Why land reform succeeded in Taiwan and Korea but failed in the Philippines?

The US made three attempts between 1903 and 1918 to institute land reform and distribution in the Philippines (a hundred years ago). Each of these attempts failed. Iyer and Maurer, two scholars from Harvard Business School examine the economic history of the Philippines under Spanish and American colonial rule, and point out why these attempts failed.

The article below is worth a read for anyone interested in knowing why property rights in the Philippines had been weak, and made it costly under those circumstances to pursue an asset reform program. The lessons learned in the Philippines, and different circumstances during the Cold War allowed US-sponsored land reform in Taiwan and Korea to succeed in a relatively short period of time. This laid the foundation for their rapid industrialization.

Covered by Iyer and Maurer is the effect of the Treaty of Paris at the conclusion of the Spanish-American War on the disposition of friar lands, whose acquisition by the US government from the Catholic Church at many times their potential annual income served as a disincentive to the proper implementation of land reform and distribution in the country.

 

The glorious revolution

In my title, I am of course referring to the event in England in 1688 which unintentionally led to the Bill of Rights, rule of law, and Western capitalism as we know it. As background for those unfamiliar with it, there are two short clips at the end of this piece worth viewing.

The now classic essay by Douglass North and Barry Weingast investigates the institutional innovations that accompanied the resolution of this conflict and relate them to developments in public finance. Their thesis is that without such constitutional and political underpinnings, England would not have achieved global success both militarily and commercially in the following century.

They purposely side-step the religious element that is often cited. Greater importance was placed on the dispute that had been brewing since early in the 17th C between the Crown and Parliament. Many of the same issues in this dispute hound developing and transitional economies today.

At the core of this was the structuring of incentives to control the coercive powers of the state. Previously the divine right of kings was invoked to justify the arbitrary use of such powers resulting in the expropriation of property from the wealthy who were represented in Parliament. Despite objections, the king continued to wield his prerogative by forcing loan contracts on the elite and reneging on the debts.

This unpredictability meant that the Crown was unable to tap private credit markets. Following the revolution, the new monarch acceded to the rights of Parliament over such contractual obligations. As a sweetener, the confidence this engendered opened unprecedented access to capital at more affordable rates. This allowed England to achieve military superiority while maintaining fiscal liquidity and provided the conditions needed for the Industrial Revolution.

It is in keeping with this seminal work that much discussion circles today around the enforcement of property rights and the rule of law in developing and transitional economies. At the heart of the debate is the question whether Western notions of governance particularly legal institutions should be transplanted elsewhere. The differential experiences found in China and East Asia cast doubts on whether a "one size fits all" approach is appropriate.

The Philippines is an example of a developing country that went through a "peaceful revolution" to topple a dictator in 1986, but which is still mired in corruption and political instability. It has enshrined "people power" in its constitution as a vehicle for removing tyrannical rulers. The vibrant NGO and activist business community have proven since then how potent a threat this institution can be.

But the high transactions costs entailed in mobilising popular uprisings has taken its toll. As a result of experiments over the last decade, there is a growing demand for the rule of law in the form of restraint on the part of both the central government and civil society in expropriating public and private wealth from one another. Should a government be formed that addresses this demand, it might pave the way for greater investments in productive sectors, the same way that mutual checks in England between the Crown and Parliament did.

Derivative Markets: The Real Underground Economy – De Soto

A distinguishing mark for an advanced economy is the extent to which its informal sector diminishes in importance and the ease with which to appraise the stocks and flows of assets within it. This may no longer be the case as Hernando De Soto rightfully points out in a recent article for the Wall Street Journal.

De Soto who is renowned for his work on property rights and the informal sector through his book The Mystery of Capital, Why Capitalism Triumphs in the West and Fails Everywhere Else states that:

(A)t the beginning of the decade there was about $100 trillion worth of property paper representing tangible goods such as land, buildings, and patents world-wide, and some $170 trillion representing ownership over such semiliquid assets as mortgages, stocks and bonds. Since then, however, aggressive financiers have manufactured what the Bank for International Settlements estimates to be $1 quadrillion worth of new derivatives (mortgage-backed securities, collateralized debt obligations, and credit default swaps) that have flooded the market.

Until I read this, I had no idea that a quadrillion (a one followed by twelve zeros) was an actual number. By getting an idea of the sheer magnitude of these "hidden assets", it should become apparent that no amount of fiscal stimulation by the world's biggest economies will resolve the crisis or prevent another one from springing up if the growth of this shadow economy remains unchecked.

It appears that the market in which hedge funds now operate may be more akin to property markets prior to the enforcement of a consistent land titling system or the unsupervised securities market prior to the Great Cash of 1929. This is a bit worrying since the success or failure of the newly unveilled blueprint for dealing with "toxic assets" rests on the same set of players that originated the mess. The time has come to incorporate this new form of trading within the formal sector so that the spillover effects that imprudent risk trading has caused is prevented from wreaking havoc on the rest of the system in the future.

The Economics of Feeling

It seems that the crisis has cleared the way for new orthodoxies in economic thinking to replace the dominant neoliberalist mode, which is not so much about the "magic of the market" as it is about the rational utilitarian way of assessing choices in the marketplace. Behavioural economics, or what I like to call the economics of feeling puts emotion into the equation. Under this new paradigm, it is not unusual to encounter words such as “confidence” and “trust” as part of the lexicon forming the bedrock of the financial system. De Soto fits in perfectly with this view as he boils down the crisis to a lack of trust by saying,

(T)oday's global crisis -- a loss on paper of more than $50 trillion in stocks, real estate, commodities and operational earnings within 15 months -- cannot be explained only by the default on a meager 7% of subprime mortgages (worth probably no more than $1 trillion) that triggered it. The real villain is the lack of trust (emphasis mine) in the paper on which they -- and all other assets -- are printed.

De Soto would be of the same mind as European leaders who will be pushing for greater regulation of this new market at the G20 meeting in London this April. Without much needed reform, De Soto asserts, the world capitalist system remains vulnerable to another round of defaults from say college loans or credit card debts that have been bundled, repackaged and sold the same way sub-prime mortgages were.

Attention now turns to what form regulatory supervision and control would take. Already there are calls for a super body from US Treasury Secretary Tim Geithner on behalf of the Obama economic team, which is being opposed by US Republicans. Again, this debate should not be construed as one of markets versus a managed solution. As De Soto points out,

(A)bove all, governments should stop clinging to the hope that the existing market will eventually sort things out. "Let the market do its work" has come to mean, "let the shadow economy do its work." But modern markets only work if the paper is reliable.

Even the most ardent libertarian would not question the role that governments have in enforcing contracts. At the heart of the enforcement problem is the language of a typical derivative contract which lends itself more to a French deconstructionist reading (i.e. signs signifying significations of some other signified) than a common sense interpretation by a third party lay person. It would be better to leave hermeneutics to literary critics. When it comes to valuing one’s assets, plain language that even a fifth grader could grasp would be preferable.