Now Comes the Hard Part…

Jan 09

Successful revolutions are rare; successful reform is even rarer, claims Samuel Huntington in his classic “Political Order in Changing Societies”.  Today, what can only be described as a serious enterprise at reform is unfolding in dramatic fashion in this country.  Whether it will succeed will depend, to a great extent, on its leading edge, President Benigno Simeon Aquino III.

With his grim determination to remove Chief Justice Renato Corona from being a stumbling block to his drive to prosecute former President Gloria Macapagal- Arroyo, there is no longer any doubt that the president is dead serious about rooting out corruption.   Along with cleaning up government, Aquino has moved decisively on the anti-poverty front, massively expanding the Conditional Cash Transfer program to reach 4.6 million families or an estimated15 to 20 million individuals by 2014.  These two policy thrusts, along with the absence of any instances of corruption in the administration, have silenced the skeptics in the chattering classes and driven the opposition in frustration to float the ridiculous charge that Aquino is using the crusade against corruption to establish a dictatorship.

With the anti-corruption and anti-poverty campaign well underway, the president must now turn his attention to the bigger challenges: bringing about a more equitable distribution of wealth, coping with the environmental crisis, and setting the stage for sustained and sustainable economic development.

Social Justice

Agrarian reform is seen widely as the litmus test of the administration’s commitment to social justice, and the president has been criticized for dragging his feet on the issue owing to, the critics claim, family ties.  However, the final resolution by the Supreme Court in favor of physical redistribution of Hacienda Luisita among its tenants should provide the impetus for accelerating and completing the slow-moving land reform program.

In 2009, Congress passed the Comprehensive Agrarian Reform Program Extension with Reforms Law, better known as CARPER.  The measure extended completion of land redistribution by five years, appropriating for this purpose P150 billion.  By this month, the Department of Agrarian Reform (DAR) will have only 30 months to complete land redistribution.  The statistics are not encouraging, according to an report by Focus on the Global South: “There is a very small window to complete land distribution…As of December 2010, DAR reports showed that 960,726 (out of the 5.1 million revised scope hectares) were still up for distribution.  Counting from January 2011, DAR will have to target 320,242 hectares per year to complete land redistribution by 2014. On a per month basis, DAR should be able to distribute 26,686 hectares per month, a feat that will seem impossible given its current performance of only 12,667 hectares from January to June 2009 and 18,635 hectares from January to June 2010.”

The challenge is great, but some observers say that if the president decides to promote agrarian reform with the same decisiveness that he has displayed on the anti-corruption front, the targets will be met.

Environmental Protection and Disaster Management

Environmental protection and disaster management pose the next set of reform challenges.  The series of cataclysms visited on the country, from Ondoy to Sendong, underline the importance of passing a comprehensive Land Use Bill as well as a truly effective Mineral Management Bill.  Were they to be prioritized for passage by the administration, these measures, in addition to the total logging ban already imposed by the president, would contribute significantly to reducing the magnitude of the loss of life and damage from disasters.

The unique challenge for environmental reform is that the arena for reform is not only local.  It is global as well since environmental phenomena do not respect national borders.  The growing frequency of disasters in the country stems from climatic changes, which have been caused mainly by carbon emissions of the rich countries like the United States and the so-called emerging economies such as China.  Thus the government must play a leadership role in the international negotiations to get these carbon culprits to significantly reduce their emissions.  At the same time it must aggressively lobby for its share of resources from the Climate Change Adaptation Fund set up under the auspices of the United Nations to provide assistance to countries like the Philippines that are on the frontlines of climate change.

Strategy for Development

Finally, the administration must move on what I consider to be its most important task, which is to accelerate sustained and sustainable economic development.  Getting the Reproductive Health Bill passed has been declared a presidential priority.  This is great, but the RH Bill, while a necessary condition for economic takeoff, is not a sufficient condition.  It is on the issue of which strategy for development our government should be adopting that I think the president and his advisers are most vulnerable conceptually and programmatically

The slogan that runs throughout the Medium Term Development Plan (MTPDP) is “Inclusive Growth.”  The problem with this approach–which is, by the way, the flavor of the month in international development circles–is that it does not offer any concrete route to development beyond its prescription that most of the population should share in the fruits of growth.

