Sunday, August 1, 2010

New Economics for a new administration

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by Walden Bello*

THE dominant feature of the Arroyo administration was pervasive corruption, but its most destructive legacy in the long term will probably be its policy failures.  The ascent to power of a new president, backed by a new Congress, provides the opportunity for a fundamental shift in policy in order to end poverty and relaunch the Philippines on the road to development.

The policy paradigm of the administration was one it inherited from previous administrations. This was a promarket, neoliberal approach the key prongs of which were accelerated trade and financial liberalization, deregulation and privatization.  In addition, Arroyo continued her predecessors’ policy of fully servicing the foreign debt, dealt with the ever-widening budget deficit by imposing a 12-percent value-added tax that hit mainly the middle class and the poor, and left it to the market to address poverty and income inequality.

With its promarket orientation, the Arroyo presidency followed the lead of previous administrations in refusing to pursue an industrial policy, reducing budget support for agriculture to a minimum, and radically bringing down tariffs on both agricultural and manufacturing imports. Abandoned to global market forces as the administration embraced the ideology of globalization, the economy was channeled to the massive export of labor, export-oriented, low-value-added manufacturing, particularly of electronic components, and providing personnel for the outsourced operations of transnational corporations like call centers.

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Not surprisingly, the country’s GDP growth rate was consistently significantly below those of its Asian neighbors; the radical reduction of tariffs decimated manufacturing; the country was turned from a net food exporter to a net food importer; the poverty rate stubbornly refused to go below 30 percent of the population; and income distribution worsened.  In addition, the ecological crisis intensified, owing to desultory environmental management and failure to promote a reproductive-health policy for fear of offending the Catholic Church hierarchy.

The country’s plight under the lash of wrong policies over the last four administrations becomes clearer in a comparative perspective.  According to the United Nations Development Program’s Human Development Report, the Philippines registered the second lowest average yearly growth rate, 1.6 percent, in Southeast Asia in the period 1990-2005—lower than Vietnam (5.9 percent), Cambodia (5.5 percent) and Burma (6.6 percent).  The only country registering average growth below that of the Philippines was Brunei, which, being an oil-rich, high-income country, could not afford not to grow.

Except perhaps for allowing the passage of the law extending the period for the redistribution of land under land reform and providing funding for much-needed support services, it is difficult to find bright spots in Arroyo’s economic record.  The only mitigating factor in this dismal performance is that it cannot be separated from that of the previous three administrations.

In the last two years, the seemingly unending crisis of the domestic economy has been exacerbated by the worst global economic crisis since the Great Depression, a development that is a product of the same principles of deregulation and trade and financial liberalization.  This dual crisis coincides with the arrival of a new president and provides an unparalleled opportunity to break with the paradigm that has condemned this country to stagnation for nearly three decades.

A proactive State

First and foremost among the necessary changes is the transformation of the Philippine state from a passive actor into a proactive agent of development.  The role of the state is not simply to regulate or discipline the market and the private sector, though this is an important function.  More important, this state must lead in developing and implementing a strategic program for Philippine development, one that harnesses the energies of the public sector, civil societyand the market to achieve development targets.  Planning, which became a dirty word in recent years, must again take pride of place among the instruments of economic development, with the National Economic and Development Authority  ceasing to be simply a statistical collection agency and becoming the planning agency it was originally meant to be.

The revival of an economy with a solid industrial and agricultural base must be among the key aims of the activist state since industry and agriculture are the main sources of solid growth in the economy.  This means engaging in industrial policy, or the strategic use of tariffs and other mechanisms not only to  protect domestic manufacturing from unfair competition but, more important, to give it depth, diversity, coherence and complementarity.  It also means making agriculture again a centerpiece of the economy through the strategic management of tariffs, quotas, subsidies for farmers and sustainable agro-technology.  The long-awaited completion of agrarian reform is, of course, a central element in the agricultural policy package, and the President’s electoral campaign promise to distribute Hacienda Luisita to its tenants would give the green light for this.

