Tim Kelsall

What the Philippines Can Learn from Rwanda

How has Rwanda managed to overtake many developing nations in the global race for competitiveness and transparency?

Landlocked, under-endowed, war-ravaged, Rwanda a nation of 10.5 million people has faced a number of challenges, not the least of which was the ethnic strife that led to genocide twenty years ago. And yet it in spite of all this, it has managed to regain stability and posted sustained economic growth averaging 7.4 per cent per annum that has led to improved social well-being over the past decade.

As an indication of its progress, Rwanda has successfully undertaken significant reforms in its regulatory environment. Just consider the following:

So how has a country which suffered many years of war and as much corruption as any other impoverished nation in the past, managed to turn things around?

Well the short answer is they did this through an accommodative political settlement and the help of both conventional and unorthodox institutions and economic strategies.

A troubled past

Rwanda has had a long history of ethnic violence between the two main rival tribes.  From pre-colonial times up to 1959, the pastoralist Tutsis were the ascendant political class over the agriculturalist Hutus. Ethnic differences were exaggerated under colonial rule. In the lead up to independence in 1962, Belgian colonists transferred their support to Hutu elites. This led to mass killings of Tutsis many of whom fled the country.

Two Hutu regimes ruled the country from 1961-94. Having a single-party dominate politics for most of this period did not prevent the nation from succumbing to decentralised rent-seeking and clientelist behaviour. A group known as Akazu was at the apex of this system. It was related to but not controlled by the administration.

Tutsis sought to regain control of the country through an invading Rwanda Patriotic Army. This culminated in the genocide of 1994 by retreating Hutus. After consolidating their hold on the country, the Rwanda Patriotic Front (RPF) established a government of national unity incorporating moderate Hutus, one of whom led the country as its president.

A reformist regime

Although a certain amount of political repression in the guise of preventing a return of “ethnic ideology” has occurred, the coalition governments comprised of all legal parties in parliament being proportionately represented in cabinet (the ruling RPF holds no more than fifty per cent of the portfolios) has succeeded in keeping the nation stable. This inclusiveness along with its program of restorative justice known as gacaca has fostered reconciliation and allowed the country to experience improvements in social and human development not previously seen.

The intrusive intervention of government in everyday life at times borders on social engineering as the government has sought to follow the Singaporean model in both economic and social policy implementation. President Paul Kagame (elected in 2003 and then again in 2010) has been labelled the global elite’s favourite strongman for improvements to public service delivery, particularly in health and education.

Departmental line agencies have been managed through an institution of performance contracts known as imihigo which Tim Kelsall describes as “modern performance agreements supported by a significant component of moral pressure and neo-traditional gloss.” This combination of formal scientific management and homegrown practices has permeated down to the grassroots by roping in local officials and civil servants.

On the economic front, Rwanda has applied a hybrid approach to investment promotion. On the one hand, it has adopted policies and institutional arrangements considered best practice by the World Bank’s Doing Business surveys. Responsibility for managing this has been assigned to the Rwanda Development Board (RDB). But this works in parallel with a more activist approach in industrial policy with the RPF’s holding company, Tri-Star Investments getting involved in joint ventures and start-up companies.

The holding company has initiated many successful ventures with demonstration effects for the rest of the economy. Telecoms is one example. When Tri-Star sold part of its stake in Rwandatel in 2007, it got five to ten times its initial investment in the company.

Because profits from Tri-Star that are not ploughed back into its businesses revert to RPF, the party is financially independent. It uses this to fund its political campaigns without having to resort to political donors. Kelsall explains what this does:

The RPF’s financial solvency obviates the need for party officials to engage in election-related corruption, which in turn allows the party to take a very tough line on corruption among its leading supporters and in the bureaucracy.

Apart from Tri-Star the government has also orchestrated the formation of other funds, the Horizon Group belonging to the army, which undertakes socio-economic projects to produce productive enterprises, and the Rwanda Investment Group, a consortium led by domestic and diasporic elite.

