Philippine economic history through the perspective of ‘institutions’

The key words employed to analyze economic and political institutions and policies in the book reviewed last week in this column, Why Nations Fail by Daron Acemoglu and James A. Robinson, could help shed light on Philippine history. Relative to our neighbors, we fell behind but it is possible to catch up.

“The language of Why Nations Fail.” We shall apply the terminology employed in that book to define our unique economic path: “inclusive,” “extractive”, and “institutions.” These terms were explained extensively in last week’s essay.

The interplay between political and economic institutions is a universal constant. Those who try to broaden the opportunities for all inclusive policies are always locked in dispute with those asserting monopolies and benefits for themselves, trying to maximize their gains at the expense of the many. But roadblocks toward competitive outcomes (a hallmark of inclusive institutions) are always under threat from those who profit from extractive institutional arrangements.

“Economic nationalism in nation-building.” Since nationalism strengthens a people’s sense of nationhood, let us review Philippine economic history in this context.

The leaders of our nation used nationalism as the instrument by which we defined our efforts to attain economic independence. One of the expressions of this nationalism was the idea that the nation must produce its needs through enterprises owned by its citizens. This is what one would expect in any successful economic growth.

During the days when pre-independence leaders were crafting the basic document of independence – the Philippine Constitution of 1935 – there existed one of the most nationalist organizations of the period, the National Economic Protectionism Association (NEPA). It was a rallying cry of the major politicians of the day. (The Philippine Economic Association, a forerunner of the Philippine Economic Society, was dominated by the politicians and businessmen of the times. There were then few, if any, economists in the land.)

This movement began innocently enough: the imperative to develop local industries to serve the needs of all Filipinos. It was the economic parallel of the fight for political independence. It was also partly a response to the adverse effects of the Great Depression which hit the country during that period – a legacy of the American economic difficulties.

In time, it began to take the word “protectionism” seriously as a means of raising economic barriers – once we had our independence. This meant that we could exclude foreigners from sharing in our wealth. In those days many of the major industries were owned by Americans. It was a dream of many that one day Filipino enterprise could dominate over foreign enterprise – that is, American enterprise – in the homeland.

This induced those who would frame the Philippine political constitution to incorporate certain provisions that were directed essentially at “foreign” capital. Thus was born the original sin of Philippine development policy. The constitutional framers introduced the national patrimony provisions in the Constitution.

Most constitutions of new countries had only political provisions. But in the Philippine context, the economic provisions became a major component of our basic document. Those provisions introduced restrictions on the ownership of land to Filipino citizens and on the limitations for foreigners to a minority position in two other important industries: the business of public utilities and the development and exploitation of natural resources.

In terms of the corporate enterprise, the specific rule of policy is a 60-40 equity proportion, with Filipino citizens controlling 60 percent. The 60-40 rule, although limited only in the constitution to these industries became very critical in defining the future revisions of policy affecting other sectors that were not intended by the constitutional founders to be covered.

“Inward-looking and extractive economic institutions take hold.” There is a term that is used in Why Nations Fail which we apply to that moment in time when the economic provisions of the 1935 Constitution became part of the law of the land. It provided the critical juncture, that point in our history when our institutions veered toward more extractive characteristics.

The critical juncture, according to the Acemoglu-Robinson book, is a major event that disrupts the existing political and economic balance in the way institutions develop within a society. In the Philippine case, the constitutional event of 1935 definitely provided that tilt – the turning point when Philippine economic institutions veered toward an extractive direction.

Once independence was achieved, the economic institutions developed from new policies – from administrative rules and regulatory edicts to the new legislation elaborating on specific policies that favored Filipinos citizens and excluded foreign enterprises. Thus, the rules took on “exclusive” features in which foreigners were treated differently.

This was still a far cry from “extractive” development policy. Most countries favor their citizens over foreigners in specific areas of enterprise. Everywhere, outsiders are often treated second class in the domestic policies of many countries. This was only to be expected.

It was the economic nationalism on the home front that turned toward an “extractive institutional direction.” At home, economic policies turned toward building highly protected import substituting industries. This meant that the few favored industrialists – pampered first by import and exchange controls, and then by high tariff protection – began to build their business empires at high cost to Philippine consumers. Also, the displacement of foreign competition in terms of traded goods as well as in business enterprises meant that the benefits of progress were confined to a limited few. Thus we had the retail trade nationalization law.

These economic practices further encouraged get rich quick and sometimes corrupt activities: rent-seeking to promote facilitation of business processes and business cronyism as a practice involving those exercising political power and those pushing their own individual projects. This happened as administrations changed even pre-dating the martial law years. The economic outcomes also would involve high economic costs. They would present difficult adjustments as the country shifted directions toward more open and competitive international trade regimes.

It would take still a long journey to set the direction right. After almost seven decades of political independence, the economic landscape has changed and progress has been attained incrementally. But Philippine performance is still far from what other countries in the region have accomplished. The one area where there has been a major difference is in the way the level of foreign direct investments have helped to uplift each of the country’s economic progress compared to the Philippine case.

The economic restrictions of the Philippine constitution are still a major issue for the nation. Just this year, the Supreme Court ruled to assert a definition of capital in public utilities which is likely to cause a problem for the government’s efforts to attract foreign direct investments into the country.

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