The bankruptcy of the "alternative development" paradigm: an outline

I've always wanted to write a definitive essay refuting the "alternative" development paradigm adopted by leftwing intellectuals and pseudo-economists. But I seldom write long essays for fun, mainly because they aren't. And this kind of paper cannot possibly have an original bone in its body. So I haven't gone beyond the outlining stage, as follows:

• Thesis

The axis of evil: fascism, feudalism, capitalism. Global capitalism as imperialism. The faces of domestic oligarchy. Alternatives: protection, nationalization, expropriation, industrialization.

• Antithesis

The critical dichotomy: exchange relations and property relations. Booty capitalism and transformative capitalism. Pitfalls of the alternative strategy.

• Synthesis

Transformative capitalism. Equity as a necessity. Conclusion: the grave irony.

The transformation of Negros

Last month I visited Negros island, in West-Central Philippines, the country's "sugar bowl". The west part especially (Negros Occidental) is covered with vast sugarcane areas, previously organized into haciendas, large estates under one landowner. Here enormously rich hacenderos accumulated enormous wealth, while poor resident workers lived on their vast estates. These workers grew to depend on the hacendero for their daily needs, depending on the vale (cash advance) for medical emergencies and other consumption needs. Sometimes the workers formed communities (complete with church and school) right on the hacienda. Meanwhile the hacendero class grew to wield great political power, entrenched itself at the forefront of the traditional elite of the country. It was a textbook example of modern-day feudalism, alive and kicking in the developing world.

In 1988, the Philippines embarked on its last and most extensive program of land reform, the Comprehensive Agrarian Reform Program (CARP). The CARP implements a law imposing a five hectare limit to total agricultural landholdings, with the excess to be distributed - with compensation - to tenants and other qualified beneficiaries. Unlike previous programs, the CARP would cover everything - including the hitherto untouchable haciendas.

The modern feudal lords have battled the redistribution program. Negros Occidental, which has the country's largest potential area for land reform (over 280,000 ha), has the lowest redistribution accomplishment (about 55%). Yet land reform has gone farther than most had expected in the late 1980s, forever transforming the face of the Negros countryside.

Not always for the better. First, land reform prohibits the transfer of land from beneficiaries to other parties (except by inheritance), for ten years after award of the land. In the medium term this has taken land away from enterprises with access to working capital (the haciendas) to enterprises without such access (the beneficiaries' farms). Sugarcane yields have reportedly dropped, as ideal input intensity cannot be achieved in the beneficiaries' farms. Second, the miscellaneous consumption financing offered by traditional sugarcane landlords did serve a useful function - which is completely disabled by land redistribution. Post-feudal forms of finance (i.e. the commercial banking system) has so far failed to deliver adequate financing to the new class of landowners.

But has land reform been a complete catastrophe? Far from it. Sugarcane yields do not seem to have seriously suffered owing to land reform. Check out the following graph, which shows the average yield in tons of cane per ha per year in the Philippines. Despite all the problems, somehow the sugarcane industry, post-CARP, is still doing well. That means the new landowners are probably enjoying a higher standard of living than without the program – they receive the profits from the land, rather than just wages. I am getting much of this information from my land markets study, a sub-component of a bigger study assessing the impact of agrarian reform in the Philippines. I can confirm that many of the new landowners do lease out their lands to big sugarcane planters, and end up earning wages from the leased out land. Despite the apparent irony of the situation, it is clear that they are better off than before the program, because they receive lease rental in addition to wage. Furthermore, most who practice this do not in fact lease out all their land, and seldom is this practiced on a permanent basis.

So are the sugarcane workers better off with than without the Program? I wouldn’t know the answer to that – yet. But I do know that a lot of distortions is poisoning the discussion about the future of land reform. The last thing this country needs is policymaking by hyperbole.

The importance of a good analogy

When I was a college student (even in economics!!!) I took it for granted that industrialization is the key to development. Agriculture is backward and plays no role in development, except to give up its workers for manufacturing (and thereby shrink). What a shame if we can't produce our own hammers, screwdrivers, cars, computers, and all that marvellous stuff made in those big macho factories.

Now as a professional economist I find myself arguing otherwise: in most cases, development of agriculture is a prerequisite to industrialization. What changed my mind? A lot of research, thinking, and exposure to data. Lots of data.

And a good analogy. Some analogies have become abused and have led to catastrophic policies. Like the Big Push and the Take-off, or the analogy between national power and economic power.

One good analogy is "flying geese." Succinct and accurate. A better analogy (and perhaps the best): the "ladder" of development. What better way to encapsulate the idea of accumulating physical and human capital and know-how? How else to demonstrate the folly of getting to the top without passing through the rungs in between? So is economic development. You don't get there by making cars and buses and computers at once, and all by your lonesome (without those pesky foreign investors, who are sooooooooo demanding about your roads and bridges and power supply and sticking to your policies and...)

