01 - the philippine economic mystery

8/3/2019 01 - The Philippine Economic Mystery

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The Philippine Economic Mystery

For class discussion only

Not for quotation


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The Philippine Puzzle

1950 RP has higher income per capita than all othercountries in East and Southeast Asia except for Japan,Malaysia, Hong Kong and Singapore

2000 RP income per capita exceeded only Vietnam,Laos, Cambodia, North Korea, and Myanmar

1950s-60s marked by modest but sustainedeconomic growth

1970s-90s RP missed out almost completely on theAsian boom

One Asian country after another moved past RP inincome per capita


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Per capita GDP of RP, Malaysia, Indonesia and

Thailand relative to US


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Possible Explanations Forwarded by

Economists

Island character of the Philippines impedesroad and railway transport but facilitateswater transport

Tropical climate Inability to attract high levels of foreign direct

investments (FDIs)

Larger fiscal deficits or more rapid inflation

But why did these macroeconomic policyfailures occurred in the first place?


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A Possible Key to the Puzzle

Longer term influences on Philippine

economic history

Two Exogenous Influences that Affected RP

apart from other Asian Countries:

Colonization by Spain from 1565 until 1898

American occupation from 1898 to 1946


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The American Years

RP showed sufficient national unity and militarycapability to challenge the US

RP as the first Vietnam or Iraq

Spanish did not do much to advance science or spread

economic growth in RP RP like other Asian countries missed out on the

Industrial Revolution in the West

After 1902 period of modernization and economic

advance Americans instituted a major land reform by

confiscating the lands of the various Catholic friarorders


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Physical and Social Development

Advancements in public health, transportationand other infrastructure, administrativestaffing, and other elements of state capacity.

Education limited opportunities underSpanish colonial rule

Americans built and staffed public schools

throughout the country UP was established in 1908 to educate the

elite in scientific and administrative subjects


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Introduction of Democracy

Filipinos were electing the lower house of a

bicameral national legislature as early as 1907

Began electing the upper house in 1916

1938 if there was already a HumanDevelopment Index, RP would top all Asian

nations except Japan


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The Philippines and Japan

before WW II Real wages in the Philippines were higher than in Japan during

1920-24 and equal during 1935-1939

1900 to WW IIRPs income per capita was 70% that of Japan

Japans defeat in WW II led to American occupation

US employed same strategies they used in RP: land reform,installed democratic political system, womens suffrage, otherhuman rights and freedoms, modern curriculum of physical andsocial sciences

RP and Japan are both island economies and have limitedendowments of oil, gas, coal and other key natural resources

1950Japans income per capita is $ 1,921 while that of RP is $1,070

2000Japans income per capita is $ 21,051 while that of RP is $2,421


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RP and Japan per capita GDP

relative to US


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Poor Quality of Philippine National Institutions

and Governance

State weakness is manifested in uncollected taxes anduncontrolled crime, bloated bureaucracies anddenuded forests, low teacher salaries, and highemigration rates.

Even the courts of law are deemed so weak and socompromised by corruption

Rule of law clings for dear life on the inaugural oath ofthe sitting president to uphold the law

Two critical ingredients required to promote businessinvestments were absent: Stability of the rules

Secure enforcement of the rules


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The Question still Remains

Some observers point to problems of poor

governance, corruption, and political

economy, or to exogenous shocks brought

about by trade liberalization and WTO rules as

culprits

But these also beset other Asian economies!


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Corruption Puzzles

East Asian Miracle is puzzling to western

economists

They believed that economic success depends

on the presence of a formal rule of law

enforced by an independent judiciary

But in East Asia, weak legal institutions have

existed side by side with high levels of

investment and rapid rates of growth


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Various Types of Corruption

There are different kinds of corruption and

they have varying potential impacts

Some forms of corruption are like virtual

informal tax on business activity

Where government rules are ill-conceived,

corruption maybe a less costly and more rapid

way of getting around these rules

Can even be treated as augmentation and

distribution mechanism


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The Issue of Predictability

If corruption payments are made according to

predictable and well-known rules serving as

informal rules the effects may not be

particularly damaging and there may even besome positive aspects

China enjoyed long-run economic growth

rates of more than 10%, despite being amongthe most corrupt countries in the world


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Korea: Corruption and National

