Inclusive economic and political institutions Part 1

Published September 13, 2022, 5:54 AM by Dr. Bernardo M. Villegas

Part 1

In a series of articles that appeared in this paper, I postulated that between 2040 and 2050, the Philippines will attain a per capita income of over $12,000 which in today’s prices according to the World Bank will entitle us to be considered a “high-income” economy, the last step after going through low-income, low-middle income and upper-middle income (which we are supposed to attain in the next two to three years when our per capita income crosses approximately $4,000). Can we assume that once we reach high-income status we can already expect to be considered a First World economy? This is whereas a typical economist, I have to hedge my bet. The answer will depend on whether or not, as our per capita income rises, we are able to establish more and more inclusive economic and political institutions.

I have observed that until very recently, South Korea was always in the list of emerging markets and only in the last two or three years was this highly industrialized country that exceeded $20,000 of per capita income more than a decade ago admitted into the Organization for Economic Co-operation and Developmenth(OECD) of the advanced countries. I am theorizing that South Korea reached very high levels of per capita income through a great concentration of economic power and wealth in what they called a “chaebol” economy. Although when compared to its neighbor, North Korea, it has far more inclusive economic institutions that “allow and encourage participation by the great mass of people in economic activities that make best use of their talents and skills and that enable individuals to make the choices they wish” (from Why Nations Fail by Daron Acemoglu and James Robinson), South Korea had for a long time been ruled by dictatorial leaders that delayed the building up of inclusive political institutions.

This political handicap to becoming a First World country was even more obvious in a number of Latin American countries like Argentina, Venezuela, Mexico and Brazil. These countries became upper-middle income countries more than a decade ago but have been caught in a middle-income trap because of lack of inclusive economic and political institutions. Although the U.S. economy is not perfect from the standpoint of inclusiveness (both economically and politically), it is far superior to its Latin American counterparts. As Acemoglu and Robinson wrote in their book, inclusive economic institutions foster economic activity, productivity growth, and economic prosperity. If private property rights are protected, then those with such rights will be willing to invest and increase the productivity of their properties. It stands to reason that a business man who frets that his production will be stolen, expropriated or entirely taxed away will have little incentive to work, let alone make any investments in new ventures. To attain economic prosperity, a society must give such rights to at least most, if not all its citizens.In a number of Latin American countries in which gross mismanagement of the macroeconomy led to inflation rates that could go as high as 1,000% or more annually, the irresponsible governments literally stole money from the private citizens whose hard-earned assets lost practically all their value in an instant. We can be grateful that at least in the last thirty years or so, we have enjoyed relative price stability, thanks to a Central Banks system whose management has been systematically ranked as one of the best in Asia. Our last Governor of the Central Bank, now the Secretary of Finance Benjamin Diokno, was named as the Best Central Bank Governor in the world by an international organization.

According to Acemoglu and Robinson, inclusive economic institutions also pave the way for two other engines of prosperity: technology and education. All countries that have managed to become First World have experienced sustained economic growth almost always accompanied by technological improvements that enable the human resources (labor), land, and capital (buildings, machines, infrastructures, etc.) to be more productive. One of the greatest economists in my book is Joseph A.Schumpeter who coined the word “entrepreneur” to designate the prime mover in the process of economic development. The entrepreneur is the one who introduces innovations that improve the productivity of the factors of production. It is encouraging to note that President Marcos Jr. is giving the highest value to the advice being given him by some of the most successful entrepreneurs in the country.

Technology, however, will have limited value without a high level of education, skills, competencies and know-how of the workforce, acquired at home, in school or on the job. All the technology of the world would be useless without workers who know how to operate it. Beyond technical skills to run machines, it is the know-how and education of the workforce that generate the scientific knowledge upon which economic progress is built and that enable the continuing adaption and adoption of technologies in the various areas of business. In the modern economy of today, technological change requires education both for the innovator and the worker. Despite the imperfections of the political system in the United States, it still has the best working model of a market economy that can produce, or attract from foreign lands the likes of Bill Gates, Steve Jobs, Sergey Brin, Larry Page, Jeff Bezos, and the hundreds of scientists who made path-breaking discoveries in information technology, nuclear power, biotech, and other fields in which entrepreneurs build their businesses. The supply of talent exists in the U.S. because most American teenagers have access to as much schooling as they wish or are capable of attaining.

It is unfortunate, however, that our youth are not getting the quality of education that is required for sustainable economic development in an increasing technologically demanding work environment. What can be done in the next five years or so to make sure that whatever low quality output our educational and other human resource development institutions can produce in the intermediate term can still enable the country to transition from an upper-middle income to a high-income economy with a per capita income of more than $12,000. This is where we can bring in what Max Weber, the German sociologist, referred to as the “monopoly of legitimate violence.” Here he is referring to the indispensable role played by the State in sustainable and equitable development. As Acemuglo and Robinson wrote, “Without such a monopoly and the degree of centralization that it entails, the state cannot play its role as enforcer of law and order, let along provide public services and encourage and regulate economic activity.” Here, we are reminded that the two indispensable institutions in society are the family and the State. They proceed from the nature of human beings. All other human institutions are dispensable.

That is why, we should expect the present Administration, despite lingering fears that President Marcos Jr. may turn out to be an authoritarian ruler like his father, to exercise the “monopoly of legitimate violence,” i.e. to exercise enough authority to resolve the many conflicts that arise in any society. Again, to quote Acemoglu and Robinson, “When the State fails to achieve almost any political centralization, society sooner or later descends into chaos…” It is in this light that I appreciate his decision to take over the post of Secretary of Agriculture. There is a great deal of central decision making that is required to address the underdevelopment of that sector. There are at least three departments whose functions have to be coordinated to address the long-standing backwardness of our agricultural sector, especially as compared with those of our ASEAN neighbors like Thailand, Vietnam and Malaysia. In an analogous way, the Department of Education has a lot to do with the Department of Labor and the Department of Migrant Workers. Some centralization of power in the hands of the Vice-President who is concurrently Secretary of Education may lead to a better coordination of the way Philippine society educates and deploys its human resources.

There must, however, be a way that we can prevent the centralization of power from spawning extractive political institutions. There is strong synergy between economic and political institutions. Following the analysis of Acemoglu and Robinson, extractive political institutions tend to concentrate power in the hands of a narrow elite and place few constraints on the exercise of this power. There is always a danger that this elite will structure economic institutions in such a way as to unfairly extract resources from the rest of society. This is where the very concept of good governance comes in. We must constantly strive to achieve good governance in the public sector. To be continued.