The first step up involves: rice, corn, coconut, chromium, and all that unsexy stuff. But then this allows a country to accumulate wealth and know-how, and climb up. At the end of the ladder: cellphones, MP3 players, medical instruments, even smart missiles, passenger jets, and sattelites. And last, but not the least, the end of poverty. One rung at a time.

Less is more

Here is a column by Federico Pascual from the Philippine Star, about fisheries in the Philippines. Since the Star is not known for permalinking, let me reproduce the column below in full (except for those pesky asterisks).

Full disclosure: I have just written a policy paper on fisheries in the Philippines, for the Economic Policy Reform and Advocacy Project of Ateneo de Manila and the USAID. Plenty of what I've written disagrees with the column. (When I have time I'll revamp my personal site and upload that paper.)

First, a few minor points: The writer blames the depletion of fish resources on "lazy Filipino fisherman." So it's possible to overfish while being lazy? That sounds fishy. The truth is a fisherman's life has usually been hard, because they are competing with other fishers to catch the limited fish. Therein lies the abuse of fish stocks, that is by no means unique, either to Filipino fishers, lazy fishers, or diligent fishers. Also: the net method is limited to small tunas. The large tunas - which is the bulk of tuna catch in the country - are caught by handline (fishing reel and rod) or longline (a long fishing line with a series of hooks).

Okay moving on to something more substantive: market-wise, isn't aquaculture obviously a threat to capture fisheries? This seems to have been completely missed by the writer. Farmed fish and wild-caught fish are substitutes. Now if fishers are able to switch to fish farming, then aquaculture would simply be a continuation (or even improvement) of their livelihoods. In practice though the skills for fishing and for fish farming are very different; one is neither a necessary not a sufficient preparation for the other.

Is fish marketing dominated by powerful traders dictating the price? A study by the ADB suggests that, contrary to this knee jerk opinion (the typical newspaper columnist sees monopoly power always and everywhere), fish trading is a competitive market.

Finally we get to the main point of the article, which has been provoked by a recent rationalization plan (which I have read) for the Department of Agriculture (DA). The plan calls for streamlining the DA bureaucracy as a whole (not specific to the fisheries bureau). That is, the principle is getting the DA out of private sector functions and local government functions. Now in the Philippines, fisheries management of inshore waters (0 - 15 km from the shore) has been delegated to local governments. Furthermore agricultural extension - including for aquaculture - has similarly been devolved. The rationalization simply calls for a structure more consistent with these realities. Moreover the DA will be renamed the Department of Agriculture and Fisheries, the more to emphasize the parity between crops/livestock and fish in the various functions of the reorganized Department.

The writer belongs to the all-too-common school of thought, that "more government" is the answer to every problem. Consider this telling quote: "The way to do it is certainly not to shrink BFAR. On the contrary, we should expand it and assign it food and industry targets commensurate to its upgraded status." Man oh man does that make me wince. Unfortunately this perspective misses the fact that government is often part of the problem. One of the best things that could happen to a society is breaking this culture of control.

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Upgrade fisheries bureau to dep't, not downgrade it

BIG JOB AHEAD: Instead of downgrading the Bureau of Fisheries and Aquatic Resources (BFAR) as planned by supposed experts at the agriculture department, the administration should upgrade it into a full-fledged department.

Humanity having despoiled the land, the future of the world’s food supply is the sea. There lie in our waters untapped resources that far exceed the food (among other) requirements of the growing population.

Surrounded by one of the world’s richest marine food banks, and with a rice-and-fish-eating population facing a coastline twice as long as that of the United States, we cannot overemphasize the need to conserve and develop our fisheries and aquatic resources.

The way to do it is certainly not to shrink BFAR. On the contrary, we should expand it and assign it food and industry targets commensurate to its upgraded status.

The Arroyo administration may want to have the distinction of having originated a two-pronged approach to the stubborn food problem -- agriculture (land-based) and aquaculture (water-based).

AQUA VERSION: In agriculture -- as in farming -- we prepare the soil, plant, tend to the crops, wait, then harvest. That takes time, and time is not always an element that we can compress.

Out there in the open sea (at least in those areas still teeming with fish), our fishermen simply go out, throw their nets and pull in the fish. No planting, no waiting.

The simplicity of the operation is probably one of the reasons why many lazy Filipino fishermen had taken the sea for granted and abused it. Now the children of these misguided fishers have to sail out farther to catch anything.

Aquaculture is akin to agriculture in at least one sense: We also prepare a fish farm or aquatic site, choose the seedlings, plant, wait and harvest the fish (or such crustaceans as crabs and shrimps or some shellfish) after caring for them over a certain period.

The fish (used here as a generic term to include crabs, shrimps, shellfish and the like) are taken care of or cultured in man-made cages, pens or ponds or some other controlled enclosure.

The fish farmer operates in a controlled environment that more or less ensures predictable results -- provided no extraneous elements such as pest, poisoning, or such weather disturbances as typhoons wreck the plans.

