Why is our country stuck?

There is an air of frustration among Filipinos I have talked to during the course of my visit to America over the past three weeks. We have first class engineers, economists and MBAs from the best schools in the world, Rene Jarantilla observed, and they have proven themselves to be world class abroad. Why is it, Rene asked, when they go back to the Philippines and assume leadership positions, they miserably fail to get the country going?

Rene, a mechanical engineer from Iloilo who migrated to America in the early 70s, has gone back to the Philippines a number of times, each time seeing for himself how the country is sliding backwards. So, he asked me the question almost every Filipino must have wondered about: why is our country stuck in a rut?

Many of these immigrants left the Philippines in search of greener pastures. Many of them have taken American citizenship but still have strong emotional ties to the motherland. Some of them, like Ernie Guevara, actually tried to return and spend their retirement years in the Philippines.

About three years ago, Ernie sold his house in Chino Hills, sold his Benz and with his wife Irene, took early retirement and returned to Manila. They bought a car in Manila and managed to stay less than year before they woke up to reality and flew back to California. They still come to Manila for several months in a year but they have since bought a house in Anaheim and no longer dream of retiring here.

With his experience, Ernie G has a good idea why our country is stuck. Some economists studying economic development are also trying to explain what happened in a recently published book entitled In Search of Prosperity. Published by the Princeton University Press this year and edited by a professor from Harvard’s Kennedy School, the book is a collection of essays and studies by economists looking into the economics of growth.

The book tries "to shed light on some of the most important growth puzzles of our time. How did China grow so rapidly despite the absence of full-fledged private property rights? What happened to India after the early 1980s to more than double its growth rate? How did Indonesia manage to grow over three decades despite weak institutions and distorted microeconomic policies and why did it suffer such a collapse after 1997?

Interestingly, they also have a section entitled: Philippines: failed transition. It starts, "the puzzle of the Philippines is why, 12 years and four presidents after the departure of Marcos and a transition to democracy, the country’s GDP per capita is lower than it was in the pre-crisis‚ year 1982 two decades ago." The chapter observes that not only have we failed to achieve the rapid tiger economy growth rate of our neighbors, we "have not even been able to restore the level of output per capita to its bad old dictatorship days."

Figures and comparisons are cited and reading them hurts. From 1970 to 1982 the Thai and Philippine economies grew at very similar rates: Thailand grew at 3.1 percent and we were at 2.6 percent. But, the book pointed out, "since then, the Philippines’ GDP per capita has fallen to only 92 percent of its 1982 level, while Thailand’s output has doubled." It also adds "at least prior to its crisis, Indonesia had overtaken the Philippines."

So, what went wrong? It is not easy to explain, the chapter’s author confesses, the continued stagnation in the Philippines either in terms of the standard "policy" or "institutional" variables or even as a result of a shift in factor accumulation.

The author tries to be charitable and surmises that maybe we just suffered too many shocks, including the Pinatubo eruption and the yearly catastrophic floods. But the author adds quickly "countries with equivalent or larger shocks have adapted without the growth stagnation."

Could it be flawed policies then? Maybe we could blame excessive appreciation of the exchange rate as a proxy for competitiveness in export markets and potential microeconomic disequilibria. Or could it be the budget deficit as a proxy for fiscal imbalance and failure of government control? He studied the numbers and concluded that the raw numbers do not suggest an explanation for our significant growth slowdown.

What about factor accumulation? Not really. Growth stagnation in the Philippines, the chapter says, cannot be attributed to a failure in human capital. The country, it points out, has always been far ahead of its more rapidly growing neighbors in the stock of education. "The years of schooling of the potential labor force (population over 15) continued to grow after the overthrow of Marcos, and if anything, accelerated."

The chapter continues: Physical capital accumulation slowed and then rebounded, but the timing suggests that the fall in capital was a consequence, not a cause, as the fall in GDP began well before and was much steeper than the fall in physical capital per worker. Investment rates and hence physical capital growth recovered after 1988, and growth in capital has been faster and steadier than output growth.

Institutions can’t be blamed either. In fact, there had been dramatic improvements after Marcos. "There were free and reasonably fair elections, with an orderly transfer of power from Aquino to Ramos to Estrada." Even the controversial transfer to Arroyo could be seen as a legitimate democratic exercise of removing a corrupt leader. It also had the blessings of the Supreme Court.

We also now have more civil rights, a freer press and "one would guess transparency‚ and accountability‚ have improved." So, it would seem, the author wondered, this improvement in institutions should be rewarded with faster growth.

Then the author hits on something we have been saying in this column as a possible explanation for our problems. The author wrote "my conjecture is that although in some ways institutions‚ may have improved under democracy, institutional uncertainty‚ has increased. This increase in institutional uncertainty – the reliability with which economic actors can anticipate the rules of the game (no matter how good or bad those rules might be) – may account for a stagnation in the level of supportable output that accounts for the Philippines’ growth dynamics."

The author observes that the fact that Indonesia overtook the Philippines proves that a country does not need a great deal of institutional capacity to generate growth. Investors look for regimes that have reasonable prospects for the future, a system of enforcing contracts and a stable system of assuring investors’ expectations.

Even high levels of corruption may be tolerated, the author observes, as long as corruption does not get absolutely disorganized. He is probably saying that if officials have to be bought, they have to stay bought and investors won’t have to buy everyone down the line.

I guess the author merely expressed in academic terms, what I have heard time and again in coffee shops: The problem with the return of democracy is the democratization of corruption down the line. Today, just because an investor has obtained Malacanang’s blessing does not mean smooth sailing because implementation means getting the cooperation of every level of bureaucracy. In some cases, legislators and judicial officials must also be kept happy.

To answer all those Pinoys abroad who asked me why we have been left behind and continue to fall even further behind, there’s a probable answer. While the real answer is not as simple as that, institutional uncertainty due to corruption is a turn off for investors and partly explains why we are in this rut.

Prohibition

Now, here’s Dr. Ernie E.

A gracious hostess, was serving drinks at one of her parties. A friend of hers brought his brother who had just been ordained a priest. She offered the friend a drink from the tray and said, "I’m sorry Father, I’ll go right back to the kitchen and bring you a coke."

The priest smiled and said, "No need to. I may have alcohol. Priests abstain from sex, not the grape."

"Oh!" said the hostess blushing, "I knew it was one or the other that I wasn’t supposed to offer you."

Boo Chanco’s e-mail address is [email protected]