Part 2: What Regulatory Powers Does the State Need?

In Part 1, James Putzel explained the Philippines’ “resilient stagnation” and compared this to South Korea’s developmental leap forward. Here he explains why the country has remained stagnant and what role the state could begin to play to achieve significant growth. Mr. 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 28,2010 edition of the BusinessWorld, pages S1/4 to S1/5.

The new President could use his office to initiate a process of more dynamic development and reverse years of “resilient stagnation.” The state has remained weak in the Philippines for two reasons: first, because this has served the interests of elites – not their long-term interests – but short-term and family based interests; and second, because social movements have been strong enough to press demands for palliatives from the state. States that have presided over dynamic processes of development have had the strength to discipline capital and keep in check the excessive demands of social movements. This has been proven again and again in history, both distant and recent. South Korea and Taiwan, but also Vietnam and China offer examples. In Sub-Saharan Africa today, at a much lower level of development, Rwanda is demonstrating the same.

What sort of state regulatory powers would make a difference? First, the state needs to have regulatory powers to finally implement a viable land registration system, which is as important for the health of the financial system as it is for pursuing future agrarian reforms. It is impossible to regulate the use of land or deploy systems of taxation to encourage sustainable and productive use of land where ownership rights are unclear. Elites in this country have blocked the development of a viable land registration system for over a century. Second, the state needs to have a long-term investment strategy for agricultural infrastructure. Less than half of agricultural lands with a potential for irrigation have been equipped for irrigation. This contrasts with China, where the figure is 85%, or perhaps more appropriately, to Malaysia, where the figure is 88%. Whatever the mix of public, private and cooperative management of irrigation – the state needs to ensure the capital investment happens in a public good crucial for overall development environmental sustainability.

Third, the Philippines could be a leader in agribusiness, developing high-value crops, and agri-processing for export. Agribusiness could play a huge role not only in expanding production, but also in investing in new environmentally friendly technologies and expanding processing and marketing. Agribusinesses could do this both by running farms themselves, as in Chile, or by contract arrangements with small producers as has been so successfully done in Malaysia. In both countries, the state developed a plan and established investment incentives for developing agricultural production for niche export markets in the developed world and for encouraging a step change in the manufacturing of agricultural products.

What is the record of agribusiness and agricultural modernization in the Philippines? It is not particularly good. Nothing illustrates this better than what happened with the family hacienda of President Noynoy Aquino – the infamous Hacienda Luisita. One might excuse the family’s tenaciousness in ensuring that their lands escaped redistribution under the Comprehensive Agrarian Reform Law if they had retained the land to become leaders in developing high-value agricultural production or the development of new lines of food processing and agricultural exports. However, this has not been the case. Instead, the family remained in sugar production, holding onto the land mainly for its value converted to non-agricultural uses. A new kind of agribusiness is required in this country— one that combines the energies of small producers, cooperatives and entrepreneurs willing to deploy new technologies and take risks. President Noynoy Aquino could demonstrate that his government represents generational change by setting an example and convincing his family to finally allow Hacienda Luisita to be redistributed under CARL (Comprehensive Agrarian Reform Law). With this he could credibly preside over the conclusion of the agrarian reform program, which, by being stretched out over so many years, has been a massive deterrent to agricultural investment.

There does not appear to be a debate about development in this country. Here the international donor community shares responsibility. Neoliberal market-focused strategies are simply not enough to deal with the need for accelerated growth in the country. Internationally, there has been a secular decline in foreign aid to agricultural and industrial production processes. International donors focus almost exclusively on “good governance” programs, forgetting that the heart of development challenges requires knowledge of agricultural and industrial production systems. While the role of markets in allocating resources is now widely understood, such markets have nowhere emerged spontaneously without the strong regulatory role of the state.

Elites in the Philippines have consistently turned away from empowering the state to “govern the market” and use the market for far-reaching industrial and social change. Fundamentally, the lack of progress in the past can only be understood by understanding the nature of elite privileges – those with wealth have faced no incentive to change the way they do business. Elites have been satisfied in the Philippines and have kept the state malleable. The new President could begin to change this and assemble a coalition that might give the state some teeth to begin to discipline wealth owners in the country and push them towards investing in expanding domestic productive capacity. This might allow the President to temper demands of social movements and mobilize their energies behind a development strategy. So far, there is little sign that those coalescing around the President have any plans to use their new political authority in this way.