RIVERS OF TUNA: The case of tuna fishermen is one good argument for giving our fisheries industry the attention and assistance it deserves.

Countless tuna swim together like a giant current, like a surging river, in known paths or patterns in the open sea. Their number is so great it defies counting.

It so happens that that great river of tuna passes right through our territorial waters! Allah is good, indeed!

Our fishermen know where these rivers of tuna pass in an endless current. If properly-equipped, all that our fishermen have to do is go to the site, throw their nets across the passing tuna and haul in as much as their boats can carry.

These fishermen do not have to plant and wait -- like farmers -- before they can harvest to their satisfaction.

But this Pinoy operation is almost primitive from the point of view of modern-day deep-sea fishing. For one, while our fishermen know the sea intimately, they are handicapped by their lack of adequate vessels, gear and marketing network.

A full-time fully-empowered aquaculture department can do wonders in making our fishermen fishers for the region and beyond.

PUEDE NA?: Inland, where we have lakes, rivers and impoundments, we have scattered family-owned farms that raise hito, tilapia, crabs, shrimps and other common species sold in wet markets and served in restaurants.

On their own, they may be “puede na” with their small-scale operation, but there is a dearth of research and development and state assistance that could enable them to improve techniques, increase yield and boost their income.

These small operators do not get the assistance and protection they deserve as contributors to the national food supply. This is just talking from an inward perspective, not yet dreaming of having these producers grow into exporters.

They cannot go into research as there is no time or money for that. Many of them just ask around, attend seminars and generally play it by ear. There should be a better organized government effort to reach out to them so they could become more productive.

LAKE PENS : In Laguna de Bay, the biggest lake in the country and the closest to the national capital, a confusion of fishpens and corrals is choking it.

Small fishermen whose families have depended for generations on the lake for their livelihood have found themselves shunted away from their traditional grounds.

Efforts to remove illegal and improperly built or located fishpens have failed, because some operators are too powerful to be touched.

I do not know if this is still true, but there was a time when even presidential guards were being used by some people close to Malacanang to guard their fishpens.

Environment and Natural Resources Secretary Angelo Reyes said days ago he was serious about restoring sanity to the lake, meaning he would remove pens that should not be there. But until we see results, we should treat that as just one of those plans.

LESSONS LEARNED: As in agriculture where most farmers do not have the means to take their produce to the market, small fish farm operators have to depend on middlemen to buy their catch at prices that the merchants dictate.

This is not to say that the government should usurp the role of private middlemen, but there should be some way to enable small operators to develop a marketing network of their own.

A full-blown aquaculture department will be in a better position to devise ways to give small operators access to easy credit, better seedlings (fry), better techniques. A department can help them work out a more efficient marketing scheme.

A new aquaculture department can learn many parallel lessons from the agriculture department under which it now functions.

VILLAFUERTE OBJECTS: In Congress, Camarines Sur Rep. Luis Villafuerte, chairman of the House committee on fisheries and aquaculture, has rejected the plan to downgrade the BFAR, calling the idea “ill-considered and foolish.”

“Our sense is that diminishing BFAR would be highly counterproductive,” the Bicol congressman said. “We may in fact have to eventually upgrade the agency and establish a new, full-grown department dedicated entirely to developing fisheries.”

He added: “Being an archipelago, fishing and allied industries are of strategic importance to the national economy. By our geographical nature, thousands of coastal communities also subsist daily on our marine resources.”

“In fact, in terms of value, fisheries now account for almost 25 percent of our total agricultural output. And going forward, we are counting on the sector to further enlarge its share (of gross agricultural yield).”

Data from the Bureau of Agricultural Statistics indicate that the country’s fisheries production grew rapidly from just 2.6 million metric tons in 1998 to over four million MT in 2005.

BFAR UNITS: Villafuerte pointed out that less and less land is becoming available for farming. “Thus, we really have no choice but to increasingly rely on fisheries and aquatic resources to produce adequate food supply, fight hunger and ease poverty.”

The agriculture department earlier disclosed a plan to lower BFAR from a line to a mere staff bureau, and to transfer its regulatory services to a new, smaller office. Its field offices, now self-operating, would be put directly under DA regional directors.

The Fisheries Code, also known as RA 8850, upgraded BFAR from a staff to a line bureau in 1998.

At present, BFAR also oversees the Fisheries Technology Center, National Freshwater Fisheries Technology Center, National Inland Fisheries Technology Center, National Marine Fisheries Development Center, National Integrated Fisheries Technology and Development Center, National Seaweed Technology and Development Center, Fisheries Biological Center and the Mindanao Freshwater Technology Center.

Collapse - of economic logic

There's another collapse going on - in economic policymaking of the Philippine government. Under the watch of a Ph.D. economist, no less.

