Wednesday, September 07, 2005

Stability and the take-off

Earlier I referred to the outward-oriented policies in the East Asian high performers as a key ingredient of their take-off. The Philippines has made considerable headway in reforming its trade policy towards an open economy. It has also implemented numerous other reforms, such as privatization (utiities, financial institutions, etc.) and deregulation (telecommunications, oil industry, domestic air travel, etc.) Where is the "reform dividend"? Why hasn't the country grown faster?

The usual answers:

  1. Reform hasn't been deep and credible enough.

  2. Policies have not been conducive to macroeconomic stability and high domestic savings.

  3. Investment in infrastructure and human capital (education) has been insufficient and misdirected.

  4. Political stability has eluded the state.

  5. Institutions remain weak and vulnerable to entrenched economic interests and conflicting political forces.

Note that the fifth element is interrelated with the preceding ones. Tonight though I'd like to talk about the fourth factor.

We know by now the latest in the President of the Philippines' impeachment saga: the impeachment complaint has been thrown out by Congress. The motley crowd of impatient rallyists - including a former President, the widow of a demised Presidential candidate, assorted Leftists, and various holdover politicos from previous administrations - are taking to the streets. Invoking the "will of the people", they threaten to subvert the Constitutional process and force the President's ouster. (Ever notice that more crimes have been committed in the name of the people, than in any other name, except God? Now I know why they say, vox populi, vox Dei!)

I have nothing against people exercising free speech and saying the President should quit and so forth. However hinting of a forcible ejection of the occupant of Malacanang by a big enough mob - that is an entirely different matter. But that is precisely what the rhetoric of people power is suggesting.

There is evidence linking political stability to higher growth. The effect is typically through investment; investors may be unwilling to invest if they find policies and even property rights to be fragile, either due to a possible change in government, or due to actions by a government under threat of collapse. Barro (1991) conducted a cross-country regression and found that measures of political stability are positively related with growth rates. Brunetti (1997) showed that policy volatility and subjective perceptions were the most important among the political factors influencing cross-country growth rates. Commeau (2003) compares Latin America and East Asia and finds that growth in the former may have been retarded by sociopolitical instability; in turn instability was affected by adoption of policies that control inflation, foreign debt, and promote economic freedom. The case of Burundi (a country in Africa) shows that a country which has pursued significant trade policy reform may still fail to reap a growth dividend, without sustained sociopolitical stability (Milner, 2004).

Perhaps the President is guilty; however unless there's better evidence, the complaints - 1, 2, or 3 - are too weak to nail her. An illegal wiretap, which represents an explosive threat to civil liberties of every Filipino, cannot be the basis of removing her. There is one year in between, which may be the opportunity to gather more convincing evidence. And then file another complaint, which will have a better chance of going through Congress and thence an impeachment trial in the Senate. This is all part of the constitutional process and I daresay is not inimical to political stability (unlike the people power option).

Ideal? Yes, but then the "people" did say an overwhelming Yes to a Constitution in 1987. This is the true "will of the people."

I think Tolstoy said it best in the title of his famous story. "God Sees the Truth, but Waits."


Barro, R. 1991. Economic Growth in a Cross Section of Countries. Quarterly Journal of Economics 106(2): 407-443.

Brunetti, A. 1997. Political Variables in Cross-Country Growth Analysis. Journal of Economic Surveys 11(2):163-190.

Comeau, L. 2003. The Political Economy of Growth in Latin America and East Asia: Some Empirical Evidence. Contemporary Economic Policy 21(4):476-489.

Milner, C. 2004. Trade Policy in Burundi: Reform Without Stability. The World Economy 27 (9), 1363-1376.


Anonymous said...

I agree this whole People Power thing is starting to get out of hand. In the end, government change by "People Power" does not measure a country's democratization since we only know the sentiments of a handful of people. Plus, it weakens institutions and the rule of law.

Econblogger said...

It is undesirable to offer legitimacy to a government that has utterly failed in its mission. However utter failure should be distinguished from instances of incompetence and venality, which simply shows that the system is imperfect. (What's new?) Hence "people power" should be rare and the perception of illegitimacy overwhelming. Otherwise people power simply becomes just another element of a defective system of governance!