Eternal Sunshine of an Ahistorical Mind: Rejoinder to Monsod, Magno, Punongbayan, et al.

Resolution of Both Houses (RBH) Nos. 6 and 7 seek to amend portions of our constitution that deal with foreign ownership in public utilities, basic education, and advertising. The current limits on foreign ownership in these sectors would remain, but Congress would be authorized to modify them through ordinary legislation. 

The University of the Philippines School of Economics (UPSE) issued a Discussion Paper (DP) recently in response to deliberations in the House of Representatives. The paper entitled, “How to change a constitution by hand-waving (Or, the unbearable lightness of evidence2 in support of lifting foreign ownership restrictions)” questions the validity of evidence used to support both resolutions. 

This reaction paper below seeks to unpack what the UP professors allege is the weak evidence presented at the House and evaluate their counter evidence.

In addition, I recorded a series on The Cusp Youtube Channel that covers the main arguments of the rejoinder. Here they are in order (see below).

Dilawan: Rise and Fall of the EDSA Regime - Another Aquino

“I have fought the good fight, I have finished the race, I have kept the faith.”

Those were the words of Pres. Noynoy Aquino at his valedictory State of the Nation Address to Congress in July of 2015 where he summed up his administration’s achievements and looked forward to “a new dawn of justice and opportunity” forged by “freedom from corruption” as he claimed, and I quote

My one and only interest is the well-being of my Bosses. I did all I could to forge a nation that is more just and more progressive—one that enjoys the fruits of meaningful change. I will let history decide.

And within 12 months of uttering those words, the era of the EDSA regime would draw to a close, with the rejection of Aquino’s hand-picked successor and the election of Rodrigo Duterte, whose approach to criminal justice was anathema to what the regime had stood for.

In this fourth part to the Rise and Fall of the EDSA Regime, we will look at the second Aquino presidency, its ambition, achievements and follies, and while five years is too short a time frame to have gained enough “distance” from those events, we will try to explain what led to the collapse in confidence in the yellow movement, which triggered their losses at the ballot in 2016 and since, and as to why it is unlikely that it will return any time soon. 

East Asia and LatAm

Image taken from Web Resources Depot.

New graphic tools tell the oft-repeated story behind these two regions in a visually compelling format.

Lately I have been playing around with the online graphing tools of the Legatum Institute; in particular, I have been using the results of the 2009 Prosperity Index which the Institute publishes to compare East Asia and Latin America. This multi-dimensional index is an aggregator of sorts in that it combines various measures of prosperity and well-being and allows users to plot different countries on a “spider web” chart.

It is a well-known fact that East Asian and Latin American countries share many socio-cultural traits as well as development strategies. This is borne out by the Institute’s results for these regions. As shown here, LatAm seems to converge into one distinct pattern, while East Asia does the same here. Note that for purposes of demonstration, I have lumped the Philippines (a Latin country transplanted in Asia) and Chile (the reverse case) with their affinitive counterparts.

The patterns show different models of development. LatAm nations score high on Personal Freedom and Democratic Institutions, but relatively low when it comes to Economic Fundamentals, Entrepreneurship and Innovation, and Social Capital. Despite this, the most well-off nations of Argentina, Uruguay and Costa Rica seem to do well in terms of some social indicators Education, Health, and Safety and Security. There is a general lack of good performance in Governance save for the richer nations.

The opposite seems to be happening with East Asia. Here Personal Freedom seems to have been less prioritized in favor of Economic Fundamentals, Entrepreneurship and Innovation, Health, Education, and Safety and Security. As countries in the region get richer, a gradual improvement in Personal Freedom and Democratic Institutions takes place as evidenced by Japan, South Korea, and Hong Kong. Governance tends to improve as well (with China in the embryonic stage of this development path).

Does this imply that democratic institutions are not good for development or that authoritarian governments promote growth? Not necessarily as this Economics By Invitation feature by The Economist showed. While as Alberto Alesina states, there may be no evidence that democracies promote faster growth, and that as Lant Pritchett suggests authoritarian regimes tend to have a spotty record, as Daron Acemoglu who co-wrote a book on this (shown below) as well as Ricardo Hausmann, Arvind Subramaniam, and Yang Yao suggest, getting the right incentives, institutions and governance arrangements do matter.