Commitment to Development

Coup d etat of Park Chung Hee in 1961

Establishment of government corporations in

key economic sectors

Despite widespread corruption, officials made

rational economic decisions

There was strong national commitment to

catch up with Japan and the West


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Indonesia: Monopolized Corruption

Suharto maximized the total corrupt payments

to himself and his surrounding circle

Corruption was limited in other parts of the

Indonesian government and society

Enforced tight restrictions on the bureaucratic

pursuit of graft


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Good vs. Bad Corruption

Just like there are efficient and inefficient

taxes

In the case of RP, it seems that corruption has

been unpredictable

This reflects a general sense of instability and

unpredictability in political and economic life

Rapid turnover of Presidents (only 6-yr. term)


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Philippine Politics

Very particularistic, regional and fragmented

There is an apparent inability of the

government as a whole to make credible or

binding commitments

Like revising taxes and regulatory policies

every two or three years

Consequence is persistent difficulty in

generating both foreign and domestic

business investment


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Incapacity to Change

Why do Filipinos not revise their political

system to make stronger and longer lasting

government commitments more likely?

Why in the Philippines does it seem that

religion does not help in limiting harmful

corruption?

Why do Filipinos find it difficult to unite?

How could a country with so many gifted, so

many nice people end up in such a mess?


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Cultures Influence

Political and economic life of a nation is inevitably a closereflection of its culture and therefore religion, which hasa large influence on the culture of many nations.

Douglass North (Nobel Prize Winner) argues that the key tobuilding a foundation to understand the process ofeconomic change is beliefs both those held by individualsand shared beliefs that form belief systems.

Moral systems have many practical economicconsequences e.g. levels of trust and transaction costs ofdoing business in a nation.


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Private over National Interest

Wealthy and landed families play a dominantpolitical role in the Philippines like in LatinAmerica.

Alfred McCoy: In the Philippines, as in manyLatin American settings, a weak state andpowerful political oligarchies have combined toput the powers of the state in the service of

private interests.

Gini coefficient is more similar to Latin Americancountries than Asian countries


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RP and Mexico

High crime rates

Dangerous highways for drivers and

pedestrians alike

General level of violence in Philippine society

(more than a hundred is killed every election)

RP as province of Mexico

Spanish culture was refracted through

Mexican lens


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RP and Mexico

American investments to Mexico transferred to thePhilippines in the early 1900s

Income gap between RP and Mexico narrowed to nearequality in 1930s

RP was more heavily damaged than Mexico in WW II(Manila is 2nd only to Warsaw, Poland in terms ofdestruction)

Economic trajectories of the two countries were very muchsimilar in 1950-2000

Both suffered major economic setbacks in 1980s

At present, Mexicos per capita income is 2.5 times that ofRP but economic fluctuations have been roughly similar foralmost 2 centuries.


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RP and Mexico (ipc/U.S.)


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RP and Peru

Economic history of RP is most similar to Peruamong Latin American (and perhaps amongall) countries

Per capita income (relative to U.S.) peak: Philippines 1933 (29%)

Peru 1935 (32%)

Lowest point: Philippines 1999 (8%)

Peru 1992 (13%)


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RP and Peru (ipc/U.S.)


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RP and Peru: Values

World Values Survey, 1999-2002

Whether most other people can be trusted:

Filipinos only 8% responded positively Peruvians 11%

Japanese 43%

Swedes 66%


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Spanish Catholic Heritage

Trade between RP and Latin American countries is notlarge enough to produce similarity in economichistories

Culture can be considered an exogenous economicfactor when few economic policy makers haveconsidered it an economic variable or sought to alter anational culture for economic purposes

Common Spanish Catholic heritage could be a maincontributing factor in the similar long run economichistories of the Philippines and most of Latin America.


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Trust: Foundation of Social Capital

Levels of trust as a particularly important

element of social capital

RP and Latin American countries have

among the lowest levels of trust in theworld


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Latin America

Almost every Latin American nation has anincome per capita of less than 30% of the UnitedStates

RP and Latin American countries have a love-hate relationship with the U.S.

