How not to build institutions

Calixto V. Chikiamco

Posted on March 20, 2017

Institutions matter. This is because perfectly functioning markets don’t arise naturally. The natural state is one of imperfect markets characterized by asymmetric information, free riding, monopoly, moral hazard, fraud, shirking and cheating, insider trading, or high transaction costs. Institutions are needed, whether these are social, political, financial, etc. to make imperfect markets more efficient and functioning.

One example is the stock market. This symbol of capitalism is chock full of rules and regulations. Not only is the stock market governed by these rules, whether for minimum trading lots to timely disclosures of dividends, it is also supervised strictly by the state through the Securities and Exchange Commission.

Obviously, if the quality of governance by an exchange’s board of directors is poor or if supervision of the exchange by the SEC is faulty or corrupt, the stock exchange won’t function effectively and do what it’s supposed to do: raise capital efficiently to be invested in industries with the most promising returns. Investors will shun it, thinking that the market is rigged in favor of a few.

I raise the point about institutions because it’s not enough that we embark on market-oriented reforms. We need to simultaneously develop, nurture, and care for institutions.

For example, I don’t think we would have achieved the high growth rates these past years without the usual booms and busts that characterized Philippine growth in the past had we not had an independent central bank led by a competent central banker and assisted by professional people.

Inasmuch as BSP Governor Amando “Say” Tetangco, Jr. can’t serve a third term, President Duterte must therefore appoint his replacement. I can’t overemphasize enough that President Duterte must appoint an equally competent, independent, and respected person in his place. I stress the word “independent” because even if that person were competent, but if he is seen as “political,” it will send a very bad signal to the financial markets. Our trajectory of high growth may be at risk.

There’s every reason to be concerned. President Duterte hasn’t shown himself to be a builder of institutions. In fact, his actions lately have been a case study of how not to build and strengthen institutions. Consider the following:

The Yasay, Laviña, Montano, Robles, and Argosino fiascos are perfect examples of this system of crony appointments that have led to failures and controversies which have affected their respective institutions.

Duterte had kept saying that he appointed Perfecto Yasay, Jr. as Foreign Affairs secretary because the latter was a dormmate. Apparently, Malacañang didn’t do complete staff work. Here was the Philippines’ foreign affairs secretary and he turned out to be American! In a political embarrassment for Duterte, the Commission on Appointments unanimously rejected him for lying to the committee.

Peter Laviña was a Davao City councilor and campaign spokesman, the actor Cesar Montano is from Bohol, Michael Robles and Al Argosino are fraternity brothers from San Beda Law school. Apparently, these were the main qualifications that got them choice appointments in the National Irrigation Administration, Tourism Promotions Board, and the Bureau of Immigration, respectively. In the case of former Immigration Commissioner Al Argosino, it turned out that he had a prior conviction for a hazing death but was appointed because he’s from the same San Beda Law fraternity as President Duterte.

The case of Gina Lopez as Environment and Natural Resources secretary is a bit different. Here, Duterte was being too clever by half. By appointing Lopez, Duterte thought he could keep the powerful Lopez-owned ABS-CBN media empire on his side and use her to go after the miners like Rep. Edgar Erice who had supported Mar Roxas’s candidacy.

However, the position doesn’t need an environmental extremist, which Gina Lopez is, but one who can balance the interests of all stakeholders in mining and the environment and who’s technically competent. Whatever the decision of the Commission on Appointments, Duterte will pay a political price. In the process, the institution of the DENR has been damaged.

Perhaps it’s time to make some institutional reforms -- split DENR into an Environment Department and a Natural Resource Department. The conflicting environmental and developmental mandates existing in one department are a recipe for institutional failure.

Institutional integrity requires accountability, i.e. leaders are made accountable for their actions. However, Duterte promotes a culture of impunity that weakens institutions. He says that he will protect cops, even if they violated the law in pursuit of the drug war. He said he will even assure them of pardon if they are caught and convicted.

By promoting a culture of impunity, Duterte is fostering lawlessness. In fact, the rubout-murder of former Albuera mayor Rolando Espinosa, Sr. allegedly by ranking police officials and the kidnap-murder of a Korean businessman inside the PNP headquarters are more likely the result of the culture of impunity Duterte is promoting. This will cause long lasting damage to the institutions and make these institutions, like the PNP, lose the trust of the public.

If there’s something wrong with an institution, the right thing is to determine the cause and propose reforms. In the case of the Energy Regulatory Commission and the Anti-Money Laundering Council, Duterte’s instinct has been to bully them.

Without yet the facts at hand, Duterte publicly asked the entire Energy Regulatory Commission to hand in their resignations on the mere allegations that they were all corrupt and complicit in the suicide of Energy Regulatory Commission Director Francis Villa, Jr.

On the other hand, he also threatened the Anti-Money Laundering Council after Justice Secretary Aguirre failed to get information about the bank accounts of Senator Leila de Lima in the case of drug dealing in the national penitentiary. The poor executive director of AMLA caved in to Duterte’s bullying and resigned.

However, AMLA is just following the law on the secrecy of bank deposits. Instead of threatening and bullying AMLA, Duterte should have directed his party mates in Congress to pass a law amending AMLA to make it easier for authorities to secure bank information where the suspected crime is drug dealing, plunder, and money laundering. It takes work, not threats, to strengthen institutions.

President Duterte is proposing to blow up the existing unitary political system and replace it with a federalist one. Federalism is his biggest institutional experiment. That’s fine, but President Duterte’s record in building and strengthening institutions doesn’t inspire confidence.

Besides, as political scientist Dr. Paul Hutchcroft said, what’s the problem that the institution of a federalist state is supposed to solve? I don’t think the administration has given enough systemic thinking on this. If it’s the lack of resources by local government units, federalism may, in fact, make them poorer. The fact of the matter is that 60% of the country’s GDP is concentrated in Metro Manila, Region III, and Region IV-A. If the country federalizes, these rich regions would be loath to share their tax revenues with the rest of the country.

There are other factors that could make federalism fail.

Political dynasties will ensure that there’s no incentive for regions to foster political competition and innovation. The lack of a cohesive rural development strategy to accompany federalism will just entrench poverty in the countryside. Bureaucratic red tape, if not confusion, can multiply. In addition, instead of competing, regions may just degenerate into feudal estates controlled by political dynasties.

I’m not saying we shouldn’t reform the present institutions. However, we should probably evolve the present state, rather than blow it up. There would be less risk. Rather than scrapping the present system, we could strengthen the present Local Government Code, and also institute political reforms such as campaign finance and party development.

To achieve long-term sustainable, inclusive growth and to attract investments, neither tax reforms nor liberalizing reforms are enough. Institutions matter too. Tell that to President Duterte.

Calixto V. Chikiamco is a board director of the Institute for Development and Econometric Analysis.