Monday, July 25, 2016

The State Aquino III left Duterte

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President Rodrigo Roa Duterte is coming in at the best and the worst of times. The administration of President Benigno Simeon Aquino III has left the Duterte a well-oiled and full-tanked government machine – but one besieged with sclerosis, incapable of solving the congestion problem, and has grown too big to feel its extremities - a "manhid" government as one would say. 

The contradictions of Aquinomics has produced a government that already surpassed the size of Marcos’ in terms of consumption per capita[i] but is still afflicted with underspending[ii], not to mention a declining growth in tax effort[iii]. Aquinomics ushered the return of big government[iv] – but one that is so dependent on the private sector for service delivery and capital outlay[v] that when big investors played hard ball[vi], infrastructure development and maintenance suffered[vii], leading to congestion[viii] and public misery[ix].

Duterte's Straitjacket

This is the government Duterte is inheriting – one that is awash with cash but held hostage by the dictates of the global market and the whims of local capitalists. Half a decade ago, a popular leader – armed with political capital – might use this money to procure shares of industrial champions and ultimately steer the economy towards its national plan[x]. Today, haunted by Marcosian “crony capitalism”, such a move would be frowned upon by most technocrats, if not explicitly opposed by existing policies and legislation these technocrats championed.

Neoliberal “reforms”, such as the GOCC Act of 2011, largely limited next administrations’ power to create new parastatals, or procuring shares from existing ones. Assuming an administration gets controlling share of a national champion, its power to pace and discipline the market will be restricted by the Philippine Competition Act of 2015. Straitjacketed[xi] by credit rating agencies into maintaining stable “macroeconomic fundamentals”, the government will likely meet the ire of the investors should it stray the path of low deficit, “don’t touch the market” regime.

Structural Inertia

For the first six months to one year, we can expect that the Duterte administration will be moved by sheer inertia. The 2016 budget prepared by the Aquino administration is still in effect, while the 2017 budget has been already prepared by the Department of Budget and Management (DBM), with policy directions set by National Budget Memorandum no.126 (the Budget Priorities Framework). A huge bulk of Duterte’s investments program, at least before the 2019 mid-term elections, is already fixed by the PPP contracts set during the Aquino years.

In the medium term, Duterte is restricted by the bureaucracy he is inheriting. The rationalization plan of a number of major agencies secured the tenure of Undersecretaries, Assistant Secretaries, Directors, and other rank-and-file civil servants from Aquino. The International Financial Institutions (IFI) and the Chambers of Commerce continue to hold sway over the technocrats, and thus will have strong influence at least in the first two to three years. Duterte is only set to appoint three judges this 2016, so we can expect a more or less stable judicial-economic regime that will have say on pending PPP contracts.

End-year growth of the gross domestic product (GDP) is already half-determined by the time Duterte comes in – and will likely meet expectations due to high electoral spending. If nothing drastic happens by the first six months, then we can expect cheers from both the domestic and international markets, cheers that will likely be taken by Duterte’s cabinet as cue on which policy directions to continue from the Aquino administration.

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Momentum of the Elite

But a closer look at growth figures reveals that it is highly correlated to the average revenues of the country’s seven largest conglomerates – Aboitiz Group, Alliance Global Group, Ayala Corp., DMCI Holdings, JG Summit Holdings, San Miguel Corp. and SM Investments[xiv]. One can see one index as indicative of the other – a change in the pace or direction of one may possibly predict the other. 

While we are perpetually warned that correlation does not equal causation[xv], we know from former NEDA Chief Cielito Habito that the country’s top 40 families capture around 75% of GDP growth. This can only point to the fact that our economic growth – the magic number we are all looking at to judge whether an administration is performing well – is, at least in the first few years of Duterte, a function of the conglomerates, their current profitability, and their business and expansion plans.

Neoliberal by Default?

One more thing about inertia: a Philippine leader can be anti-neoliberal, yet the government will still be. In this case, one can say that Duterte is neoliberal by default – unless he keeps his promise of leading a revolutionary government – one that can summarily reversed all the privatization, liberalization, deregulation, commodification, and contractualization initiatives implemented by the past five administrations combined. 

Running the Philippine state apparatus within its parameters and as it is currently defined by thousands of laws, policy pronouncements, executive orders, development plans – most developed via the financing of the purveyor of neoliberal thinking – constraints Duterte to be a neoliberal, even if his rhetoric isn’t.

