Being Pro-Business is Good

Sta. Ana coordinates for Action for Economic Reforms. This piece was published in the Yellow Pad column oof the BusinessWorld on June 23, 2008, pages S1/4 to S1/5.

In the article titled Populism and Being Anti-Business (BusinessWorld, 16 June 2008), I said that Gloria Arroyo’s populism, while pandering to the masses, is ultimately anti-poor as well as anti-business.  It is a brand of populism that weakens macroeconomic fundamentals and productivity and therefore harms the whole nation.

Her being anti-business is politically partisan, and the economic consequence of this antagonism is damaging.

In her spite toward business community members who oppose or criticize her, she has unleashed the State’s instruments to intimidate or demolish them.  Corporations of businessmen sympathetic to or active in the anti-Arroyo movement are subject to tax harassment, threat of takeover, and arbitrary change of rules.  Even the apolitical segment of business is hurt by corruption, cronyism, and the State’s arbitrariness in undermining contracts and reversing policies.

Being anti-business is part and parcel of Arroyo’s hostile governance that has exacted huge economic costs, especially in terms of foregone investments and jobs.  The current consumer-led growth could have attracted or generated a much bigger amount of investments, if we only had a business-friendly regime.  Foreign direct investments (FDI) in the Philippines, for example, pale in comparison to communist Vietnam’s FDI flows.  Vietnam gets three times as much FDI as the Philippines.

The flipside of being anti-business—being pro-business—can be the catalyst to propel the country towards rapid and sustained growth. India’s success story illustrates this.

India was seen then as a promising developing country where economic and development policies went wrong.

The conventional story line about India was that high trade barriers, inefficient State-protected industries, and heavy government regulation obstructed growth.  And what turned India around was the combination of liberalization, deregulation, and privatization in 1991, measures undertaken in the aftermath of a balance-of-payments crisis.

But Dani Rodrik and  Arvind Subramanian debunked this story in a 2005 paper titled From “Hindu Growth” to Productivity Surge: the Mystery of the Indian Growth Transition.  The paper, incidentally, was published in the International Monetary Fund’s IMF Staff Papers, Volume 52, Number 2.

While acknowledging that the economic liberalization in 1991 was a milestone, Rodrik and Subramanian observed that the pickup in growth began a decade before the liberalization reforms.  Here’s the relevant passage:

“Even a cursory glance at the growth record reveals that the more-than-doubling of India’s growth rate took place sometime around 1980, with very little change in trend after 1991. In fact, some indicators, such as economy-wide total factor productivity (TFP), even go in the ‘wrong’ direction, showing a deceleration after 1991. Therefore, the striking post-1980 improvement in performance cannot be attributed to the liberalization of 1991. The latter may well have played a role in sustaining and deepening an ongoing process of growth, but we need to look elsewhere to understand how India made the transition to high growth. A related implication is that more recent phenomena, such as the boom in information technology and related services, cannot have been the original source of India’s economic growth.”

The authors dissected the different factors that could have possibly triggered India’s initial burst of growth.  Marshalling the evidence, Rodrik and Subramanian discounted the favorable external environment, fiscal expansion, public investment, green revolution, external liberalization, and deregulation as factors that could explain the growth and productivity boost in the 1980s.

What catalyzed growth was not an economic factor but a political motivation, an imperative for the ruling party to adopt a pro-business stance.

To quote Rodrik and Subramanian:

“We argue that the trigger for India’s economic growth was an attitudinal shift on the part of the national government in 1980 in favor of private business. Until that time, the rhetoric of the reigning Congress Party had been all about socialism and pro-poor policies. When Indira Gandhi returned to power in 1980, she realigned herself politically with the organized private sector and dropped her previous rhetoric. The national government’s attitude toward business went from being outright hostile to supportive. Indira Gandhi’s switch was further reinforced, in a more explicit manner, by Rajiv Gandhi, following his rise to power in 1984.”

The threat from the rival Janata Party, which in the 1977 elections soundly defeated Indira Gandhi’s Congress Party in central areas, led her to woo business.  That meant taking a pro-business stance, even if it diluted the Congress Party’s socialist and populist program.

The pro-market stance was basically an attitudinal shift, which was accompanied by haphazard, limited and incremental policy changes.  But the attitude of being pro-business was the signal that the Indian economy, which had already built up the formal industry sector under the import-substitution regime, and the Indian entrepreneurial class were waiting for.  That was enough to ignite the businessmen’s animal spirits.

Rodrik and Subramanian made a crucial distinction between being pro-market on the one hand and being pro-business on the other hand. They explained:

“The former focuses on removing impediments to markets and aims to achieve this through economic liberalization. It favors new entrants and consumers. A pro-business orientation, in contrast, focuses on raising the profitability of the established industrial and commercial establishments. It tends to favor incumbents and producers. Easing restrictions on capacity expansion for incumbents, removing price controls, and reducing corporate taxes (all of which took place during the 1980s) are examples of pro-business policies, while trade liberalization (which did not take place in any significant form until the 1990s) is the archetypal market-oriented policy.”

Furthermore, the authors pointed out that “genuine liberalization after 1991 added very little to aggregate economic performance.”  The attitudinal shift in 1980 was so powerful in triggering the burst of growth and productivity that it overwhelmed the ubiquitous market distortions.

Rodrik and Subramanian emphasized the institutional underpinning of the pro-business attitudinal change that became a powerful growth stimulant. India has had relatively strong political and economic institutions for a developing country, suggesting a potential for higher levels of productivity and income.  Thus, even a slight improvement in the policy environment can have a dramatic impact on the economy.  The shift to a pro-business stance was an example of a minor change with profound consequences, “something that did not leave much of a paper trail in actual policies but had an important impact on investors’ psychology.”

The Philippines can learn much from success stories like India and China. The Philippines and India, in fact, have much more in common with respect to initial conditions—specifically, a tradition of and the value for democratic institutions.

Yet, under Arroyo’s enchanted kingdom, we are missing the lessons from India’s growth transition.  Arroyo’s disrespect for institutions, her hostility toward business, and her harmful populism are bringing us farther away from the doorstep conditions to achieve long-term prosperity.

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