Dealing with democracy deficit in the time of COVID-19

Using four standards of competitiveness as basis: economic performance, government efficiency, business efficiency and infrastructure; and relying on 2019 hard data and perceptions from a 2020 executive opinion survey, the 2020 International Institute of Management1 (IMD) World Competitiveness ranked the Philippines 45^th out of 63 economies.

The Philippines dropped from 38^th to 44^th place in the area of economic performance. This measure covers the domestic economy, international trade and investment, employment and prices.

The country also dropped one rung from 41^st to 42^nd in the area of government efficiency which embraces public finance, tax policy, institutional framework, business legislation and societal framework.

There was also a slight deterioration in ranking from 32^nd to 33^rd in business efficiency which includes productivity and efficiency, labor market, finance, management practices, attitudes and values.

We kept our standing at 59^th place in the area of infrastructure covering basic, technological and scientific infrastructure, health and environment as well as education.

The most competitive economies were: Singapore, Denmark, Switzerland, the Netherlands, and Hong Kong SAR in that order. Some emerging economies in Asia were prominent in this year’s ranking including Malaysia at 27^th, Thailand at 29^th, Indonesia at 40^th, and India at 43^rd. Bigger emerging markets came in lower like Mexico at 53^rd and Brazil at 56^th.

In the case of the Philippines, we moved up one rung from 46^th to 45^th following a slight shift of various components from last year’s assessment. Respondents to the survey ranked the Philippines high in its skilled workforce, economic dynamism, high educational attainment, cost competitiveness and effective labor relations. We scored less in corporate governance, government competency, policy stability and predictability.

The Yearbook called on the Philippines to intensify its mitigation efforts against the viral pandemic and in restoring normalcy. It reminded us that the healthcare system must be prepared for any possible resurgence of the virus. It also advised in favor of continuous strengthening of the infrastructure program.

In previous columns, we stressed that the Philippines has an excellent economic story. It is a narrative that spans 20 years of uninterrupted growth buttressed by 25 years of policy and structural reforms. Despite this achievement, there are still some governance shortfalls.

The challenge is exacerbated by the fact that like the rest of the world, we are battling a formidable health crisis. In peace, as in war, follow-up and mopping-up operations are keys to total victory.

Our experience with our public health care management “strategies” during this pandemic and our three-month community quarantine have been very instructive. A “democracy deficit is now as much a problem as budget and trade deficits,” wrote Satyajit Das in his book The Age of Stagnation as early as 2016.

There is a “democracy deficit,” when policies intended to increase public welfare actually penalize the vast majority. As a result, there often is public resistance, instead of public ownership, of such policies. Public trust wanes and suffers.

For instance, managing a sizable public debt usually comes with the trade-off with lower growth, inflation and fiscal austerity. There is also risk of default. This was the experience of many emerging markets during the 1980s and during the Asian Financial Crisis of 1997. Many countries sustained lower growth, higher inflation, and timid, self-defeating fiscal policies. In some Latin American countries, debt restructuring drained default domestic savings. These generated pressures created another round of financial crisis. Since many other critical factors such as the structure of specific economies were at work, currency devaluation also failed to establish competitiveness in many countries.

There is a shortfall of democracy when banks charge depositors for placing savings with them. Germans call it a “punishment rate.” Das wrote that in 2007 to 2012, near zero or negative interest rates brought $1.6 trillion to US, UK, and Euro governments in the form of reduced debt service costs and increased central bank profits. After the GFC and following QE operations, the US Fed ran a bigger balance sheet, earned huge interest income from purchases of government bonds and remitted a cumulative dividend of about $500 billion. Non-financial corporations were reported to have gained around $700 billion through lower debt servicing costs. These losses were shouldered by civil society: households, pension funds, insurers and even foreign investors. Households alone lost more than $600 billion.

There is a democracy deficit when banks abuse their fiduciary roles such as when Goldman Sachs encouraged its clients to invest in securities or products they wished to unload at a profit prior to the GFC, resulting in clients stuck with undesirable assets. Data on flow of funds (FoF) can trace “savers and dissavers,” or “winners and losers” in an economy for any given year.

Our most recent 2018 FoF data for the Philippines was driven by such factors as high inflation due to exogenous factors and elevated trade tension between the US and China. While the economy realized gross savings of more than P4 trillion, or 9.5% higher than the previous-year level, because of the Build, Build, Build program, capital accumulation surpassed the increase in national savings. The result was invariably net borrowings of more than P458 billion from the rest of the world, four times larger than the 2017 level. The general government was the highest borrower while financial corporations lent less than in the previous year. This was reflected in the higher current account shortfall as more imports of raw materials and intermediate goods fueled domestic economic activities.

Years from now what would our 2020 FoF data indicate? Who would emerge as the winners and losers owing to COVID-19 management — or lack of it — and public policies to restart the economy? Will a democracy deficit become evident?

There is a democracy deficit when during a crisis, public policies partake of what former Citigroup chief economist Willem Buiter, my professor in international monetary economics at LSE, described as “potpourri of factoids, partial theories, empirical regularities without firm theoretical foundations, hunches, intuitions and half-developed insights.”

In other words, there is a democracy deficit when public policies are not based on careful thinking and strategic planning.

The collateral harm to the general public — in terms of the terror we did not prevent, or infections and deaths we did not mitigate — mutate into actual assault against democracy itself.

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.