Thursday, February 24, 2011

People Power and Prosperity


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I recently gave a presentation at the Forum on People Power and Poverty Reduction (Celebrating the Silver Anniversary of EDSA 1) organized last February 23, 2011 at the Institute of Social Order (ISO), Ateneo de Manila University. This was organized by several NGOs in coordination with the Cabinet Cluster on Poverty Reduction (which is composed of secretaries of DSWD, NAPC, among departments). I gave a presentation on economic alternatives (after the one by Freedom from Debt Coalition President Ric Reyes on a critique of the "EDSA Economy" - check it out here).
I began by saying that maybe, all government interventions should go beyond the meager dream of poverty reduction and the proverbial "providing food for the table". Our generation (EDSA Babies - Generation Y) ought to have dreams more ambitious than that. I then proposed that the theme of an economic alternative should be, instead of poverty reduction, prosperity - the creation of spiraling wealth that will increase incomes, employment and productivity. We should go beyond palliative economics and instead address the roots of poverty.

It is with this thought in mind that I delivered my presentation:






(If it doesn't appear in your browser, try clicking the Read More link below)

The presentation was also to promote FDC's HANEP 2020 - an alternative national economic development program that focuses on creating an equitable and just Philippine society by promoting asset reform, ecologically-sound industrialization, and technological leapfrogging. The document is in its very early stages, and is currently being refined through FDC's internal processes and consultation with sectors. You can view the draft at the end of this blog entry (a Scribd document).

The presentation I made, however, only focused on five out of ten aspects of the HANEP 2020 program. The five components constitute already a coherent development strategy that is in-line with our constitution and consistent with some elements of the "Filipino First" policy of former President Carlos P. Garcia:

1. The government must pursue an Industrialization Strategy that synergistically links an integrated domestic industry that scales the entire value chain with a strengthened domestic market for demand and sustainable local economies for supply. The industrial policy must facilitate technological leapfrogging, facilitate  industrial evolution (from Original Equipment Manufacturing, to Original Design Manufacturing, to Original Brand Manufacturing) , and eventually, create uncontested market spaces. All developed economies of the United States (US), United Kingdom (UK), Japan, South Korea and the rest of the Asian Tigers used such strategy. An industrial policy is necessary if the government is to aim for a full employment policy.


2. The government must still complete the long overdue Land Reform program. Tenure instruments, which should go beyond farms and include coastal areas owned by fisher-folks and uplands managed indigenous communities, should serve the dual purpose of equity/social welfare, and agricultural-industrial development. Land reform that encourages land stewardship through institutional support must be fully implemented. Public ownership and management modes of agricultural enterprises through cooperatives must be strengthened. The Taiwan, Vietnam, and China experience should also be emulated and improved for this purpose.

3. The government must replace the Cheap Labor Policy with a High Wage Labor Policy to induce demand and increase marginal labor productivity. Ensuring that workers are paid well, free to spend on non-basic commodities, and save for their future will thus facilitate the creation of a strong domestic market and large savings base which domestic banks can capitalize. Public goods for human development should thus be provided. The United States (US), after the Great Depression, sought to increase workers wages in order to establish a Fordist regime.


4. The state must recognize the intrinsic capacity of each member of society to work, through the provision of a social wage even for the unemployed. Aside from incentivizing the government to create jobs in order to reduce cost, this has an added benefit of ensuring that women in households, which have no formal market work, will have purchasing power – the absence of which perpetuates imbalanced relations in the household level. A Guaranteed Minimum Income (GMI) system – a system that goes beyond the current Conditional Cash Transfer (CCT), must be implemented, filling up the difference between ones' actual wage and living wage via mechanisms.

5. The government must finally free public finance from constraints and fiscal hemorrhage by Strategically resolving the Debt and debt service problem, and by accelerating the shift to a treasury policy that is biased on domestic savings rather than the global credit market. We must accelerate shift to peso borrowings, national treasury policy that is biased on domestic financing and savings. It is time to resolve the Public Sector Debt Problem and the consequent resource-gap by conducting a comprehensive audit of foreign debts and subsequent repudiation of illegitimate ones. Argentina’s experience must be explored by the Philippine government.

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Check out the rest of the HANEP 2020 document below:
HANEP for 11th FDC Congress (draft)





EXTRA: You might also be interested into looking deeper on the Blue Ocean strategy, the aim of which is not to out-perform the competition in the existing industry, but to create new market space or a blue ocean, thereby making the competition irrelevant.

11 comments:

mark said...

