Rule of law, authoritarianism, and civil society

November 27, 2022 | 4:07 pm

Introspective  By Romeo L. Bernardo

The Asia Liberty Forum interview with Professor Raul Fabella

(Part 2)

(This is the second part of the interview with Prof. Raul Fabella conducted by Romeo Bernardo that was the culminating activity of the “Asia Liberty Forum” in Manila on Sept. 29-30, presented by The Atlas Network (https://www.atlasnetwork.org/) and the Foundation for Economic Freedom or FEF (https://www.fef.org.ph/). Through panel discussions, break-out sessions, the Asia Liberty Awards Dinner, and other events, attendees heard from leaders from across the continent about the challenges and opportunities ahead for liberal democracy. The second part of the interview follows below.)

Romeo Bernardo (RB): Rule of law is almost always cited as a lynchpin of economic freedom. For example, the index of the Heritage Foundation lists it as No. 1, followed by government size, regulatory efficiency and market opennes

The UN Charter and the Universal Declaration of Human Rights, defines such to include right to life and liberty, freedom from slavery and torture, freedom of opinion and expression, the right to work and education, and many more, without discrimination.

Your thoughts please on such a broad definition of human rights vs. the narrower one espoused in writings of some authors — and practiced in some authoritarian regimes, especially ones which have been quite successful in bringing millions of their people out of poverty, trading off limitations on political liberties — e.g. China, Vietnam. Arguably even Singapore.

RF: Rule of Law and inclusion/inequality: Acemoglu and Robinson’s monumental opus (Why Nations Fail) argues that economic liberalization in the form of thin definition of rule of law (protection of property rights and enforcement of contracts) is the lynchpin of long-term sustained growth. Thus, economic liberalization is conducive to improved inclusion (as poverty reduction shown in the People’s Republic of China [PRC]) as growth reduces poverty (Burnside and Dollar, 2000). However, the reduction in poverty incidence does not preclude the violation of the thick definition of rule of law as including respect for basic human rights (the treatment of Uighurs in PRC comes to mind).

Barro and Salai-Martin (2004, Economic Growth) were the first to point out that whereas economic liberalization significantly associates with economic growth, political liberalization has at best a little and negative association. This suggested a tradeoff and a spirited backlash. In the new world of the 21^st century, well-being has many more dimensions than monetary income: environmental sustainability, shared well-being and resilience, etc., all of which can be attenuated on the way to higher per capita.

The tension spikes when the tradeoff is couched in terms of basic human rights: Did the so-called social contract to attenuate political space in exchange for economic space pay off? Depends upon the criteria of validity. If economic space means economic convergence with the high-income economies and lower poverty incidence, East Asia and PRC are evidence of its payoff.

Was it worth the lives lost or crippled? Was the Tiananmen Square Massacre in China a fair price to pay for 600 million graduating out of poverty? This is a question of the Sphinx!

There is, however, a strong evidence-based consensus that the race to the top of the per capita income ladder has scarred the environment, sometimes irretrievably; that climate change has a human agency footprint. Incidentally, the scars are worse for the previous socialist bloc than for market economies. Social unrest can follow norm violations in these other dimensions despite or because of rising income which also changes public values and perception. Finally, the carbon footprint of energy-impoverished Filipinos is so small you would need a microscope to see it.

RB: In recent years, there seems to be a drift away from liberal regimes that espouse market-based solutions (economic freedoms) towards authoritarian regimes from both the right and the left, everywhere globally. To what extent is this being driven by income inequalities and the failure of governments to address poverty and create jobs with globalization and tech change? Notable examples in developing countries are: to the right Brazil, and to the left, Colombia, Chile, Bolivia. (In the west, the USA is poster boy No. 1, and from the news earlier this week — Italy seems to have turned neo-Fascist!). Is Philippines at any risk at risk of being next? What conditions promote these?

RF: There is a great deal of debate and interest on how Francis Fukuyama (End of History) — that liberal democracy is the future of humanity — got it wrong. Is income inequality the culprit: possibly, but more salient in the literature is the loss of accustomed and expected entitlements (falling wages, potential loss of jobs from new entrants, threats to accustomed cultural matrix and social contracts from growing diversity, etc.), which can happen with or without growth in inequality. James Scott (Moral Economy of the Peasants, 1976) noted that peasants in East Asia tended to resort to violence when their accustomed standards (food intake, say) are attenuated, especially after adverse climate and harvests and the shares of the landowners do not adjust to accommodate as dictated by the moral economy. So, both inequality cum rigidity and broken expectations are indicted.

