ADB diagnoses the Philippine economy

Sta. Ana coordinates Action for Economic Reforms. This piece was published in February 1, 2010 edition of the BusinessWorld, pages S1/4 to S1/5.

It might be strange for some to read or hear me endorse a publication from the Asian Development Bank (ADB).  I have been associated with causes that resist anti-development policies sponsored by multilateral financing institutions, including the ADB.  I’m not defensive about this; after all, critics of the multilateral organizations are in good company.  It’s not only anti-globalization icons like Walden Bello and Naomi Klein but also former senior insiders like Joseph Stiglitz and William Easterly who have energetically lambasted the multilaterals for different reasons.

It is thus most welcome when the multilaterals change course and admit accountability for failures.  This is the context in which I warmly recommend the recent study co-published by ADB and Anthem Press titled Diagnosing the Philippine Economy: Toward Inclusive Growth, edited by Dante Canlas, Muhammad Ehsan Khan, and Juzhong Zhuang.  The volume, published in 2009, was launched at the University of the Philippines School of Economics on 22 January 2010.

Quite refreshing is ADB’s forthrightness in admitting its past failures.  In the study’s foreword, Ursula Schaefer-Preuss, ADB’s Vice-President for Knowledge Management and Sustainable Development, wrote:

“[E]xperiences of many countries…showed that the policy prescriptions based on the Washington Consensus did not always deliver the expected development outcomes.  The disappointment with the Washington Consensus led to a continued search for new approaches to development strategy. A new consensus has in the meantime emerged that the economic and political environment differs a great deal among countries, and there is no ‘one size-fits all’ solution to development problems; thus identifying the binding constraints to development and sequencing policy priorities contingent on country-specific circumstances are critical for igniting and sustaining growth and accelerating the pace of poverty reduction.”

The approach described above by Ms. Schaefer-Preuss is called growth diagnostics. The international development agencies, including ADB, that previously propped up the Washington Consensus are now using, if not promoting, GD.

The GD approach or framework provides real world—others call it second-best—solutions to binding constraints that prevent developing countries from having sustained growth.  The GD has become the alternative to the out-of-fashion Washington Consensus, which was heavy on liberalization on many fronts.  The Washington Consensus pushed too many simultaneous reforms, which developing countries could not absorb instantly, thus resulting in failure.

GD is more practical as it focuses on a narrow list of priority reforms. It pinpoints key reforms that address the main binding constraints on growth and investments.

I welcome Diagnosing the Philippine Economy because it spreads to a wider audience the new GD framework and approach. Further, by having the study published in book form, ADB is in a way expressing its intent to champion and institutionalize GD.

Moreover, Diagnosing the Philippine Economy has contributed to enriching GD’s substance. Here, the GD framework undergoes an innovation so it can be applied to addressing inclusive growth and poverty reduction. The typical GD approach is mainly concerned about the constraints on growth and investments; the issue of inclusiveness and poverty reduction is but a by-product.

Said another way, even as the volume subjects the Philippine economy to growth diagnostics, it also attempts to make the response sensitive to poverty reduction and equity.

In this case, the volume identifies two overlapping subsets of “critical constraints,” one on growth and the other on poverty reduction. The volume likewise includes chapters or background studies on human capital, equity and the social sector, and poverty reduction.

In addition, even as the volume’s first few chapters are devoted to introducing GD and identifying the most critical constraints, later chapters expand the discussion on major themes that relate to GD though some of them may not necessarily be binding constraints. Thus, the study gives readers a more comprehensive understanding of the Philippine economy. These chapters include macroeconomic management; trade, investments, and domestic production; and infrastructure.

One of the binding constraints on growth identified in the volume pertains to governance, “in particular, corruption and political instability.” This problem in fact also contributes to the other constraints like the weak fiscal situation, the inadequate infrastructure, and the incapacity to solve market failures.  The volume’s final chapter tackles the controversial area of governance.

Emmanuel de Dios clarifies that good governance, now a catchword mouthed by every politician, is but the outcome of good institutions. The consensus among many economists is that institutions are a determinant of long-run economic performance.

In other words, in the Philippine setting, rebuilding institutions is an immediate task at the same time that it is long-term and strategic.  It is thus highly germane that in the 2010 elections, we choose a president and other elected officials whom we most trust can reform and strengthen our institutions, thus leading to good government.

The beauty of diagnostics is that it identifies and attacks the main binding constraints.  Diagnostics can be applied to other conditions as well, not only limited to growth and investment concerns, as the different chapters in the volume have shown.

Moreover, doing diagnostics and recognizing binding constraints can be used by anyone.  They do not have ideological or philosophical biases. Those in the Left, for example, are familiar with the phrase “concrete analysis of concrete conditions.” Was it Lenin who coined the term?  But isn’t diagnostics essentially “a concrete analysis of concrete conditions?”

Lenin’s follower, Stalin, popularized the term “key link.”  Isn’t identifying key link similar to finding the binding constraints?

The GD approach has gained currency, and it has been used all over the world. I just hope that its use will not lose steam, that it will not just be a passing fancy.

The publication of Diagnosing the Philippine Economy contributes to enriching and sustaining the GD approach and framework. And while we may not agree to all the specifics of what the writers say, still the use of GD can bring us closest to what is true, what is based on evidence. All the contributors to the volume—Arsenio Balisacan, Dante Canlas, Maria Rowena Cham, Emmanuel de Dios, Jane Carangal-San Jose, Muhammad Ehsan Khan, Joseph Anthony Lim, Gilbert Llanto, Hyun Son, and Juzhong Zhuang—deserve the congratulations.

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