"The government must pursue an Industrialization Strategy that synergistically links an integrated domestic industry that scales the entire value chain with a strengthened domestic market for demand and sustainable local economies for supply."

You're are just begging the question. HOW do you do this? The free market simply allows industries who cannot meet this criteria to fail. Even state directed economies of Japan and Korea did so. They certainly did not tolerate striking workers with as much patience as you do.

"The government must still complete the long overdue Land Reform program... The Taiwan, Vietnam, and China experience should also be emulated and improved for this purpose."

Let me speak for China, if a farmer did not produce enough food with his land for the benefit of society HE WAS KICKED OUT OF IT.

"The government must replace the Cheap Labor Policy with a High Wage Labor Policy to induce demand and increase marginal labor productivity."

How sure are you this won't induce inflation wiping out whatever nominal increase in purchasing power was achieved?

"The United States (US), after the Great Depression, sought to increase workers wages in order to establish a Fordist regime."

A higher wage can sometimes increase productivity but it does not follow it always does (try paying every clerk a million Pesos a day). The difference with Henry Ford and government induced wage increases is that if it fails to increase productivity Ford's factory would face loses and may even close. This helps keep inflation in check. Interest groups could just keep demanding ever higher wages from government without giving anything in return (ie increase productivity).

"The state must recognize the intrinsic capacity of each member of society to work, through the provision of a social wage even for the unemployed."

You mean we should invest in a person because someday in the future he can be a productive member of society? Well what if your investment doesn't work out and he becomes a bum? Especially if guaranteeing an income is a disincentive to work? May pambayad ka ba? If I choose to invest in a person I use MY money and not anyone else'. I think it is common decency you do the same.

"The government must finally free public finance from constraints and fiscal hemorrhage by Strategically resolving the Debt and debt service problem, and by accelerating the shift to a treasury policy that is biased on domestic savings rather than the global credit market. We must accelerate shift to peso borrowings, national treasury policy that is biased on domestic financing and savings."

1.) I'm actually sympathetic to the idea of defaulting on our debt.
2.) The effects of focusing solely on the domestic credit market for finance has so many implications I don't even want to talk about it.

James Miraflor said...

Hi Mark! Thanks for replying. Here are my responses:

You're are just begging the question. HOW do you do this? The free market simply allows industries who cannot meet this criteria to fail. Even state directed economies of Japan and Korea did so. They certainly did not tolerate striking workers with as much patience as you do.

You mentioned Japan. In 1958, there was a debate whether Toyota, which recently released the largely-flopped Toyopet in the world market, should still receive government protection or be abandoned already. After all, as of that time, it already received 25 years of state protection. Japan decided to keep Toyota, and in fact even imposed heavier protection and bigger subsidies for product development. Today, there is not even a question whether or not Japan should have a globally-competitive Toyota which in 1990s even threatened to erase GM from the US market. And I will not mention Samsung anymore, which was heavily protected by Seoul from Japan's Sanyo.

Industries need time to be mature, develop, and become competitive. Some say that it is far more efficient to specialize on what is currently your "comparative advantage", but if this comparative advantage do not yield or create as much value as the comparative advantage of other nations, then the country will always be stuck in a low-growth path largely in the periphery of the more advanced countries with high-value-yielding industries. If we cannot believe that, then we might as well believe that specializing in silk just as the anti-Toyota technocrats of 1958 recommeneded Japan to do will make us at least as competitive as those who specialize in Smart phones.

As for domestic competition, I'm all for it. In fact, it is a crucial element to make infant industry protection a success - the presence of domestic rivalry.

As for striking workers, it is good to note that great economic booms are usually associated or began with the industrial peace created by huge concessions to the working class. This, because a nation needs to position a strong, well-paid domestic market as the crucial driver of productivity gains.

Again, the Japanese can be emulated here. After WWII, the Diet of Japan passed a very liberal labor law (as per Trade Union Act of 1949, which allowed workers to organize, strike, and bargain collectively). Because of intensive labor struggles, Japanese workers experienced rising incomes, creating a huge worker-middle class (the distinction is not clear anymore) that served as the avant-garde home demand for Japanese manufacturing industries. In fact, it is the Japanese markets' tightly-constrained demand for kei-haku-tan-sho (light-thin-short-small) products that compelled Japanese firms to innovate, and create never-before-seen products that invaded the global market. Home demand conditions are important, and thus the necessary domestic market through a high wage regime.

To be continued.

mark said...