The same is true with the mantra associated with the development thinking of the administration: “public-private partnerships” (PPPs).  Here the problem is that PPP is not a strategy but a means of realizing the objectives of a strategy.  Thus some projects may be best done by PPP’s, some by government exclusively, some by private enterprises alone.  But the strategy must be articulated first, or the process will become simply an accounting exercise in reducing project costs devoid of a developmental context.

The Old Path

Which development path must the country take?  To get a fix on this, it might be worthwhile to discuss the previous route.  The former economic path, followed in varying degrees by the five administrations prior to the current one, had three key features: export-orientation in both agriculture and industry; neoliberal reform, the key thrusts of which were privatization, deregulation, and trade liberalization; and massive labor export to address to solve local unemployment and underemployment and increase national income in the form of remittances.

This path did not deliver sustained development.  Instead, it resulted in the erosion of our agriculture and industrial base by uncontrolled importation; made us vulnerable to external economic and political developments; and reduced, if not eliminated, the government as a dynamic economic actor.  A key indicator of the failure of this economic path has been the anemic rate of growth; this has averaged 4 per cent over the decade 2000-2010, much below the 7 to 8 per cent that is needed to launch sustained growth, raise per capita incomes, and roll back poverty.  Even more worrisome, the national economy, driven mainly by globalization, has lost its coherence, with industry, agriculture, education, and employment losing their articulation with one other.  This trend could only be exacerbated by the state’s being cast into the role of a passive bystander, unable to exercise its planning function owing to the anti-state bias of neoliberalism.

The ongoing global economic crisis has underlined the dangers of adopting globalization of the national economy as a national economic strategy.  Given the long-term stagnation now afflicting the traditional centers of global demand, namely, the United States and Europe, developing country governments have increasingly looked to their domestic markets as being the key source of growth, the domestic economy as playing an even more critical role as an absorber of labor, and domestic sources serving as the principal source of capital.

The New Path

The Aquino administration needs to do likewise.  It should decisively adopt an economic strategy focused on revitalizing the domestic market to serve as the key stimulus of economic growth.  It must regulate the country’s relationship with the global economy so as to strengthen the capacity of domestic agriculture and industry.  It must forge an intimate link between agricultural and industrial growth and rising incomes and a more equal distribution of income.  And it must recognize the limits to growth posed by environmental considerations.

But a strategic focus on domestic demand as the driver of the economy is not enough.  Economic strategy involves a choice of which sector one devotes the lion share of financial resources to, coming up with a plan on how to spend and allocate those resources, and ensuring that the activity in this leading sector has a positive impact on the rest of the economy.

Resources are scarce, and they must be invested in that sector of the domestic economy that promises the greatest economic and social returns.  Everything cannot be a priority. One must, in short, allocate a significant share of scarce resources to that sector which a) promises the greatest gain in terms of growth and poverty reduction; and b) has the greatest potential of pulling the rest of the economy behind it.  In our view, agriculture plays this role.

Agriculture as the Key Sector

Agriculture must be the priority sector for various reasons.  Agriculture is where most of the work force, about two-thirds according to some estimates, is found. Agriculture and related activities account for some 40 per cent of the gross domestic product.  Agriculture is where most of the poor are, with the poverty incidence among farmers coming to almost 50 per cent, compared to the national poverty rate of 27 per cent.   Finally, with investments in irrigation, seed development, and credit assistance, Philippine agriculture has tremendous potential to become very productive.  Even now, for instance, the yield per hectare of rice land is greater in the Philippines than in Thailand, the world’s top rice exporter.

