A New Social Contract for the Philippines

At the start of his campaign for president, Benigno Aquino stated in an advertisement that he was not a thief and that he would not steal using a play on the filipino word "magnanakaw" which means both "thief" and "to steal". A similar statement was issued by his late mother, ex-president Corazon Aquino twenty five years earlier when she ran against Ferdinand Marcos.

So ingrained and apparent was the greed that motivated candidates to pursue public office that it had been assumed to be the case among all of them. With the installation of president-elect Aquino at 12 noon on June 30 2010, there are a few assumptions regarding the state and its role in society that also need to be challenged.

In a paternalistic society such as the Philippines, it is the role of the state to dole out benefits to the connected, by that I mean both the wealthy and the needy. The state is captured from both above by the wealthy who seek regulations that favor their commercial interests and from below by the incessant demands of constituents whose need for support drives their elected representatives to capture "rents" from government transactions to provide personal help and thus perpetuate their electability.

This it would seem is the existing social contract as it stands - it is one based on personal dealings between (1) Big Business and the power brokers of the state and (2) the disenfranchised and their political bosses. A society based on personal kinship and relations does not reward individuals who want to strike out on their own, away from the established networks. It is one where one cannot get ahead simply by working hard and relying on fair play. That is why so many have sought to pursue their fortunes outside the country.

Many commentators have seized on the potential for transformation under a new Aquino presidency based on its reputation for probity. In order for it to be transformational, it would have to restructure the "rules of the game" or negotiate a new social contract between the state and its stakeholders. The new arrangement will have to resource the state appropriately to lessen the need for its constituents to rely on personal interventions by their representatives.

It will have to ensure that the wealthy contribute a fairer share of their profits to the state. The productive sectors in turn would expect a predictable regulatory environment and a skilled laborforce enabling them to take advantage of new opportunities. For this to happen, a series of reforms are needed in areas such as social welfare, human capital, regulation and taxation which are discussed here.

1. Social Welfare Reform. This includes the re-alignment of poorly targeted, improperly designed and ineffective programs towards those with greater impact. The rice subsidy program is one example of a program which has suffered a leakage of 71%, whose coverage of intended recipients is a mere 18%, and is costly to administer. It cost the government about Php40 billion in 2008 alone. Other similar programs that provided rebates on electricity suffered similar flaws, but were hurriedly engineered during the height of the global financial crisis and are non-recurring. The grains program on the other hand represents a recurring expense for the government. Manasan of the government think tank PIDS suggests that the same expenditure if it were spent on the more effective conditional cash transfer program or 4Ps targeting public school children would have a greater impact in terms of alleviating poverty by providing support to poorer households while improving school participation and completion rates (see her slideshow below). They are also proven to be less costly to administer and have a reduced level of leakage. At the same time preventive programs like child immunization and maternal health connected with the 4P's program would help reduce the cost burden of treating diseases and supporting larger families. 
Social Welfare Programs and Social Safety Nets in the Philippines: In Times of Crisis and Beyond
2. Education and Skills Reform. The next step would be to undertake reforms that would improve the stock of human capital through educational and health reform. As school children improve their participation and completion rates, it becomes necessary to strengthen the content of their education to ensure they are equipped with necessary skills and knowledge needed in the workplace both here and abroad.  Part of the solution lies in extending the years of schooling from 10 to 12 years with the option of leaving school after year 10. The senior years of high school should offer students the option of either college preparation or vocational education and training (VET). There is a need to address the imbalance between college and VET that is leading to the strange anomaly of skills shortages alongside high unemployment. Work-based apprenticeships and traineeships in partnership with industry can also be introduced. The "adopt a school" program can be leveraged in order to provide such a partnership. Metropolitan and provincial polytechnics could also be tapped to provide instructors and facilities for such training. A voucher or entitlement system that would allow public school students to take up a place in a technical college can be designed to allow the funding to move with the student to any local technical college or institution to complete the equivalent of years 11 and 12. It is also important for such VET courses to feed into the higher education system in a seamless manner. The lack of vertical integration currently is a disincentive to pursue technical training.
3. Health and social insurance reform. The Philippines has a health system akin to the US, where a mixture of public and private hospitals abound and the state funds them through what amounts to a health insurance program called PhilHealth, the key challenge here as it is in the US would be to increase the coverage of the program. This cannot be done without mandates and concurrent subsidies to firms that employ people to increase contributions. Part of the reform process also involves looking at the funding rate of various treatments. Chronic diseases are on the rise in developing countries. While the Philippines does not have an ageing population, there is a high dependency ratio. This means the problem confronted by households at-risk of slipping into poverty due to lost income of primary breadwinners has to be addressed through a combination of social and health insurance improvements.
4. Regulatory Reform. The cost of doing business in the country has to be lowered through regulatory reform. This entails opening up many sectors including aviation, ports, power and transportation to greater competition. It also involves red-tape reduction and strengthening the property rights of investors. A comprehensive review and consultation process needs to take place to give direction to many of the reforms in these areas. A mix of policy tools could potentially solve many of the bottlenecks in the process of business registration and licensing. Stakeholder consultation would shed light on which tools to use.
5. Tax Reform. From the mid-90s to the mid-noughties the tax collection effort measured in terms of collection to GDP ratio deteriorated from 17 percent to 12 percent. It recovered slightly with the hike of the VAT rate from 10-12%, but leakages such as the granting of fiscal incentives for the country's freeports and special economic zones and the non-indexation of sin taxes have offset much of the improvements in tax collection. The redundancy and inefficacy of many fiscal incentives have been extensively documented (see for instance the article by Dr Reside below). Meanwhile corporate and personal income taxes in the country remain higher than elsewhere in the region. The current deficit amounting to 4% of GDP or roughly Php300B has to be brought down to a sustainable level, say 1-2%. A mixture of improved collection efficiency, fiscal rationalization, indexation of sin taxes along with budget neutral adjustments to the tax system to lessen distortions and improve the country's competitiveness are all justifiable and in keeping with the spirit of Mr Aquino's campaign pledge of no immediate new taxes.
Fiscal Incentives and Investment in the Philippines

