Unpredictable

This article addresses two questions under the theme “The Philippine Development Puzzle.” The questions are:

· Why does development continue to elude the Philippines?
· Why are states important for economic growth and for the social transformation that go with it?

The main reference for the first question is a book that contained a collection of articles edited by Balisacan and Hill (2003) and for the second question, the book of Doronila (1992) constituted the main source of information and ideas.

Definition and measures of development
Both books defined “development” based on economic growth, where the GDP (gross domestic product) is used as the indicator. The term “development” is often times understood as synonymous with “welfare,” and “well-being” or “improved living condition” although measures of welfare, well-being and improved living condition have not gained much currency yet, except for the HDI (human development index which is a combined measure of literacy, life expectancy and GDP per capita in a country). Bergheim (2006) contends that GDP was not designed to measure welfare or well-being and only measures the market value of the final goods and services in a country. For Bergheim, the “ultimate goal” is happiness and this could be measured through life satisfaction surveys to come up with a “happiness index.”

There are other broader measures of well-being and improved living conditions but this article would focus on the more “traditional” measures such as GDP as was done in the two main reference books and would include the HDI as another measure in the discussion.

Deteriorating economic performance
Balisacan and Hill (2003) are puzzled by the economic performance of the Philippines during the period 1898 to 2000. They aver that among the newly independent countries, the initial conditions in the Philippines were favorable: American colonial rule had been comparatively benign, there were no serious communal or ethnic divides, educational standards were among the highest in the developing world, the country had privileged access to the world’s largest economy, the country’s civil institutions were comparatively well-developed, it had a reasonably democratic political system, the press was open and vigorous, the judiciary and legal system were quite well developed and somewhat independent, and finally the country possessed ample agricultural lands to sustain several decades of rapid economic growth.

Yet, as Balisacan and Hill (2003) assert, the Philippines development outcomes in the last century until 2000 have been disappointing. They say that the country’s per capita income has been overtaken by Korea and Taiwan in the 1950s, Thailand in the 1970s, and China in the 1990s. They further state that the country became an increasingly marginal player in the region’s trade and investments flows and in consequence, its social indicators stagnated, in marked contrast to the situation in its high-growth neighbors.

Brief history of Philippine economic development strategies
For at least the last 1,000 years, the Philippine economy has always been tied to the regional or global economy and its history may be loosely divided into five (5) phases:

1. Maritime trade within Southeast Asia before the arrival of the West.[i] Archaeological finds suggest that even before the arrival of the Spaniards, there were already merchant vessels sailing though Southeast Asia bringing trade and commerce to the Philippine Islands. The vessels carried ceramics and other commodities from China, Vietnam and Thailand. This was not discussed in the two (2) principal reference books, therefore there is no description available on the general contours of the economy at this time, when the Philippines was not even known as the Philippines yet. As there was no Philippine state yet, the institutions[ii] that shaped and governed economic behavior must have been informal in nature.

2. Era of Mercantilism or The Manila-Acapulco Galleon trade (1565 to 1815)[iii]. During this time, the Southeast Asian maritime trade was connected to Mexico and Europe. This was also not described in the principal reference books. The Philippines was already a colony of Spain during this period.

3. International Commerce through Agricultural Exports (1834 to 1949)[iv]. According to Doronila (1992), the opening of Manila in 1834 and key provincial ports in the next decades to international commerce signaled a shift of Spanish economic policy from mercantilism and established new patterns of economic development in the Philippine islands. During this period, the economy basically rested on four (4) agricultural crops – sugarcane, hemp (abaca), tobacco and coffee – as exports. And the main markets for these products were America and Britain, instead of Spain. This period paved the way for the emergence of “caciquism” where powerful landowners gained control of political institutions (De Dios and Hutchcroft in Balisacan and Hill 2003).

4. Import-Substituting Industrialization or ISI (1950s to 1970s). After the Second World War, economic policy shifted towards ISI. This resulted in the increased prominence of the secondary sector[v] (manufacturing) that grew from 10.7% of GDP in 1948 to 17.9% in 1960 (De Dios and Hutchcroft 2003). ISI gave rise to the emergence of an “industrial interest” in the country[vi] although many family conglomerates that dominated the agro-export sector since 1830s up to the 1940s moved towards a more diversified mix of interests in agriculture, industry, commerce, real state and finance.