For decades the Philippines had pursued a regime of "financial repression" involving interest rate ceilings, mandatory lending for private banks, and direct lending by government. In the mid-1980s this regime went on a phase-out. One of the last nails on the coffin was Executive Order 138, which prohibited direct lending by government agencies. The main credit intervention of the government (aside from Central Bank regulation) is now relegated to government financial institutions, such as the Land Bank and the Development Bank of the Philippines.

The advantage of such institutions is that they are specialized financial intermediation companies, whose objective is the bottom line - maximizing net present value. Of course that objective is undermined by the "soft budget constraint" i.e. they have the implicit fallback on government subsidy; moreover they receive preferential treatment (for example, the Land Bank is the official government fund depository). This arrangement though remains vastly superior to having the Department of Agriculture dishing out loans to farmers. For the latter, there is essentially no mechanism for accountability should financial disaster happen. And it has happened, as this columnn discusses.

Now the President has repealed the prohibition, opening the floodgates to direct lending by government agencies. Where is the logic, nay the sanity of this?

Dynamic ambitions

A common criticism of the State of the Nation Address (see previous post) is that there was little detail on how the grand public investment plan was going to be funded. This criticism is ill-founded. It was already a long speech, without all those financing details (which could get bloody).

Furthermore, thinking about financing when formulating a strategy is bad planning. Strategy is all about ambition ("vision" is the MBA-speak these days). While I don't recommend throwing reality entirely out of the window, it's healthy to be optimistic about the possibility of relaxing constraints.

So the first question is: are these projects worthwhile? If the answer is yes, only then does one ask: how am I going to pay for it? Because once you have reasonable expectations of value for money, then you can go and persuade someone to give you the money. In the context of government, that's either borrowing, or exacting tax revenue.

In evaluating a public investment plan, the level of analysis is important. It is easy to get mired in a micro, case-by-case evaluation. It may be that a project in isolation yields smaller benefits than a bunch of projects together making up a coherent development strategy. The reason is that there may be "dynamic externalities"; this is just fancy way of saying that in the long run a critical mass of the right investments could deliver proportionately greater benefits than individual projects.

Rural development is an important example. Perhaps an irrigation project by itself can't hack the required social rate of return (say, 15%). But what if it's part of a grand strategy of agricultural development? Suppose a widespread boost in agricultural incomes dramatically improves human capital formation - which investment did not take place previously because of poverty and various institutional failures. The human capital then becomes the base of a sustained industrialization drive. (If you think I'm dreaming, think "East Asian miracle.")

A similar issue is related to city formation. The interesting thing about a city are the so-called "agglomeration economies" - there must be some value in many producers and consumers all bunched up in a small space. That value seems obvious - proximity makes transactions easier for everyone - but on second thought it's not so obvious: because the "everyone" had to be there in the first place! ( Consider the problem of building a city in the middle of nowhere - there is little value in just one person making the move; some type of coordination is definitely required.) Once the critical mass of producers and consumers are clustered, then dynamic agglomeration economies take over, and we get increasing urbanization (economic growth) over time.

So how do you get that critical mass for a "take-off"? Some private sector developer consortium might do it. So could government. Rather than twiddling thumbs waiting for the market, why not support the ambitious State?

Zona

The State of the Nation (SONA) address of the President of the Philippines yesterday was long on specifics and short on generalities. (Full text of the speech is here, sans the Powerpoint.) What it could have used was a bit more abstraction on this "mega-region" approach to public investment. As it is, it came off more like a sound-bite to organize the existing Medium Term Public Investment Plan (download here, large file).

The mega-regions are: Northern Philippines, Metro-Luzon (that is, Greater Manila), Central Philippines (Visayas), and Southern Philippines (Mindanao). The North and South specialize in agribusiness, Central in tourism, and Metro-Luzon in industry and services. (There is a fifth, the "cyber-corridor" cutting across regions. But that detracts from our story). Regional specialization is not of course exclusive (there is plenty of manufacturing in Central and South Philippines, and tourism in Metro-Luzon), but for planning purposes the designation identifies the geographic targeting of public investment. The idea is that each region has its competitive edge, which requires further strengthening through infrastructure support. The enabling environment for private enterprise would stoke economic growth in the long term.

I would have liked to hear more about agricultural development from that speech, but if everyone's baby was in there she would have talked the whole day. The approach is essentially sound - question is if the President's political base remains sufficiently resilient to push these projects through. Her last budget proposal already tanked in the Senate, without all these mega-projects.

Oh, one more thing: she mentioned some startling tidbits like:

"Even before this, Metro Manila firms paying bribes for public contracts declined from 57% in 2003 to 46% today. Congratulations, Metro Manila."

Also:

"Helping our infrastructure upgrading, is the fall in bribery for public sector contracts in Metro Cebu, from 62% of companies in 2004 to 47 today. Congratulations to Cardinal Vidal for shepherding his flock and to Metro Cebu Mayors Osmena, Ouano and Fernandez, and Metro Cebu representatives del Mar, Cuenco, Gullas and Soon-Ruiz."

