MITI and the Japanese Miracle

The National Development Project, part 2: Re-defining Good Governance

This is a continuation of Part 1: The National Development Project.

Governance is the cornerstone of the Aquino presidency, and this point is brought out by his development plan. Since Public-Private Partnerships which is the Plan’s centerpiece has been around since the mid-80s under the name Build-Operate-Transfer, better governance of them will provide the only new impetus to growth.

The question now becomes what sort of governance model best suits this strategy?

Peter Evans in an essay entitled Transferrable Lessons? Re-examining Institutional Pre-requisites of East Asian Economic Policies states that there are three alternative models of good governance. He describes them as:

  • The ‘market-friendly model’, best exemplified by the World Bank’s [1993] East Asian Miracle report, which focuses on ‘getting the fundamentals right’. In this model, “government must preserve macroeconomic stability and provide ‘rules of the game’ that are transparent and predictable.”
  • The ‘industrial policy’ model, which is best epitomised by Chalmers Johnson’s classic [1982] study of MITI (Ministry of International Trade and Industry), more demands are placed on economic policy makers…Policies nurturing the general macroeconomic environment must be complemented by “industry-specific policies that push setors most worth pursuing and shift capital out of sectors with declining returns and weak growth prospects.”
  • The ‘profit-investment nexus’ model [Akyuz and Gore, 1996] which shares with the ‘industry policy model’ the idea that policy must do more than simply provide a facilitative macroeconomic environement, but is not as demanding of industry-specific policies. Policies must simply increase the overall level of investment and not necessarily foster certain “sunrise” industries.

The relevant part of the Plan that describes the administration’s governance model is Chapter 7: Good Governance and the Rule of Law. From the elements and the tone of the text, it sounds like that the Plan is using the ‘market-friendly’ model with its four-pronged strategy of eliminating red-tape, pursuing anti-corruption, increasing citizen participation and accountability.

Ensuring a minimum level of probity is consistent with all three models of governance. As Evans states “if developing countries…could achieve the levels of bureaucratic capacity entailed in the ‘market friendly’ model, the additional capacity implied by other models would be institutionally within reach.

That should not be taken to mean though that emulating East Asia requires incorruptible super bureaucrats able to “out-manage their private counterparts from a distance.” As Evans explains,

Minimal norms of probity and competence need to be applied on a general basis, but East Asian reformers did not attempt to transform every ministry. Radical changes were reserved for key economic agancies; routinized behavour and surprisingly high levels of clientelism were allowed to persist in those considered less crucial to the national development project.

If there is any positive thing the economic rationalist theory has contributed to our understanding of governance, it has been the couching of rent-seeking in non-pejorative (or moralistic) terms, according to Evans. Rent-seeking which can take the form of lobbying or corruption is merely a form of profit-maximization on the part of rational agents.

When Mrs Arroyo in an interview at the start of her administration said for instance, that as an economist, she understood that markets did not operate in a ‘frictionless’ environment, she was acknowledging the need for transactions costs. Clientelism is sometimes needed by reformists to ‘payoff’ or compensate those hurt by reforms.

The East Asian countries did not try to reform the entire bureaucracy or weed out rent-seeking in one swoop. They took a different approach:

  • In Japan, the Ministry of International Trade and Industry performed the reformist role, while the Ministry of Agriculture continued to operate along clientelistic lines.
  • In Korea, a bifurcated bureaucracy existed, with the Economic Planning Board taking the helm of development while Construction followed along paternalistic lines.
  • In Taiwan the ruling Kuomintang Party ensured meritocratic appointments to key economic agencies while allowing a “back door” entry for retired military and party members to other parts of the civil service.
  • The pervasiveness of the Confucian ‘super bureaucrats’ in East Asia is a myth save for Singapore where civil servants are paid more than their private sector counterparts.

The Plan seeks to renovate the entire bureaucracy all at the same time. A very noble and ambitious goal, but it is difficult to imagine how this will be achieved given its meager resources and the quality of the civil service pool. This strategy is fraught with risk. Perhaps the biggest risk involves spreading the reform effort too thinly.