Income and asset redistribution

Market-driven export-oriented industrialization and export-oriented agriculture were the main prongs of the old, discredited paradigm.  It is time to make the domestic market again the driver of growth.  This can only be done, however, by increasing the purchasing power of Filipinos in the lower income groups.  This will inevitably involve income and asset redistribution, including a deepening of the land-reform program.  Higher wages for workers, income subsidies for the poor, and strengthened support services for peasant farmers are also mechanisms to achieve this goal of activating a vibrant domestic market that will be the locomotive of growth.  In the current global economic crisis, the Philippines and other countries, via stimulus programs, have fallen back on the domestic market to make up for the shortfall in foreign markets.  This reorientation must be made permanent, a prescription that is underlined by the poor prospects of recovery by export markets in the next few years.

Asserting the role of an activist developmental state does not mean a return to the old developmental paradigm of the 1960’s and 1970’s.  The old paradigm focused on achieving high growth rates, prioritized industrial development, made equity a secondary consideration, and paid little attention to environmental damage.

The New Economic Policy, in contrast, stresses the quality of development, with a strong emphasis on equity and ecological stability.  A lower rate of growth that meets the needs of development and poverty reduction without destabilizing the environment is not a utopian dream, but it can only be brought about on the basis of a more equitable sharing of the fruits of growth.  Thus, equity in the distribution of income, assets and resources fulfills simultaneously the needs of demand-driven growth, environmental sustainability and social justice.

Democracy and development

The New Economic Policy is not out to create an authoritarian state.  Indeed, it sees democratic governance as central to creating consent and thus giving legitimacy to the state’s economic initiatives.  This means fundamental economic decisions, such as which industries should be promoted owing to their disproportionately positive impact on development and employment, must be arrived at democratically.  It means the establishment of mechanisms of accountability of government agencies to civil-society bodies such as peasant and workers’ production councils and consumer associations.  Democracy strengthens government, not weaken it.

The New Economic Policy must acknowledge the value of women’s work.  For too long, women’s central role in the reproduction of the economy has not been acknowledged, leading to the devaluation of women’s work and generating systemic inequality in income distribution between the sexes.  That the majority of the poor are women is not an accident.  Addressing the inequality created by gender will involve coming up with a set of complementary mechanisms, including income support, affirmative action in employment, and promotion of women-friendly methods of family planning.

Production, consumption, equity and ownership of the means of production are closely linked.  In contrast to a system where one form of property subjugates others, an equity-oriented system of production combines various forms of ownership, including state ownership, private property, cooperatives, and ancestral domain or communal property.

Full recognition and protection of ancestral domain or communal forms of ownership as enshrined in the Indigenous Peoples’ Rights Act of 1997 is the best guarantee for enhancing the economic welfare of indigenous peoples.  Their well-being can also be promoted through the establishment of and effective maintenance of protected areas where environmental management will be in the hands of indigenous communities. Such sanctuaries must be created not only in forest and mountain areas but also in the seas and lakes.  Fishing in waters at a designated distance from the shore must be reserved for artisanal fishing communities.

Sustainable development, provision of public goods

Mining for natural resources is an important economic activity.  Yet government policies have supported foreign corporations that have brought little of their profits to the country and left mainly environmental disasters like the Marinduque mining disaster in 1992.  Constitutional restrictions on the nationality of owners of mining firms must be fully respected, mining policy must favor mainly small operators, tight environmental restrictions must be instituted, and profits from mining operations must flow mainly to mining communities.  Repeal of the 1995 Mining Act will be necessary to bring about such a propeople mining regime.

In all areas of the economy, there must be a concerted shift to green technology. In agriculture, for instance, land reform and a reversal of destructive trade liberalization is not enough.  To be sustainable, agricultural technology must be made less dependent on the chemical-intensive technology that has proven so ruinous to the environment and public health.  At the same time, it must avoid the illusion of a new “Green Revolution” based on genetically engineered seeds that are owned by transnational corporations.  Organic agricultural methods suitable to small-scale farming must be developed and promoted with the aid of the state and our local scientific community.