RB: I like much of what you have written in the past on the role of civil society and organizations like FEF. What can we in FEF (and similar like-minded institutions) do to help improve social welfare and preserve economic freedoms? How do we help ensure that we don’t suffer the reversals and drift to illiberal regimes, both left and right, as had happened in other developing countries?

RF: On the role of Civil Society and incremental market liberalization reforms: Most reform battles in the Philippines involve market liberalization. The reflex response of Philippine political actors to economic difficulties is to find scapegoats among market actors such as the profiteers, oligarchs, foreign investors and speculators. The normal state response is to ban or restrain market exchanges and let government take over: thus the old NFA (National Food Authority, a state monopoly in imports of rice), the OPSF (the Oil Price Stabilization Fund, a state monopoly in imports of petroleum), ban on land ownership over five hectares (CARP, the Comprehensive Agrarian Reform Program), ban on mining and forestry activities; the Agri-Agra law (restraint on bank allocation), blam[ing] oligarchs for nature-triggered water shortages, etc. The Philippine economic saga from the 1990s is one of slow and spasmodic extrication from the straitjacket the state has imposed on the market.

On FEF engagements: Economic liberalization is where civil society has had the most impact. FEF has been leading the charge to economic liberalization: rice import liberalization, PSA (amended Public Service Act) law allowing foreign participation in more economic activities, free patent law allowing faster grant of titles to patent holders and now allowing consolidation by lifting the five-hectare ownership ceiling and facilitating farm consolidation in the food production sectors. As in Deng’s China, market liberalization is very inclusive in the sense of poverty reduction although it may raise income inequality. The advantage of FEF over other business clubs (MAP or Management Association of the Philippines, MBC or the Makati Business Club, etc.) is that its membership/fellows is not limited to representatives of businesses and firms but also include academics, independent researchers, and public intellectuals.

Note: (i) the relationship between tech revolution/social media and polarization/inclusion is murky and already heavily covered and discussed in many other local and global fora; added insight may be hard to offer; and, (ii) the response to social cost of illiberal politics and economy is imbedded in the discussion above.

RB: Economic freedom metrics typically include size of government. As a former Finance undersecretary, I have often wondered whether this is appropriate for a developing country like the Philippines with low tax to GDP ratios and under invests in public goods, especially education and health? In our case we have slipped to the bottom in global rankings on literacy and numeracy, and, not coincidentally, among those who spend least for basic public education. What do you think?

RF: Barro and Salai-Martin also used size of government as regressor for growth and found that the sign of association is negative. Their interpretation was that it was a proxy for corruption: the more government the more corruption. This interpretation jibes with the weak institution narrative: weak governance tends to throw money and government administration at perceived problems leading to higher government budgets, waste, and corruption. And the allocation of these state resources is skewed towards the squeakiest wheels, fast burn explosions that threaten Armageddon now.

Unfortunately, neglect of education and human capital infrastructure is a slow burn issue and gets the least attention. And when allocation is increased for education, it supports the same tired formula: more classrooms, more teachers, and more textbooks which result in the same more illiteracy. V. Fabella (2017, “Political-Economic Determinants of Education Reform: Evidence and Interest Group and Student Outcome,” European Journal of Political Economy) has shown that in the battle for reforms in education, access reforms (more classrooms and textbooks) normally trump quality reforms (better trained and motivated teachers) due especially to the opposition of the teachers’ union. In our case, a mortal sin: we can never access exam results of national high school exams to compare quality of high school education outcomes.

RB. I much enjoyed and learned from your book Capitalism and Inclusion Under Weak Institutions that came out in 2018. It was also the subject of our FEF Paderanga Valera lecture that year. Would you care to talk about it in the remaining time we have?

RF: On Capitalism and Inclusion: My thesis in the book is that under weak institutions, a greater role of markets is more inclusive defined as poverty incidence. This flies in the face of Piketty (2011) who showed that capitalism or market economics in affluent well-run economies militates against inclusion defined as income inequality. For low-income countries, poverty incidence is the more compelling metric of success. Poverty incidence in the Philippines is highest in the rural areas where the government has effectively vetoed the role of markets for land and finance.