5. Export-Oriented Industrialization or EOI (roughly 1970s to present). The adoption of the EOI policy strategy has it roots in the 1970s with the enactment of the Exports Incentives Act of 1971 but development strategies during that time were viewed as incoherent – there was continued promotion of exports but at the same time continued protection of ISI firms (De Dios and Hutchcroft 2003). The EOI policy strategy encouraged the production of goods and services where the country has a “comparative advantage.”

Recent economic and social indicators
Balisacan and Hill’s book was published in 2003 and the country’s recent (2007) economic and social indicators may not be as dismal as what they found four (4) years ago.

For instance, in terms of average GDP growth that was shown in Table 1.1, page 7, in Balisacan and Hill (2003), the average GDP growth of the Philippines for the period 2000 to 2007 has improved. From being the cellar dweller in the period 1990 to 2000 (with an annual average GDP growth of 3.2), it has moved up to number 3 during the period 2000 to 2007 (with an annual average GDP growth of 5.9, Table 1).

Table 1: Average Growth of GDP in Southeast Asia, 1950-2007 (% per annum)

Sources: Lim (2001:38); World Bank (2002), World Development Report 2002 in Balisacan and Hill (2003) and World Bank (2008), World Development Indicators 2008

The country’s HDI (Human Development Index) figures have been steadily increasing. Although of the five (5) Southeast Asian countries mentioned in Table 1, the Philippines has dropped in ranking from second (after Singapore) in 1975 to second from the bottom (before Indonesia) in 2005 (Table 2).

Table 2: HDI figures of selected countries in Southeast Asia, 1975 to 2005

* = Among the 5 South East Asian countries included in the table only.
Source: United Nations Development Programme (2008) Human Development Report 2007/2008

As Table 2 shows, despite the good performance in terms of annual average GDP growth from during the last seven (7) years, the Philippines is clearly still not in the lead pack in the “development race.”

Reasons for poor performance
What explains the country’s poor performance? Based on Table 1, the country’s economic performance plummeted during the decade 1980 to 1990, when the average annual GDP growth was only 1%. Balisacan and Hill (2003) called this period the “lost decade.” Annual GDP growth rate seems to have picked up again in the next two (2) decades. Although as Table 2 shows, the country’s HDI ranking in relation to four (4) of its Asian neighbors, has dropped considerably.

What accounts for the country’s dismal economic performance in the 1980 to 1990s? Balisacan and Hill (2003) contend that there is a large body of literature that attempts to explain international variations in long-term rates of economic growth with reference to a range of policy and country endowment factors. Included in the large set of variables are: macroeconomic outcomes, trade policy, human capital, institutional quality, natural resource endowments, proximity to large economies and initial levels of per capita. Balisacan and Hill, however, say that they are unaware of any systematic testing of such a relationship against Philippine data.

The analytical approach mentioned by Balisacan and Hill above has some similarities with the ideas of Douglass C.North, 1993 Nobel Peace Prize awardee on institutions and the sustainable livelihoods framework (SLF) of the United Kingdom’s DFID (Department for International Development). According to North (1993) formal constraints (rules, laws, constitutions), informal constraints (norms of behavior, conventions and self-imposed code of conduct), and their enforcement characteristics define the incentive structure of societies and specifically economies. The SLF, on the other hand, presents three (3) major factors that affect people’s livelihood strategies. These are a] vulnerability context (shocks, trends, seasonality), b] capital assets (human, financial, physical, natural and social capital) and c] policies, institutions and processes.

So going back to the attempt to explain the poor economic performance of the Philippines during the “lost decade” and answering the first question of this article, Balisacan and Hill insinuated that the reasons could all boil down to “bad luck.” What they meant actually was a string of “shocks” (in the language of the SLF) that unfortunately took place during the period. These “shocks” were: a] sharp decline in the price of sugar, b] prolonged political and financial crisis (People Power in 1986), series of coup d’etats after that, c] eruption of Mount Pinatubo in 1991, and d] the Asian economic crisis and severe El Niño-induced drought[vii].