So previously nearly 3 of five public contracts required bribery; now it down to a tad less than one out of two.

Speaking about the glass being half-full...

Where coffee first addicted man

Due to insistent public demand (?), I am taking time to post about my host country here.

Ethiopia is known for many things. It is the birthplace of coffee, as well as possibly the birthplace of humanity. Lucy is here in Addis Ababa. Ethiopia has been free of colonial rule, except for a brief occupation by Italy under Mussolini.

Unfortunately Ethiopia is also known for its poverty. It is the second biggest in Africa in terms of population (75 million), but is one of the poorest countries in the world. Life expectancy here is below 50 years.

Ethiopia also experimented with socialism when their last King Haile Selassie was deposed in 1974. However a successful uprising replaced it with a government more sympathetic to markets and free enterprise. However you can still see the iron hand of government intervention everywhere - exchange rates are tightly controlled, though I am told there is a flourishing black market. There remain many obstacles to open trade and business investment. The value-added tax rate is 15%.

As I walk the streets I have an impression, despite the large number of beggars and street children (not that Manila has already inured me to the sight), that economic activity is starting to pick up. If they can move more rapidly in terms of market reforms, it can be a great experiment to check whether a move away from a planned towards a market economy can make a big difference in terms of human development. Fingers crossed.

Into Africa

Don't be surprised if this blog shows little activity until the end of next week. I'll be off to Addis Ababa, Ethiopia, for a workshop organized by the Poverty and Economic Policy Network. Looking forward to it, as it is my first visit to Africa.

Presidential versus parliamentary system

Professor Winnie Monsod reviews the academic literature comparing the presidential with the parliamentary systems. Read them here and here. Conclusion: no clear evidence in favor of one or the other system, whether in terms of corruption or economic performance. Parliamentary systems though are more readily associated with structural reform, but also with greater government spending. Professor Monsod concludes that we avoid "indecent haste" in pursuing a shift in system.

When the data is ambiguous, we need to substitute intuition and experience for number-crunching. Look at the recent history of this country. After three People Powers, and nearly a fourth, shouldn't we rethink the idea of a fixed term for the President? Lay to rest the persistent calls for "snap elections" by (con/in)stitutionalizing the "snap election"?

Parliamentary systems are of course fraught with their own risk and sources of instability. It's no magic bullet. Nothing is. But perhaps it would, overall, hasten the pace of development. What do you think?

Population damnation

When Keynes wrote about slavery to the idea of some defunct economist, he may well have been referring to Malthus. The idea of population growth outstripping food supply has had a long life, retaining great vigor even in its advanced age.

In its modern version, the Malthusian idea is that population growth is driven by high fertility (and low mortality), eventually outstripping the carrying capacity of the environment and natural resources. Physical scarcity will eventually force a stable population outcome, while producing plenty of human misery by war, disease, and famine. (Ever watch Soylent Green?) The most oft-cited essay on modern Malthusianism has got to be "The Tragedy of the Commons" by Garret Hardin, published in Science. Hardin's argument is that the world is an open access resource ("commons"), and population growth forces an inexorable pressure upon it. Individually rational behavior from the growing population causes a depletion of global resources. Solutions offered - appeals to conscience in restraining demands on resources, or privatizing the commons - are all impractical. Hardin's recommendation? Do away with the idea that families have the fundamental human right to determine their own size. Implement population controls by "mutual coercion, mutually agreed upon."

Written as it was in 1968, the essay is now very seriously dated. What really happens when we allow households to determine their own size voluntarily? It depends. In wealthier nations, households tend to be smaller. In fact in many countries the fertility rate is below 2.0 (the absolute minimum for population replacement), hence without migration, these populations will shrink! These countries include: Canada, Japan, Korea, France, Germany, Greece, Norway, Portugal, Sweden, Spain, Italy, Singapore, Germany, and the United Kingdom. Why? A host of reasons - educated, working, socially assertive women, access to modern contraceptive technologies, all correlated with developing country status, are the key reasons. Growth to a developed country status would be the long term cure for overpopulation, averting the dire Malthus-Hardin prognostications.

In the medium term though, I don't deny that rapid population growth is itself a drag on per capita income growth. One reason may be through diminished household asset formation: the more children, the lower the savings (Orbeta, 2006) and the lower is schooling per child.

So there is an argument to providing incentives to limiting household size. Tax exemptions based on number of dependents have the perverse effect of encouraging larger household size (simply by lower the cost of bigger families.) Subsidies on contraceptives and information drives on their responsible use will also play a role. Now if your religion doesn't allow you to avail of these technologies, then of course you are not to be coerced. But neither should the state allow its population policies to be hijacked by the values of one or two religions, however widely held.