Avoiding Capture

A coherent economic bureaucracy was deemed necessary for the state to engage with but avoid capture by increasingly more powerful and wealthy private interests.

Initial conditions fostered the formation of this sort of governance model, namely, an egalitarian society, which was the result of land reform sponsored by the Americans after the War and the external policy environment that allowed market distorting industry and currency policy which was made possible by the US Cold War strategy of propping up capitalist states in the region.

The unlikelihood of duplicating such initial conditions is what causes pessimism with regard to the national development project for late bloomers like the Philippines. Yet, Evans encourages us to resist the fatalism of this view by saying

(w)hat puts East Asian practices out of reach is less likely to be external compulsion than antiipatory acquiescence by developing country governments to perceived constraints.

The rapid growth of China most recently proves that despite its signing up to the World Trade Organization, it has managed to resist measures to prevent it from exercising some of the tools under the industry and profit-nexus models. Singapore demonstrates in fact how the tools have evolved to more sophisticated measures that no longer involve the strong arm tactics applied elsewhere.

The more difficult problem has to do with large inequalities. While concentration of wealth should not necessarily hinder but in fact aid the formation of capital in productive areas, large inequalities have a corrosive function in the policy process.

State capture is what prevented the Philippines in the 1950s and 60s from following a similar path as its neighbors in the region although Malaysia and Singapore managed to avoid this despite having similar disparities among social groups. Here again is what Evans has to say

Entrenched inequality undercuts legitimacy of state autonomy…makes it hard for governments to credibly claim that they represent a national development project. Populist clientelism seems to offer at least a temporary relief to the excluded and close government-business ties which look more like a conspiracy for redistribution upwards than a joint project of national development.

It sounds like he is describing what happened to the country when it opted for a populist clientelist president in the person of Joseph Estrada. The perception was that growth under the elites was only favoring the rich.

Charting a new path

This brings us back to the questions of nepotism and cronyism that have started to emerge even in PNoy’s first year. In a country where only a small group of ruling elites hold much sway over the economy, it becomes difficult to prevent such rumors from floating.

If sanitizing all state agencies from clientelist practices can be ruled out (at least on the ground, despite its being paid lip service), the need to ring fence private rent seeking interest groups from crucial economic policies and infrastructure projects needs to be guaranteed.

That means boosting the capacity of the economic bureaucracy. The Plan which is the first one under the post-IMF oversight period, fails to break out of ‘perceived constraints’ by not examining other more effective governance models.

It remains wedded to the old generic formula of macroeconomic stability, open markets and establishing rule of law which has failed to produce results in places where it has been attempted, namely in Latin America and Sub-Saharan Africa. The challenge now is convincing the policy elite to chart a different path.

To be concluded…go to Part 3: Renovating the Bureaucracy

 

BFFs, NO! Developmental State, YES!

For all its talk of good governance and economic reform, PNoy’s government seems to be struggling at both. It needs a circuit breaker to change its current trajectory.

Last week, two surprise announcements were made. Well perhaps one was a surprise, the other was to be expected, but shocked a lot of people nonetheless. The first had to do with the resignation of Jose “Ping” De Jesus as secretary of the DOTC (Transport and Communications). The second was the less than stellar growth rate recorded in the first quarter of the year of 4.9%.

According to “Mareng Winnie” Monsod, Ping De Jesus her former colleague in Cory Aquino’s cabinet resigned due to his distaste for the shenanigans of his assistant secretary, Virgie Torres, a political appointee and shooting buddy of the Benign One himself. It appears that Mrs Torres who was already on the nose for two scandals involving her alleged abuse of authority was causing interference in the way Sec De Jesus wanted to run things at the department.

What’s more is that the DOJ Sec Leila De Lima, another highly esteemed member of PNoy’s cabinet had recommended suspension for Mrs Torres pending investigation of her latest infringement. What broke the proverbial camel’s back for Sec De Jesus, was PNoy’s decision to just ask Torres to go on leave for awhile, disregarding the DOJ’s recommendation.