The Market for Rules

A recent straw poll among the business elite in the Philippines showed that an overwhelming proportion of them support the candidacy of Benigno Aquino III, the son of former president Corazon Aquino who is campaigning based on a platform of rule of law and good governance.

The demand for the “rule of law” in the Philippines coming from the oligopolistic business community is quite puzzling considering that the literature points to reasons why this demand would normally be absent in such a context.

The argument goes that the elite often prefer a system in which they can bend the rules to suit their needs. They would have a comparative advantage in capturing a weak state since they command more resources compared to the owners of small and medium enterprises. They would in fact continue to see returns from their investments in capturing rules and regulations long after such investments have been made.

The founder of Transparency International’s Corruption Perception Index, Johann Lambsdorff has in fact found that investors prefer “grand” corruption compared to petty corruption for the simple reason that under the former they feel part of an elite group that is able to influence laws and regulations.

So why are Aquino’s supporters pushing for the “rule of law”?

There are two possibilities: (a) they could be merely capitalising on public anger against corruption in government aimed at the present administration, or (b) they have seen how the absence of rule of law affects their interests and have learnt to compete on their own terms.

The first reason would cast the elite in their traditional role as opportunistic predators positioning themselves behind the leader that captures the zeitgeist during an election in order to exploit opportunities after the wave of public euphoria has passed. The second reason is a bit more interesting since it would suggest that a genuine market for rules is beginning to take shape.

Is there proof for either position?

History certainly favours the former. Studies comparing the Philippine state with that of its East Asian counterparts have categorised it as a weak incoherent state controlled by dominant business interests. The ability of the economic elite to capture state banking institutions and monetary authorities since their inception has been well documented by Prof Paul D Hutchcroft of the Australian National University.

The country’s failed attempts at implementing a genuine land reform program since the 1950s despite the backing of American aid missions and its susceptibility to protectionist crony capitalism under authoritarian rule in the 1970s to mid-80s despite the doting guidance of the IMF are proof that the legal-administrative system in the country has been under the tight control of landed and later industrial elites.

More recent history may be on the side of the latter. It was in the mid-80s after a major banking crisis and the assassination of the exiled leader of the opposition, Benigno Aquino Jr, that the business community withdrew its support to the autocratic regime of Ferdinand Marcos. This is when the yellow confetti rained down in the central business district of Manila during the height of the protest movement to depose him.

According to Emmanuel De Dios of the University of the Philippines the severe recession experienced in the 1980s led to a weakening of the import substituting industries that were standing in the way of reforms to open up the Philippine economy. Under the presidencies of Corazon Aquino and Fidel Ramos, the country began a process of liberalisation in its tradable goods and non-tradable sector (namely in telecommunications) as subsidies and protection were done away with.

As restrictions to foreign investments were gradually eliminated in all but a few sectors of the economy, a new set of economic elite comprised of small and medium sized exporters began to prosper according to De Dios. Industrialists began to see the opportunities of foreign markets as part of the benefits of increasing globalisation.

Then the Asian Crisis hit. A new populist president in the person of Joseph Estrada took office. While the country had initially outperformed its ASEAN neighbours at the height of the crisis, self-manufactured home-grown crises including insider trading and shady deals involving government pension funds in the takeover of prominent business interests were slowly unravelling the country’s image abroad.

It is in light of these events that the current actions of the business community should be assessed. The second people power revolt that unseated Mr Estrada because of his involvement in illegal racketeering was largely backed and funded by the business community. Seeing how such shenanigans connected to his maladministration affected their wealth via the stock market and how the unfair takeover of their businesses could take place under such a regime, they have begun to see the value of Western style rule of law.

