SEC's Ruling on Rappler

The revocation of Rappler's certificate of incorporation by the Securities and Exchange Commission is contained in SEC Resolution 437, Series of 2017 dated 8 July 2017.

Central to the decision was whether Rappler had ceded control over the corporate policy and management of the company to a foreign party. The Philippine constitution requires mass media companies to be wholly owned by Filipinos.

Rappler was found by the SEC en banc to be in breach of the Anti-Dummy Act, the Mass Media Law, and the Foreign Investments Act.

Towards a well-informed public debate over this latest controversy involving the media outfit, the SEC's decision in its entirety is found below. The document may also be accessed on the SEC's archive of decisions for 2018 here.

London Burning

No matter how hard he tries, David Cameron's attempts to evade responsibility not just for the conditions that may have caused or contributed to the eruption of riots in London, but also the inadequacy of the response to it, it is becoming apparent that not only politicians, but the public at large are losing faith with his reforms and the Big Society it promises.

Cameron of course, beset by calls from the Labor Opposition to reconsider cuts to the police budget laid the blame on parents and the so-called broken society. The rioting was criminality run wild, not a form of political protest against an unjust social order. The police response was slow and tactically wrong, he intoned during parliamentary debates.

Unfortunately for him, the police did not take too kindly to this characterization of events, and the public appear to back them instead of the political leaders. The seeming disconnection of the politicians who were on holiday, the PM in Tuscany, his deputy in France and the London Lord Mayor Boris Johnson in the United States, when the burning of London raged surely did not help build credibility for them.

In this situation, the importance not only of empathy but also a desire to ease suffering on the part of ordinary citizens could have gone a long way.

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.

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.

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.