 

Romeo L. Bernardo was finance undersecretary from 1990-1996. He is a trustee/director of the Foundation for Economic Freedom, the Management Association of the Philippines, and the FINEX Foundation. He is the principal Philippine Adviser of Globalsource Partners (globalsourcepartners.com). He also serves as a board director in leading companies in banking and financial services, telecommunication, energy, food and beverage, education, real estate, and others.

romeo.lopez.bernard @gmail.com

 

Growth, poverty, inequity, and freedom

November 20, 2022 | 7:05 pm

Introspective By Romeo L. Bernardo

The Asia Liberty Forum interview with Professor Raul Fabella

(Part 1)

The Atlas Network (https://www.atlasnetwork.org/) partnered with the Foundation for Economic Freedom or FEF (https://www.fef.org.ph/) to organize and host the “Asia Liberty Forum” in Manila on Sept. 29-30. We brought together friends of the freedom movement across Asia to discuss challenges facing the region and to learn from one another how to most effectively advance free-market reforms. One hundred forty-seven Atlas Network partners, academics, economists, journalists, students, and many other proponents of the freedom movement from 22 countries gathered in Manila. Through panel discussions, break-out sessions, the Asia Liberty Awards Dinner, and other events, attendees heard from leaders from across the continent about the challenges and opportunities ahead for liberal democracy.

One of culminating events was an interview with economic freedom champion, our only living National Scientist in Economics, former Dean and UP Economics Professor Emeritus, Raul Fabella. I am proudly his fellow “Introspective” columnist in this space, co-author of Momentum (Momentum: Economic Reform for Sustaining Growth, 2019) and Momen2m (Momen2m: More reforms for Economic Growth, 2021), and, together with Calixto Chikiamco, Philip Medalla, the late Dondon Paderanga, Mahar Mangahas, and others, co-founded the FEF.

It was my honor to interview my friend of long standing — since 1977 when we first met, both economics graduate students, at a bus stop in Washington DC. The interview follows below:

Romeo Bernardo (RB): I will act as a provocateur to help bring out Raul’s thoughts. Apologies if questions seem Philippine centric, though they could just as easily apply to other developing countries, where majority of our participants here come from.

We hope to cover relationship between economic freedom, growth and inequality, rule of law and inclusion/inequality (including where human rights fit in), the retreat from liberal economic regimes towards authoritarian/statist regimes (coming from the right and the left) we are observing globally, the role of civil society organizations like the FEF and how we may strengthen.

In a column you wrote in 2014, “On poverty, inequality, growth,” you expounded on how a developing country like the Philippines should view the then-just-released book (both celebrated and scorned) of Thomas Piketty.

At the risk of oversimplifying, these were my own take-aways from your column:

• sustained growth is paramount, especially for a developing country with substantial poverty like the Philippines.

• right market based policies and institutions essential to sustain growth. Excessive inequality can also be corrosive of sustained growth.

• poverty reduction should be higher priority than reduction of inequality. As illustrated in the case of China started by Premier Deng, inequality may well be a corollary of pursuing market policies and thus the price of graduating hundreds of millions out of poverty.

Have I captured your views correctly? Can growth be sustained with inequality increasing?

Raul Fabella (RF): A. Poverty reduction should be a higher priority than income inequality in low-income countries and in weak governance environments, the state should retreat to its Smithian competitive competence and cede to the market activities where the market has superior competence. The state and the market can cooperate in PPP (public-private partnership) projects. Excessive inequality can shorten the duration of growth (Berg and Oster, 2011): social unrest can be a corollary to excessive inequality.

B. Growth is sine qua non for poverty reduction but some [kinds of] growth are more equal than others. Growth led by Manufacturing and Tradables are more poverty reducing than growth led by the Services sector (Fabella, Daway-Ducanes, Ducanes, shortly to appear).

C. Growth can be sustained with increasing inequality: witness the MDG [Millennium Development Goals] (1990-2015) experience of PRC [the People’s Republic of China]: rapid growth reduced poverty incidence to 5% — 600 million people [were raised] out of poverty — but raised income inequality from 31% to 43%.

This was the message of front end of the Kuznets inverted U hypothesis: inequality as Gini ratio first rises with rising wages, second, reaches a ceiling, and finally, begins to fall with further increases in wages. The rise in equality in the front end is understood to be in aid of economic growth. Sustained increases in wages cannot be realized without sustained economic growth. The US Constitution itself says as much when it asserts that inequality should be foreborn as long as it advances the common good. There is such thing as welfare advancing inequality. What is that point where inequality is most productive of the collective weal is anybody’s guess.

Piketty (2011) however showed that in normal times, the second and third part of the Kuznets curve does not exist for well-governed advanced economies in the West; he gave evidence that income and wealth inequality rises progressively in these economies and it is not due to some garden variety market failure. It is rather a meta-market failure that Marxists and Socialists in the 1930s riled up against as the fatal soft underbelly of market economies. A case in point is the PRC economy over the MDG period from 1990 to 2015: the economy grew at a record pace while income inequality rose from GINI 31 in 1990 to GINI 43. The rise in the rank of Chinese dollar billionaires was in exchange for the 600 million Chinese being graduated from abject poverty. Few would say “no” to such a tradeoff.

