Trickle down isn’t good enough

Finance Secretary Cesar Purisima must have anticipated the ho-hum response of most people to the good news about our GDP growth rate for last year. He told the business group that listened to the Roubini talk, somewhat defensively, that we have to celebrate our small victories.

I agree with Sec. Purisima, but any celebration should take no longer than a minute to high five each other. The problem with our government, both Ate Glue’s and P-Noy’s watch, is that they tend to dwell on the small victories. That’s why our small victories remain small. We tend to rest on our laurels.

We have to move on and deal with the urgent problems of our people. For instance, there is no ignoring the disparity in the distribution of the country’s wealth. Marketing experts point out that 90 percent of our people belong to the socio economic class DE, the poorest of the poor. Class ABC is 10 percent of the population, but control 85 percent of the country’s wealth. The 90-percent share the remaining 15 percent.

Geographically, NEDA chief Arsi Balisacan said “60% of the country’s GDP is concentrated in three regions in Luzon. This shows that we have yet to tap the full potential of other regions, especially those in Mindanao.”

Thus, our seemingly impressive GDP growth rate is meaningless to a great number of our people who are mired in poverty. Yet, the country is by no means poor. More than a trillion pesos belonging to the country’s rich are idle in Bangko Sentral’s Special Deposit Accounts (SDA). And we are bigger investors in China than the Chinese are here.

We are now actively salivating to win another trophy in terms of a credit rating upgrade to investment grade. But according to studies conducted by Moody’s and Fitch’s cited in a Rappler report, it is historically more difficult to reach an investment grade when a country’s GDP per capita falls under the $3,000 range. Indonesia’s GDP per capita was $3,508 in 2011 while the Philippines was still way below the mark of $2,223 in the same year.

Business ( Article MRec ), pagematch: 1, sectionmatch: 1 GDP growth rate, credit rating upgrade… all these are short term indicators of economic progress. We want our officials to be focused on sustainability.

Whether an administration is able to introduce enough significant reforms that will be sustainable in the long term is the real test of leadership. P-Noy said so himself. He said he wants to make sure the anti corruption measures he institutes would survive beyond 2016 whoever emerges as his successor.

P-Noy was voicing a silent fear among many of us who are supportive of his Daang Matuwid campaign. Published reports on the supposed three top contenders for the 2016 presidential elections caused a lot of worries on the country’s future. One seems honest but inept and the other two have somewhat more colorful reputations.

I am also reminded of that book, Why Nations Fail. That book covers studies of countries over different eras in an attempt to find out why some are successful and why others are failures.

James Robinson, a political economist and a recent Manila visitor, wrote the book with Daron Acemoglu, an economist with the Massachusetts Institute of Technology. They underscored the importance of “inclusive” governance versus extractive.

And that’s the key difference between successful and failing countries. Apparently, man-made political and economic institutions spell economic success or failure — not history or culture or even natural resources. We can stop blaming the Spanish colonizers and our so called damaged culture. P-Noy’s success or failure in putting up the right institutions will determine our future.

Successful and rich nations have “inclusive” economic institutions that “enforce property rights, create a level playing field, and encourage investments in new technologies and skills.” These countries provide state support in terms of public services and regulation. Inclusive economic institutions support markets that are open to new entrants because these are more conducive to economic growth.

Extractive economic institutions, on the other hand, “are structured to extract resources from the many by the few.” This seems to describe us and some of our institutions that enforce entry barriers and regulations that prevent the effective functioning of markets.

Robinson and Acemoglu concluded that nations fail when their political and economic institutions become “extractive” and concentrate power in the hands of the elite. I guess that explains why we have remained a failure all these years.

The authors of Why Nations Fail think there should only be some amount of political centralization so as to establish law and order. But inclusive institutions distribute political power widely in a pluralistic manner.

On the other hand, “extractive economic institutions are linked to extractive political institutions, which concentrate power in the hands of a few, who will then have incentives to maintain and develop extractive economic institutions for their benefit and use the resources they obtain to cement their hold on political power.”

UP economist Winnie Monsod pointed out that growth may take place under extractive institutions (the elite after all, will want growth — else, what will they be able to extract?). But that growth will not be sustained, for two “key” reasons:

First is sustained economic growth requires innovation, with its attendant creative destruction which is feared by the dominant elites, so they will resist it. And the second is that political power, being highly coveted, will be fought for, and this in turn creates political instability. And that’s why nations fail economically.

We still hear people talk of “trickle down” economics as if to say that people must just be patient because sooner or later the benefits of economic growth will come their way. But for P-Noy, he must realize that the fruits of growth must flow down rather than trickle. Otherwise, our economy cannot really meaningfully take off.

In fact, I am happy to note Sec. Balisacan expressed a view we share: “We are mindful that economic growth is but a means to an end; that development is about improving the quality of life of all Filipinos.” P-Noy must deliver on this promise.

Sec. Balisacan himself outlined what needs to be done: “to implement measures to minimize corruption, and to ensure consistency of policies, alignment of plans and priorities, and efficiency of regulation. We want to improve the efficiency and capacity of the bureaucracy to respond to the needs of our people. These will require institutional reforms. This government is determined to see these through.” I sure hope that is the case because it simply isn’t obvious now.

I have criticized Ate Glue during her watch for making too much of GDP growth rates as if that indicated some sustainable economic policy success on her part. The same criticism applies to this administration if they continue to dwell on this number without making an impact on our economy’s uneven distribution of the benefits of growth.

I know P-Noy has talked a lot about inclusive growth. He must act boldly, against the interest of his own social class, to create inclusive economic and political institutions that will outlive his watch. P-Noy must realize the absolute importance of learning the lessons discussed in Why Nations Fail.

Finally, P-Noy’s spin doctors should not be allowed to make it look like small victories are bigger and more significant than these really are. –Boo Chanco (The Philippine Star)