Technological change and the Almighty Corporation

John Kenneth Galbraith, recently deceased after a long and full life, was the most potent popularizer of the Almighty Corporation. Galbraith argued that the "new industrial state" is fundamentally a planned economy - driven not by decentralized competition, but consciously directed by a business oligarchy. A linchpin of his thinking was the manipulative power of advertising, which brought consumers in line with the planning objectives of the Almighty Corporations.

Now go sell this theory to Eastman Kodak. How the big bosses there wish this were true. Digital cameras? Make it disappear with a savvy advertising campaign. That will save the company's core business, now 125 years old - the manufacture of films, to catch those "precious moments".

From Galbraith's fantasies, let us look at the facts: Kodak has been in travails over the last five years. Its prospects for 2006 are negative (bad pun intended). Its only hope is that its recent transformation into a digital camera company would succeed - and fast, before skittish stockholders start dumping, big time.

Ahh, suddenly these all-powerful corporations look helpless against technological change. It all started when a couple of Bell Lab scientsts invented the Charge-Coupled Device (CCD), essentially an instrument for converting light into information. The rest is techno-history. Now the camera film industry is in a total meldown. How the Almighty have fallen!

When you walk around malls and supermarkets and convenience stores, take a good look at these camera films. Store your film cameras in a safe place. They'll be memories and museum pieces. Sooner than you think.

Experimenting with corruption

The Economist points to this great study, in terms of scientific approach and relevance to development. The paper (PDF) is mostly nontechnical (and is completely accessible to an economics major.) The study looks at road projects in Indonesia and compares actual expenditure with measured expenditure, working backward from the observed quality of the road. The difference between the two is the effect of corruption (pocketing project money that should have gone to purchasing materials and labor.) The experiment is made by introducing community-based monitoring and central government audit at random across the sample of projects, prior to the conduct of the projects.

It shows that - surprise! - officials respond to announcement of audit. This is observed within a corruption-prone society. More "modern" approaches, which relies on community-based monitoring, is found to be less effective, or effective only for controlling corruption with respect to labor purchases (which are observed by the community). Since only one-fourth of the road project is composed of labor, this is not very effective on controlling overall corruption.

Here's what you take home (from the author's conclusion):

By contrast, increasing grass-roots participation in monitoring the project affected only missing labor expenditures, with no impact on materials and, as a consequence, little impact overall. These results suggest that grass-roots monitoring may be more effective for government programs that provide private goods, such as subsidized food, education or medical care, where individual citizens have a personal stake in ensuring that the goods are delivered and that theft is minimized. For public goods where incentives to monitor are much weaker, such as the infrastructure projects studied here, the results suggest that using professional auditors may be much more effective. This does not mean that empowering community members to discipline service providers has no role in an anti-corruption approach. In fact, the results suggests that the audits were most effective when the village head was up for re-election, which suggests that local level accountability may be an important mechanism for disciplining public officials. However, the results suggest that grass-roots monitoring alone may not be sufficient, and that for detecting corruption professional monitors may also important. The results in this paper present the results from a short-run intervention. If auditors are bribable, over time villages may develop repeat relationships with auditors which may make bribing auditors easier than in the one-shot case examined here. This might suggest, for example, that frequent rotation of auditors – or lower probabilities of audits combined with higher punishments – may be optimal.

Singapore - after decades of liberal trade and investment

Okay so I'm stuck here in Singapore on an eight-hour wait for my connecting flight. An airport display informs you of the following factoids:

Did you know that Singapore makes:
1/3 of all hard disks?
1/3 of all hearing aids?
20% of all photoflash lamps?
Oil and gas equipment?

About 26% of GDP is accounted for by manufacturing, of which nearly 40% is in electronics, 26.4% is in chemicals, 17% in mechanical engineering, and 7.6% in biomedical products.

Of course we all know that Singapore is a global transport hub. One-third of the world's oil passes through Singapore; it has the 3rd largest oil refinery hub; it has 50% of the world market for fast ferries. It is the world's number 1 in shipbuilding repair, cornering 20% of the world market. Changi airport exemplifies this excellence: all cargo is cleared within 13 minutes; the airport has been voted best airport by "Business Traveller" for the last 17 years.

Was this achieved because the government closed off the economy to foreign investment and trade? You gotta be kidding. It's one of the freest economies in the world, next to Hong Kong. One of the beauties of the market is how it identifies export winners in such detailed niches that no planner or economic model could possibly foresee. Well okay, a world transport hub, maybe; but friggin' hearing aids? Photo flash lamps?

Okay lots of people are complaining about the repressive political environment. However what is important is total freedom - economic and political. Some countries have lots of political freedom but place plenty of economic restrictions. Time to realize that these restrictions fall within a continuum of repression. So before we say in the Philippines fault Singapore for this and that, tell me, how long does it take for you to register your real property in the Philippines, grease-free, in the Philippines?

Cultural attitudes towards science and pseudo-science

Answer first:

1. Which nationality is more likely to believe that astrology or fortune-telling is scientific? Chinese, South Koreans, Europeans, or Americans?

