Many of us have been wondering why our country is now an economic basket case in a region of tiger economies. I came across a paper by Dr. Jesus Felipe and his team of economists at La Salle that analyzed what went wrong and what we should do next.
The paper is on economic transformation and growth in the Philippines, focusing on how our politics and rent-seeking economic elites doomed us to where we are now. It is a highly technical paper but it contains good insights that should be shared with a wider audience.
Most (but not all) of the words in this column are taken from the La Salle study with some editing to convey a story that flows, fits my space limitations and considers the attention span of a mass audience.
Dr. Felipe and company started by identifying the dramatis personae in our development drama.
First off are the rentiers or rent seekers. These are firms that live off regulatory rents provided by the government. They mostly export natural resources to global markets. These firms only invest heavily in machinery that extracts and packages resources already provided by nature.
Then there are the magicians. These are the firms that compete in the global market through businesses operating in a competitive environment. They produce complex products worthy of demand from other countries.
Developing countries usually have firms that export garments, agricultural products, tourism and processed items.
Then come the powerbrokers or firms that live off regulatory rents provided by the government but only sell to the domestic market. Most of these firms are regulated by the government and entry is limited.
Companies that require franchises, port operations and gambling are good examples. Powerbrokers place a premium on forming relationships with politicians and regulators (they lobby for political favors) to keep their licenses. One powerbroker today runs a political party.
Finally, workhorses are firms that only sell within the domestic market but operate competitively. They are largely the sources of goods and services in the market available to the public, such as food, beverages and beauty services. Workhorses mainly comprise farmers, builders, restaurant owners and some small entrepreneurs.
Powerbrokers favor barriers to entry instead of regulated competition due to the advantages they receive from the confusion of bureaucratic procedures and inconsistent enforcement.
Magicians and workhorses require better infrastructure and clarity in regulations. Magicians and rentiers also advocate for specialized infrastructure, such as special economic zones and port facilities.
Additionally, magicians and rentiers call for subsidies or lower taxes but for different reasons. Rentiers seek subsidies for increased profits, whereas magicians aim for improved competitiveness and greater market presence overseas. Understanding these demands is essential for analyzing the interest of the elites in promoting growth.
The Philippine economy is dominated by rentiers and powerbrokers. The landed elite, usually family-centric oligarchs endowed with generational wealth, dominated the rent space in the Philippines (something that remains up to the present).
During the post-colonial era, the country witnessed the growth of an “elite democracy” where a small group of influential families held sway over both the economy and politics.
The prevalence of elite families implies a lack of a clear distinction between those who control the government and those who control businesses.
Workhorses and magicians, who operate in low-complex goods like small and medium-sized enterprises and retail, constitute 99.51 percent of businesses in the country and provide the majority of employment and income, particularly for vulnerable workers.
Economic transformation is the key to the nation’s future. The question is, once again: who will lead this process? The history and politics of the Philippines have created a system such that the future of the nation will remain in the hands of the economic-turned-political elites.
The majority of conglomerates’ subsidiaries feed on regulatory rents. No wonder they favored non tradable goods for the domestic market. This created a boom in non-tradables such as property, malls, public transportation and renewable energy. They are not export oriented.
Our government needs a better plan to induce the jump from non-tradable goods and simple products toward more complex products, most of which should be exported in global markets.
Overall, the problem of the Philippines is not that it has too many powerbrokers and rentiers. The problem, ultimately, is the lack of magicians. This has been detrimental to the state of the country and its lack of competitiveness in the world economy.
The integration of the interests of the political and economic elite led to a lack of export-oriented firms because businesses thrive on regulatory rents. There is a constant negative feedback loop that benefits powerbrokers and takes away the competitive sectors’ opportunities for growth.
In order to start a process of much-needed structural transformation of the Philippine economy, it is necessary to implement a comprehensive roadmap that guides the country’s major conglomerates toward producing and exporting tradable goods. Only the nation’s large companies have the capacity to lead this process.
There should be a clear program for linking multinationals to domestic suppliers that includes technology acquisition. Otherwise, the country will remain doing low-value activities such as assembly.
For the last 30 years, we have been asking the same questions regarding how the country can grow, but it has not led to results.
If the economy does not open up to competitive sectors, the Philippines will either face boom-bust periods of growth or stagnation. A significant share of its workers will still be employed in the agricultural sector, or most output will be generated by regulatory rents prone to corruption and monopolization.
Unless we can break away from the historical curse caused by our power elites, our country seems hopeless.
I was thinking, how many malls and luxury condominiums do we really need? Couldn’t the Zobels, the Sy-blings and other elite families start thinking about export industries now? They owe it to the nation to lead in saving its economy from which they already profited much.
Boo Chanco’s email address is bchanco@gmail.com. Follow him on X @boochanco