Room for Transformation

In any case, the government Aquino left is a much more effective tool for transformative politics than what Arroyo left Aquino, what Arroyo inherited from Estrada, or even what Ramos left Estrada. Arroyo left Aquino with a bureaucracy that is ridden with corruption and strangled by micromanagement – a by-product of an unpopular administration which has to rely on patronage to counter destabilization threats. Ousted Estrada gave Arroyo a gangster government [xii] that is ill-equipped to face the real-economy effects of the 1997 Asian Financial Crisis and El Niño. Neoliberal pioneer Ramos, anxious to reduce government accountability after the bungling Cory years, gave Estrada a dismantled state stripped of its defenses against exogenous shocks and robbed of its instruments to steer the economy into modernity.

In contrast, Aquino’s relative popularity allowed him to pursue good governance goals which redounded to increased credit and capital market confidence and eventually, to an unparalleled fiscal space. Meticulous preparations for Private Public Partnerships (PPP) starved the Aquino administration of big-ticket, popularity-raising infrastructure projects, but these preparations gave Duterte anomaly-free projects that will be implemented smoothly in his first and second years.

Moreover, while Aquino helped calcify neoliberal hegemony inside his government, he started projects that can trigger a drift towards a more progressive economic agenda. For instance, a unit in the Department of Trade and Industry (DTI) under Undersecretary Adrian Cristobal and Assistant Secretary Rafaelita Aldaba started the creation of an industrial roadmap [xiii] – a big turn-around from “no industrial intervention” mantra of trade liberalization hawks. The expanded Conditional Cash Transfer (CCT) program can be modified into a Basic Minimum Income (BMI) for the marginal poor and pave the way towards a modern welfare state. Major experiments in participatory democracy (Kalahi-CIDDS, Bottom Up Budgeting) can serve as a vehicle towards deepening citizens participation in government.

Akbayan's partnership with Aquino III produced a government, which, while neoliberal, has had pratice implementing elements of transformative reform. Duterte's partnership with the National Democratic Front (NDF) will hopefully channel his populist tendencies into maximizing and expanding these elements towards a deeper progressive agenda - one that ends the neoliberal state and replaces it with a developmental one

"Murmurings of the People"

In his inaugural address, President Duterte emphasized to need to listen to the "murmurings of the people". This is a good start towards ending the state of insensitivity in the government. One concrete way this can be implemented would be to transform DSWD's Family Development Sessions (FDS) of 4Ps from a one-way street to a feedback session. The Duterte administration, via the progressive leadership of incoming Sec. Judy Taguiwalo, can use the FDS to get people's opinion on burning national issues, as well as on their local needs. 

Bottom-Up Budgeting (BuB) should be institutionalized and expanded, and not rolled-back. BuB is a step towards meaningful devolution - a step towards ensuring that federalism that the next PDP-Laban leadership will build will not be feudal. BuB is our indigenous experiment on participatory budgeting. In fact, its practices should be used in the programming of IRA, and eventually, the GAB. We can understand where DBM Sec. Ben Diokno is coming from, for there had been instances of undue politicization of the funds. The best way this would never happen again is via legal institutionalization - like IRA was institutionalized by the LGU code.

DBM Sec. Diokno should reconsider his opinion.

Fulfilling the Promise of National Industrialization

Finally, Duterte and the NDF has emphasized the need for "national industrialization". There is no better time to start than now, especially with our fiscal space and good macroeconomic fundamentals. it is a good thing that Duterte is not starting from scratch - he will be inheriting the Comprehensive National Industrial Strategy (CNIS) developed by Aquino's DTI under USec. Cristobal and ASec. Aldaba. DTI's approach was to identify the already existing sectors, then craft separate plans to develop each. The CNIS then attempts to merge these separate industry plans. 

The problem with this however, was too dependent on the inputs of the private sector, the bickering between competitors delayed the project so much. Case in point was the automotive industry strategy, which has an arena between local manufacturers and importers.

The thing is, unlike in social development interventions, you cannot be bottom-up for industrial development strategies. Some plans have to be developed top-down, especially when you are dealing with the anarchy of the market. The proper method would be to fix a development strategy first, then commandeer the rest of the sectors towards the fulfillment of that strategy - either via force, incentive, or simply buying them out.