2. Which nationality is more likely to support public funding for science? Chinese, South Koreans, Europeans, or Americans?

3. Which nationality is more likely to say that science does more good than harm? Chinese, Europeans, or Americans?

Now peak at the answers here. And read the whole thing while you're at it.

Those silly Confucianists. (Crash!)

Disasters

Aside from faulty institutions, the country's economic growth continues to suffer from natural disasters. The recent landslide in Leyte - with massive loss of life and property - is the latest tragedy to command national and global attention.

In 2000 the Centre for Research and Epidemiology of Disasters named the Philippines as the world's most disaster prone country. A major contestant for this dubious disinction is Bangladesh, according to the UNDP (PDF).

There are some interesting statistics on economic loss from disasters (PDF file: bottom of page 1). The most destructive in these terms are the hurricanes hitting the US (Katrina and Rita) just last year, valued at 131 billion. Interestingly but unsurprisingly, economic loss is highest for the developed countries. However loss of life is certainly far greater in developing nations, which aside from having higher populations, tend to maintain population centers in disaster-prone areas, for which mitigating measures are scanty at best. When was the last time a typhoon passed in the country, however minor, without at least one death? These are typically households in makeshift shelters along riverbanks or coasts, who are ill-equipped to fend off floodwaters and heavy winds.

So once more poverty rears its ugly head. While economic growth can by no means prevent disasters, in the long run it can shift the cost from human lives to human commodities. However costly in numerical terms, this would be a very welcome development indeed.

Addendum on "rolling stores" as a poverty alleviation tool

Just a brief follow-up on an earlier post I had about those "rolling stores". The Provincial Welfare Officer in Eastern Samar mentioned that such a method fails to reach the poorest of the poor. Why? Because rolling stores will travel only up to villages where roads are passable with their big trailers. But the poorest dwell in remote villages where road access is difficult or absent. Oo nga naman. (Policy and program evaluation is 99.9% common sense, and 0.01% technical analysis.)

But note that even for these areas there are local stores which sell food patronized by the poor. By whatever means they are able to bring their wares (by mule or horse if necessary). A food stamp system would, unlike the rolling store, be able to reach the hinterland villagers through these intrepid entrepreneurs. There is indeed a better way.

Why booty capitalism thrives

Mel Ditangco tells about his father's experience in running a business in the Philippines:

My dad has been operating his business in the province of Tarlac for some decades now. I would say that he has achieved some degree of success. So much so he decided to expand his base of operations in the neighboring province of Pangasinan in Urdaneta city. However, he seems to be encountering institutional harassment from the police force over there. According to these law enforcers, my dad’s operations have violated certain laws as such will be shut down. As such, my dad would perform the necessary upgrades to his plant in Urdaneta.

However, recently the powers at be have run out of excuses for his plant to get cited for anything as my dad have spent millions of pesos in complying with all existing regulations. In the last raid by the authorities, they had no reason to find exception, but did so anyway and shut down the plant.

Competitors are controlling the NBI and local police force. It’s sad but it is reality. Is this the free market economy we enjoy today? Where a powerful family or company can shoot down its competition through influence. It is not the best companies that survive the Philippine market, rather the most treacherous survive, no matter how poor their services or products are.

Anecdotal, yes, but it drives home an obvious point: the more rules, the greater the cost of doing business, the wider the opportunity for vested interests to restrict competition. With limited competition, goods and services tend to be shoddier, and prices higher. The public at large is shafted; ironically because of the rules ostensibly imposed for the "public good". The reverse is true: the fewer rules, the more competitive the market; in general quality improves and prices are lower.

Is it really that simple? I do need to qualify that with ifs and buts. But booty capitalism in the country is so bad, such oversimplification is good.

Developing the fringes: Tawi-Tawi as a freeport zone

Tawi-Tawi sits at the southernmost tip of the Philippines, just a few hours away by fastcraft from Malaysia. Its Human Development Index is only 0.364, making it third lowest in the country. To give you an idea, that's below Malawi, Zambia, Congo, Mozambique, Burundi, and Ethiopia (but just ahead of Chad). To get there I had to fly from Manila to Zamboanga City, then take a jetprop to the province. The jetprop alone costs 3,200 pesos (about US$ 62.00) one-way. (Otherwise you need an overnight trip by fastcraft). (Photo source.)

Surely this remoteness has contributed to its lack of development. The province has many woes: electricity (delivered by desiel-fueled power barges) is said to be the most expensive in the country. Its fragmented landmass needs to be linked by a system of bridges. Water sources are few and hard to pump; given its island structure, saltwater intrusion can hardly be avoided.

However it has several things going for it. First, its remoteness from mainland Southern Philippines also means proximity to Borneo. If you walk through the typical Tawi-Tawi marketplace you will see plenty of Malaysian and Indonesian products. Tawi-Tawi was a traditional center of trade between Borneo and Southern Philippines. Before it was conducted on a barter basis (so was the common impression), but these days the transactions are regularly for currency. To a large extent this cross-border trade is happening informally.