The last three decades have witnessed a disastrous experiment in the privatization of power, water and other public goods. Privatization has resulted in higher profits for the private sector, but it has not brought about more efficient management and lower costs of power and water.  People have a basic right to power and to water, and production and delivery of these goods by public or cooperative enterprises is the best guarantee that their price remains within the reach of all citizens.  Making public goods affordable will sometimes involve some form of subsidization in which richer classes and organizations assist, through transfer payments, the poorer sectors of the community.

The fiscal challenge and the debt

Taxation is an indispensable mechanism for the government to raise the resources to spend for the public welfare.  The problem in the Philippines is a system that is regressive, where owing to reliance on the value-added tax and other forms of indirect tax, the burden of taxation falls principally on the poor and middle classes.  The key to raising resources is to shift the burden of taxation to the rich through higher marginal tax rates for those in the upper-income brackets, more efficient collection of income taxes and corporate taxes, and increasing taxes on socially unhealthy activities such as gambling, drinking, smoking and carbon emissions.  This mix of measures will yield a significant part of the resources to cover the now gargantuan budget deficit.

Fiscal balance will not, however, be achieved without addressing the debt problem. Twenty-two percent to 25 percent of the budget now goes yearly to servicing the national debt, a far greater proportion than in most of our Asian neighbors.  Debt servicing has become the most important single item contributing to the government deficit, especially since the government is now borrowing at higher and higher rates of interest mainly to repay debt coming due.  Servicing the debt has become the top national priority, and this has had not only fiscal consequences but also developmental ones.  This practice has contributed to the massive reduction in public capital expenditures, which has, in turn, caused a decline in the rate of investment since government is the biggest investor in the economy. And this, in turn, has translated into a depressed rate of economic growth.

Without a radical change in our debt-management policy along the lines of a debt moratorium or a negotiated or unilateral reduction of the government’s debt burden, successfully implementing a new economic policy that will launch the Philippines anew on the road to development will not be possible. A fundamental change in debt management similar to Argentina’s decision in 2002 to pay only 25 cents to every dollar it owed to foreign creditors is the sine qua non of a change in the direction of economic policy.  The President himself recognizes the need for bold action in this area when he spoke about the need for debt repudiation during the electoral campaign.

In sum, a golden opportunity awaits the administration of President Aquino. A break with past policy, however, is necessary. The contours of a new strategy that will relaunch the country on an ecologically and socially benign developmental path are discernible:  an activist state; industrial policy; reinvigorating agriculture through a reversal of trade liberalization; domestic market-driven growth made possible by more equitable income distribution; environmentally benign production processes in industry and agriculture; affirmative action policies for women and indigenous peoples; a mixed property regime; state provision of public goods and services; and an aggressive progressive tax regime.

Instituting such an alternative comprehensive program will take a great deal of courage and determination, especially at the beginning.  A Chinese proverb says that every journey of a thousand li begins with a first step.  That first step is to take the bold measures necessary to tackle the biggest problem weighing down the country: the foreign debt.

*Walden Bello is the president of the Freedom from Debt Coalition (FDC), a member of the House of Representatives representing Akbayan, and senior analyst of Focus on the Global South.  For most of the ideas expressed here, the author is indebted to Milo Tanchuling, secretary-general of the FDC, and James Matthew Miraflor, who headed up FDC’s New Economic Policy Project.  He may be contacted at

1 comment:

mark said...

God help the Philippines if P-Noy is considered representative of the ideals of free markets.

Walden Bello obviously never tried to do any empirical research in how business is run. Philippine government is enormously influential in the day-to-day operations of a business with all sorts of regulations and conditions attached to every business decision.

Liberalization merely exposes how inefficient these regulations are in that their costs exceed their benefits to society. eg regulations that "protect" a worker from abuse but also make it overly expensive to give the worker a job.

If P-Noy screws it won't be because of free markets but because he didn't have the balls to fully implement free market reforms in order to placate the left.