innovation policy

The Good Life, the Good Society and the Role of the State

What constitutes a good life? Or put differently what is a life well-lived? Philosophers, artists and theologians have struggled with this question down through the ages.

The enjoyment of “life, liberty and the pursuit of happiness” was a famous attempt at describing what a life well-lived meant. That was the culmination of thinking that began in antiquity and was captured by the Enlightenment, which defined a life well-lived as one in which people took responsibility for their own self-determination, as opposed to living under the strictures of gods, ancient scriptures, absolute monarchs, traditions of an external authority (tip of the hat to AC Grayling for that).

Professor Grayling says that this was not always the predominant way of thinking about the good life. He says that “from the fourth century AD until the Reformation a hegemony over thought was exercised by the Christian religion. The Church had a definite idea about how people should live, what the aim of life is, and how happiness is to be obtained. Part of this view was that happiness…is secured by living so that one survives into a posthumous existence in which one will be permanently in the presence of God’s glory, and therefore will enjoy bliss forever. In the mortal dispensation of the flesh, one might suffer and undergo the agonies of the ‘vale of tears’.”

We no longer think of pursuing the good life in that way. It is now seen as being possible in this life. The science of happiness is helping us uncover meaning behind that elusive term, happiness, or what psychologists call “subjective well-being”. It turns out that attaining physical security and material wealth is necessary but not a sufficient condition for it. Having positive social connections and a sense of purpose in what you do is just as important.

Thinking about the good life is ultimately tied to the question, what kind of society do we want to live in? Do we want to live in a world where the opportunity to have a good life is limited to some? Perhaps if we were part of the few that enjoyed the good life, that might be alright. But just as self-interest is part of human nature, so is empathy.

From Good Life to Good Society

When you walk down the street and see a homeless person, you might feel a sense of gratitude that you are not in that position. Much as I would like to think that where I am now is all a result of my personal effort, I know for a fact that I owe it to so many other factors that were outside my control. It distresses me then to realise that under a different set of circumstances, I might be that person living on the street.

That sense of lost utility or well-being comes from knowing that the society I live in still cannot cope fully with this problem. I know that in Australia’s case homelessness is not simply a financial question, but is connected to poor mental health. It is then incumbent on me to act on that by supporting causes and policies that address it. I live in a community, and part of my happiness is tied to the happiness of others with whom I live. I want others to have the same opportunity to pursue the good life, just as I have.

It is in considering the first two questions, that a third one emerges, what is the role of the state in guaranteeing equal opportunity to pursue the good life?

Some would limit the state’s role to simply securing life and liberty. Providing national defence, upholding the rule of law, protecting property rights and ensuring transparency and accountability of institutions is the only role of government, the only role it can perform competently, they would say.

Education, health, social security, including housing, unemployment insurance, disability support, are all best left to the private sector, charities and civil society groups to sort out. Any form of government intervention in these areas is seen as meddling that simply “crowds out” the private sector.

In most modern societies, the role of the state in providing an educated, healthy workforce is recognised as central to maintaining a high standard of living for its citizens. The public, social and economic benefits of health, education and social security are reasons for government to get involved. The pursuit of happiness depends on it.

The debate centres on how, not whether the government should, get involved to provide such services: whether directly, or indirectly, through co-production, collaboration and coordination with private providers, community and client groups. Public provision does not necessarily mean public production. But public provision is needed nonetheless.

Rather than seeing the public sector as “deadweight” to society, it is increasingly being seen as an important part of the economy, one on which a great deal of our personal well-being depends. Improving the quality, efficiency and effectiveness of its service delivery thus becomes the challenge.

Providing a skilled and healthy workforce is only half of the equation. The other half is fostering a vibrant economy that produces jobs. This leads to the next question: does the government have other roles to perform in the economy?

Some would limit its role to providing a favourable business environment by having “business friendly” regulations, low taxes, and efficient administration. Government should simply “get out of the way” of the private sector, remove barriers to entry, promote an entrepreneurial culture, efficient capital markets, healthy competition and reduce transactions costs.

That is not all, though. When private markets crash or hit a rough patch as they often do, government’s role is to smoothen out the business cycle by providing liquidity, unemployment insurance, and pump priming the economy through infrastructure spending.