The purpose of the second group is to raise capital other than through foreign borrowings to invest in high impact projects of strategic national importance. Without such an interventionist approach, much of the agricultural and industrial transformations currently underway in different sectors of the economy simply would not be happening.

The case of Rwanda demonstrates many similar traits to that of the Northeast Asian developmental states. The RPF led government faced existential threats from the opposition in exile and from a potentially hostile ethnic majority at home just as the South Korean and Taiwanese states did from North Korea and from mainland China. 

These threats have kept the ruling RPF focused on improving social and economic well-being for its citizens to maintain its legitimacy and hold on power. The regime has exercised a capacity for long-range vision and forward planning contained in its Vision 2020 roadmap, free from the influence of rent-seeking, private interests. It has ruthlessly pursued its policies at times through heavy-handed regulations and enforcement of rules.

The low crime, low corruption, low red-tape environment this has fostered was not enough. The RPF has used its clout to address market failures and encourage the adoption of productivity enhancing new technology. Through its holding company and other private-led investment groups that it has brought into being, jobs have been found for talented managers and skilled workers that might have otherwise gone overseas.

The Rwandan experience demonstrates the capacity of poor nations to bring about a system of governance that is relatively competent and free from corruption within a short span of time using home-grown institutions, resources and talent. The extremely harsh and disadvantageous position it faced did not become a hindrance, but rather provided greater incentive for it to go down the road it has followed. Surely, any emerging economy seeking to do the same should take heed the lessons from Rwanda.

Lessons for the Philippines?

The Philippines may have already attained middle income country status, a milestone that Rwanda is still aiming to achieve by 2020, but there are certain elements in Rwanda’s development experience that it can learn from.

  • Financially autonomous political parties:

We have seen how  gaining financial solvency allowed the RPF to govern without fear or favour. This enabled it to take a long-term view in planning and executing its economic development strategy. It enabled it to rule with moral ascendancy and punish erring, corrupt officials, putting an end to the patrimonial, rent-seeking behaviour of its bureaucratic and business elite.

  • Inclusive, participatory governance:

We have already seen how the RPF has shared power with other political parties. The proportion of cabinet appointments follows the same proportion of parties represented in the parliament. In the 2013 elections, an unprecedented 64 per cent of seats were won by women. This is the highest level of female participation in political office anywhere in the world. With this level of representation, laws that uphold women’s rights and promote women’s health and well-being are being enacted.

  • Home-grown solutions:

Although a certain amount of repression of the press and political opposition has taken place, in the guise of preventing ethnic tensions from flaring up once again, such suppression it can be argued would have taken place anyway, given conditions prevailing in Rwanda. Rather than relying on foreign models of governance and economic development, Rwanda has charted its own path. It uses institutions like gacaca and imihigo to bring about restorative justice and better governance.

  • Robust government role:

In promoting economic development, Rwanda didn’t follow the Washington Consensus that simply limits the role of government to creating a level playing field. It followed the example of East Asia, which meant addressing structural issues in its economy through interventionist industrial policy aimed at catalyzing investment in productive sectors in agriculture, industry and services to raise the standard of living of those residing at the base of the socio-economic pyramid. Ironically this has emboldened the private sector to take risks as well, to invest in the future of the country.

  • Political succession.

Many commentators are wondering whether President Kagame intends to step down at the end of his second term in 2017. A third term is constitutionally prohibited. As early as 2012, the ruling party held a conference to tackle the issue of political succession at Kagame’s request. At this early stage, the RPF has begun to look for ways to bring about an orderly succession, but one that does not put in jeopardy the advances made already. It is seeking ways to institutionalise mechanisms for bringing this about.

It would not be right to recommend that the same set of policies be adopted in the Philippines. The message here is that countries need to chart their own developmental path based on the conditions they face. The universal prescriptions of the Washington Consensus are becoming less influential as the balance of economic power shifts to the East. While that may be true, certain key principles can be gleaned from the success of other countries.

Considering the way the RPF developed its Vision 2020, opened up participation of women, included its political opponents in a cabinet that advises the president, and managed the bureaucracy through formal and informal contracts, what changes could the ruling Liberal Party make that would improve the way it governs under President Aquino? More importantly, how could it ensure that the positive changes it makes continue beyond 2016 when he steps down?