The critics of “civil society” (a local euphemism for the business elite) point to the very methods used by them in unseating the former president as a violation of democratic principles and rule of law. This is where economic and political definitions of rule of law clash. The legalities of the extra-constitutional process as affirmed by the Supreme Court notwithstanding, the opponents of Mr Aquino see his support from the business community that stood with his mother since the mid-80s as a sign of his capture by vested interests.

Partly for this reason perhaps, a recent survey shows the trust rating of Aquino lagging behind the man who may win the election, property tycoon Manuel Villar, who styles himself as a champion of the poor from whose ranks he claims to come. The association of Aquino with a family owned sugar estate that has been mired in controversy ever since his mother made land reform the centrepiece program of her government does not help his case either.

Not that Mr Villar is free from criticisms himself. A censure motion was put forth by his colleagues in the Senate for a conflict of interest involving his properties that benefited from road works proposed by him as chair of the powerful finance committee. The manner by which he flouted the rules in the Senate to avoid bringing the motion to a vote bespeaks of the manipulative way in which he could govern the country. For this reason, enthusiasm for his candidacy from his counterparts in the business world appears to be dismal.

The Big Swindle

The collapse of the Berlin wall in 1989 attested to the untenability of socialism as a way of organising productive forces in society. In the West, a similar decline in Keynesian economics had been taking place. The emergent paradigm came to be known as the Washington Consensus (WC), a term coined by John Williamson referring to the ten universal principles for encouraging growth and prosperity.

These principles were anchored on a faith in unfettered markets and a reduced role for government through liberalisation, privatisation and macro-stability. While they were intended to form the lowest common denominator for policy prescriptions, as Williamson later observed, they became a panacea, sufficient in and of themselves to cause economic transformation.

As it later became evident from the experiences of Russia, Sub-Saharan Africa and Latin America which had experimented with "market fundamentalism" or neoliberalism in the 1990s, the link between these reforms and economic growth seemed to be weak or untenable at best.

Meanwhile, economies like China and India which had used a hybrid approach involving private joint ventures with town and village enterprises (in the case of the former) or had engaged in selective deregulation (in the case of the latter) did extremely well. Decades earlier, Japan, Korea and Taiwan had engaged in industrial policy and currency devaluation, clearly distorting product and money markets, and saw their populations rise out of poverty within a generation.

What is worse, capital market liberalisation, an important WC tenet, apparently made Southeast Asian economies vulnerable to speculative attacks as demonstrated in 1997 with the Asian financial meltdown. In order to rescue the reputation of the economic doctrine, a renewed focus was placed on the role of governance, institutions and corruption something that the WC had hitherto ignored.

Ten additional principles covering these areas rounded out what was termed the Washington Consensus Plus. Never mind that an earlier financial crisis had erupted in Scandinavia where countries have an unrivalled reputation for transparency in government or that bureaucratic corruption had not prevented Korea or China from developing quite rapidly.

If the thesis had previously hinged on "getting the price right", it now depended on "getting institutions right" to deal with "noise" in the form of non-productive transactions costs that prevent markets from functioning properly. Institutional determinants (property rights, contract law, juducial capacity) were given the same level of concern that political considerations had earlier occupied (democracy v authoritarianism). It was observed however that no matter what developing countries did, the list of reforms and explanations for why they did not subsequently grow just kept getting longer and longer*.

The one democratic country that had comprehensively applied the principles of the Washington Consensus Plus and had developed from it was Australia. Since the 1980s, successive governments instituted reforms in the economy and governance. When the dot com crash of 2001 and global financial crisis of 2008 hit, local banks were innoculated from it through prudential regulation and supervision. By adapting the book title of one famous Peruvian author, this episode could be called, "Why the Washington Consensus works in Australia and fails everywhere else" for even America had resisted the need for transparency in exotic derivatives markets or prudential regulation over its banks.

When the bubble that was the US realty-derivative market burst, weaknesses were exposed in its political economy. As Simon Johnson noted (Johnson being part of the trio including Acemoglu and Robinson or "AJR" that first highlighted the importance of institutional determinants), Washington had become captive to Wall Street in a manner that was characteristic of many developing countries. This would suggest that the US ought not grow as fast into the future, something that recent developments seem to confirm.

