Executive Director's Corner

Why institutions are key to inclusive growth

Posted on September 22, 2014 09:43:00 PM

Why institutions are key to inclusive growth


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M.A.P. Insights
Rolando T. Dy

WHY are some countries successful in giving their people better lives while others are not? Why are there different levels of poverty in Southeast Asia?
We will try to answer this strategic question.

M.A.P. Insights — Cliff M. Eala: “Level up by powering down”

This subject finds importance in the fact that, officially, some 25 million Filipinos are poor — and worse, over half of Filipinos consider themselves poor.

The main determinant of differences in prosperity across countries is differences in economic institutions, according to Daron Acemoglu and James Robinson (2010) in an article in the Review of Economics and Institutionsbased in Italy. Their analysis reveals the challenges for those who would wish to solve the problem of development and poverty. Some countries do undergo political transitions, reform their institutions, and move on to more successful paths of economic development.

Douglass North and Robert Fogel, 1993 Nobel Prize winners in economics, define institutions as “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.” Institutions and the technology employed determine the transaction costs that add up to production costs of goods and services. Institutions form the incentive structure of a society and the political and economic institutions. Thus, they are the underlying determinant of economic performance.

Transpose that to the Philippines. Let me discuss some concerns.

Is the 1987 Philippine Constitution, developed by 48 learned persons, pro-growth and development? Perhaps yes. However, the Charter itself has brought the seeds of “anti-development.”

First, the three-year term of local officials has caused a cycle of learning the ropes, doing the job, and campaigning for the next election. It has undermined the role of management continuity of programs and projects, and infected the psyche of the nation. Every election could mean change in focus, programs and people.

Second, the term limits have become the catalyst for family dynasties. I can recall in earlier days when the governor or mayor dies in office and thus few family members joined politics. Dynasties, with few exceptions, feed on long-term continuity and affect the democratic process.

Third, limiting ownership of many sectors to Filipinos has left the nation with few choices. With limited competition, the choices of most Filipinos have been narrowed in media, education and utilities. Who will be really affected if the investment sector is liberalized? The people or the elite?

The ill governance of rural development has caused “underdevelopment.” The Local Government Code empowering barangays and local governments is good. But it has discouraged private investors by their onerous taxing and rent-seeking. It has caused organizational disjoints in agriculture extension systems, making the country’s agriculture productivity among the lowest in the ASEAN.

Within regulatory bodies, the agencies are loaded with legal professionals, and fewer economists and management experts, leading to decisions of inadequate economic-impact analysis. Examples were the MWSS reversal on water rates, and the endless investigations on NAIA Terminal 3. The academic experts speak about “elite capture” among some agencies. Elite capture means strong influence of select groups in policy-making for economic gains.

The Philippine bureaucracy is riddled with political appointments and never-ending changes in management styles and emphases. Career paths are limited and thus discourage new blood. Promotions to director and higher levels often need padrinos. In the end, it is the people that suffers in slow decision-making and, for some, misguided decisions. Equally important is professionalizing the local government bureaucracy which is often ignored and treated trivially. As one senior official opined, the national bureaucracy is useless without competent local counterparts.

On the other hand, there appears to be little resonance on the need for responsive management structure. Look at the Department of Agriculture (DA). For many years, experts have called for a separate Department of Fisheries to focus on the two million square kilometers of waters as compared to 300,000 square kilometers of land. A separate department would fast-track the development of the sector and reduce the poverty of some 1.5 million small fisherfolk. The usual reply: no need to create another organization.

Recently, when Secretary Francis Pangilinan was appointed to manage three large organizations — the National Food Authority, the National Irrigation Administration, and the Philippine Coconut Authority — the media opined that it is splitting the DA.

In Indonesia and Chile, there are separate Ministries of Fisheries to manage their large bodies of waters. In Malaysia, there are a Ministry of Agriculture and Agro-based Industry, a Ministry of Plantation Industries and Commodities, and a Ministry of Rural and Regional Development, with the latter overseeing the Rubber Industry Smallholder Development Authority and the Federal Land Consolidation and Rehabilitation Authority.

We have to get real.

The conversion of the Philippine Coconut Authority to a separate department for coconut and other tree crops (coffee, cacao, rubber, oil palm) is worth considering. The DA can concentrate on rice, corn and short-term crops. Another department can cover fisheries and aquaculture. At the very least, a Department of Fisheries would be needed to move out of the current maze.

Management experts must be deployed to determine the manageable sizes of departments. Certainly, the DA is just too big for its multiple development missions.

Why are countries more developed than others? Look at their institutions. Look at how they develop their long-term visions, strategy and key result areas. Look at how they professionalize their organizations. Look at their sound project selection criteria. Look at their practice of consulting foreign and local experts in strategic analytics and policies.

Institutions are important. Institutions drive development. They are critical for growth and equity and, to use the current buzz word, for inclusive growth.

Rolando T. Dy is the chair of the MAP Agribusiness and Countryside Development Committee, and the executive director of the Center for Food and AgriBusiness of the University of Asia & he Pacific.