I was hoping you'd continue so I'd just write one rebuttal but here goes:

"Some say that it is far more efficient to specialize on what is currently your "comparative advantage", but if this comparative advantage do not yield or create as much value as the comparative advantage of other nations,"

What value do you speak of? Just the pride to say that your country has industrial base or the ability to feed and house your people? Hong Kong has done very well for itself simply following its comparative advantage. Its GDP per capita might be higher if it had more land for factories. Whether or not we should invest in having an industrial base should be decided by those who will cough up the cash not some politician or bureaucrat with grandiose visions using other people's money. What does it matter to the ordinary worker if the person that pays him is a Filipino or not? What does it matter to the consumer if the goods he/she buys was made by a Filipino or not? Foreigners can serve the interests of Filipinos just as well as other Filipinos and Filipinos have already demonstrated that they are just as capable as any foreigner of exploiting their own people.

I cannot argue that following comparative advantage can yield an industrial base as I'm not familiar with any economy that has done so but:
1.) the absence of evidence does not presume innocence.
2.) I have a feeling that a number of Scandinavian countries were able to produce hi-value and hi-tech industries in a relatively free market environment. The kind of products used as inputs for intermediate goods that end consumers know nothing about. Was Nokia protected or subsidized?

mark said...

"If we cannot believe that, then we might as well believe that specializing in silk just as the anti-Toyota technocrats of 1958 recommeneded Japan"

There were also people who wanted to shut Honda down as they felt the car industry was becoming over-crowded. But the pertinent question is who pays for such mistakes? The entrepreneur and investors who risk their own cash or the unknowing taxpayer? As for specializing in silk: a.) I'm not arrogant enough to presume to know that and b.) change happens and our comparative advantage can always change as we develop as China is experiencing as Hong Kong experienced.

"As for domestic competition, I'm all for it. In fact, it is a crucial element to make infant industry protection a success - the presence of domestic rivalry. "

Empty words. Frustratingly empty words. Competition requires winners, loser, rules that determine who are winners and losers, incentives for winning, and disincentives for losing. Your article lacks these especially on the disincentives for losing.

mark said...

"As for striking workers, it is good to note that great economic booms are usually associated or began with the industrial peace created by huge concessions to the working class."

Words cannot express how strongly I disagree with this statement. You are putting the cart before the horse. Capitalism in itself was sufficient in raising the living standards and wages of workers (wasn't this how Marxist revisionist came about?). China's wages are rising despite the fact that the official minimum wage is set below market rates. China has all sorts of laws protecting labor. Try talking about your rights and you're liable to get shot. No country grew rich by implementing highly regulated labor laws. Rich countries that possess them grew rich first through truly liberal and free labor markets. On Japan see my next reaction.

So excuse me when I say I do not feel sorry when people who perpetuate this myth get shot and killed.

"After WWII, the Diet of Japan passed a very liberal labor law (as per Trade Union Act of 1949, which allowed workers to organize, strike, and bargain collectively). Because of intensive labor struggles, Japanese workers experienced rising incomes, creating a huge worker-middle class (the distinction is not clear anymore) that served as the avant-garde home demand for Japanese manufacturing industries."

The presence of a collectivist type liberal law means nothing. Question is how it was implemented. Take for example Marcos practically wrote our present day Labor code. He was responsible yet he also issued a ban on strikes. I'd say he knew very well these labor laws crafted with his tool Blas Ople would make the Philippines so difficult to govern that people would yearn for a strongman to straighten things out. Or see China as I illustrated above.

" the necessary domestic market through a high wage regime."

You forget, what about wage inflation? I'm not reminding you again.

James Miraflor said...

To kick off my reply, I just want to say that Nokia, or more aptly, its electronics subsidiary (which doesn't matter at the present - since Nokia is now known as an electronics company - but of vital historical importance), had to be cross-subsidized for 17 long years before it made profit. Nokia was founded as a logging company in 1865. Had Finland liberalized foreign investment in 1960 when the electronics subsidiary was just developing, Nokia might still be cutting trees by now. What, with AT&T and Bell around? They have as much chance as the Philippines have on tugging Spratlys away from China (as of the moment).

It is not as if Finland planned to invest in electronics for two decades because after then it would be reaping profits like hell - rather the investment had been condition rather than time-bound. It invested until returns came. In fact, it only liberalized Nokia in 1986 - just a year before it attained technological capacity to launch the Mobira Cityman, the first handheld automatic cellphone.

James Miraflor said...

