What the Marcos victory heralds

Image courtesy of PNA, June 2022.

The New Society under Pres. Ferdinand E. Marcos sought to break with the Commonwealth era, by dispossessing the old aristocracy who were in charge of that order and replacing them with his own cronies and political acolytes. State-led development using financial leverage supplied by the West was its economic growth model. This was made possible by various policy settings prevalent at the time.

The Marcos regime operated state owned enterprises in nearly every sector of the economy. It had a fixed exchange rate with the peso pegged to the US dollar. It sought to develop industries behind protectionist trade walls. It had a central wage fixing system that was politically manipulable. Foreign investment was confined to a short positive list, set by his government. The tax regime was highly irrational and regressive.

This was reformed by the EDSA regime, which subscribed to Washington’s neoliberal agenda. State-led development gave way to market-centrism. State-owned enterprises were privatised. Crony capitalists were left to fend for themselves. A flexible foreign exchange rate regime was introduced. Quantitative trade restrictions were converted into tariffs, which were then lowered at an accelerated pace. Foreign investment was restricted by an ever dwindling negative list. The tax regime was gradually made more progressive and rational. 

In the political arena, regular “free” elections were restored. This led to the revival of the old Commonwealth political clans that went into hiatus under Marcos. The regime increasingly tolerated many of Marcos’ political allies, at first in local bailiwicks, then eventually at the national stage. This included the Marcoses and Romualdezes themselves who were allowed to return from exile, after Marcos, Sr. passed away in Hawaii.

Some of the EDSA stalwarts who had fought the dictator survived, for a time. But in the end, they either lost to more traditional political clans, former Marcos loyalists and new dynasties, or got compromised by the system, so much so that the distinction between them and their former opponents was difficult to perceive.

Was it any wonder that after restoring the pre-Martial Law system of politics, the result would be the same old patrimonialism that thrived under that old order? Allegiances were feigned towards whoever was the occupant of Malacanang by members of congress and local governments, to gain maximum advantage. No permanent alliances, only permanent interests.

The political class realised that it was better to collude by forging “unity” - the path of least resistance - to remain in power. Ferdinand Marcos, Jr. despite claiming that the post-EDSA regime had disrupted his father’s grand plan for first world status, had in fact accepted the tenets of its economic philosophy as the basis for his administration.

Having subscribed to it, he saw no need to debate policy with his opponents during his presidential campaign. They were advocating mostly the same things, anyway. His rivals would only use the debate stage as an opportunity to raise the issue of his father’s dark past, which he needed to avoid at all cost. 

At his first address to the joint-sitting of Congress, he surprised many by simply sticking to the policy line of his economic managers. The same high priests who had advised his father, but whose prescriptions went unheeded. Marcos, Jr., for fear of upsetting markets at a precarious post-pandemic period, towed their line.

Neither did he signal any structural break with the past by way of revising the 1987 charter. This was despite hinting that he was for amending it, up until he got elected. Then, he suddenly switched gears and said it was not a priority, dousing the fervour of those who were expecting something more radical from him.

Unlike 1986 when the difference between the Marcos and EDSA regimes were as stark as light and darkness, good and evil, the main differences now had to do with the extent to which three lettered acronyms like PPP ought to be relied on to boost infrastructure spending. They were  marginal, because both sides had actually gravitated towards the middle.

In the end all that Bongbong Marcos could offer was more of the same, only better. In truth, this was all the Filipino public had bargained for. They simply wanted more effective governance than what they had been shown in the past. Better conditions on the ground, rather than lofty ideals based on such abstractions as “democracy” or “people empowerment”. The EDSA regime had offered these in spades, but seemed inept, unable to translate them into reality. 

The Aquinos, having fallen from political grace, were now seen as the enemy. And so as the logic goes, the enemy of my enemy becomes my friend. These were the Marcoses who were able to spin the yarn that things had been better under their watch. Substituting “unity” for “discipline” the mantra of his father, Marcos Jr., was able to provide an antidote to the perennially argumentative, critically divisive and deconstructive attitude of the EDSA forces. Unity required discipline after all.

And in so doing, he was able to foist his own counter-narrative that would explain the past. It was all a lie, the attacks on our family. We hold these hidden truths that the EDSA forces don’t want you to hear. And yet, despite the success of his propaganda, and his victory at the polls, what did the second coming of Marcos herald? Not a break with the previous dispensation.

Though the rejuvenation of the Marcos dynasty signalled a rejection of the formerly ascendant Aquinos and their allies, it didn’t represent a repudiation of the constitutional, political and economic norms they had put in place. Quite the opposite. 

Imitation is the sincerest form of flattery that mediocrity can pay to greatness, so Oscar Wilde said. Maggie Thatcher when asked what her single, greatest achievement was, replied, “Tony Blair and New Labour. We forced our opponents to change their minds.”. So it became with the EDSA regime. Its crowning glory, its finest hour, came not at the apotheosis of the Aquinos, but with the measured return of another Marcos into Malacanang.

Constitutional political economy of foreign investment in the Philippines

Originally livestreamed on the Facebook page of The CoRRECT Movement on February 21, 2021 (the 35th anniversary of EDSA), this discussion with Orion Perez Dumdum covers the political economy of constitutional restrictions on foreign ownership in key sectors of the Philippines. CoRRECT stands for Constitutional Reform and Rectification for Economic Competitiveness and Transformation. It is a study group that espouses reforms in the Philippine Constitution of 1987.