Way forward
Balisacan and Hill (2003) posit that sustained economic growth depends upon the quality of the bureaucracy. Again, this statement finds resonance in the ideas of North (1993) regarding institutions and enforcement characteristics of societies and the SLF’s third factor that affects livelihoods, i.e. policies, institutions and processes.

The two (2) authors state that while incremental measures have been carried out, such as the removal of restrictions on competition[viii], there is still a need for initiatives that require sustained administrative capacity. For example, liberalization of agricultural products require construction of roads, irrigation facilities, extension services and other infrastructure for farmers to improve their productivity and meet the challenges of international competition.

In answer to the second question of this article, states are important in economic growth and social transformation because they enforce the rules (in the language of North) that define the incentive structure in an economy and the performance of governments affects economic strategies adopted by individuals and firms (in the language of the SLF).

Balisacan and Hill wrote their article in 2003 and their conclusions then was that Philippine state institutions have shown themselves incapable of providing the necessary political foundations required even by a laissez-faire model of development that the colonial powers, IMF and the World Bank have been trying to promote in the country. They ended their article by saying that it is difficult to instill long-term investor confidence when a high degree of arbitrariness reigns in the political and legal spheres where economic initiatives are threatened by simmering resentment among the marginalized. In short, the “rules of the game” in the country and how these are enforced remain unpredictable. And unpredictability is anathema to strategic development planning and sustained economic growth. There may have been some positive changes since 2003, which will not be explored in this article.

But what explains the unpredictability? This will be explored in the next articles.

Endnotes
[i] See: http://philmuseum.ueuo.com/nm_museum/nmgallery/5cent2.html
[ii] According to Douglass C. North, who was awarded the Nobel Prize for Economics in 1993, institutions are the humanly devised constraints that structure human interaction. They are made up of formal constraints (rules, laws, constitutions), informal constraints (norms of behavior, conventions, and self imposed codes of conduct), and their enforcement characteristics. Together they define the incentive structure of societies and specifically economies. See: http://nobelprize.org/nobel_prizes/economics/laureates/1993/north-lecture.html
[iii] See http://en.wikipedia.org/wiki/Manila_Galleon
[iv] See Doronila (1992).
[v] The primary sector being extractive economic activities such as Mining, Agriculture, Forestry and Fisheries.
[vi] The article of De Dios and Hutchcroft, however, did not specify the prominent families who belong to this “industrial interest” group.
[vii] The last two factors occurred in the following decade after the “lost decade,” ie 1990 to 2000.
[viii] The details of this are not discussed here.

References:
Balisacan, Arsenio and Hill, Hall (2003). The Philippine economy: development, policies and challenges. Quezon City: Ateneo de Manila University Press.

Bergheim, Stefan (2006). Measures of well-being. Germany: Deutsche Bank Research. See: http://www.dbresearch.com/

De Dios, Emmanuel and Hutchcroft, Paul (2003). Political Economy. In Balisacan, Arsenio and Hill, Hall (2003). The Philippine economy: development, policies and challenges. Quezon City: Ateneo de Manila University Press.

DFID (1997). Sustainable Livelihoods Guidance Sheets. United Kingdom: Department for International Development.

Doronila, Amado (1992). The State, economic transformation, and political change in the Philippines, 1946-1972. Singapore: Oxford University Press.

North, Douglass (1993). Economic performance through time. Lecture to the memory of Alfred Nobel, December 9, 1993. Sweden: See: http://nobelprize.org/nobel_prizes/economics/laureates/1993/north-lecture.html

UNDP (2008). Human Development Report 2007/2008. New York: United Nations Development Programme

World Bank (2008). World Development Indicators, 2008. World Bank. See: http://ddp-ext.worldbank.org/ext/ddpreports/ViewSharedReport?&CF=1&REPORT_ID=9147&REQUEST_TYPE=VIEWADVANCED&HF=N&WSP=N