Almonte’s sophistry

Mr. Sta. Ana is the coordinator of Action for Economic Reforms . This article was published in the Yellow Pad column of BusinessWorld, February 14, 2005 edition, p. 21.

When former national security adviser Jose Almonte talks, we better
listen. What he says is expected to be controversial, as controversial
as his public life. Almonte was the ideologue who helped construct the
Marcos dictatorship’s program of a “new society” and a “democratic
revolution from the center.” He was the ideologue of the Ramos
administration’s liberalization program, whose unforgettable rhetoric
of NIC (Newly Industrializing Country) 2000 metamorphosed into an
economic crisis in 1997.

His history is sullied because of his involvement with the Marcos
dictatorship even as he now thinks that current problems can be
resolved democratically, albeit with a qualification. In a recent talk,
he asked the question: “Can we resolve our problems democratically?”
His response to his own question: “Yes, tentatively.”

What is perhaps consistent in him is his crusade against vested
interests. Marcos’s “revolution from the center” was an attack not only
against the Left but also against the traditional oligarchy. (Of
course, Marcos created a new oligarchy). Ramos’s liberalization program
was meant to weaken monopolists and rent-seekers. (But the Ramos
cronies were spared.) The oligarchy is Almonte’s bete noire.

For that, Almonte’s supporters call him a reformer. His opponents and
skeptics describe him as a Rasputin, a crafty manipulator. There is no
contradiction between being a reformer and being a manipulator. The end
justifies the means, as it were. The real question is whether Almonte’s
reformism strikes at the roots of the core problems.

In this regard, a recent speech of Almonte before the members of the
Foundation for Economic Freedom (its name reveals its neo-liberal
orientation) deserves scrutiny. For some, they will view Almonte’s
ideas as profound and sophisticated. For others, their conclusion will
be the opposite.

Let us go through the essential points in Almonte’s speech titled “Can
we deal with our problems democratically?” In his introduction, he
criticizes Gloria Macapagal Arroyo, for “she has failed to deploy the
moral power latent in the Presidency.” He then notes the rising
pessimism of Filipinos and “the security implications of economic and
political failure.”

Almonte asserts that the “basic problem is a failure of government.”
The Philippine state is captured by vested interests, and his
prescription is “to use the economy to reform politics.” By this, he
means to struggle against “statism” and to further “open up the economy
in the teeth of opposition from those who benefit from the status quo.”
This is a new type of nationalism — one that is “outward-looking.” In
gist, Almonte offers a solution that is consistent with a full embrace
of globalization.

Indeed, Almonte’s speech looks sophisticated. He, for instance, can sound being a globalist and a nationalist at the same time.

But there are different types of sophistication, too. Sophism is a form
of sophistication. To be straightforward, Almonte is a sophist. He is
clever in the manipulation of words and ideas, but a more trenchant
critique of his speech reveals contradictory statements, economic
misconceptions, and a distorted understanding of economic developments.

To reiterate, the main point of his speech is that the Philippines
should rely on economic integration and liberalization, for it cannot
rely on a weak state to achieve industrialization and prosperity. But
Almonte contradicts himself. At first, he acknowledges that “in the
developing world…the State must necessarily assume a vital role. And
our country’s key failing is that the Philippine State has been too
weak to carry out the interventionist policies that South Korea,
Taiwan, Singapore — even Malaysia and Thailand — all managed
successfully.” But then, he “sees our highest priority as working to
free the economy as far and as fast as we can — so that the more
impartial market can begin to make decisions our all-too fallible
politicians and bureaucrats cannot do.”

How does he escape from this contradiction? A master of sophistry, he
reasons out that government cannot be interventionist because “in our
country, dirigiste policies have merely facilitated rent-seeking and
political corruption.” Ergo, let the markets work freely.

To buttress the argument in favor of liberalization, he says that “the
spread of the market economy throughout East Asia has brought not only
higher living standards. It has also had a liberative political
effect.” A very subtle way of championing liberalization, but which is
another example of his sophistry. Almonte now equates “freeing the
economy as far and as fast as we can” with the market economy. Even in
high school economics, students already learn that the Philippines and
its fast-growing neighbors all have a market economy. The economies of
the world, except North Korea’s command economy, are in varying degrees
market economies. Some market economies have taken the bullet train
towards global economic integration; other market economies prefer
riding the slow train.

