Finding and Losing Keynes: A Philippine Development Story

It is widely held that the Philippines' economic performance compared to that of other countries in the region over the past three decades has been disappointing. Why does development continue to elude the Philippines?

This question is explored in the book, The Philippine economy: Development, policies, and challenges edited by ARSENTO M. BALISACAN and HAL HILL, which is an in-depth study of the Philippine economy focusing particularly on the two decades from 1980 to 2000. The Philippine development puzzle is divided into three major riddles namely:

1. What accounts for the Philippines' indifferent long-term growth record?
2. Why did it not gain a larger dividend from a process of policy reform that got under way in the late 1980s, and continued and deepened during the Ramos administration of 1992-98?
3. Why did the Philippines emerge, at least in comparison with its neighbors, relatively unscathed from the Asian financial crisis of 1997-98?


The answers to these riddles are embedded narrowly in economic and broadly in political, historical, and institutional factors. The book posits the following answers:

The reform process that was implemented during the late 80’s and Ramos administration did not translate into substantial dividends because government spending on infrastructure and social goods was politicized, priorities were skewed to favor vested interests, and there was uncertainty over long term development goals due to personalistic politics which renders it difficult to shield economic policy making. Attempts at good economic policy making have been spoiled by the prevailing oligarchic social structures and ineffective political institutions.

Moreover, there are significant barriers to long term growth. We have been handicapped by our rapid population growth, neglected state of physical infrastructure, and declining quality of public education system. We have not been able to seize the opportunities present in Mindanao which has for centuries been besieged by peace and development issues.

The Philippines was not badly hit by the 1997 crisis. This was not due to good economics, though. Since investors approached the Philippine economy with caution hence, it did not receive the large private short term capital flows that went into neighboring high growth economies. These investments resulted to availability in these countries of large quantities of credit which in turn generated a highly-leveraged economic climate that pushed up asset prices to an unsustainable level resulting to individuals and companies defaulting on debt obligations. The ensuing panic among lenders led to a large withdrawal of credit from the crisis countries, causing a credit crunch and further bankruptcies. What worked to our favor however, was the relative healthier shape of the Philippine financial sector due to a stronger banking regulation and more conservative portfolios.

In summary, the book identifies three reasons to explain the Philippine development puzzle. These are conventional growth explanations, bad luck, and political and institutional barriers to good policy. What these imply is the growing recognition of the political and institutional requirements for economic growth. It is essential then to improve the overall performance of government, insulate it from the plunder of oligarchic groups, and promote new types of private sector initiative.

The current world economic crisis is forcing us to re-visit and re-think our basic understanding of economics. The fall of socialist regimes in the early 1990’s inspired Francis Fukuyama to declare the end of history because capitalism emerged victorious. Free market is and has always been presented as the panacea to underdevelopment. In the Philippines, this “spirit” was translated into instituting a “process that included the lowering of trade barriers, liberalization of foreign investment, deregulation of financial and foreign exchange markets, an improved tax effort and the establishment of a new, more independent central bank focused on inflation targeting in the context of a more flexible exchange rate. Yet, it was by no means clear that the reforms had achieved any substantial success in shifting the Philippine economy to a rapid, equitable and sustainable growth trajectory”.

Twenty or more years later, the world is witnessing the unraveling of what potentially is a deep recession resembling that of the depression of the 1930’s. Surprisingly, free market pundits are scampering for governments to intervene to save the collapsing world economy. This has shaken the free market orthodoxy. Is this signaling the end of capitalism?

Many of the major political debates for decades have centered around one key issue: "the efficiency of the market economy", and the appropriate relationship between the market and the government. On one side is the belief that for the market to be efficient, the government should keep its hands off the market to allow for the “invisible hand” to find the equilibrium. On the other, is the belief that there is no invisible hand in the first place. The government is the best regulator of the excesses of the market or the best stimulator of an underperforming market.

The Philippine development story is the story of finding and losing John Maynard Keynes, the British economist who introduced the notion that the state should stimulate economic growth and improve stability in the private sector - through, for example, interest rates, taxation and public projects. This has always been the role the Philippine government played. However, the government’s track record has been that of misusing the power to intervene in the economy to make policy decisions that benefit oligarchies that have captured the state and the bureaucracy. The degree to which the government intervenes in the market is merely a secondary issue to the the real challenge of whether the government will spend it wisely — avoiding special-interest pleadings and pork projects such as bridges to nowhere. We’ll need a true capital budget that lays out the nation’s priorities rather than the priorities of powerful oligarchic interests. The question of whether we need more or less of Keynes or more or less of Adam Smith is immaterial if the government that makes such policy decision does so on the basis of the interests of the few who have historically captured political and economic power in the country rather than on an articulated national development agenda that majority of the people support and aspire for. In the end, it is not economics that is the problem but politics. Reform the politics, the market will follow.