The Development Challenge Facing Noynoy Aquino (1)

James Putzel is Professor of Development Studies and Director of the Crisis States Research Centre at the London School of Economics. This was published inthe June 21,2010 edition of the BusinessWorld, pages S1/4 to S1/5.

Part 1: Caught between state fragility and resilient stagnation

As Noynoy Aquino prepares to take over the helm of government in the Philippines, it seems appropriate to ask whether the government he will be assembling will outline a development strategy that can begin to place the country on a growth trajectory. In a comparative research program looking at problems of state fragility and development, based at the London School of Economics, the Philippine state appears to be caught between a condition of “state fragility” and one of “resilient economic stagnation.” As a lower-middle- income country with a reasonably stable democratic government, the Philippines can hardly be considered a fragile state. Yet assessing Philippine performance since independence, it is disappointing to see that the country has not made more progress in terms of growth and development.

One of the over-riding features of state fragility is the weak exercise of the state’s monopoly over the legitimate use of coercive force. Within Southeast Asia, in 2002 the Philippines had the highest homicide rate and almost tied with Indonesia for second place after Myanmar in the number of deaths from “war”, according to data from the World Health Organization. In the WHO’s 2004 data (the latest available), Indonesia was the only country with a higher homicide rate than the Philippines. The Philippines is comparable only to Colombia in having had a series of continuous armed challenges from insurgent forces over the past half century. But the fact that the state by and large has been able to contain the insurgencies and they have not threatened its dominance underscores a significant degree of state resilience.

Nevertheless the Philippines can probably best be summed up as achieving a form of “resilient stagnation.” Despite enjoying significant opportunities, the state has presided over a lackluster economic performance since independence, even with its many advantages as a major aid recipient from the United States and its proximity to the fast-growing economies of its neighbors.

Looking at the Philippines in the early 1960s, most observers thought it would be Asia’s development success story. It looked far better off than its poor neighbor, South Korea. In 1962 the Philippines’ per capita gross national income was almost twice that of South Korea (US$ 210 to US$ 110) and it remained higher throughout the decade, according to World Bank data. But from 1970, Korea began to overtake the Philippines. By 2008, South Korea’s per capita GNI was 11 times bigger than the Philippines (US$ 21,530 to US$ 1,890).

One reason why South Korea took off was that its land reform in the late 1950s transformed incentives facing its elites and laid the basis for both rural peace and an expanding domestic market. Elites who wanted to maintain and expand their wealth had to invest in manufacturing. South Korea’s manufacturing sector grew three times faster than the Philippines in the 1960s and 1970s, more than ten times faster in the 1980s and three times faster in the 1990s.

Another factor underpinning South Korea’s leap into accelerated growth was the state’s strong steering of the economy, which created the incentives for elites to invest productively, protecting markets at home, while providing incentives for a massive expansion of production for export. South Korea’s average annual growth in exports was ten times that of the Philippines in the 1960s, almost three times higher in the 1970s. South Korea’s growth in exports has continued to outpace that in the Philippines until the present. What is more, after 1965, South Korea’s exports were overwhelmingly manufactured goods, whereas in the Philippines manufactured goods made up less than a quarter of export value until the mid-1980s and only made up more than half of export earnings after the mid-1990s.

The difference in state behavior in the two countries is reflected in their performance in “gross fixed capital formation” – that is, investments in land improvements, plant and machinery, transport infrastructure and the construction of schools, hospitals and residential and commercial buildings. In the first half of the 1960s the Philippines was ahead of South Korea. In 1964 it invested 20% of GDP to South Korea’s 12%. But by 1966, South Korea had already taken the lead. During the 1980s, South Korea was investing 30% of GDP in gross fixed capital formation, to the Philippines’ 22% and in the 1990s, South Korea increased that to 35% while the Philippines remained at 22%. Over the last decade South Korea continued investing 29% of GDP in gross fixed capital formation while the Philippines fell to an average annual rate of 16%.

South Korea has the sort of regulatory state that the Philippines in its resilient stagnation lacks. If the President-elect is to usher in a new period of growth and development, he needs to seek inspiration from the country’s neighbors in Asia. He needs to build a coalition prepared to empower the state to discipline capital and win over social movements to an ambitious development strategy. This could provide a route out of perpetual stagnation and put the country on a trajectory of sustained growth and development.

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