Octavio Paz (Nobel Prize Winner for Literature)

Mexico and U.S. are 2 distinct versions of

Western civilization

Triumph of Reformation in England whileCounter-Reformation triumphed in Spain


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Reformation

Gave way to the rise of Protestantism

Began in 1517 when Martin Luther published

The Ninety-Five Theses

Attempts to reform the Catholic Church, which

was then confronted by issues such as the sale

of indulgences, simony (buying of clerical

offices) and perceived systemic corruption in

Church hierarchy


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Counter-Reformation

Began with the Council of Trent (1545-1563)

A commission of cardinals tasked with

institutional reform, addressing issues such as

corrupt bishops and priests, indulgences, and

other financial abuses

Rejected Protestant positions and upheld the

basic structure of the Medieval Church


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Mexico and U.S.

Mexican society

Work did not redeem and had no value in itself

Manual work was servile

The Superior Man neither worked nor traded Puritans of the U.S.

Work is redemptive because it frees man

Individual relationship with God, absence of anyclerical hierarchy (Priesthood of all believers)

Powerful internalized sense of ethicalresponsibility


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Spanish Catholicism and

Protestantism

Secular Age

Protestant individualism and personal

responsibility would reappear as religiouscommitment to values of free market and politicaldemocracy

The political centralism of the Spanishmonarchy had religious orthodoxy as itscomplement, and even as its foundation

Catholicism taught an orthodoxy that


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Spanish Catholicism and

Protestantism

Reformation

began with the a religious criticism of religion marked the beginning of the modern world

necessary antecedent of the Enlightenment

Claudio Veliz of Chile

Latin American economies beset by sterility,

silliness, and irresponsibility


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Spanish Counter-Reformation

largely dominates, even today, the lives of the Spanish-speaking peoples almost as convincingly and pervasivelyas the dynamic asymmetries of the Industrial Revolutionpreside over the English-speaking world

attempted to bring change in society forever to a halt

at odds with the free market that is the most powerfulinstitution for change in the history of human existence

Cultural tradition of the Spanish-speaking peoples isunresponsive to industrial capitalism

East As an e tes vs Lat n Amer can


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East As an e tes vs. Lat n Amer canelites

East Asian societies

obligation to society is an integral part of being

an ethical person

Confucian heritage

commitment to self-cultivation is analogous

to Protestant work ethic

Strengthens personal drive for achievement

Lacking in the Philippines


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Philippines

Characterized by Feudal hacienda mentality andpoor leadership

Elites are more individually concerned with theirprivate interests than collective action to

strengthen their nation An artificial political unit created by the Spaniards

and maintained by the Americans

Poorly integrated linguistically and socially

Decay of modern democratic government

Constitutions of Latin American countriesmodelled after the U.S. also worked poorly


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Argentina

Has per capita income of 80% of the U.S. in early1900s, comparable to France and Germany

From 1930 its economy began a long period of sharpdecline

Most rapid decline in the 1980s (characterized by widepolitical turmoil)

With RP, two of the most corrupt nations in the world(TI 93rd and 121st most corrupt in 2006)

Bloated payrolls, antiquated equipment, managementstrategy is to pay bribes to government officials inexchange for lucrative contracts


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RP and Argentina

2001 removal of RP and Argentinian

presidents

Juan Domingo Peron and Ferdinand Marcos

(plus Evita and Imelda)both challenged the

reigning landed oligarchs

Political violence and extra judicial killings


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Role of Culture in the Economy

Economists have long ignored the effect ofpolitics and culture to the economy

Latin American tendency towards faileddemocracies and authoritarian rules

Catholics depend much on Church

regarding questions of morality Protestantism instills an attitude of

individual questioning, Protestants get usedto independence, freedom and the

assumption of their duties and obligations


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Role of Culture in the Economy

Latin American countries acts ofsubmissiveness and outbreaks of

rebelliousness in dealing with authority Confession transfer of guilt

Secret rejection of rules or breaking themviolently

Cleaning cities as governments job

Salvation more than solutions

Spain and Ireland, Germany and Italy

influence of European Union economics

C i i i h R l f C l i


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Criticisms to the Role of Culture in

the Economy Max Weber was one of the first political

economists to explore the role of culture inthe economy

Jeffrey Sachs: Some Catholic countries aredoing better than Protestant countries (likeIreland)

Peoples from poorer countries value workequally or even more than Americans

While Sachs may also be correct, there is notenough reason to discount the role of culture


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References:

Nelson, Robert. 2007. The Philippine

Economic Mystery. Forthcoming in The

Philippine Review of Economics.

Sachs, Jeffrey D. 2005. The End of Poverty:

Economic Possibilities for Our Time (New York:

Penguin Books).

01 - the philippine economic mystery

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