Monday, August 29, 2011

The other binding constraints

BusinessWorld Online


Introspective -- Calixto V. Chikiamco

Posted on August 28, 2011 08:41:12 PM

Can political reform be divorced from economic reform? Is the Pope Jewish? There’s this fashionable idea that what the country needs to achieve a sustainable, high-growth path is to focus solely on economic reforms. Discussions about a Philippine development agenda revolve almost entirely on economic policies -- raising the tax effort, hastening Public-Private Partnership implementation, liberalizing foreign ownership limits, etc.

There’s indeed some talk about political reform in the context of good governance, primarily centered around reducing corruption. But how policies to improve good governance and reduce corruption relate to sustainable economic growth is not entirely clear. While there might indeed be some moral imperatives to follow the "matuwid na daan," the strategic underpinnings of how an anti-corruption crusade can lead to sustainable development aren’t understood. Absent are analyses and discussions of political reform and how they relate to the development agenda.

Take, for example, the problem of low investment spending. Investors, both foreign and domestic, aren’t spending. This is why the system is awash with liquidity. However, investment spending must rise if the country is to go from a consumption-driven growth to an investment-driven growth. Only an investment-driven growth will increase the country’s productive capacity, make a real dent on the unemployment problem, and sustain high levels of GDP growth. 

The problem is not simply one of corruption. Corruption is prevalent in many of our Asian neighbors as well but that has not deterred investors in those countries from spending. Corruption may well be efficient, as some observers say, because it facilitates transactions and enables investments that would not otherwise have been done. However, in the Philippines, corruption is dysfunctional, because outcomes are not assured. Contracts may well be overturned by successors or sabotaged by either the courts or some other parts of the bureaucracy. 

Overall, what investors complain about is inconsistency of policies and weak enforcement of property rights. These point to an institutional problem, and institutional problems can’t be fixed with economic reforms alone.

These institutional weaknesses show up in many ways and give investors pause. For example, it’s widely perceived that President PNoy relies on "kaklase, kabarkada, andkabarilan" and not really on his own political party. True or not, investors will wonder whether a system that’s dependent on personal and kin-based relationships can guarantee stability and consistency of policies over time. If a kaklase falls out of favor, will a kabarkada successor continue the former’s policies? What does a kabarilan really stand for? Given also our weak bureaucracy, there’s no assurance that the policies of President Aquino or his appointees will be institutionalized and carried over to the next administration.

More than eliminating corruption, investors want policy stability and security of property rights. That can’t happen if there are no genuine political parties and if the bureaucracy remains weak and politicized. Economists talk about investors needing "credible commitments" from the state, but can a state that’s influenced by kaklase, kabarkada,and kabarilan deliver those "credible commitments?"

The weak bureaucracy and lack of modern, programmatic parties therefore are "binding constraints" as much as monopolies and labor rigidities are. 

It’s not only an effective bureaucracy and a genuine political party system that are needed to improve the climate for investments. Electoral reforms are, too. In a previous column, I said that electoral reforms are the "mother of all reforms." It’s not hard to see why. All the evils that spawned from the Macapagal-Arroyo presidency, from the abuses by the Ampatuans to the fraudulent sale of pre-owned helicopters to the PNP, stemmed from an electoral system that’s easily manipulated and rigged. 

Development is not simply a matter of "getting prices right." Growth doesn’t simply happen. Both institutions and economic policies must interact to create an environment conducive to growth and investment.

What’s troubling is that the Aquino administration seems clueless about any kind of reform, economic or political, other than pursuing malfeasance in the previous administration. It’s bad enough that both the State of the Nation Address (SONA) and the Legislative Agenda do not contain any strategic economic reform agenda, whether it be liberalizing foreign ownership limits or reforming the National Food Authority; the absence of any political reform agenda, to strike at the roots of our graft-ridden system, is severely disappointing. 

Besides, the anti-corruption crusade, the sole program of President Aquino, must prove to be balanced and symmetrical, i.e., applicable not only to former President Gloria Macapagal-Arroyo and her cohorts but also to President Aquino’s own erring subordinates, before it can be declared a success.

To achieve development, we need to modernize our political institutions as much as our economy. Our weak, inefficient, and politicized bureaucracy, our flawed and money-driven electoral process, our lack of ideological parties, our unmeritocratic practice of appointing public officials -- these are also binding constraints to development. Political reform as much as economic reform must be on the nation’s agenda. 

Calixto V. Chikiamco is a board member of the Institute for Development and Econometric Analysis.

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