The show notes used to structure the discussion are found here.

Lessons from Rwanda

Twenty years on since the Rwandan genocide how has the country transitioned into a more stable society and been able to punch above its weight in good governance and growth?

Landlocked, under-endowed, war-ravaged, Rwanda a nation of 10.5 million people has faced a number of disadvantages, not the least of which was the ethnic strife between the Hutus and Tutsis that has ravaged the country in the past. And yet it in spite of these setbacks, it has experienced very respectable growth figures (averaging 7.4 per cent per annum) and improving social indicators over the past decade.

Rwanda has undertaken significant efforts to reform its regulatory environment. Just consider the following:

• The World Bank ranks Rwanda the 4th best country in Africa to do business, after Mauritius, South Africa and Botswana.
• It only takes 3 days to set up a business, the 8th shortest time in the world.

• The country is in the 71 percentile rank with a score of 53/100 in Transparency International’s Corruption Perception Index, placing it in the same class as Malaysia and South Korea.

So how has a country which suffered many years of war and as much corruption as any other impoverished nation, 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.

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.

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 seen previously.

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 imhigo 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 theory 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.

Tri-Star helped the RPF raise funds during the Congo wars to overthrow Zairean dictator Mobutu Sese Seko through trading metals in international markets. The surplus achieved was then channeled towards domestic private sector development. 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 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.

The entrepreneurial state: more shoving, less nudging

What is the role of the state?

Since conservative ideology gained ascendancy in the 1980s, most people tend to regard the state as a sluggish, unwieldy and overbearing beast which often gets in the way of private enterprise and creativity by imposing higher taxes and burdensome regulation. 

Those advocating for a minimalist role for the state say that the growth of debt has caused the crisis in the EU, which makes the need for austerity paramount in rebuilding its fortunes.

Mariana Mazzucato, professor of economics at Sussex University has recently published a book called the Entrepreneurial State. The title will sound like an oxymoron especially to those steeped in the tradition of Adam Smith’s Invisible Hand and David Ricardo’s theory of Comparative Advantage in which the market not the state holds primary importance in the economic life of a nation.

Under this rubric of market ideology, the role of the state is to get out of the way of business. State investments are frowned on for “crowding out” private investment. Any type of intervention in the free market only leads to distortions that prevent capital from flowing to those sectors which deserve them the most. 

Today even the task of countercyclical spending when business and consumer sentiment collapses espoused by the Keynesian school of economics is challenged by pro-austerity advocates who question the effectiveness of stimulus measures.

The only place where the importance of the state is acknowledged in promoting growth and industrial diversification is in the developing and emerging world. But even there, the role of the state has been confined to that of a ‘facilitator’: nudging businesses along, addressing ‘market failures’, reducing transactions costs like corruption, providing basic infrastructure, the protection of property rights and the rule of law.

In the advanced economies of the West, where the state is relatively corruption free, where market institutions are mature and where economies operate on the edge of the technological frontier, there does not seem to be any role for the state except in providing tax credits for innovation, improving human capital and supplying basic research and development.

In popular culture, prestige is given to the entrepreneurial class, those rugged individuals who take risks, great visionaries that have given birth to new industries. The stories of Google, Apple and Microsoft are seen as shining examples of this. These are popular myths that Mazzucato’s book seeks to dispel.

Through programs funded by obscure agencies like DARPA, ARPA-E, the National Science Foundation, the National Institute of Health and the Small Business Investment Company, the US government developed the technological building blocks with which these companies built their innovative products. Far from being a bastion of the "market friendly model", the American state has in fact conducted industrial policy by stealth, according to the book. 

Far from being risk averse, these state actors showed the capacity to take risks, support nascent industries, took the role of “patient finance” as opposed to private venture capitalists who came in late in the piece and piggy backed on the wave of technology that the state generated. 

But instead of supporting the entrepreneurial state, what many iconic companies that have benefited the most from it have done is seek to diminish it by availing of tax loopholes.

This leads to another key theme of the book: the socialisation of risk and privatisation of reward deepens inequity in society. A certain amount of wealth creation and concentration is a natural consequence of disruptive innovation which gives rise to massive profits or rents. 

Although the state did much of the heavy lifting in producing general technologies which became the basis for such wealth, it is unable to reap a share of the rewards from it.

There are a number of policy implications presented by Mazzucato including the need for new risk-reward models in public private partnerships. She proposes income contingent loans as a possible alternative, allowing the state to be rewarded when the start-ups it funds become profitable. 

A model that would allow the state to recover its losses from some bad investments by making a killing from a few good ones sounds sensible.

The growing number of sovereign wealth funds in advanced, emerging and developing economies presents an opportunity for entrepreneurial states to fund the next round of innovation. For advanced economies, this would allow them to get out of the productivity rut that has been noticed since the 1990s. 

For emerging economies, it allows them to avoid the middle income trap by moving up the value chain. For developing countries, it would help them “catch-up” in the technological race.

Far from being an inhibitor of growth, the state according to Mazzucato provides the impetus for it:

And this is the punchline: when organized effectively, the State's hand is firm but not heavy, providing the vision and the dynamic push (as well as some 'nudges'- though nudges don't get you the IT revolution of the past, nor the green revolution today) to make things happen that otherwise would not have...This requires understanding the State as neither a 'meddler'nor a simple 'facilitator' of economic growth. It is a key partner of the private sector - and often a more daring one, willing to take the risks that business won't.