We can understand where the technocrats are coming from: the rise of crony capitalism under Marcos' 11 Major Industrial Projects (MIP) during the late 70s. Some economists, sympathetic they may be to state intervention, no longer trusts the state's corporate government sector to properly control the market. 

The new industrial plan should thus also invest on a professional corporate government sector. Good thing we already passed GOCC Governance Act of 2011 - but it has to be amended, since with its current form, it actually makes our parastatals ineffective instruments for industrialization. There is also a need to study the implications of PH Competitive Act, which, while a good way to regulate Philippine oligopolies, may also constrain efforts by the corporate government sector to dominate and pace markets.-30-

The author, James Matthew Miraflor, is a graduate student currently finishing his MA Economics from the UP School of Economics and MS Computer Science from the UP College of Engineering.

[i] Government expenditures per capita hovers around P6,400.00 per capita in 2000 prices from 1975 to 1982, the highest since 1967. This record will only be broken by Aquino III in 2012, when it posted government consumption per capita at P6,964.77. The figure even increased to P7,198.56 by 2014.
[ii] Data from the Department of Budget and Management (DBM) point to P103.70 billion of its budget unspent for 2013. By 2014, we saw this figure triple to a whopping P302.68 billion.
[iii] The National Budget Memorandum no. 126, or the Budget Priorities Framework for the 2017 budget, admits a slowdown in revenue generation – from 12.9% annual growth in 2012 to only 10.5%  in 2015. The NBM says that “existing revenue measures only provide the country with a narrow revenue base that is not enough to support the country’s growing development.” But the Department of Finance (DoF) under Aquino III is not actually that outstanding with respect to revenue effort. While improving, DoF’s 15.1% revenue effort in 2014 still fell short of Arroyo’s peak at 16.49%. In fact, there is a current trend of deceleration (the increases, starting from 2010-2011 up to 2013-2014, are: 0.59%, 0.53%, 0.33%, and 0.23%). Despite aggressive tax policies of the Bureau of Internal Revenue (BIR), tax revenues fell short of target in 2014 (short by 159.78 billion) and 2013 (72.2 billion). This is despite the imposition of revised sin taxes, which contribution turned out to be measly 0.4% of GDP.
[iv] Looking at historical values of the share of government expenditures with total expenditures in the economy, we come at an interesting observation: Aquino III’s ratio of 10.84% in 2013 and 2014 already surpassed 10.36% in 1976 – the height of Marcos’s Martial Law rule.
[v] We know that the primary mode of service delivery by the Philippine government is through procurement of services of the private sector. So government consumption directly leads to private sector activity. But there is a more interesting phenomenon – that even for financing, the state has come to rely on the market. In the recent years, the Philippine government has moved away from direct infrastructure expenditure financed by Official Development Assistance (ODA) to Build Operate Transfer (BOT) to Public-Private Partnerships (PPP). Why the government is not inclined to directly spend on infrastructure is explained well by UPSE Prof. Raul Fabella and Prof. Emmanuel De Dios: “Congress seems incapable of approving infrastructure budgets of any sizeable amount and with any gestation periods longer than the period between two elections. The most that lawmakers seem capable of mustering are local projects of limited significance (local roads, local school buildings, etc.), designed primarily for maximum electoral impact on the ‘folks back home’. We like to call this the ‘divide-by-N imperative’. As a result, most projects of a sizeable character or of national significance have always relied on either of two modes: (a) foreign financing such as for the North Rail Project and MRT Line 2 (Santolan-Dasmariñas); (b) various build-operate- and-transfer schemes, such as the NAIA Terminal 3 and the North Luzon Expressway improvement… In both cases, since no budgetary allocation is required, the executive branch is able to give fuller scope to its vision, thus evading the parochialism of congressional priorities – but also eluding congressional scrutiny, except for the odd ex post congressional investigation or so.” (from Lacking a backbone: Thecontroversy over the “National Broadband Network” and Cyber-education projects).