The first step of any reform process is for the leader to be honest and committed to it. Mr Aquino satisfies this  condition with his probity and policy seriousness. During this period of transition, his first task involves assembling a competent team to help him in this effort. They should focus on assembling a coherent package of reforms with the help of partners and stakeholders in the community aimed at restructuring incentives in the Philippines that would transform the current set of assumptions about the state and its role in it.

Moving from a padrino society that depends on personal transactions based on kinship and wardship to one where citizens are empowered with greater access to improved services requires a new social contract between the state, market and society. It will be necessary to move towards the new mold in the next six years. 

The state needs to be equipped with the resources necessary to improve the incentives towards human capital acquisition and productive activities. It requires reforms in social welfare, education, health as well as regulation and taxation. At the end of his six year term, if Mr Aquino is able to say that he brought the country forward in these areas, he would have done it a great service worthy of the term transformational.

Corrupt Yet So Popular

It is quite surprising a phenomenon to witness how that in many countries around the world corrupt leaders often retain public support.

In a recent poll conducted in the Philippines, the late fromer president Corazon Aquino was rated highest by her countrymen among their most loved political leaders (no surprise there), but the man she toppled in a bloodless revolution, Ferdinand Marcos ranked second.

Following in fourth place was the actor turned politician former president Joseph Estrada who was ousted and convicted for his involvement in illegal racketeering. The latter two figured in the top ten most corrupt leaders of the world compiled by the corruption watchdog Transparency International.

The man who topped that list, Mr Suharto, the late former dictator of Indonesia is still widely held in good esteem by his countrymen despite what current media reports suggest about the successful drive against corruption there. What makes these crooked leaders so well-loved among their poor countrymen long after their demise? Is it their charisma? Perhaps. Is it a sense of nostalgia? For what? Is there something that these corrupt leaders attend to quite effectively that honest leaders fail to do?

The answer to that last question is most definitely a yes. What they do is support a system of clientelism to enough of their constituents so that in their eyes, the means through which such patronage is dispensed becomes irrelevant in a country where governments fail to provide an adequate level of support to their populace.

The phenomenon is in no way limited to developing countries. In an advanced economy such as Italy where people still prefer to contract with each other based on personal ties rather than through impersonal markets, their current prime minister Silvio Berlusconi, who has been hit by sex and corruption scandals, seems to retain wide popular support.

It took the global recession for the long-dominant ruling party of Japan to be booted out in last year's election. The new government vowed to take down the all-powerful triad led by the civil service along with members of the political and business elite who in the past have so successfully colluded to steer the economy in the right direction, but whose complacency was now holding the country back, so it claimed.

Even in countries where impersonal contracting has taken over as a result of a strong judicial system and where governments are adequately resourced, political parties are often found to engage in unsavoury practices. In Illinois for instance, the former governor tried to sell the vacated senate seat of President Barack Obama. One can find instances of such wheeling and dealing in local politics perhaps where such personalistic contracting can still be performed.

A recent Gallup poll in the US found trust in government to be at a low. Ever since the Vietnam War and Watergate scandal that toppled President Nixon, the trust rating has gone down from the previous highs registered since the “New Deal” era of President Franklin Roosevelt.

Many attribute this low rating to the gridlock and extreme partisanship that goes on in Washington. Yet despite these sentiments, polarising and highly partisan figures such as former Alaskan governor and vice presidential contender Sarah Palin retain immense popularity. This is probably due to the fact that they are able to connect with their party base by delivering the “red meat” in terms of policy prescriptions.

In other words, in Western democracies, instances of patron-client relations involving the exchange of tangible goods can still be found within governments and political parties, but it is replaced by and large with principle-based policy back-scratching that appeals to the lowest common denominator among their most loyal constituents.