A pattern emerges

This case mirrors the treatment of Sec Jesse Robredo, a highly decorated public official. In that instance another shooting buddy of PNoy in the person of Ricardo Puno was appointed undersecretary and was preventing Robredo from running the agency effectively. Despite the Luneta debacle involving Puno, who again was found liable by the DOJ secretary for mishandling the rescue of hostages, PNoy once again came to the aid of his BFF (best friends forever!).

At some point surmises Mareng Winnie, Robredo and De Lima might follow De Jesus and leave the PNoy administration.

It could not happen at a worse time as the economy seems to be slowing as a result of government underspending by a magnitude of 70 billion or three and a half conditional cash transfer programs in the first quarter alone. This according to the nation’s chief statistician NSCB Sec Gen Virola dragged the growth of the economy down from 5.1% supposedly to 4.9% effectively causing the NEDA to rethink its growth forecasts for the year.

Despite the approval given by Congress before the start of the year and the zero based budgeting approach instituted which presumably cleansed the roster of projects of wasteful anomalous spending, the current administration still found itself stumbling at the gate with a review of costings delaying its spend. Senator Ralph Recto a former NEDA director general says, “Use it, or lose it.”

Unfortunately, these two events are just symptomatic of a dysfunctional state and set of institutions that continue to hound the Philippines.

The BFF phenomenon

Ferdie had his cronies. Cory had her kamag-anaks (close relatives or Kamaganak Inc), Eddie had his fellow generals. Erap had his drinking kumpadres, Ate Glo had her husband’s classmates, and Noy has his shooting barkada (update: or Kaibigan Inc as the Inquirer has put it). It’s a BFF phenomenon replicating itself with each successive administration. Despite their rhetorical flourishes, they just can’t help but stick to the same playbook.

What’s the reason for this?

Well it goes to the heart of what institutions are about, which in economic theory is all about reducing transactions costs. Let me break it down for you…

In a nation like the Philippines, where business transactions are lubricated through personal relationships and kinships, using close friends and connections are one way to minimize costs associated with screening and monitoring business contracts, partnerships and joint ventures.

So it is in running a government, the sheer size of it makes it necessary for the one appointing to efficiently select appointees to help him share the burden. So often the shortest possible route to that is appointing BFFs.

The use of personal ties does not always lead to dysfunction. In post-war Japan where the top graduates from the premier law schools were often recruited into the economic bureaucracy, a member of an incoming “cohort” would often rely on school ties to forward his or her career. In fact, companies were wont to recruit graduates from the same universities mainly because of the close connections they had with public servants in these powerful agencies.

Todai Law School, University of Tokyo: has one of the most powerful of school cliques in Japan. Alumni are well-placed in the upper echelons of government, banking and industry.

The term they used for this was gakubatsu or school cliques which are ensconced in the upper echelons not only of government, but banking and industry. Within this batsu, is the Todaibatsu, or the “bastu of all batsus” which refers to alumni of the University of Tokyo Todai Law School, whose education features a heavy dose of public administration, more like political science, and economics.

This mixture of a merit based appointment and school/class based loyalty system enabled these bureaucrats to work cohesively and professionally, which in turn permitted policy to be developed independent of local as well as international pressure or influence, to strengthen economic policy and manage public-private cooperation.

The developmental state model

In his widely celebrated book on the powerful Ministry of Trade and Industry, MITI and the Japanese Miracle, the late Prof Chalmers Johnson outlined how the Japanese bureaucratic model worked

The first element of the model is the existence of a small, inexpensive, but elite bureaucracy staffed by the best managerial talent available in the system…they should be educated in law and economics, but it would be preferrable if they were not professional lawyers or economists, since as a general rule professionals make poor organization men…

The second element of the model is a political system in which the bureaucracy is given sufficient scope to take initiative and operate effectively. This means, concretely, that the legislative and judicial branches of government must be restricted to “safety valve” functions…to intervene in the work of the bureaucracy and to restrain it when it has gone too far…

The third element of the model is the perfection of market-conforming methods of state intervention in the economy. In implementing industrial policy, the state must take care to preserve competition to as high a degree as is compatible with its priorities. This is necessary to avoid the deadening hand of state control and the inevitable inefficiency, loss of incentives, corruption, and bureaucratism that it generates.

