Institutions vs. Bargains

Eric Gutierrez is a policy analyst at Christian Aid 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.com.

This piece was published in the February 7, 2011 edition of the BusinessWorld, pages S1/4 to S1/5.

The key argument of the book Philippine Institutions: Growth and Prosperity for All (Anvil, 2010) is that, “weak Philippine institutions – manifested in corruption and political patronage, and in the subversion of the constitutional provisions on checks and balances and accountability – have become a binding constraint on growth and investments” (p. 2). Because Gloria Arroyo’s rule destroyed institutions, moved goal posts and changed the rules of the game, investments have become limited and growth has stagnated.

This argument is straightforward and persuasive, but it needs to be debated. Indeed, it is initially supported by evidence since governance and institutions (i.e. the structures or mechanisms of social order) matter a lot in economic growth and development. But the problem is that there exist countries that have grown and developed despite having widespread corruption, political patronage, no checks and balances, and the various other institutional weaknesses experienced by the Philippines . South Korea and its chaebols are notoriously corrupt – yet its corrupt political elite made money by growing their economy. China is a one-party state with little constitutionally mandated systems of checks and balances. Yet its resources have been captured by productive capitalists who put them to good use, unlike in the Philippines where scarce resources are captured and typically wasted by our unproductive elites.

There are risks in putting the blame on “weak Philippine institutions.”  First, the typical solution to weak institutions is “good governance.”  The book argues that this is what the Philippines needs, describing it as the central issue of the May 2010 elections. But good governance does not necessarily deliver growth and development.

The weak-institutions approach also fails to appreciate that corrupt and criminal politicians actually enjoy some form of political legitimacy. They exist because they are supported by a real political base. The likes of Gloria Arroyo, Joseph Estrada, or Andal Ampatuan Sr and Jr are continually vilified. But how come they get voted into office? Rather than delving into theories of institutional change, it may be more useful to simply discuss the ancient politics of Robin Hood – or why individuals considered outlaws by polite society actually become more effective politicians who enjoy popular support and legitimacy.

That corrupt politicians and violent criminals enjoy some legitimacy says some things. It suggests that corrupt politicians and gangsters-next-door are more embedded than central state authorities in local communities. The government is perceived as a more detached or “alien” institution, not the localized structure that households can rely on. Secondly, it suggests that poor people’s expectations of what authorities have to deliver are quite different from good governance assumptions. Acts considered corrupt and criminal by the state have different meanings to local people in different contexts. But perhaps most importantly, it tells us that the corruption or gangster problems are much more political. Hence, enforcement and legal instruments, implemented in isolation of a proper understanding of the political relationships, risk making state authorities look more like the Sheriff of Nottingham.

Some influential analysts have in recent years argued against the proposition that good governance is a prerequisite for economic growth. The most sustained critique comes from development economist Mushtaq Khan. Khan, who teaches at the University of London,  and has debated many times with World Bank economists on the sources of economic stagnation. It was Khan asked: “Why is it that elites in some developing countries make money by growing their economies, while some make it by destroying their economies? Why are resources in a country sometimes captured by emerging capitalists who put it into productive use, while sometimes resources are captured by unproductive groups who then lead the country into economic collapse?” In this vein, we can ask, why are the elites in the Philippines the “unproductive kind”? Can they become more “productive”?

I believe Temy Rivera, a fellow of Action for Economic Reforms, provided the answer to these questions 17 years ago, through his Landlords and Capitalists: Class, Family and State in Philippine Manufacturin. Rivera grouped the elites who lorded over the Philippine economy into three: a) landed capitalists; b) non-landed capitalists; and c) ethnic Chinese capitalists. The landed include the Cojuangcos, the Lopezes, or even the Roxas-Araneta clan. The non-landed elites include what the left has called the “national bourgeoisie” – Jacintos, Sarmientos, Puyats. The third group are the ethnic Chinese, who play mostly behind-the-scenes and kingmaker roles in politics, rather than be involved in politics themselves.

Indeed, Rivera’s answer to the puzzle of slow industrialization is that economic growth slowed down and stagnated because capitalism in the Philippines came to be dominated by its landed elite, who were interested only in diversifying their landholdings, not in deepening industrial growth. They resisted policies such as foreign currency controls, because they would make more money from their exports of agricultural products. They supported more open trade policies, and cared less about what happened to infant industries. Those landed elites who went into business had their small, protected monopolies, and were under little pressure to be competitive: should their enterprise fail, they had their landed wealth to fall back on. They were more interested in keeping their privileges than in breaking new ground for growth. And most importantly, they were too powerful for the state to discipline.

So the bottom line is – the problem is less about institutional change, and more about forging elite bargains and how to force a political settlement on the troublesome elites who have lorded it over for so long. Temy Rivera discussed the idea of a “growth coalition” in his book. Is it too late, or much more complicated now, to discuss this again and put it on the agenda?

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