Bad governance and the economy

I have lately been asking fellow economists and other friends what they think to be the three most critical impediments to achieving high and inclusive (broadly beneficial) economic growth in the Philippines. The runaway winner in my little survey has been the new big, bad G word (no, not globalization; that was the old one): Governance—more precisely, bad governance. One friend was more precise and emphatic about it: His three answers were corruption, corruption and corruption!

This tells economists like me that the most important answers lie beyond the confines of our discipline and claimed expertise. This need not stop us from making sound prescriptions on what can be done in the economic sphere to overcome our persistently narrow, shallow and hollow growth performance. But in the end, the best economic strategies and policies could come to naught if bad governance gets in the way.

Seven faces

It’s easy enough to say bad governance is the problem, but how exactly does it become the problem? Let me count the ways.

I will focus here on seven faces of bad governance, but I’m sure readers can easily cite more. The seven I will dwell on are (1) poor tax administration, (2) widespread smuggling, (3) over-centralized decision-making, (4) policy reversals and poor implementation/enforcement, (5) unnecessarily cumbersome procedures, (6) political interference and (7) regulatory capture. Note that I didn’t bother to list graft and corruption; we all know what that does to all of us.

Poor tax administration/widespread tax evasion has been a persistent, seemingly unsolvable problem. It is again a prominent problem now as the government keeps missing collection targets at a time when its deficit is at an all-time high. And we all know how this has perennially led to the faithful and honest taxpayers among us being constantly penalized and martyred whenever government gets strapped for cash, as we get hit by new and higher taxes while perennial tax evaders keep getting away with it. We can only hope that the next President can change all this—and restoring wide trust for the government is essential to getting this done.

Widespread smuggling is related to the above, as it also implies failure to collect taxes that are due from importers of various goods. What’s bad about it is that it has a two-fold effect. Not only does it deprive government of substantial revenues, but it also unfairly undermines and compromises the viability of domestic producers, particularly in agriculture and manufacturing, who are driven out of business by unfair competition from cheap imports coming in through the back door.

Overcentralized decision-making is a problem I’ve seen every time I have the chance to visit the Philippine countryside. I always ask common folk I encounter what one thing they would ask of the government if they had the chance—and what they are actually getting. Invariably, government misses out on their greatest need, as the tendency for “one-size-fits-all” approaches conceived at the national level leads to interventions that are ill-designed and unresponsive to the actual problems. There is a propensity for favoring approaches that involve large-scale procurement (of fertilizers, seeds, equipment, etc.), never mind that these commodities may not necessarily be what’s most needed out there where the problems are—and we all know why.

Policy reversals and poor policy implementation/enforcement undermine the predictability of the policy and regulatory environment, and impairs overall business confidence and the general investment climate. It’s no surprise that our Southeast Asian neighbors, including the ones considered to be lagging, are leaving us behind, with total investments growing 3 to 20 percent annually while we stand out averaging zero percent (and lately negative) investment growth since 2000.

Unnecessarily cumbersome procedures and requirements significantly raise the costs of opening, starting up and maintaining a business enterprise, thereby further negating the investment climate. This is true of procedures in both national government agencies and local governments, who would do well to adopt an enabling mode rather than a stifling restrictive mode of working with the private sector.

Political interference or political motivations in the allocation or outright diversion of public investment funds reduces the quantity, quality and impact of public expenditures. The congressional pork barrel, and selective budget releases by Malacañang to favor political allies and exclude perceived political foes compromise the integrity of our budgeting system.

Regulatory capture—where (usually monopolistic or oligopolistic) firms subject to regulation end up reversing roles with their regulators—has facilitated and strengthened monopolistic tendencies, and hence fostered higher costs in key industries. This has in turn harmed the competitiveness of other downstream economic activities, whose costs are correspondingly raised.

So much, indeed, rests on good governance, which tells us that the most important attributes we should be looking for in our elected leaders have more to do with the candidate’s heart, and less with his/her head or mouth. –Cielito Habito, Philippine Daily Inquirer

Comments welcome at chabito@ateneo.edu