Second is its security. Contrary to popular belief, Tawi-Tawi is not a dangerous place. Locals tell me perhaps that insecurity is true for nearby Sulu (which lies in-between Tawi-Tawi and the mainland) but not for Tawi-Tawi. A lot of it has to do with culture, apparently - not warlike, but peace-loving. They are more apt to trust the local military and police, and more suspicious of potential insurgents, or terrorists, or plain criminals, which have made Mindanao undeservedly notorious. (So perhaps there is a cultural basis for social capital?)

Third, its island structure is both a blessing and curse. I saw lots of beautiful sandy beaches (unfortunately I had no time to take a dip). Seaweed culture, as well as fishing, are major industries.

I spoke to some members of the local chamber of commerce. All of them complained against the high cost of doing business in the province. This is partly due to the unecessary bureaucracy, plus fees and paperwork, introduced by the national government and by the autonomous region of muslim mindanao (ARMM). For instance, the national government slaps a 1,620 pesos travel tax (about US$ 31.00) for every legal visit to Malaysia.

To a man and woman - lots of female entrepreneurship in this Muslim-dominated province - they all spoke of Tawi-Tawi's strategic location and wonderful economic potential. I broached the idea of a Tawi-Tawi freeport zone. Turns out, they had been proposing that for a long time. But the remote center (i.e. Manila - now I'm beginning to feel the long arms of Imperial Manila) has been cool to it.

For a special economic zone to work, a lot of infrastructure investments have to be put in place. But I think it makes a lot of sense - the idea certainly merits serious benefit-cost analysis. And government has to strike a deal with the local traders - we'll give you duty-free priveleges, and all the infrastructure to becoming a regional center of trade, but everything has got to be formalized, and all the requisite taxes on sales and income (minus absurd fees and charges such as the travel tax) will have to be collected. I don't see a reason for local entrepreneurs to object.

A thriving economic zone anchored on the freeport. Then sit back and enjoy watching this blessed province rocket ahead in the human development rankings.

Lee Kwan Yew on India

Hat tip to Atanu Dey at Indiaeconomy. Lee Kwan Yew might as well be talking about the Philippines. It's a classic. Consider:

Like Nehru, I had been influenced by the ideas of the British Fabian society. But I soon realised that before distributing the pie I had first to bake it. So I departed from welfarism because it sapped a people’s self-reliance and their desire to excel and succeed. I also abandoned the model of industrialisation through import substitution. When most of the Third World was deeply suspicious of exploitation by western MNCs (multinational corporations), Singapore invited them in. They helped us grow, brought in technology and know-how, and raised productivity levels faster than any alternative strategy could.

Who says free market economics is all theory? This is economic theory in practice. Correct theory, that is.

The World Bank has also done its own study. It found that in India it can take a decade to close a business through insolvency proceedings. It also found, among other things, that official fees amount to almost 13 percent of a property transaction in India as against just over 3 percent in China.

Ever tried to get your property titled in the Philippines? Hah!

My secretaries asked Singapore businessmen with investments in India what, apart from infrastructure, they found as major constraints. To a man, they replied it was the bureaucracy. They believe it is a mindset problem. The average Indian civil servant still sees himself primarily as a regulator and not as a facilitator. The average Indian bureaucrat has not yet accepted that it is not a sin to make profits and become rich.

Regulator rather than facilitator. Spot on. Sin to get rich? Here it is more of a balato mentality - gimme a share or else!

The average Indian bureaucrat has little trust in India’s business community. They view Indian businessmen as money grabbing opportunists who do not have the welfare of the country at heart; and all the more so if they are foreign usinessmen. Deng Xiaoping said at the start of China’s open door policy, it was glorious to be rich. The sequel is reported in Forbes Asia, November 14 2005, where it listed over 300 China’s richest, 40 of them with thumbnail CVs in a centre -fold. All are new entrepreneurs creating jobs and spreading wealth. Now, after private enterprise and the free market have generated wealth in the coastal provinces, China’s leaders have concentrated on spreading growth to the inland provinces by building infrastructure and offering generous economic incentives for investments.

Listen folks: without ambitious and talented men and women dreaming of wealth and security and prosperity, pupulutin tayong lahat sa kangkungan (they'll be picking all of us up from the canal.) And see what China is doing: bake the cake first. You can start distribution when there's something to distribute. And in fact what you can distribute first are the tools and equipment - and skill - to bring the laggards up to par.

One Singapore businessman told me this story. He entertained a former senior Indian civil servant to lunch in Singapore. Some months later when he was in India, the former civil servant reciprocated by hosting a dinner at which severa l other guests were present. His host made this surprising comment that he was amazed to see that in Singapore, a business could be successful without being dishonest.

No comment necessary.

Please read Atanu Dey's commentary also. A good explanation of why politicos keep their blinkers on.