It is interesting to note that from Australia, the jurisdiction that provides the ultimate case for the successful and bi-partisan application of neoliberalism its leader should have screamed the loudest for an alternative social democratic paradigm with protestations that "the Emperor has no clothes". In practice it has meant adopting a kind of Millenium Challenge approach through its domestic social and labour market policies enforced through a "cooperative Federalism".

One could challenge this approach as an alternative to the Washington Consensus, but the problem is what else would one then substitute it with? Development economists are in a state of confusion about the way forward. There are it would seem many paths to prosperity, not just one. But for countries already on that road, a key question is how to build on it.

An important study that illuminates this question was performed by Gustav Ranis in 2000. He showed that countries pursuing economic growth as their paramount objective may wind up in a development rut, but for those countries that pursued human capital development, a virtuous cycle that involved both growth and improved human well-being ultimately occurred.

Although it would seem straight-forward and self-evident to take the conclusions of the study and recommend investing a greater share of GDP to human services as what Jeffrey Sachs and the UN Millenium Challenge Project would prefer, the same old questions crop up. Namely, would not improvements in governance be more helpful? How would local institutions, cultural and social norms interact with the resulting programs? Should governments or private markets take the lead?

Just as the "death" of god led to his resurrection in the form of "structure", the decline of neoliberalism is bringing about its rebirth in other deterministic forms.

* Perhaps instituting structural reforms is not the answer if it eventually weakens the legitimacy and capacity of governments to function especially if local conditions prevent reforms from producing material differences in outcomes.

Hu is afraid of the big bad state police?

In the World Bank’s annual Doing Business Survey, the People’s Republic of China is regularly ranked in the middle of table. For 2009, it was ranked 83rd overall out of 181 countries in terms of the ease of doing business. It is immediately preceded by Trinidad and Tobago, Panama and Kenya, and ranked right below it are Grenada, Belarus and Albania.

The rest of the so called BRIC economies do not fair any better with the Russian Federation at 120th, India at 122nd, and Brazil at 125th place. The rankings in the survey are determined by a set of criteria including the ease of starting a business, getting construction permits, ease of hiring, enforcing contracts, protecting investors, securing credit, paying taxes, trading across borders and the ease of closing down a business.

In economic studies, these rankings are often used as “proxy” indicators for institutional quality. Dani Rodrik has for years controversially raised the point that the rapid growth of countries like China provides evidence that poor institutional quality aka corruption is not necessarily a roadblock to development.

Enter Rio Tinto executive Stern Hu. What impact, if any, will his being incarcerrated for allegedly bribing officials and in the process stealing “state secrets” have for the future of doing business in China?

Discounting Human Nature

Why governments and voters in resource rich countries fail to horde boomtime windfalls for future economic contingencies and what to do about it.

"Australia's net debt will be the lowest of any major advanced economy in the world for the next decade. It is responsible for us to have embraced such a strategy to deal with the challenges presented to us and other economies with the global recession, and to do so within that responsible framework."

-Wayne Swan as quoted in The Australian, 9 May 2009.

“Young people have got to know this; that they have been put into hock for a very long period of time by this government and they’ll be paying for it through their taxes probably for generations.”

- Peter Costello as quoted in The Australian, 13 May, 2009

Governments today wish they had the equivalent of a Joseph, the biblical hero, appointed to Pharaoh’s court whose prudent advice spared the land of Egypt from hunger during seven years of severe famine. The thing is: there were josephs in our midst; they are known as economists who predicted the current crisis and the severity of its impact (Nouriel Roubini being one of them).

Apart from Norway and Chile, a country long considered a model of policymaking no other country seems to have taken the lesson of this biblical story to heart. Regarding Chile, The Economist reports

As a small, open economy it (Chile) is uncomfortably exposed to the world recession—the price of copper, its main export, has fallen by almost two-thirds since mid-2008 … The government forecasts this year’s fiscal deficit at 2.9% of GDP, but it can easily afford this. That is because it has stuck to a rigorous fiscal rule … requiring it to save much of the revenue gained when the copper price rises. Not only is public debt minimal (4% of GDP in December), but the government has also piled up $20.3 billion (about 12% of GDP) in a sovereign wealth fund which it can now spend.