Succeeding Aquino

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.

Source: NSCB

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:

  1. The new Philippine political architecture: a blueprint for strengthening political parties.
  2. The national development project: Renovating the bureaucracy

 

Developmental patrimonialism? The Philippine preference for pork, part 2

handouts

Filipinos have a preference for pork. They expect their elected representatives to provide private or club goods, such as money, roads, community halls, rather than public goods like legislative scrutiny, economic policy, and the like. Yet this has not prevented their economy to grow at the same time. In this sense the Philippines might be considered a developmental patrimonial state. The following is how Tim Kelsall explains the concept based on the findings of his research

 Africa may have some of the world’s fastest-growing economies, but investment and incomes still lag far behind other regions. Conventional development wisdom lays the blame on a governance syndrome known as neo-patrimonialism, a system of personal rule held together by the distribution of economic rents to clients or cronies. But recent research … shows that neo-patrimonialism is not always as economically damaging as the development community believes…(It) may even help, the climate for business and investment (and) can be compatible with rapid, pro-poor, economic growth (emphasis added).

To paraphrase Kelsall, neo-patrimonialism comes from Max Weber’s concept of “patrimonialism”, an “ideal-type” of traditional rule in which authority is founded on ties of personal loyalty between leader/patron and subordinates/clients. The system is maintained through the distribution of perks or rents. These benefits are distributed among clients with no distinction between private and public property.

Neo-patrimonialism is a political economy in which patrimonialism is overlayed with elements of modern governance and rational-legal systems that differentiate between private and public domains on paper, but where informal practices still trump formal rules. Developmental patrimonial states according to Kelsall have exhibited these characteristics, but were also capable of long term vision and able to

distribute economic rents in a way that balanced the demands of political stability and economic growth, while facilitating investment through …‘relationship-based’ governance.

The rents being talked about here, are not just monopolistic, the sort that takes welfare from consumers and transfers it to producers. They also involve Schumpeterian rents, associated with entrepreneurial ventures and wealth creating innovation. Developmental states are able to  train resources at both kinds of rent-creation and make them serve a national development agenda. The motives behind this need not be altruistic, as higher long-run growth provides better rewards for those at the top of the patron-client network.

The findings of Kelsall are similar to the conclusions of Solon, Fabella and Capuno (2009). When they looked at the spending behaviour of provincial governors in the Philippines, they found a kind of competitive developmentalism at work along patrimonial lines as political clans sought to outdo each other to win local elections. Where rival clans have been present, the consolidation of power has not led to complacency. Instead of simply plundering all of their discretionary funds, patrons have had to ensure that a significant portion of it ends up serving their local constituents for them to survive in the political jungle.

The Philippines has been described as a patrimonial state by Hutchcroft (1998). He attributes this to the capture by local elites of the levers of the state under the American commonwealth period and beyond. The Martial Law regime centralised rent-creating and distributing capacity, an important pre-requisite for becoming a developmental patrimonial state based on Kelsall’s findings.

Although the post-EDSA era has decentralised power to local elites by restoring congress, it has kept the power of the purse with the executive branch as demonstrated by its ability to impound and re-align government spending without congressional authority. This centralisation as some have pointed out covers large lump-sums in the budget, effectively giving the office of the president immense powers to dispense patronage with minimal oversight from a complicit congress with which it shares some of the spoils through pork barrel.

But despite the opportunity for this sort of patrimonialism, and the fact that the countries’ ratings in traditional indicators of good governance have not improved much over the past decade, the Philippine economy has experienced a relatively stable and sustained period of economic growth for over a decade. It has been the fastest growing economy in the region over the last two quarters.

Becoming developmental?

Since the third quarter of 1998, the country has had 60 consecutive quarters of growth averaging 4.9 per cent year-on-year. It created about 11 million net new jobs during this period. Since 1999 the country’s capital formation has outstripped investments making it a net saving rather than a net borrowing nation, largely on the back of foreign remittances. Macroeconomic stability, that eluded the country in the 1970s to the 1990s was restored. 