[vi] This is true in the case of 1) creation of new infrastructure and 2) improvement of existing ones. For 1), only 5 Public-Private Partnership (PPP)  are targeted for completion by mid-2016 – the largest of which is DepEd’s P16.43 billion Phase 1 PPP school construction which included Megawide Construction Corporation in the list of its partners, even as Megawide is embroiled in a conflict-of-interest complaint against Filinvest for the Mactan airport PPP. Another 5 PPPs had been awarded (the largest of which is the P64.9 billion LRT1 Cavite expansion), but none has seen completion. For 2), we know that when the Department of Transportation and Communication (DOTC) attempted early 2014 to acquire 48 light rail vehicles (LRVs), the MRTC and MRTH petitioned and won a “temporary order of protection” against DOTC at the Makati City Regional Trial Court Branch 66. The RTC ruled that under the BLT contract, MRTC will only lose its preferential right to supply LRV if a) MRTC is in breach of its obligation under the BLT; or b) MRTC consents to DOTC’s use of LRVs not provided by MRTC.
[vii] MRTH’s refusal to allow DOTC’s purchase of LRVs led to persisting congestion and eventual decay of the railways. The lackadaisical PPP program was believed to have contributed to an infrastructure underspending, which eventually took a toll in the form of slowing GDP growth.
[viii] Former NEDA Secretary Arsenio Balisacan himself revealed in 2012 that 2.4 billion pesos ($51 million) a day, or 3 billion pesos ($64 billion) a year (0.8% of GDP), is lost due to the traffic in Metro Manila and surrounding areas.
[ix] At the peak of MRT congestion problems in 2015, the MRT3 and LRTA Operations Director Renato San Jose hilself admitted during a Senate hearing that MRT commuters endure 30 to 45 minutes of queuing from the ground level up to the boarding platform. MRT3 authorities also reported an increase of average service interruptions per month from 1.83/month in 2008 to 2.42/month in 2011 to 4 a month during the first 7 months of 2014. This was when even the DOTC Secretary himself reveals that the MRT carries 600,000 passengers a day, beyond its design capacity of 350,000 and “crush capacity” of 500,000.
[x] This is true in the case of Lee Kwan Yew’s Temasek – a Sovereign Wealth Fund (SWF) that has been used by the Singaporean government as an instrument of its industrial policy.
[xi] Thomas Friedman coined the term the “golden straitjacket” to pertain to the phenomenon where countries have to sacrifice its economic sovereignty to global institutions and the global capital market in order to achieve prosperity. Friedman said that the straitjacket ‘shrinks’ politics while growing the economy. Directly quoting him: “Governments – be they led by Democrats or Republicans, Conservatives or Laborites, Gaullists or Socialists, Christian Democrats or Social Democrats – which deviate too far from the core rules will see their investors stampede away, interest rates rise and market valuations fall. The only way to get more room to manoeuvre in the Golden Straitjacket is by growing it, and the only way to grow it is by keeping it on tight. That’s its one virtue: the tighter you wear it, the more gold it produces and the more padding you can then put into it for your society.” Of course, this prescription had disastrous results in the case of the global financial crisis in 2009 and the Asian financial crisis in 1997.
[xii] Ironically, the deals surrounding the controversial NationalBroadband Network (NBN) deal in 2007, as revealed by a series of Senate hearings, seems to exemplify all the elements of a “gangster government” – illicit deals, threats to competitor and demands for them to “back off”, technocrats forced to “moderate the greed”, Beijing connection, bribes involving sexual services, among many other things.
[xiii] DTI-BOI has since called the initiative the “Comprehensive National Industrial Strategy (CNIS)”. More information can be found here:
[xiv] The study was conducted by Christopher Mills, as mentioned in an article by Richard Mills (Asia CEO Chairperson) in a Business Mirror article “ThePhilippine economy may have overshot its largest companies” last May 13, 2016. Christopher Mills computed the correlation at 0.95 (1.0 points to perfect correlation). Mills, however, reported an increasing divergence in the past few years – with the pace of economic growth outpacing conglomerate revenues. He concluded that economic growth is largely supported by electoral spending, and we can expect it to show decreasing trends in the next few months, since it is expected to follow closely the decreasing trends in conglomerate revenues.
[xv] We can see at least three possible scenarios: 1) GDP growth in general helps these conglomerates grow (in terms of affecting product or service demand), 2) growth of these conglomerates dictate the pace of the GDP (since these conglomerates are responsible for the huge bulk of production and consumption in the country), 3) a third factor – it can be institutional, exogenous, technological, etc. – is affecting the growth of both.

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