With the inauguration of President Rodrigo R. Duterte to the presidency comes the hope that government institutions will be reformed. As promised in his campaign, change is coming. In particular, peace and order will be given the highest priority. In his economic agenda, security is one of the crucial factors for sustaining the growth of the economy.
Meanwhile, those who voted for him believe that they have found the one person who can eliminate all the ingrained inefficiencies and corruption that ails society. Who is the one person who can solve laglag bala and drug trafficking? These voters believed Mr. Duterte when he referred to himself as the country’s “last card” who will finally solve this long-standing menace.
In fact, with his political will and unique “Davao system of law enforcement,” he promised to solve this problem in less than one year.
But can the Duterte administration fulfill all of its promises to voters and still work within the current path of economic growth? The solution lies in the setup of good economic governance.
A buzzword in recent years, economic governance refers to the structure and functioning of the legal and social institutions that support economic activity and economic transactions. Without good governance, markets and transactions in general cannot function well.
Specifically, good governance establishes three essential prerequisites of market economies: (1) the protection and security of property rights to guarantee the return on investments are earned by investors; (2) the enforcement of contracts to prevent people from reneging on their promised role in a transaction and acting opportunistically; and (3) the implementation of collective action in adequately providing for the public goods and the control of public “bads”, including not just physical but also institutional and organizational infrastructure.
All these seem to be satisfied in the Duterte economic and social reform agenda. However, behind the general pronouncements of the new administration is the assumption that the government and governance are synonymous.
As pointed out by Princeton University economist Avinash Dixit, other social institutions of economic governance also exist.
They function especially in areas that the government serves poorly, or not at all. Sometimes, they work better than the formal law, because they have better expertise or information. And they are essential as a counterpoint against the government’s own abuse of power.
The concern is that the Duterte administration may altogether opt to ignore these private institutions, because they may come in the way of government initiatives. Because they work in niches where the government cannot or does not operate, the government may view such movements as a violation of laws, thus, requiring the regulation or prohibition of production or consumption of the commodity in question.
But private governance by social groups or industry associations can have advantages of information and expertise, and can use them for arbitration of disputes that the courts would find too complex to interpret and adjudicate.
A good example is the use of contractualization in labor markets. It is widely held that, if the distortionary costs of regulations are not insignificant, as in the case of the Philippines, then the returns to both legal and illegal noncompliance will be high.
One particular form of noncompliance is the shift from permanent contracts to short-term flexible contracts, such as agency hiring or contractualization. This is not to say that the labor regulations cause such contracts.
The argument is that, along with structural transformation, globalization and other industry factors, labor-market regulations and the associated enforcement systems in the labor market have created a situation where such contracts are viable and efficient.
Enforcing a scheme that will force firms to regularize, say, 80 percent of the workers would surely be counterproductive, as firms can respond by selecting and hiring only a small set of workers who can work permanently and investing in capital equipment that will substitute for the temporary workers.
In this case, the larger firms have a greater chance of survival, as the smaller firms, with limited resources to manage the costs of such regulations, are forced to close. In the end, workers who cannot find work in the formal markets will end up in the informal sector.
Especially for larger firms, a more effective program of worker protection should be offered to workers, if these firms are to engage in temporary contracts.
Other examples of different governance systems can be found the areas of media and agrarian reform. Institutions and contracts must be flexible enough to meet the needs of the parties involved in an activity or transactions
In short, governmental and private institutions of governance must coexist even in low-income economies, like the Philippines. Many economic transactions take place outside conventional markets, e.g., within families, social networks and firms. Therefore, the issue of varied governance institutions is not the classical dichotomy between market and the government. Rather, it is the complex interaction of the whole system of governance and transactions. Different combinations can work well under diverse conditions.
In principle, no institution or system will prove perfect or ideal —the so-called first-best—under all circumstances. Everything is “second-best,” limited by numerous constraints of information, incentives, commitment and rules of the political game. For President Duterte, an indicator of good government then is how well his administration is able to navigate through all of these constraints and find a way to recognize the role of private institutions and individuals in the country’s development.
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Leonardo Lanzona Jr. is professor of Economics at the Ateneo de Manila University and a senior fellow of Eagle Watch, the school’s macroeconomic research and forecasting unit.