You may have misunderstood what we were discussing about "value". Actually, it is very simple - how much the market is willing to pay for a good. "Value creation" or "value addition" is when an economic activity adds to the intrinsic value of a particular good through some processes, usually industrial. On this note, foodstuff for export or customer service (which is supposedly our comparative advantages), even if they are of vital importance, does not match the "value" of say, the IPad - the amount people are willing to pay for each unit item (or unit time, in the case of service).

This is where my argument about specializing in your so-called "comparative advantage" (in the Ricardian sense) begins. As experiences of Finland, South Korea, and Japan show, "comparative advantage" in an economic sector that does not pay enough is no advantage at all, and we might as well shift to industry even as we cannot hope to compete globally in the short-run. Australia, until now, props up its globally uncompetitive industrial sector via subsidies and protection in order to prevent its entrepreneurs from shifting to agriculture - which, while it may yield higher profit for individual capitalists, will surely yield lower value in the aggregate (due to lower capacity and susceptibility to diminishing returns).

Thus, even if our comparative advantage is exporting foodstuff, it is advisable to leave the foodstuff industry (or maintain if only to keep domestic food prices cheap and to attain self-sufficiency in a period of volatile global food prices) and still go for developing our own electronics industry with the end view of exporting home-grown electronic products, even if we cannot hope to compete the global market leaders in the short and medium-run. Anyway, eventually we will, as we will be able to emulate their industrialization techniques, and push it further later. This is true for the experiences of a large number of developed countries now: US (learning from Britain), Japan (from US), South Korea (from Japan), China (from Japan), Thailand (from Japan), Malaysia (from Japan), Indonesia (just now, from Thailand), and Vietnam (from China).

James Miraflor said...

Yes, it does matter matter to the ordinary worker whether it is a Filipino capitalist who pays him or not - but not in the way you would have assumed and disagreed. It matters only if the Filipino capitalist invests back to the Philippines, because then the "surplus" (or added productivity) generated by his industry would be utilized by other Filipino industries, leading to a spiraling of wealth. Actually, a foreign capitalist can play the same role too - but we all know that a foreign company, historically and empirically, repatriate its profits, keeps its technology, and imports its inputs. Liberalization can only be an option if we, like Vietnam, China, Korea, and Japan, regulate liberalization to maximize technology transfer and the absorption of the domestic economy of the productivity generated by foreign firms. Japan used content restrictions (you have to have local supply), Korea used explicit requirements for tech-transfer, so did Vietnam. In other cases practiced by all of them from time to time, it was done through non-consensual reverse engineering and copying (China and Japan).

James Miraflor said...

On higher wages and inflation

Let us approach the problem on the monetary level. Where will the money for increased wages come from? Of course, from the existing money supply. The demand for money in the aggregate does not increase or decrease - there will be the same number of goods around, and same amount of money supply. What happened merely is a redistribution of wealth from the capitalist to the workers.

If anything, inflation can only come from increased demand of commodities. Lets assume that inflation will be caused due to aggregate demand increases because of increase in purchasing power of workers. The usual answer is that (and this is yours too) inflation will erode purchasing power increases - the inflation primarily driven by producers increasing their price in order to reduce demand and prevent exhaustion of its inventory. But what is more realistic - an entrepreneur increasing its price due to increased demand, or him increasing production to increase gross income? Wouldn't capitalists be induced to produce more rather than increase price? This is on top of the fact that there are associated "menu costs" involved - changing menu prices disrupt demand and even supply regularity.

This is also the reason why entrepreneurs will not be inclined to pass the added cost of labor to the price of their products. They would rather expand and increase production, and seek new markets. Expansion rather than tightening has always been the reaction of business to exogenous shocks. If they cannot do so, they will fail anyway. Once volume of sales dips, their net income might not suffice to cover for the interest of their loans to the banks (as we know, it is through banks that firms usually generate their seed capital).

Would their expansion be a success? I think yes, and this is because of increased purchasing power of workers. And we know that as business expands, the more it invests on product development, further decreasing prices and increasing quality. Again, a glorious cycle of increasing wealth (until such time though, that real inflation begins to settle in, and this is the period when we have to slow the economy down before unemployment kicks in. China made a brilliant example of this as they shifted to increased taxes after 2005 economic overheating. It only stopped this trend only because of the global economic crisis in 2008, when they again expanded monetary supply through stimulus).

Would there really be inflation to begin with? That has to be empirically established via testing and econometric analysis. But I seriously doubt inflation would be significant. Anyway, much of our inflation is cost-pushed rather than demand-pulled. Over-dependence on imported crude oil and imported foodstuff (from Vietnam) is the culprit for jacking up prices in 2008-2009. This will not be addressed by holding wages down. It can only be addressed by strategic planning to shift to self-sufficiency in renewable energy and food production.