Even when the economy is not in the doldrums, the state’s role in promoting innovation and technological breakthroughs has been recognised. Only the state has demonstrated the capacity to fund basic and applied research for a prolonged period of time in the early stages of technological development. Private sector involvement often comes in at a later stage.

Vision and Ethos Create a Moral Compass

The story of the recently deceased Douglas Engelbart, inventor of the computer mouse, illustrates this point. Decades before the rise of personal computing, funding for his research came from the government’s Defence Advanced Research Projects Agency (ARPA).

At the Stanford Research Institute he worked on the ARPANET computer network, a precursor to the Internet. Although the state had originally approached IBM and AT&T to run this project, they declined thinking that it would compete with their existing business. IBM’s vision of the future was a world in which a handful of large machines did all the computing.

Of the 21 patents which Engelbart produced at SRI, the last one, which was for “an X-Y position indicator control for movement by the hand over any surface to move a cursor over the display on a cathode ray tube” now known as the mouse, was later bought by Apple.

This ubiquitous device and many others such as touchscreen technology, the Internet, HTTP/HTML, GPS and SIRI to name a few, form the basis for today’s electronic gadgets that provide us with so much social connectivity and enjoyment. They all came about through government funding of early stage, high risk entrepreneurial projects. The same state that is often derided for being bureaucratic, risk averse and an obstacle to creative dynamism.

Engelbart never received royalties for his inventions. He and the state actors that supported him were motivated by something else other than money. For Engelbart the young navy officer stationed in Leyte during the War, inspiration came from the words of Vannevar Bush, head of the US government’s wartime research effort.

Bush envisioned a “future device for individual use, which is a sort of mechanised private file and library,” on which someone “stores all his books, records, and communications, and which is mechanised so that it may be consulted with exceeding speed and flexibility.” This vision created an ethos, one on which he operated.

It is that same long-term vision and planning that motivates the pursuit of energy security and environmental sustainability today with an agency called ARPA-E. And it was that same sort of vision and ethos that motivated the developmental states of East Asia to promote rapid industrial development through state investments and guidance.

moral-compass

It was easier in a way for these states, since all they needed to do was find a way to adapt existing technologies to local circumstances in a process of “catching up”. Assisting local firms in this process was often needed as they were inhibited to shoulder the associated costs which others would avoid by simply piggybacking or free riding on their discoveries.

From Japan’s Ministry of International Trade and Industry, to Korea’s Economic Planning Board to Taiwan’s Industry Development Boards to Singapore’s Temasek Holdings, they were governed not according to any external authority’s directives, dogmas or mantras, but according to what they saw was in the interest of their own national development.

It was in pursuit of the good life for their citizens that they operated for decades until that vision became a reality. It is only by following their example that other nations can find their own path to development, in which all their citizens not just a few have the opportunity to pursue a life well-lived.

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.

Defying Gravity

Faltering growth prospects for the economy and paralysis over how to kick-start big infrastructure projects do not seem to have dampened public support for the president.

Its economic managers remain fixated on ‘fiscal consolidation’ (a euphemism for shrinking public works expenditures to close the fiscal gap) as its roll-out of PPP (public-private partnerships) hits yet another snag with a new ‘review’ announced by the government. The confusion over how to proceed with its centerpiece program demonstrates how that it entered office armed only with platitudes and no real plan.

Yet even as punters from multilateral institutions, ratings agencies and think tanks alike place a down-side risk to the country’s growth prospects, the poll numbers of the president have headed upward. This strange phenomenon needs some explaining. How has P-Noy been able to defy gravity with his public approval ratings?

Some would point to his campaign against corruption as the source of such levitation. Yet, the same reason was given when his poll numbers were slipping early this year. The explanation was that as the public became familiar with so much corruption occuring in high places their faith in government collapsed. So why is the opposite happening now?

Perhaps it is because previously the pursuit of justice seemed to be going nowhere; whereas now, with the help of a few unexpected whistle-blowers, it seems to be heading in the right direction. That is one plausible explanation.

Another comes from the notion that growth and development do not necessarily go together and that despite sinking growth figures, the government has attended to the material needs of the populace through such programs as the CCT or conditional cash transfers.

Indeed one can characterize the government of P-Noy as following the script laid out by the Washington Consensus of promoting macroeconomic stability (to the detriment of growth) while providing social safety nets (to buy-off public support) and pursuing good governance (despite setbacks in providing public infrastructure).

