Political economy and public policy

The Economist described the current US riots, violence, and looting as a “fury of polarization.” It is inauspicious that these lawless outbreaks are happening at the same time as the deadly COVID-19 pandemic.

The Economist observed that both American and French Revolutions began in the hot months of June and July. Police brutality and consequent protest rallies also peaked in the summer of 1967. This being so, we are not logically inclined to blame violence on summer heat.

In the past, racial inequality and governance were rallying points. Today, in the US, political polarization and partisan rage are drivers as well.

Whoever is the real George Floyd, his murder by a policeman who mercilessly kneeled on his neck as he gasped for breath fueled the mass protests. Protesters of different races and colors supported the “Black Lives Matter” rallies. But more than their original cause, underlying their discontent is frustration over the Federal Government’s inept handling of the pandemic and its implications on international trade and the US macroeconomy. The US is facing its worst economic decline of the century signaled by, among others, business giants filing for bankruptcy and by thousands of grounded aircrafts.

In the midst of all this, the US is divided against itself. The Federal Government is divided against itself.

There is a great lesson to be learned from the US experience: the political economy of governance cannot be ignored. One cannot ignore how interactions and relationships between and among individuals, groups, government agencies, and nations affect reactions to and the shaping of, public policy. History, culture, perceptions, even customs can impact the economic system.

Even here in the Philippines, the political economy of governance shapes critical public policy and the public’s response. As we enter the third month of community quarantine, several lessons have become clear and are proven by evidence.

In an IMF study, “How the Great Lockdown Saved Lives” written by Dragyan Deb, Davide Furceri, Jonathan D. Ostry and Nour Tawk, the experiences of 129 economies were examined. The study covered 30 observation days after a significant outbreak of 100 cases.

The Fund study is very credible. Robustness checks were conducted on empirical results. Extreme cases such as China’s early pandemic curve flattening and the US’ high COVID-19 cases and deaths were excluded as control factors. Other variables were included as additional controls in the regressions.

To shock the system to handle variations, dummy variables replaced containment measures. The study also considered the effect of announcements on mobility even before actual implementation. Finally, lag structure of regressions was used and other scenarios were considered to cover all possibilities. According to the Fund, the tests for robustness yielded similar conclusions not statistically different from the baseline.

In its sample of both developed and emerging nations, it was found that first, containment measures such as stay-at-home orders; school, office closures; limitation of public transport and cancellation of public events significantly reduced the number of COVID-19 cases and deaths. In Wuhan and New Zealand, infections and mortalities were reduced by around 200% relative to a no-containment baseline scenario.

The Philippines was one of the first to implement a strong lockdown even as containment was delayed because of diplomatic considerations. This delay was political. Moreover, credibility issues continue to taint quarantine measures as “justice” and punishments are perceived to be dispensed with selectively.

Second, the IMF study also concluded that early intervention and containment measures bring down infections and deaths.

The study used “public health response time” (PHRT) as a metric. The PHRT counts the number of days that containment measures were imposed after an outbreak of 100 confirmed cases. Countries with low PHRT recorded a lower average number of infections and deaths by 300% and 400%, respectively. Vietnam is a prime success story. With strong leadership and a monolithic hierarchy, Vietnam wasted no time in debating public policy. It exercised a complete think through complemented by high civic spirit.

In the Philippines, the PHRT is challenged by coordination issues between the national and local governments. This has resulted in a lack of transparency and in a constant flip-flopping of policies.

Third, according to the Fund, country characteristics and health infrastructure are also factors in fighting the pandemic. These include temperature, demographics, population density, and health preparedness.

In the Philippines, health preparedness is our Achilles heel. Testing kits were in limited supply. Testing facilities became available outside RITM weeks after the start of the lockdown. Contact tracing could have benefited from digital assistance from the two telcos. What happened to decades of budgetary allocation to the health sector? Good governance could have produced general hospitals and testing facilities in all cities and provinces.

The broad picture is that prompt viral containment serves as the foundation for medium-term economic growth. To the Fund, “The course of the global health crisis and the fate of the global economy are inseparably intertwined — fighting the pandemic is a necessity for the economy to rebound.”

In the Philippines, our economic managers eagerly wait for Congress to approve funding for economic recovery efforts. It has remained a work in progress. Assurance is also needed that a second wave of the disease will not force another lockdown, depressing demand. Only a flatter pandemic curve will inspire higher growth, higher purchasing manager’s index, and higher business and consumer expectations. This is the wish list of our economic managers. This is also our wish list.

On what else can business anchor its confidence? We can rely on our success in sustaining 20 years of uninterrupted economic growth. There is expertise there. Behavioral economics would advise us to rely on “whatever available anchors” there are. Our track record provides some assurance.

But there are clear obstacles. A reality check would dissuade us from now relying on OFW remittances as hundreds of thousands have been sent back home. BPO revenues are likely to drop with businesses in the US and Europe closing shop. With resuscitation of air travel, tourism may provide hope. Public spending especially on infra and social amelioration could also soften the blow to output. In any case, private investment is key to supporting growth and keeping jobs.

A moral anchor can also give us stability. Psychologically, people are motivated by narratives and not by quantitative guideposts. Election candidates are voted for rarely on their platforms, but based on their life stories. Stock market picks are rarely valued because of PE ratios but because of stories from the grapevine that expansion plans are afoot.

In this regard, there is moral suasion offered by the Philippine economic story. Decades have demonstrated its fundamental soundness. Our current economic managers are doing well even as they are now revising the playbook to adjust for new challenges. For indeed, the challenges are formidable. Markets and events can shift and shift considerably. We must avoid non-consequentialist reasoning. As if in a game of chess, we should anticipate several future possibilities and develop appropriate counter moves. This is the political economy of governance in action. It is fluid and dynamic. It is the active identification of very specific policies and concrete programs to improve service delivery that is more responsive to citizens’ needs.

Perhaps this is what was ignored in the US to fuel the protests. It is also key, even here at home, as we bounce back.

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.