RB: How about the effect of income inequality on freedom and what it implies on human welfare broadly defined apart from possible drag on sustained economic growth? Also, should we not worry about concentration of wealth and political power?

RF: A. Economic freedom — That rising income inequality can impair economic freedom is an arguable point: where the concentration of wealth readily translates into political power, economic freedom may be curtailed by wealth-sponsored-legal mandates that favor monopolies and cartels. Contrarily, economic freedom can unleash the power of the market which results, as Piketty showed, in rising income inequality. The causation can work in either direction. There is no evidence that rising income inequality curtails economic freedom. Piketty feared that wealth inequality would rather curtail or blindside political freedom.

In the Robber Baron era (1870-1900), political power was suborned to economic power and but major economic freedom legislations were enacted: e.g., the Sherman Anti-Trust [Act], etc. Enforcement of anti-trust was however spotty at the start but eventually improved with the Fair Trade Commission law.

B. That inequality impairs political freedom is Piketty’s fear but is arguable: it is clear that political power beholden to economic power can legislate anti-union and tariff protection laws. But the decline of unionism in the USA had little to do with anti-union laws and more to do with economic liberalization laws allowing imports to gut the US steel and textile industries. On the other hand, there is a school of thought that says that a rising middle class could provide the agency for greater political liberalization, say, more inclusivity in voting rights and the allocation of fiscal resources.

RB: In the case of the Philippines, the most egregious evidence of concentration of economic and political power is the pervasiveness of political dynasties, which are either themselves directly engaged in business, mostly of the rent seeking monopolistic types in their areas, if not illegal activities like gambling, or are partnered with such commercial operators both local and national. Our 1987 constitution recognized its pernicious impact on genuine democracy and economic welfare, but was never operationalized in law. Instead, there seems to have been an expansion and deepening since then, as studied by Prof. Ron Mendoza. Your thoughts on this?

RF: Political dynasties: here the evidence is also mixed. The relation between political dynasties (granting that we have a fool-proof definition we can all agree on) and income inequality is difficult to establish as causation rather than just association. The rise of political dynasties in democracies is affected by and large by economics, i.e., economies of scale: an election victory gives winner broad name recall, brand and franchise asset and an election network which reduces the cost of campaign for the rest of his/her kin. Contestability of entrenched family machineries can, if infrequently, come from black swan events (Isabela’s polio-stricken Grace Padaca) and more readily by another entrenched family — incumbent newcomer Governor Art Yap’s machinery in Bohol, considered formidable, was swept away by the machinery of the older Aumentado family.

(To be continued.)

 

Romeo L. Bernardo was finance undersecretary from 1990-1996. He is a trustee/director of the Foundation for Economic Freedom, the Management Association of the Philippines, and the FINEX Foundation. He is the principal Philippine Adviser of Globalsource Partners (globalsourcepartners.com). He also serves as a board director in leading companies in banking and financial services, telecommunication, energy, food and beverage, education, real estate, and others.

romeo.lopez.bernardo@gmail.com

The first 100 days: The Good, the Bad, and the Ugly

October 12, 2022 | 6:42 pm

Introspective By Romeo L. Bernardo

I am pleased to share with readers a post that Christine Tang and I wrote on Oct. 10 for subscribers of Globalsource Partners (globalsourcepartners.com), a New York based network of independent analysts.

One hundred days have passed since Ferdinand Marcos, Jr., the late dictator’s son and namesake, was sworn in as the 17^th President of the Philippines. So far, he has behaved as we expected, i.e., not like his father. Although we had said that this is both good and bad, the overall net sentiment of businesses seems to lean towards the former. That his main concern is the redemption of the family name is perhaps the key takeaway during these early days. Below is our assessment of the positives and negatives of his government so far.

THE GOOD
1. The President’s appointments for the economic cluster deserve the first mention. We count here not just the core oversight functions — finance, planning, budget and industry, central bank — but several key agencies (the “++” for lack of a better term) — foreign affairs, public works, transportation, energy, trade and industry, labor and migrant workers. The naming of a five-person private sector advisory council directly in touch with the President seemed to have bolstered confidence that this will be a business-friendly administration.

2. A medium-term fiscal consolidation program containing concrete macro targets that seemed to have convinced markets of the new government’s commitment to fiscal sustainability. The sovereign has continued to maintain its investment grade credit rating and despite current volatile global financial conditions, was able to raise $2 billion worth of global bonds from the international capital markets at relatively tight spreads.