In fact, some are pressing P-Noy to take advantage of his high popularity to pursue charter change and maximize the liberalization agenda by opening up the remaining sectors of the economy reserved for local participation and ownership. No less than the leaders of both the Senate and the House concur in this. As I pointed out in a previous post, the president is right to be a little wary of this move (although his reasons may differ from mine).

Others would have him go the other way and review the existing liberal trade and investment policies that have been in place for the last three decades as the country’s manufacturing and exports base suffers from a strong peso and seems highly concentrated within a few sectors, import dependent, and without much depth.

The PPP conundrum is emblematic of this confusion. P-Noy’s government started out with complete faith in private markets to ‘get prices right’, but it seems to be coming around to Sec Roxas’ belief that the public sector can do better. His proposal for the state to finance and build the projects itself, and then sell them off to the highest bidders to operate and manage would be a complete turnaround from the president’s previous position.

The idea behind Mr Roxas’ plan is that to get the ‘right price’ the government should use its access to cheap capital that is not available to private firms. That makes perfectly good sense, but the problem with his proposal is that government has not been known to be an efficient producer of public works projects. This could wind-up making the government penny-wise, pound foolish in the end.

A third way was actually proposed by me in another earlier post. The idea would be for the government to access cheap capital and create a fund that would either partner or loan these out to projects for either infrastructure or regional development needs. This would allow the cost of financing and construction to be lowered by leveraging the advantages of both public and private institutions achieving the best of both worlds.

This approach I must admit is hardly original. It was applied by South Korea in promoting industrial development through partnering with the private sector during its fast growth phase of development (see Alice Amsden’s book Asia’s Next Giant). The emergence of light and heavy import substituting industries which supplied export-oriented manufactures owed much to this strategy.

The economic bureaucracy there was a master at engaging in entrepreneurial self-discovery by importing licenses to operate foreign technology and then auctioning them off to private firms while at the same time providing them with sovereign guarantees and cheap project financing (I recommended a similar approach through an innovation fund which the government could create by borrowing some of the excess dollar reserves of the Bangko Sentral).

Indeed the government cannot live on macroeconomic stability and social insurance alone. For its growth trajectory to shift upwards, it will need to have a credible employment and industry strategy. Its PPP program was touted in P-Noy’s first state of the nation address as the vehicle for achieving this. In addition, the government will need to foster innovation and investment.

Let us hope that the administation finally gets to find a set of workable arrangements to get its pipeline of projects off the ground. Defying gravity with its poll numbers is one thing the government can do at the moment, but keeping developmental projects suspended in the air is something the nation simply cannot afford.

UPDATE:

DOTC Sec Roxas’ recent announcement of a five year plan involving 380 or 426 billion pesos (depending on which paper you read, the PDI or Business Mirror respectively) sheds more light on the new policy direction.

Essentially, a couple of things came out of the press release. The first is that aside from the PPP vehicle the government will be entertaining other conventional ways of financing infrastructure projects including overseas development assistance, foreign loans and items in the national budget. The second is that the Chinese contract to construct the NAIA to Pampanga rail line has now been superseded by a fast-rail project which will extend to Clark instead of Mabalacat.

These two moves by Mr Roxas clearly indicate a stronger more interventionist role for the state on offer from the one originally envisioned by the president. While P-Noy was only interested in handing infrastructure projects to the private sector, standing back and watching it work its magic, the DOTC secretary is willing to roll-up his sleeves and seek a better bargain or boot out in this case a poorly performing contractor to deliver a much better outcome.

His promise of a scorecard for his 5-year plan underscores the managerialist aspect of his approach to strategic projects in contrast to the laissez faire attitude of the president. The 90 billion a year average spend represents almost 1% of annual GDP. If he is able to roll this out on time, it will help provide a much needed stimulus to the economy at a time when the global economy goes through an adjustment to slower growth.

It makes me wonder what his rival Vice Pres Jojo Binay will now seek to do in order to outshine Mr Roxas. Will he adopt the proposal of Councilor Lagman of Quezon City and push for a 1% real property national tax as proposed by some fiscal experts to fund a national social housing program? Will he push for the creation of a housing department? Time will tell.