FINEX Folio

THE magazine The Economist recently conducted a debate series on “affirmative action.” Readers will find lessons from the debate considering the many policy choices being made in the Philippines today. The concerns on both sides of the issue “should affirmative action be scrapped?” are instructive and can be put to good use.
Affirmative action describes the practice of giving preference to members of certain groups, for example in terms of university admissions, government contracts or jobs, often in an attempt to rectify systemic discrimination or deep-seated prejudices. Debate moderator Ana Lankes gives the following examples: (1) India uses quotas for Dalits, the country’s lowest caste group, in government jobs and public universities; (2) Malaysia’s actions are in favor of Malays, historically poorer than their Chinese and Indian counterparts; and (3) Norway, Italy and Belgium require a certain percentage of board members at listed companies to be women.
Ella Whelan, who argues for scrapping, believes affirmative action is an insult, suggesting that certain individuals need a leg up to achieve what the rest of society does with ease. She believes supporters of the action think the barrier for favored groups are too difficult to face. The more important problem, she claims, is that affirmative action understates how far the world has come from the day when society was systematically racist, sexist and discriminating. Finally, she tags affirmative action as “lazy tokenism”.
Julia Rubin, on the other hand, thinks affirmative action is an equal opportunity provider which is necessary because society is not meritocratic where preferential treatment based on income, race and ethnicity is the norm. Supposedly meritocratic selection criteria actually reflect and reinforce society’s inequities and prejudices with tremendous advantages to those already at the top. Diversity brings immense benefits to the community like in classrooms and work environments. And for Rubin, the most compelling reason to support affirmative action is equity. Everyone in our very unequal society should have an opportunity to succeed.
In the course of the debate over a 7-day period, the affirmative side initially got favor, but additional comments tipped the scale towards being against scrapping of the policy. Richard Kahlenburg, a scholar, argued that affirmative action should be based on income, not race. Lewis Iwu, a campaigner, maintained that affirmative action actually strengthens meritocracy by levelling the playing field.
In her recap, Ana Lankes noted how observers agreed that inequality and discrimination against minorities have not gone away. But most believe that the best way to address discrimination is not to target race and gender but need. Most people still agreed that there are serious inequalities of opportunity, and outcome, which naturally affect poor people. The consensus is for affirmative action to be effective, the focus must be on income, not gender or race.
In the Philippines, many policy decisions have been reflected in laws that attempt to tip the balance in favor of a sector of society deemed discriminated upon. Mandatory lending laws like the allocation of loans for small and medium enterprises and the agri-agra law are good examples of affirmative action. And these laws are all based on income disparities.
The problem with such policies though is their proportionality and non-recognition of other constraining factors. For example, is the 10% mandatory lending for agrarian reform beneficiaries a reasonable metric consistent with the number of possible borrowers? Are the financial institutions being mandated to lend equipped or supported in this endeavor? Affirmative actions must both have positive reinforcement mechanisms and not just negative penalties.
This writer has long espoused the benefits of a well crafted directed lending law for SMEs given their number, 98-99% of all enterprises per government statistics. Unfortunately, the implementing guidelines did not consider the size of the potential lenders and have not been fair to smaller financial institutions. The subsidy programs being contemplated under the “Train Laws” for those who will be adversely affected by the revised tax structure are all with good intentions. But are the execution design well studied?
The bottom line is in an unequal world there is a place for intervention through affirmative action to level the playing field. The concept has solid foundation, but its implementing guidelines must also support the realities on the ground. Failure of execution does not necessarily mean that the policy thrust of addressing redistribution is not sound in the first place.
 
Benel D. Lagua is Executive Vice-President at the Development Bank of the Philippines. He is an active FINEX member and a long time advocate of risk-based lending for SMEs.