Why aren’t other countries, particularly resource rich ones in the developed world, following the Chilean countercyclical example? Well, the answer depends on whom you consult, for example:

Political economists will point to the “Dutch disease” phenomenon that afflicts resource rich countries. During boomtimes, GDP accelerates past the long-run steady state of the economy. This windfall tempts governments of the day to increase spending on social services (as in the case of Holland in the 1980s) or reduce taxes or a combination of both (as in the case of Australia). When the boom ends, growth moves below the steady state, making the contraction all the more painful as social services are cut, taxes raised, etc. In fact, Jeffrey Sachs has built a general equilibrium model that mimics this phenomonen in action in the Venezuelan economy.

Institutionalists will identify the agency costs associated with the exercise of control over windfall profits. Especially in developing economies with weak judicial systems and endemic corruption, decision-making with regards to such wealth becomes diabolically problematic.

Behaviouralists will point to the lack of rationality and self-control that creates perceptual biases that prevent a proper assessment of the risks involved by not saving. Planners could suffer from optimistic or hindsight bias as a result.

A rational observer might comment that these explanations aren’t good enough. Anyone with common sense would intuitively sense that “all good things eventually come to an end” and see the wisdom in “saving for a rainy day”. As it turns out, neuroscience is helping to uncover the reason for this irrational behaviour.

Any standard economic model would use exponential discounting to determine the optimal amount of consumption and saving a household or government should engage in. This only works when temporal or time preferences are consistent. If humans were completely rational, they would follow this mode. It now appears that our preferences for rewards change depending on the length of time being considered. This has led to the method of hyperbolic discounting which takes into account our being “present-biased”.

So it would seem that when faced with two options of having a reduction of taxes in the long-run through savings made in the short-run versus receiving a short-term benefit in the form of a one-off payment/increased social services paid for by higher taxes in the future, that taxpayers will by and large opt for the latter even if in the long-run, they would benefit more from the former. This is by the way the reason why households over-consume and over-borrow. Given that their governments suffer from the same imperfection in judgement, it is not surprising that they would give in to this populist urge.

On the other hand, a paternalistic State such as Chile, would recognise that given our flawed judgement, the necessity of enactomg legislation that automatically sets aside above average fiscal benefits in the short run to smooth over shortfalls in the long-run. This would reduce the need to go into debt when markets head south and unburden future generations from interest payments. This, to me, seems the only sensible way to go about discounting our very nature.

Mapping Happiness

This intriguing diagram was taken from a publication of the World Values Survey Association, a global network of social scientists committed to cross-cultural mapping of societies in all of the inhabited continents of the world.


What is striking about it is that after conducting interviews with representatives of 80 societies from 1981 to 2007, each national sample consisting of 1,000 participants, covering 85 percent of the world's population, the results remain stable over this time (i.e. movements have been slow).

You can conclude that the results confirm the importance of two things:

Institutions. The new institutional economics (NIE) school tells us that individuals and groups in society structure and organize their dealings in a manner that reduces costs to them (the so called transaction cost approach). Social norms and expectations (a.k.a instituions) are a way of enforcing stability and regularity. Because these arrangements suit the interests of both parties transacting, they are expected to endure much longer than any formal legal or political dispensation.

Inertia or status quo bias. Behavioral science tells us that much as we would like to think of ourselves as rational agents, our behavior is affected by what we perceive others think and expect of us. Thus, we might persist in customary practices even when the original incentive for it has gone. This makes the case for institutional change even more difficult to make.

Difficult perhaps, but not impossible nor uncommon. One key finding of the WVS is that

since 1981, economic development, democratization, and rising social tolerance have increased the extent to which people perceive that they have free choice, which in turn has led to higher levels of happiness around the world, as the "human development" model suggests.