How elites give up their privileges

Eric Gutierrez is a policy analyst at an international NGO  (nongovernment organization) based in London. He has worked for other NGOs in Africa and Asia, including the Institute for Popular Democracy in the Philippines . For comments, please email eric.gutierrez@live.comThis piece was published in the November 28, 2011 edition of the BusinessWorld, pages S1/4 to S1/5.


Second of two parts

Economic actors are either producers or consumers of goods and services. Where corruption is rife, “rent-seekers” emerge: those who seek and capture positions of power from which they can extort payments or favors in exchange for allowing normal economic activity to take place. Corruption becomes entrenched when rent-seekers become more powerful than the other economic actors, or when the other actors try to be rent-seekers so that there is just too many of them.

Successful rent-seekers are always in a position, and have the power to flout, co-opt, thwart or even reverse meaningful reforms. The irony is that efforts to reduce corruption will succeed only if allowed or tolerated by them. The question that needs to be asked, therefore, is how do elites transform from being destructive rent-seekers to becoming productive economic agents? What incentives, or threats, are necessary so that they will choose to make their money by growing, not destroying, the economy?

South Korea and China’s experiences —two countries that achieved high levels of economic growth despite corruption, lack of checks and balances, or lack of transparency —may be informative.

Like the Philippines, South Korea had massive corruption problems. But unlike the Philippines, South Korea seems to have avoided directly trying to dislodge rent-seekers from power, or cut their ability to create rents. Instead, South Korea continued the rent-seekers’ privileges, but on condition that they become more productive economic agents. For example, according to development economist Ha Joon Chang, the South Korean car industry was saved from the competition of cheaper and better quality Japanese cars by tariffs on imported cars and government subsidies. These privileges were given generously, but on condition that the South Korean car companies export 20 percent of their production. So Kia and Hyundai had to produce cheaper and high-quality cars that could compete in the global market. Inability to export meant loss of their privileges. Eventually, South Korean cars became global brands. By then, the car companies no longer needed such privileges, which they could easily give up.

The South Korean experience suggests that rent-seeking elites can be part of the solution. Something similar has been seen in China. According to economist Yingyi Qian, China adopted an unconventional approach to market liberalization, the dual-track approach. Under the planned economy, economic agents are assigned rights to and obligations for fixed quantities of goods at centrally determined prices. When the system of free market prices was introduced, economic agents were allowed to participate, provided  they fulfill their obligations under the pre-existing plan. Simply, China improved efficiency while protecting existing rents. Politically, this meant that reforms were implemented without creating losers who can oppose those reforms.

Another lesson emerging from China is how connections to powerful decision-makers and institutions—the key role most rent-seekers capture—were made more accessible to a wider array of actors. Research by Andrea Hampton shows how the creation of Investment Promotion Agencies made local government officials, top party and national officials more accessible to the private sector. These connections became the assurance investors wanted. Bureaucrat-entrepreneurs who made money by, say, sitting on business visa applications, realized they were being made redundant by networks of relationships evolving between economic actors and the state. To survive, they needed to transform to become more efficient service providers, instead of just enjoying rents. Apparently, this is one key reason whyChina, a socialist country where private property is not recognized, has been able to attract more investors with less rights and entitlements guaranteed.

Another more effective way of dealing with elites has already been practiced in the Philippines: let markets—not congressmen, prosecutors and the courts—fight corruption. Before the liberalization programs of the Ramos years, elite entrepreneurs were content enjoying the privileges of their mini-monopolies. For example, shipping agricultural harvest from Mindoro toBatangasCitywas inefficient and expensive. When competitive bidding for licenses was introduced, the shipping companies who wished to remain in the business had to provide a better deal. They could no longer rely on bribing officials to keep their licenses. The break up of so many monopolies—the biggest of which was telecommunications—expanded the tax base, too. Markets, rather than state or legal mechanisms, can be much more effective.

To conclude, there exist more nuanced and potentially more effective approaches to fight corruption. Given the experience in South Korea, one wonders what would have happened had Francisco and Sarao Motors been given generous subsidies and protection from imported vehicles, on condition that they export their products. The “palakasan” system has always been despised by reformers—but why not make it the system, like in China, where access to the powers-that-be was “democratized?” If the elites in power cannot be dislodged or pushed out, why not negotiate or force a bargain on them?

The bottom line to all this are two steps. First, look at governance from upside down to create effective public authority. Then, have a more detailed power analysis of our elites in order to find collective ways of shifting their incentives and interests.

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