Yet, Almonte himself has pointed out that the success story in East
Asia is characterized by strong state intervention. To follow that line
of thinking, the strategy that has to be pursued then is how to
transform the weak state so it can better intervene in the (market)
economy.
Out of left field, Almonte, arrives at this conclusion: Put sweeping
political reforms at the backburner, minimize the state’s role in the
economy, and free the markets. His words: “The reformer must be willing
to settle (in the meantime) for limited political goals… In this
spirit, I suggest that, to compensate for the weaknesses of the
Philippine State, we harness the power of the market to the public
interest.”

That liberalization is a necessary condition for growth and development
cannot be proven. Evidence, on the contrary, is abundant that the
liberalization process — trade liberalization and capital account
liberalization are the main pillars — has to be approached cautiously.

Empirical papers published in refereed journals, especially those
written by Dani Rodrik, have demolished the argument that trade
liberalization predicts growth. There is no correlation between trade
liberalization and growth, no causality in the direction that trade
liberalization leads to sustained growth. In fact, what the evidence
shows is that the high-performing economies, notably China, India and
now Vietnam, have been protectionist during the initial period of
laying the basis for sustained growth. China and India are beginning to
slowly open up, only after a long period of high growth rates. Further,
the necessary reform to jump-start growth in less developed countries
involves unconventional (read: nonliberal) policies. This is the
recurring theme in papers written by Rodrik, Joseph Stiglitz, et al.

All told, what economic history shows is that countries liberalize
trade once they have become richer and more developed. (A fascinating
book is Ha-Joon Chang’s Kicking Away the Ladder — Development Strategy
in Historical Perspective, Anthem Press, which won the 2003 Myrdal
Prize, awarded by the European Association for Evolutionary Political
Economy.)

The debate on capital account liberalization has also been settled —
that it should not be rushed and that there are circumstances in which
capital control is necessary. Even the IMF has come out with a similar
conclusion in a paper (Effects of Financial Globalization on Developing
Countries: Some Empirical Evidence, 2003) that coauthored by then IMF
chief economist Kenneth Rogoff. It would take a series of financial
crises throughout the world, especially the 1997 crash in Southeast
Asia, to learn this lesson.

Let us return to Almonte’s speech: He rues the fact that “dirigiste
policies in the Philippines merely facilitated rent-seeking and
political corruption.” But it cannot be denied either that there is a
lot of rent-seeking and corruption in China and other high performing
Asian economies. Worse, from a liberal democratic viewpoint, China’s
rule of law, including the property rights regime, is more antiquated
than that of the Philippines.
{mospagebreak}
Hence, rent-seeking and corruption by themselves cannot explain growth
failure. Other variables account for the high growth in China and other
countries that are also notorious for corruption and rent-seeking in
the same way that other variables explain the low growth in the
Philippines. One insight is that while there is a high level of
corruption in both China and the Philippines, corruption in China is
more predictable and thus assuring to investors (drawn from the volume
edited by J. Edgardo Campos titled Corruption: Boom and Bust of East
Asia, Ateneo Press, 2001). The underlying message is that specific
institutional arrangements matter in the crafting of successful growth
strategies.

But can the market reform the state as suggested by Almonte? Of course,
it can. But markets can also overwhelm and hence further weaken the
state. Alas, the example used by Almonte to support his argument is
incorrect: “Considering how foreign investment is forcing even China to
adopt the rule of law by bits and pieces, I feel the open market should
become just as strong medicine for our recalcitrant polity.” In China,
the opposite is true — foreign investments follow and adjust to the
rules laid out by the Communist Party. The initial surge of private
investments occurred at the level of towns and villages, without the
benefit of formal property rights. The participation of government in
the business ventures and the profits gained from such became the
incentive mechanism for government to give security to the investors.

Along the way, the Party has made policy and institutional changes but
not because it is compelled to do so by foreign investors. Rather, the
Party is just applying the Deng Xiao Ping’s motto of “it does not
matter whether the cat is black or white so long as it catches mice,”
which is to be interpreted as choosing the most suitable instruments at
a given time to advance development objectives. The Chinese authorities
understand what Rodrik has said, i.e., “construct over the longer term
a sound institutional underpinning to endow the economy with resilience
to shocks and maintain productive dynamism.”