James Miraflor said...

On higher wages and workers productivity

On this, we have to ask the question first: where will workers invest their higher wages? The obsolete neoclassical model would presume that they would substitute work for more leisure, i.e. they will all become "lazy" if you reach a certain point. But this is a static model, and an unsophisticated one at that. We know that a person, after achieving a certain point of wage, would invest in his or her own self-development (through education for its own sake, or for increasing its skills), and what would this effort redound to? Isn't it increase in productivity?

Workers will invest in education, as long as there are incentives and institutions are in place. And rising education levels of workforce is necessary if we are to transition from labor-intensive production (which pays cheaply) to a capital-intensive one (which yields more value). Eventually, as long as there is a strong regulatory and welfare function of the state, this will redound to not to increase in unemployment, but a decrease in labor-hours for all and more social services (due to increased revenue yields as productivity increases).

But a number would indeed, substitute labor to leisure as income rises. Is this necessarily bad? I don't think so. More than the fact that leisure is necessary for the reproduction of labor capacity (wouldn't a good spa now and then refresh your capacity to work?), more demand for leisure would end up creating new industries, generating more employment. Does it even occur to you why a barber in the US can earn 10x as much as the same barber doing the same job in the Philippines? Because their market can afford to pay more, because they have higher wages - and higher wages will not just be an output of increased firm productivity (as the instinct is to hold costs down), it has to be extracted from the firms as government policy. Firms are simply not in an informed position to determine wages because they are not concerned on the aggregate demand. Ford was able to do that because of its size. On other cases, it can only be the government.

You do not need to pay a clerk a million pesos a day. But a P5000 wage increase per month across the board will largely redound to increase consumption or increased savings - both stimulus for increased investments. Your argument - that productivity increases will not meet wage increases - is so simple to address: we stop increases until real purchasing power of both firms and employees are no longer increasing. That is the scientific way of doing it. Playing prophet of "a priori" doom will not generate prosperity nor information on how our economy works.

James Miraflor said...

"No country grew rich by implementing highly regulated labor laws."

I will first answer this on a normative, then on the practical level. First, assuming without conceding that what you are saying is true, that economic growth can only occur by dismantling protection on labor, I say, I don't want the Philippines to grow into an economically robust country at the foundation of blood due to wage slavery and labor abuse. I don't want to see Filipino workers committing suicide because their powerhouse industries are giving them subhuman treatment, like the ones producing your Blackberries and IPad now in China, or the despicable experience of British workers (as depicted by Oliver Twist) that compelled Marx to write his Communist Manifesto. I don't want Filipino workers to receive below minimum wage salaries when even minimum wage salaries cannot provide a decent life for a family of five. No morally sound person would want that, even if, assuming you're right, eventually they will be prosperous because of economic growth. But even in that, there is no guarantee. What if your Filipino capitalists who earned their billions through wage repression suddenly decide to reside in another country (and Filipino aristocrats had a history of doing so), and sell their cheap goods elsewhere? What will happen to the vast majority of Filipinos who were their workers?

There is another way. Prosperity can be achieved, and is not mutually exclusive to that of ensuring welfare for your citizens. When China, as late as the late 1990s, came out to join WTO as a manufacturing giant, it wasn't considered a prosperous country - it was seen as a corrupt oligarchy, where a handful of extremely rich elite feeds from the cheap labor of the rest. Sure it is an economic powerhouse, but it wasn't prosperous. Only under Hu Jintao which focused on wealth redistribution and wage increases that the middle class emerged and China, truly, can be considered wealthy.

The question then becomes, does having accumulated huge capital a necessary condition for prosperity and good life for citizens? I don't think so. Maybe decades ago, it was still necessary, but now, with the level of technology-induced productivity, we no longer have to undergo a social fabric-wrenching experience in labor slavery in order to accumulate capital. We can simultaneously develop industrial capacity through direct government intervention while making sure that productivity increases are shared to workers in the form of wage increases.

Practically, in our age now, it is even more effective to evolve a robust industrial base under liberal rather than repressive labor laws. Sociologically, this helps maintain social stability as you develop (and we do not have a lack of economists and "experts" who say that coups, insurgencies, and terrorism are major setbacks to development). Economically, it is far better to rely on your own domestic market rather than the global market, especially if you are on the process of incubating your industries. This is only possible if you develop your domestic market to begin with by ensuring that your buyers are not reduced to slaves - that they can buy for leisure and save for better life, that they have enough wages to do just that.