In the May 2019 elections, the Filipino people, it appears, reaffirmed its faith in Dutertismo — an attenuated political space in exchange for expanded economic space. Having now control of both Houses of Congress, Duterte can no longer blame oppositionist obstructionism for the lack of progress in the economic space. At the start of his watch he promised to leave the management of the economy to his economic team who has sworn by the market. Everyone knows that the boundary between the economics and politics is very porous and artificial. For the most part, he has honored his promise in the past three years. How will this apparent lurch into autocracy affect Duterte’s balancing act between the market and his populism?
The first real test came in July this year with the Security of Tenure bill (SOT). The SOT threatens the viability of many businesses which provide employment. After long soul-searching, Duterte vetoed the controversial bill over a central election promise. Organized labor is crying betrayal. The industry associations and chambers argued and tipped the balance for the veto. Until then the Duterte economic team seemed unable to move the needle for the market. Finance Secretary Carlos “Sonny” Dominguez III even let out days before the veto (BusinessWorld, July 25, 2019) that SOT will not affect investment; that he supported Planning Secretary Ernesto Pernia’s view that SOT needed “tweaking” to protect competitiveness of the Philippines. Either the SOT bill is not negative for investment or it is negative for investment and thus needs tweaking to reduce the damage to investment flow.
Outsourcing or a return to “core business” is a market efficiency strategy, but core business is a fluid concept and differs for different firms in different environments. Being good at making solar panels does not mean you are also good at keeping your premises clean or secure from unauthorized entry. In environments where others are better at cleanliness or security than you, you outsource; in environments where those services are not provided efficiently, you insource. Knowing exactly when to switch is internal to the firm. Governments mandating that switching point can cause serious inefficiencies and create junctures of corruption. Investors shudder at the potential cost of disputes over what constitutes “core business.”
As a practitioner of the “dismal science” and acutely aware of unintended consequences (see, e.g., Fabella, April 2018, “Endo and Manufac turing” https://www.bworldonline.com/endo-and-manufacturing/), I applaud President Duterte’s veto. I have always felt that Duterte’s watch will be a tug-of-war between the market (growing the economic pie) and populism (redistributing the economic pie). Unbridled populism only manages to redistribute poverty. Ask the Venezuelans. The veto shows that for the moment at least, the market has not lost ground.
But has the market gained ground? The veto, alas, just maintains the status quo, a status quo which, truth be told, has fallen badly behind our rivals in the region. Closing the gap on investment-friendliness should be our principal preoccupation. Instead we are putting out fires. And yet we are thankful that we dodged a bullet.
There is another reason for being upbeat. The veto shows that Duterte’s populism remains for the moment “bridled”; by economic common sense, that is. Bridled populism takes courage. It requires the populist leader to recognize when the demands of his public becomes unbridled, when the long-run harvest of those demands become poison and to say “Enough!” Eating today the seeds of tomorrow’s harvest is folly. The explanatory note for the veto indeed reveals a recognition that a balance must be preserved, that unduly depriving capital its just due will hurt labor in the end. The reaffirmed Duterte looks like he appreciates the painful trade-off. Can we hope to build on that instance of courage to gain ground for competitiveness?
The hope can be unfounded. For the veto to firmly anchor that hope, it must be based on a firm conviction that the investment rate (GFCF/GDP in percentage) should accelerate to 25-30% of GDP when we were running at 20% for decades. Investing at that clip will rapidly grow the economic pie and accelerate job creation. Paltry job creation is the real root of labor sub-contracting — if job creation is brisk, people will snub inferior arrangements. Ending sub-contracting by law is palliative. Job creation first, and for that you need a herding of investors. What good is Build, Build, Build if private investors do not come to the party — or, even worse — fly the coop because capital gets a better deal elsewhere? Which is also why parts of TRABAHO pertaining to PEZA locators pose a danger: those will attenuate the incentives for Manufacturing investment in PEZA where the threat alone has now begun to slow the investment flow.
Without that firm conviction on the central role of investment, the veto can only serve as an excuse for more populist profligacy down the line, either in the reincarnated SOT or elsewhere. “You had yours, now they will have theirs,” may seem like an alluring fair exchange. But the ground the market just managed to hold can easily be lost by profligacy elsewhere, like through mandated excessive minimum wage, national wage setting or excessive (not matched by productivity) increases, and salary increases for government workers. The latter will raise the labor bill everywhere, not just the government’s. Rapid salary increases for public school teachers are causing the closure of many private schools. Jobs are being lost even as public school teachers rejoice. Excessive entitlements to public servants were the very mistake of the socialist government in the run-up to the decade-long Greek economic collapse starting in 2008. Without such conviction, the reaffirmed Duterte may pose a danger to Ambisyon Natin 2040.
History has a lesson here (see, e.g., Acemoglu and Robinson, Why Nations Fail): you trifle with your future when you trifle with the market. Even if you are an absolute autocrat! Nicolas Maduro of Venezuela and Mao Zedong of China brandished autocratic power to serve unbridled populism that destroyed the market on the way to shared poverty. Deng Xiaoping used autocratic power to firmly entrench the market towards shared prosperity. We hope that Duterte’s veto is only the first step in a Deng Xiaoping journey towards shared prosperity.
Raul V. Fabella is a retired professor of the UP School of Economics and a member of the National Academy of Science and Technology. He gets his dopamine fix from hitting tennis balls with wife Teena and bicycling.