Almonte need not look far to see how aggressive liberalization further
undermines the state and the economy. He was a key adviser, nay, the
Rasputin of the Ramos administration that enthusiastically pursued
accelerated integration into the global economy. Yet, it was this
administration’s liberalization of the capital account that led to the
1997 financial crisis.

Almonte takes pride in the liberalization of banking entry, which is
indeed welcome but insufficient to reform the industry. The banking
system remains fragile notwithstanding liberalization. The high ratio
of nonperforming loans is an indicator. Another indicator is the
laundering that banks tolerate as in the case of the Jose Velarde and
Jose Pidal accounts. The bigger challenge then and now is how to
strengthen banking regulation and supervision.

And what about the promise of enormous benefits from trade
liberalization? Small or big businessmen from different industries want
a re-examination of the tariff policy; which has undermined Filipino
jobs and products. The tariff rates for most imported items are quite
low, well below the bounded rates of the World Trade Organization. It
goes without saying that the significant tariff cuts have also
contributed to the overall decline in revenue collection.

We can anticipate Almonte’s response to all these criticisms. In his
speech, he said: “So far, liberalization — because it has often been
timid and tentative — has been relatively easy for oligarchs to
block.” What he is suggesting is we need a bigger dose of
liberalization.
This is simplistic thinking. For one thing, public policy in a
democratic setting cannot avoid compromise. More importantly, the
big-bang approach to liberalization can be disastrous. Just compare the
experiences of Russia and China in their economic transition. Russia
rushed the market reforms, and this resulted in an economy that went
out of control, paving the way for criminals and profiteers to control
vital sectors of the economy. China, on the other hand, has been more
cautious, and despite the absence of formal property rights, the
Chinese economy has consistently registered high levels of growth.

Again, empirical studies of Rodrik show that there is no need to put in
place a comprehensive and thoroughgoing liberalization agenda, which
can only exhaust the country’s institutional capacity. The key is to
identify a very narrow set of reforms that more often than not involves
unconventional or heterodox policies.

Liberalization of course can work. In some sectors such as the airline
industry, which Lucio Tan dominates, liberalization is most welcome.
But liberalization’s overall success is predicated on the soundness of
the policy design (including the sequencing of reforms) and on the
institutional capacity (including the capacity of the state to
regulate).

The case of the liberalization of the airline industry best illustrates
this point. In spite of progressive liberalization being the official
policy, Philippine Airlines (PAL) continues to extract entitlements and
rents in the airline industry. The reason is that the Office of the
President and the regulatory body favor PAL. It is clearly a political
problem that requires a political solution.

We undeniably have to address the failure of government. But economic
liberalization cannot be the solution to this problem. The complexities
of liberalization will in fact only compound the problem.

The solution lies principally in the realm of politics. Almonte, who
mocks the Latin American countries for their old-style protectionism
and patronage, should now take a second look at the recent developments
in that region. Rejecting the neoliberal Washington Consensus that was
first experimented in their continent, the citizens of Brazil and
Argentina, the two biggest countries in South America, have installed
governments that defy the orthodoxy of liberalization. Their leaders
have introduced unconventional if not illiberal strategies that have
revitalized their economies. Brazil and Argentina are now enjoying
surprisingly high growth rates, high level of investor confidence, and
widespread mass support.

To follow the example of Brazilians and Argentines, the Filipino voters
should not elect into office parties that continue to espouse economic
dogma. In this regard, the party of Ramos and Almonte is no different
from Joseph Estrada’s party. The dominant parties in the Philippines
have allowed neoliberalism to dominate policy making.

The fact is, neoliberal economists have been in command of economic
policy making in the post-Marcos period. Also note that neoliberals
(the term was not yet coined then) like Gerardo Sicat and Cesar Virata
comprised Marcos’s economic team.

Protectionism has nowadays become a straw man. Sure, Philippine
protectionism turned out to be a disappointment. As Almonte points out,
that kind of protectionism benefited the oligarchy.

But a failure of protectionism in the past does not mean that it should
forever be rejected as a policy tool in the same way that the present
failure of liberalization should not mean that it has to be totally
discarded.

In more recent times, though, it is the neoliberals who have to be made
accountable for the failure of sustained growth and prosperity in the
Philippines.

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