On the fiscal side, the government was able to tame its budget deficits. From 2001 to 2011, the government’s net borrowing averaged a mere 1.98 per cent of GDP per annum based on IMF figures. Debt as a percentage of GDP fell from a peak of 68% in 2003 to 42% in 2011, and it is projected to fall to 33% by 2018. The orderly transition from Arroyo to Aquino, and the continuity of policies have, despite the political recriminations and legal prosecutions that followed, made this sustained performance possible.

Fiscal consolidation and resilient growth has led the three most prominent credit rating agencies to upgrade the country to investment status. This has given the Aquino administration fiscal space to focus on social and economic programs. These include expanding the conditional cash transfers program, which began under its predecessor. In 2014, the government will boost funding for this to Php 40 billion covering in full the four million estimated poorest households nationwide.

In the past, such a large program would have presented opportunities for waste, political interference and corruption, resulting in policy failure. That has not been the case here. A recent impact evaluation of the program conducted by the World Bank has concluded that it has been effective in fulfilling its desired outcomes–school enrollments and attendance rates are up, while malnourishment is down among children of households that are participating.

Between 2012 and 2013, social and economic services received the lion’s share of increased fiscal spending growing from a combined total of P1.05 trillion to P1.2 trillion. The 2014 budget increases this to P1.4 trillion. Included in this is the closing of the school building deficit and increased public works expenditures. The government aims to spend 5% of GDP on public infrastructure by the end of its term in 2016.

Increased spending on education and health to develop human capabilities will be an important determinant of future growth in a world where human capital counts more than physical capital, as Peter Evans suggests. The 21st developmental state will need to develop the kind of institutions that foster this kind of investment.It will require a political consensus to support it in a sustained manner. In a country with large social disparities, that can only be achieved through some sort of rent management.

What PDAF and DAP represent

PDAF and DAP have caught the ire of the middle and upper classes in urban centres who regard these as pork barrel. To them this type of spending represents patrimonial plunder and a hindrance to development. PDAF has accounted for 1.2-1.3% of the General Appropriations in the last three years. DAP amounted to 5.3% of the budget in 2011 and 3.2% in 2012, of which only 9% went to projects identified by members of congress. In 2013, about 0.8% of the budget has been approved under the program.

What PDAF and DAP represent from a neopatrimonialist point of view is an investment in political stability. Compensating powerful elements of society with such rents, buys support for inclusive development spending to provide a social safety net for the marginalised sectors of society. Without such an “investment” the country would have slipt into political chaos during the Arroyo administration. This would have disrupted economic growth and hindered the country’s fiscal capacity for investing in social development as what happened in the 1980s following the assassination of Benigno Aquino, Jr.

The question now is whether such a set-up needs to continue beyond the present administration’s term of office. As Kelsall points out,

Developmental patrimonialism has a limited shelf life and will not be appropriate everywhere.

What the recent Pulse Asia survey on the pork barrel reveals is that people are still unwilling to change things dramatically. They will still allow for clientelist side payments to be made, with some caveats or none at all, to facilitate local development spending.

As the Philippines enters middle-income country status where the pace of growth is providing increased fiscal capacity to deal with the requirements of social and economic development, it is possible for the illegal practices associated with pork barrel to be legitimised through some new formal compensation and benefits arrangements for elected officials and other mechanisms such as state-subsidised political party campaigns, or a combination of both.

Whether this happens or not depends on the political pulse of the country, and what the ruling elite perceive is in their best interest. Other factors may come into play, such as the Supreme Court ruling on the constitutionality of PDAF and DAP, the actions of prominent leaders and mobilisation by civil society groups.

Given the public approval for the president’s handling of the situation (as borne out by the Pulse Asia survey), much will also depends on what the administration perceives it can and should change, and the capacity it retains after all the dust has settled to set the agenda for the remainder of its term.

Regardless of what happens though, it is important for the policies that foster growth and social equity to be preserved as President Aquino hands over the reins to his successor in 2016. Only sustained growth holds the possibility for improved governance down the track.