The fourth and final element of the model is a pilot organization like MITI. The problem here is to find the mix of powers needed by the pilot agency without either giving it control over so many sectors as to make it all-powerful or so few as to make it ineffective.

What Johnson was describing is basically the East Asian economic model based on the developmental state or the BeST Consensus (BeST stands for Beijing, Seoul and Tokyo). The Commission on Growth and Development in its findings covering the factors that gave rise to rapid and sustainable growth gave a tip of the hat to the fourth element. Its term for this is “reform teams”. According to the report

The business of “feeling for stones” in fast-growing economies was often carried out by highly qualified technocrats in small, dedicated “reform teams”. Singapore had its Economic Development Board, Korea its Economic Planning Board, and Japan its Ministry of Trade and Industry.

Reform teams were not burdened with adminstrative duties, but they were given direct access to the top of the government. Malaysia’s Economic Planning Unit reported directly to the prime minister. Taiwan, China’s…Council for Economic Planning and Development, reported directly to the president. Indeed, several future heads of government sprang from their ranks: the second chairman of the Council later became president of the country.

From this unique position…the reform teams helped coordinate the government’s efforts and overcome administrative opposition and inertia.

Although technocrats unchecked by political forces can fail to balance economic with political and social concerns, political forces unchecked by technocratic knowledge can be disruptive.

In the Philippines, the closest resemblance to a “reform team” is the NEDA which creates the revolving five year medium term plans and screens development projects. The latest roll-out is the Philippine Development Plan 2011-2016.

Unfortunately, while the director general of this agency does sit within cabinet, his stature is often relegated to a planning or “secretariat” function. We also witnessed in the case of Sec Romulo Neri how the clout of the NEDA chief could get superceded by political players and personalities outside of government.

The NEDA in its original design was meant to perform the function that the cabinet cluster under EO#43 sets out to do. Under this over-arching framework, the NEDA’s sole job is to act as secretariat for one of the clusters, on economic development leaving social development, climate change, governance and justice to be handled by other lead agencies.

The Philippine reform experience

If we look at our own track record at performing economic reform, the reform teams have traditionally been held by players close to the president, a Joe Almonte under Mr Ramos or a Joey Salceda under Mrs Arroyo.  Love them or loathe them, the reforming credentials earned by their presidents (whether you agree or disagree with the type of reform is immaterial) can be credited to them and the teams that worked with them.

Following in that tradition, I formed the view that the person best placed for this role would be Mar Roxas, the president’s failed vice presidential running mate. Although EO#43 has been branded a power play on the part of the opposing faction to “cluster out” the incoming chief of staff, I believe that it has the exact opposite effect. A reforming team requires a strategic “helicopter view” of the world.

Had the E.O. pigeonholed the chief of staff like it has the NEDA chief, the occupant would be unable to move out of this administrative strait jacket. Perhaps the strongest suit of Mar is his being a former DTI secretary, which puts him in good stead with the various industry groups and the economic bureaucracy. Given his skill sets, he should be able to drive a number of key reforms across all five cabinet clusters.

It is reported in today’s Inquirer that his rivals within the office of the Executive Secretary want Mar Roxas to take the DOTC secretaryship supposedly to keep him away from the Palace. Given the shambolic state that the administration currently is in, with its rookie student council style of governance, the presence of a veteran like Roxas might help steady the ship and keep it on course.

Conclusion

If the government of the Benign One ever hopes to dig itself out of the rabbit hole it has dug itself in, now is the time to do it. It will have to show its reformist credentials soon. The paternalistic state was one where BFFs thrived. It was compatible with the misplaced faith in “the Market” to deliver its citizens into the promised land of economic prosperity wherein the state played a diminished role.

As inconsistencies between the outcomes of this model and what it predicts has become apparent, perhaps our leaders will realize that the responsibility for charting our own path lies in our hands and not that of foreign aid donors and advisors. Perhaps this “re-awakened sense” of self-determination is the vision lacking in all our plans.