The just-concluded elections highlighted the need to elevate local welfare into the national perspective. In fact, President-elect Rodrigo R. Duterte has vowed to undertake major changes that will ensure the distribution of the fruits of national economic progress to the local communities.
Ironically, this call for changes came during the months of unprecedented growth, making the Philippines the fastest-growing economy in the region. Because of this, the eight-point program of Duterte seems far from the type of change Duterte was advocating during the campaign. If anything, the program seems to emphasize continuity more than change. As the incoming secretary of finance recently mentioned, the gains of the Aquino administration had even exceeded its target.
In light of these developments, how can institutional change proceed? Much of the change that had been promised seems to be pointing toward continuity. Even the composition of the Cabinet does not inspire much, given that all the appointees seem to be coming from the previous administrations. Fundamentally, the change seems to be mainly originating from the “political will” that Duterte has claimed his other presidential rivals do not have.
Unfortunately, much more than political will may be needed to undertake the reforms. A significant part of the problem is the fact that institutions are path dependent. This means the institutions are products of long years of historical processes, which can take more than six years to revise. Of course, if and when the structure of economic incentives and constraints is altered by events that may reasonably be regarded as “exogenous innovations” (independent from the current state of relevant knowledge, or in the present regulatory institutional regime), the previous historical structures may be destroyed, freeing the system to endogenously begin to evolve some new configurations.
But to claim that the political will itself be sufficient to dispose of the notion of a persisting inefficient institutional lock-in is the same as assuming that Schumpeter’s concept of “creative destruction” will be blowing continuously at full force, through every nook and cranny of the economy. Consequently, it may lead to a dead end. Nevertheless, one’s failure to make sense of the variations in the flow of events through time is what make histories interesting to read.
For instance, an obvious instrument to redistribute economic gains is through asset reform. But the current asset (or capital) structure is complementary to the industry system. This industry is characterized by high capital intensity and, to some extent, linked to high-level skills. This system may seem inconsistent to the huge amounts of labor resources. Hence, while creating a more labor-intensive and less capital-using industry may be the right policy, this route can cause further dislocation in the economy, pushing us out of the current growth path.
For Duterte, this is a difficult choice. The pronouncements that he has made during the campaign can, indeed, be overwhelming.
The institutional features of the economic structure, thus, create a political economy that is in favor of resilience. Against this backdrop of severe reform obstacles in the core of the system, piecemeal reforms at the margins would seem to be the only viable reform strategy. By contrast, comprehensive reforms are more feasible in cases where policy- makers either do not face powerful veto players (in the other branches of government) or where they can rely on an infrastructure for multigroup discussions and a sufficient level of trust among the actors to negotiate social pacts. Accordingly, the Philippine political system, with its highly decentralized structure and weak coordination mechanisms, impedes encompassing reform strategies.
Following the idea of incremental change, a sequential process of transformation can be undertaken in key sectors. Starting from the adverse circumstances for institutional change, a reform trajectory can be designed where each step provides for some ad-hoc adjustment to some urgent problem pressure and, at the same time, shapes the conditions for subsequent steps. As opposed to a fundamental comprehensive reform, a long-term, systematic and coordinated consideration of the problem solutions must prevail. In the short run reform stages can even be contradictory. But this should be seen only as a stage in the long-term process. What is important is that the desired change will eventually occur. The outcomes from the marginal reform should cascade toward a favorable convergence, where the main goals of inclusion and growth are achieved.
For instance, if the aim is agricultural productivity, the agencies directly assigned to the sector should make the initial moves, followed by subsequent programs and policies by all the other departments designed to reinforce such initiatives. By addressing the consequent blocks, inconsistencies and hindrances, all conflicts in the short run can eventually be resolved in order to achieve the final goals. This process can be likened to guiding a symphony, which starts with a single, perhaps inaudible, note but finishes with a flourishing combination of tones, timbres
and textures.
This process, of course, will require a competent and knowledgeable conductor who can coordinate all the sounds and movements. Whether Duterte can be such a conductor remains to be seen.
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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.