Long-term vs short-term gains and suicidal absurdities

As we enter into the third month of our own country’s battle with COVID-19, despair is fighting for a foothold. Isolation of individuals and communities breeds depression.

The 20^th century thinker Albert Camus posited that when realizing the “absurdity of existence,” suicide may be the only viable escape. So while every generation feels it must reform the world, his generation’s calling is to simply prevent it “from destroying itself.”

This pandemic has made us realize that the process of world suicide began generations ago. The perfect epidemiological storm of greed, disrespect for nature and dishonesty has fueled COVID-19’s wrath.

Addressing the proximate cause of despair, we must then strive to find — in the midst of this crisis — meaning and purpose. It is this approach that will make the pursuit of fundamental reforms, life-giving for the long haul, rather than suicidal.

For many politicians, the trade-off presented by policy choices may spell political suicide or may result in humanitarian redemption. The choice of allowing economic reopening and freer movement of people and goods across local borders might be misinterpreted as callousness towards protecting human life. On the other hand, giving a lion’s share of the budget to the health sector, prioritizing lockdown and testing for infections rather than immediately allowing commerce to resume, could alienate the business community. This choice does not bode well for 2022’s campaign contributions. The driving forces of meaning and purpose will indeed define policy choices.

In October 2019, the IMF published a discussion note entitled, “The Political Costs of Reforms: Fear or Reality.” Authors Gabriele Ciminelli, Davide Furceri, Jun Ghe, Jonathan D. Ostry, and Chris Papageorgiou, address the political economy of structural reforms beyond their economic benefits.

What kind of structural reforms did the IMF paper have in mind?

Structural reforms that count are those that reduce regulatory challenges to competition in both financial and product markets, those that open trade and financial flows and foster flexible labor markets. The IMF discussed reforms that will lead to better medium-term economic prospects — higher living standards, productivity and employment. The reforms envisioned would improve debt sustainability and enhance economic resilience to shocks such as this current global pandemic.

In this regard, the authors observed that given weak medium-term growth and limited fiscal space in many IMF member countries, structural reforms will “generate gains only in the longer term… distributional effects may be sizable in the short run.” IMF economists pointed out that the reforms are likely to produce concentrated losses with gains that are more spread out. This gives ground for anti-reformists to represent themselves as strong even as they are just few but well-funded. Politicians may then be inclined to pull out from socially desirable and long-term advocacies for fear of being voted out. It also argued that governments “may lack political capital to confront vocal interest groups.” This may prompt politicians to either delay or dilute policy changes for fear of political cost. This tendency further contributes to the inertia of reforms.

In the Philippines, our 30-year experience with economic difficulties have fostered far-ranging but longer gestating reforms. These institution-building exercises straddled several global and domestic crises and transcended presidential term after presidential term. Through the years, tenacious reform advocates in Congress, in the executive, and in the private sector, combined to achieve game-changing reforms. In turn, we have seen economic efficiency rising and total factor productivity surpassing others in the Asia Pacific region. These reforms were key to our 20 years of uninterrupted economic growth broken only by the effects of this unforeseen coronavirus pandemic.

Strong and decisive leadership could indeed make a difference between inertia and action.

It took decades and a Duterte to secure amendments to the Bangko Sentral ng Pilipinas (BSP) Charter. Without these amendments, monetary authorities were hamstrung. Now, we reap the benefits of the new charter as the BSP is more effective especially during this crisis.

It took decades and a Duterte to reform the food sector. We now feel the benefits of the removal of quantitative restrictions in the rice industry in favor of tariffication as well as the overhaul of the National Food Authority.

The IMF paper also discussed the role of crisis in inducing reforms. A crisis is often a turning point and catalyst of popular support. Crisis has the potential to result in net welfare gains after deducting the loss from the crisis itself.

This kind of crisis leads to varied reforms. Economic recessions lead to trade, labor market and domestic financial liberalization in the medium term. Banking crises motivate tighter regulation in domestic finance and capital accounts.

Coming to the current COVID-19 public health battle, the urgency of the situation comes head-to-head with planned benefits of structural health reforms which may be felt only in the future — that is, after the forthcoming elections. Without the reforms yet taking effect, the decisions to pursue them — which will always be at immediate cost — may not be popular come election time 2022.

For example, the move to establish a modern general hospital in every city and province, complete with research and testing facilities and medical personnel, is a long-term aspiration. Compared with releasing more cash transfers and launching special amelioration programs for immediate needs, “the general hospital initiative” will not intuitively win more votes at the poll. Addressing current food and financial needs is a better campaign strategy. Thus, the personal incentive to pursue long-term health structural reforms for those with 2022 ambitions is weak.

According to the IMF, slowdown in public policy inertia is influenced by uncertainty in what to do; a lack of technical expertise to craft and implement reforms, a tendency for government to allow temporary issues to resolve themselves and finally, a tendency to postpone necessary reforms.

The IMF paper concludes with four findings based on data and evidence. First, reforms do not cost an electoral defeat when done during the early part of the incumbent’s term of office. Second, real sector reforms are benign compared to financial reforms which could have political costs. Third, political costs are magnified when reforms are undertaken during periods of weak economic activity. When the economy is doing well, economic reforms enhance electoral victory while financial reforms can be harmless. Finally, even if reforms are undertaken during bad times, political costs are minimized when there is strong ownership of reforms that are considered unavoidable. Costs are also mitigated when government clearly conveys firm commitment to proposed changes.

Society can truly benefit from reforms that are “well designed, appropriately timed, and carefully implemented” based on effective communication and transparency. There is nothing to lose and everything to gain.

As our own contemporary history has shown, difficult and even temporarily unpopular policy choices driven by greater meaning and purpose will deliver us from the “absurdity of existence,” and will halt us from destroying ourselves. This requires political will, foresight, and investment in the future.

Diwa C. Guinigundo is the former Deputy Governor for the Monetary and Economics Sector, the Bangko Sentral ng Pilipinas (BSP). He served the BSP for 41 years. In 2001-2003, he was Alternate Executive Director at the International Monetary Fund in Washington, DC. He is the senior pastor of the Fullness of Christ International Ministries in Mandaluyong.