3. Fast-tracking the revision of the Implementing Rules and Regulations (IRR) of the Build-Operate-Transfer (BOT) Law which will help rekindle private sector interest in investing in infrastructure. Keeping public infrastructure investments at 5% of GDP is an important plank of the new administration and the hope is that public-private partnerships will help government overcome its tight budget constraint post-COVID. As it is, the 2023 budget does not explicitly provide budget cover for donor-supported, mass transport projects that are expected to begin construction.

4. Decisiveness in acting on major pending issues that threatened the country’s energy security, including approval of Prime Infrastructure Capital’s acquisition of Shell Philippines Exploration BV’s (SPEX) 45% stake in the Malampaya gas field, as well as determination by the Department of Justice that renewable energy is not covered by 60-40 restriction on foreign equity. Both moves would pave the way for much needed investments in oil exploration and electricity generating capacity to improve energy security. Additionally, there was broad support for the Energy Regulatory Commission’s decision denying the joint petition of Metro Manila’s electricity distributor and one of its power suppliers for fuel pass-through price adjustments that would have contravened the basic terms of the power supply agreement that the two parties entered into voluntarily.

5. Reverting to a more centrist approach to foreign policy after the two previous administrations’ polar positions, i.e., Aquino’s overly pro-US then Duterte’s overly pro-China stances. Unlike his predecessor, the President appears inclined to follow the lead of his foreign affairs secretary, a career diplomat, as gleaned from his well-received speech at the UN General Assembly last month and a constructive meeting with the US President at the sidelines. Observers take this to mean that the balance will likely tilt more towards the US although the President’s personal ties with the neighborhood Goliath will likely mean continuing friendly relations with China.

THE BAD
The President boasted of having put in place a “functional government” in his first 100 days, an achievement that seems to us par for the course. Yet even this we find hard to agree with given his inability to name the key person, i.e., a health secretary, to manage COVID-19’s transition to an endemic disease. When asked, he explained that consultants are still working on a “new structure” of the health department to make it responsive to all aspects of public health. Although the more sympathetic could appreciate the care being taken to choose the health chief, many observers have taken to crossing their fingers in hopes that despite a stalled vaccination program happening alongside the education department’s back-to-school mandate, the immunity wall built up thus far would be strong enough to avert another wave of infections. The critical problem of lack of leadership extends to the scandal-ridden health insurance agency that has an estimated actuarial life of only about five years.

The other disappointment is that the President has yet to convene the Legislative-Executive Development Advisory Council (LEDAC). The body, which is composed of the leaderships of the executive and legislative branches as well as representatives from public and private sectors, is crucial to ensure that the two branches work in sync and priority reforms are not delayed in congress. As it is, we worry that the gathering global gloom leaves the economic team much less time to deliver on promises and with more and more analysts expecting domestic economic growth to markedly underperform government’s target next year, congress needs to focus soonest on the President’s most urgent tax and expenditure reforms.

THE UGLY
We have written about the leadership vacuum in the Department of Agriculture when the President appointed himself secretary and its early fall out, the sugar crisis, how it was a test of the President’s leadership mettle, and how the mismanaged crisis may have sent the wrong signals to well-meaning technocrats in government. The belated resignation of his executive secretary gives hope that in time, the President would develop better instincts to course correct sooner.

At this time however, his flip-flopping on the issue of importing sugar, a move backed by his point person in the agriculture department and by his economic managers based on data showing production shortfalls, raises the question of how he intends to address the food crisis that he himself brought to the fore. There are several upcoming issues, most important of which are estimated shortfalls in rice outputs and the end-year expiry of Executive Order 171 issued by the previous administration allowing freer importation of major food items and coal.

Year-to-date, food inflation accounted for about a third of the headline inflation rate. Per the latest Pulse Asia survey, controlling inflation which is “the only majority urgent national concern, the plurality opinion among Filipino adults (42%) is one of disapproval for the national administration’s performance.” Given the predominantly supply-driven nature of domestic inflation, the BSP has repeatedly stressed the “importance of urgent non-monetary government interventions to ease domestic supply constraints.” n

Postscript. All told, so far, much more good than bad. The LEDAC was convened the day after we released our GSP report. We hope LEDAC will meet regularly, at least once a month, as it did during President Fidel Ramos’ administration.

 

Romeo L. Bernardo was finance undersecretary from 1990-96. He is a trustee/director of the Foundation for Economic Freedom, the Management Association of the Philippines, and the FINEX Foundation. He also serves as a board director in leading companies in banking and financial services, telecommunication, energy, food and beverage, education, real estate, and others.

globalsourcepartners.com

romeo.lopez.bernard@gmail.com