But the administration does not have to start from scratch in drawing up such a strategy.  Agriculture Secretary Proceso Alcala already has a vision for a diversified agriculture that rests on a modernized irrigation infrastructure, is moving towards self-sufficiency in rice and other grain, and relies in great part on high-yielding organic agricultural methods, with “niches” specializing in turning out organic products for export to Singapore and other Asian countries.  Alcala’s perspective has been criticized for being too optimistic.  It is, however, an informed optimism that stems from a grasp of the potential of a Philippine agriculture serving both a dynamic internal market and selected middle class export markets.

Reviving Industry

Even as agriculture is made the priority sector, industry must not be forgotten.

The structural adjustment of the 1980’s and 1990’s devastated our industrial sector and savaged the ranks of the urban working class.  The list of industrial casualties included paper products, textiles, ceramics, rubber products, furniture and fixtures, petrochemicals, beverage, wood, shoes, petroleum oils, clothing accessories, and leather goods.  The textile industry shrank from 200 firms in the late seventies to less than 10 today.  The shoe industry centered in Marikina is struggling for its life owing to the surge of Chinese-made shoes from trade liberalization and smuggling.

Though less than the investment going to agriculture, investment in industry must be significant, and a program of industrial recovery must be set in motion.  The key elements of industrial invigoration are, in our view, 1) an inventory of the status of the different sectors of industry, which will seek to determine which sectors can be salvaged and which should be let go; 2) a capital subsidy and trade protection program for selected industries which are deemed to be viable and can relatively easily regain competitiveness; 3) an increase in tariff rates for selected imported products; 4)) a smart industrial policy aimed at providing state support for pioneer industries and services or industrial and service subsectors where the country is deemed to have initial advantages, especially in green technologies and information technology (e.g., web design and animation); and 5) development of an agro-industrial sector that will specialize in providing inputs to agriculture and in the processing of primary products such as virgin oil.

The World Trade Organization might pose a problem to some of these measures, but if there is anything we can learn from China and many of our neighbors, it is in the innovative ways they have resorted to to get around WTO rules in order to protect and strengthen their industries, instead of simply letting them die by being faithful to anti-development global and regional trade regimes like previous Philippine administrations have been.

Industrial policy, or the use of trade and subsidies and other forms of government intervention, will be a central weapon in the industrial invigoration strategy.  And industrial policy need not focus on solely on innovating in labor-intensive industries.  As UN expert Manuel Montes explains, “industrial policy is all about technology that can be scaled up” with selective government support.  Articulating Iinkages among the sectors of the economy will also be a key feature of the new industrial policy.  Also, as Montes explained, “good policies in health and education, while they cannot strictly be considered industrial policy, could be relevant ingredients of industrial policy. For instance, government can put more support to science and technology research in the universities, and harness the country’s substantial healthcare work force towards the adoption of higher technology.”

The Future of Labor Export and BPO’s

A primary focus on agriculture, with a secondary emphasis on industrial reinvigoration, does not mean we neglect the export of labor or discourage the entry of business processing operations like call centers.  Yet we must realize that labor export and BPO’s are fragile pillars on which to build an economy.  The mass layoffs that hit thousands of workers in the Middle East owing to economic and political developments in the last two years have shown how vulnerable our OFWs are to international trends.  Similarly the growing protectionism around the export of business processing outsourcing activities (BPOs), reflected in a recently introduced bill in the US House of Representatives that would discourage American firms from outsourcing their operations, underlines the fragility of the call center industry.

During the internal debate on whether the Philippines must remain a domestic-market oriented economy or shift toward export-oriented industrialization during the 1970’s, a World Bank technocrat, Davis Steel, asserted: “The bread and butter of a modern manufacturing sector will always be at home.”  That perspective, which unfortunately lost the debate then, is even more relevant today than it was 40 years ago.

The question is:  Will President Aquino dare to break with the old and lead the Philippines onto a new path of development?  In our view, he has no choice if he wants to see his other reforms sustained, for anti-corruption efforts and the fight against poverty will bog down in a stagnant economy.

 

Leave a Reply