal mouth has been and start showing us the money. From another biblical parable comes the saying, “to whom much is given, much is required.” P-Noy was given a huge electoral mandate back in 2010. It is time he used it.

The halo effect

image courtesy of listverse.com

The halo effect is a cognitive bias first studied by Edward Thorndike in 1920 whereby the perception of one trait (i.e. a characteristic of a person or object) is influenced by the perception of another trait (or several traits) of that person or object. An example would be judging a good-looking person as more intelligent or believing a politician’s policies are good, just because the person appears good.

In the case of President Aquino and his high public satisfaction ratings, there seems to be a substantial amount of this effect taking place. The general impression of P-Noy is that he is honest. This comes from being who he is, the only son of two national heroes. This has translated into very positive sentiment towards the actions taken by the government under his watch.

Part of this has to do with the anti-GMA sentiment or the reverse halo effect. So pursuing cases against his predecessor is seen to be the legitimate thing to do, and rightly so, given the shenanigans that her administration was accused of. It also ties in with the president’s retraction and review of contracts and projects already approved for fear that they would somehow benefit her proxies within certain departments and sub-contracting firms.

But if you look at the outcome of these actions, it becomes immediately apparent, leaving our cognitive biases aside, that the positive evaluations given to P-Noy by the public are probably unjustified.

First of all, with respect to the way in which his justice department has gone after Mrs Arroyo, certain questionable legal manoeuvres have actually undermined the rule of law rather than upheld it. And secondly, with regards to the handling of the economy, the third quarter GDP figures clearly show that the overly cautious due diligence performed on public contracts undermined economic growth rather than encouraged it.

On the first point, I am referring to the use of a joint panel composed of the Department of Justice and the Commission on Elections that investigated allegations of vote rigging in the 2007 elections. This is said to have been anomalous in that a supposedly independent constitutional body such as the COMELEC is not meant to be seen as partial or collaborating with the administration in any way. Also, when their joint findings were published, it took a judge a few hours to read their eight ring-binder document and issue an indictment on Mrs Arroyo.

The undue haste with which such decisions were reached coming on the back of a temporary restraining order issued by the Supreme Court on the hold departure order issued by the DOJ on Mrs Arroyo that was “in effect” despite the dissenting opinion of some justices makes it highly likely that politics rather than due process was observed. This TRO was issued because the legality of the DOJ’s hold order was questionable to begin with.

Had these actions been undertaken by Mrs Arroyo while she was running the country, the protests from civil society regarding the “creeping authoritarian” nature of her government would have occupied public discourse. But because it was attempted by the meek and mild administration of the “benign one” there does not seem to be the same level of public indignation, although the result is the same—if upheld, it would grant vast powers to the state to curtail individual freedoms.

If we turn to the second point, on economic governance, the promised economic take-off billed as a public-private partnership by the president did not take place. Instead the economic deceleration has been rather remarkable in a region that is seeing quite robust growth despite the downturn in Europe and the US. The government which was prepared to take the credit for positive growth in agricultural output in the first half when early rains produced a bumper crop is now shifting the blame for poor production on storms both natural and man-made.

Public construction continued to show weakness despite the government’s promise to fast-track the roll-out of resources in response to the slump in the first half. Even with the announcement of a “stimulus” to deal with the effects of the EU debt crisis, there still appears to be little traction on this front. All hopes are pinned on the fourth quarter, but as the country’s chief statistician has pointed out, to attain even the lower end of the government’s modest growth target range for the full year, the economy would have to expand at a pace rarely seen.

In attributing the weak economic performance registered this year, there are certain factors that lie outside the government’s control (storms and financial crises overseas) which have to be acknowledged, but a portion of it definitely lies within its sphere of influence (public construction spending). It is clear that external factors did dampen growth, but the government’s action or inactions dampened it even further.

Again, had this occurred under Mrs Arroyo, the government would have been pummelled. Hounded by questions of legitimacy, it was her economic credentials that proved her only saving grace. Now that the government is run by someone whose electoral mandate is unquestioned, his now sullied economic credentials don’t seem to be much of a problem.

To counter the cognitive bias associated with the halo effect on the part of an evaluator, “blind-fold” tests or blind experiments are often administered where the person rates a product based on its actual attributes or performance, not on the subject’s perceived reputation. Respondents are often surprised with the results when they remove their blindfolds. I wonder what would happen if a poll was conducted that used the same principle in evaluating the performance of our presidents.

If faced only with the indicators of success and not the name of the person being rated, what marks would be given this president? What the government under him did this year countered its aims of fostering good government, rule of law and economic growth, but somehow its acts of commission and omission get glossed over and given a positive spin. Not only that, but the public by and large is willing to accept the message given them that all is well. So it seems the halo effect can cover a multitude of sins.