Our romance with ‘small is beautiful’ and how large businesses provide needed remedies

(Part 2)

THE MAIN PROBLEM with large commercial establishments is the “too-big-to-fail” feature: when a commercial and industrial enterprise has become so large and encompassing, they achieve quasi-immunity from regulatory intervention by virtue of size and systemic reach. They cannot be brought down without courting the collapse of the whole economic system. They become, as it were, exempted from the Schumpeterian “creative destruction” rule which is the anchor of capitalist dynamism. The 2008 Financial Crisis with the Lehmann Brothers collapse shows this clearly even under so-called cutting edge regulation.

But even more dangerous in environments with weak public ordering is the problem of “too-big-to-behave.” Being too big, they change their color and become political actors on top of being economic actors. They train their political clout not to enable, but to prey on weaker rivals – to suppress any form of competitive challenge. Large conglomerates may succumb to the temptation of employing political leverage for rent-seeking after the capture of political centers of power.

Many large business groups may indeed develop and maintain clandestine but mutually beneficial relations with political actors. This murky matrix of relationships and connected dealings became the favorite whipping boy of sanctimonious Western observers in the wake of the Asian Financial Crisis of 1998 which, for many, signaled the end of the proverbial East Asian Model (“In Praise of Rules,” The Economist, April 7, 2001).

This danger re-emerged in the 21^st century case of massive self-dealing of the Saigon Commercial Bank in Vietnam, and in the collapse of the state-supported “Evergrand” in the People’s Republic of China where some rules of law on self- and connected dealings were rendered inapplicable by political interference. We still do not know how much damage will be wrought upon these economies. And we do have problems of our own with too-big-to-behave entities in our midst. They are largely associated with political power blocks.

For all the dangers of large corporations, this is just the echo of the classic risk-return conundrum of state-formation. It endows the state with a monopoly on the use of violence on a hope and a prayer; that the powers bestowed will be used for our boon rather than its opposite. On the whole, the historical gamble has been successful, although we need a judiciary that understands its role as a firewall against abuse to make it work.

We do not underestimate this risk. Our view is that rather than condemn size at the outset, we consider firm size as necessary investments in efficiency and sustainability. Where such investment is prudent and kept in place by the guardrails of rule-of-law, even if only by a lapse-prone judiciary, the returns on investment is substantial.

When all is said, the economics profession should have known better. It was its duty to know better than their tutors in the West.

A different question is the following: had they known better, would we have stood up against the tide? There is a place for smallness in the economy but like the season, its place is not everywhere and not every time. We are a small economy but our vision should encompass the whole world. If tiny Denmark can host a global giant container shipping company, Maersk, which employs many Filipinos, so can Filipino companies become leaders and pioneers in global businesses, if only our regulators look more benignly at big business.

THE BOON OF LARGE CAPITAL
The Philippines started out on the wrong foot in its farm and land policies with its Comprehensive Agrarian Reform Program (CARP). It chased big private capital away from the farm sector.

Some 20 years ago, Metro Pacific President Manny V. Pangilinan (often referred to as MVP) called the UP School of Economics Group at Diliman to ask for the whereabouts of the government’s 100,000 hectares of land for lease, as announced by then Secretary of Agriculture Arthur Yap of the Arroyo administration. MVP said he was interested in large-scale farming and was ready to pour in billions of pesos if a suitable location was found. He said he was anticipating that China would become a food importer and we may as well be ready to answer the demand. After a few phone enquiries later, we discovered that the 100,000 hectares was the aggregate of five hectares in Tawi-Tawi, three hectares in Sorsogon, four hectares in Batanes, etc. This killed the enthusiasm of MVP who said his expertise was organizing and managing production, not in consolidating many disparate pieces of farm lands quickly. He said he was not interested in owning land, but would like to sign a contract of lease with a consolidator (government or otherwise) for 25 years for 10,000 hectares and to pour in considerable sums in the venture. Bottom line, he would not sign 1,000 lease contracts with 1,000 farmers for 1,000 pieces of farmland. That seemed the end of the story. But having large capital and enthusiasm will travel. As the saying in a western movie goes, “Have gun will travel.” MVP had other ideas.

In 2019, Metro-Pacific Agri-ventures entered into a joint venture agreement with the LR group of Israel to establish a high-tech vegetable outfit in the Philippines. LR Israel is a world leader in drip irrigation greenhouse farming and precision agriculture in Fort Magsaysay, Nueva Ecija. The project was a 50-hectare industrial scale farm which was to produce high value crops (bell peppers, tomatoes, and lettuce) in climate-controlled greenhouses. Their sales destination were the supermarkets in Manila and elsewhere so as to reduce the imports of these from other countries. Every greenhouse was air-conditioned and climate controlled for the optimal growth of each vegetables type. The farm is now producing batches of vegetables for shipment to Metro Manila.

The vision is to expand the area to a thousand hectares in the vicinity, but also in other areas where suitable land could be leased. That is not easy because of restrictions on land ownership in the country. The trick is state-of-the art industrial greenhouse farms. This would be the first of its kind in the Philippines! This shows that having large capital can afford the importation of new technologies and modalities to overcome the rigidities posed by CARP. At the moment, the firm is privileging worker-leaseholders and their children for employment among its workforce.

Metro Pacific Dairy Farms, Inc., a P2-billion state of the art dairy processing plant in Bay, Laguna, produces up to 2 million liters of local fresh milk. It started out with the acquisition in 2019 of majority ownership of Carmen’s Best from the Razon Group, which retained a significant minority ownership and continuous in the management. The goal was to establish the largest and most technologically endowed local dairy processing facility. Local dairy farmers will have a stable fair priced market for their milk. It will clearly reduce imports of fresh milk.

LARGE CAPITAL REDUX AND BRINGING REMEDIES
All these mark a new beginning in our farming sectors, viz., the return of big capital to our farm sector which, in the past, due to land reform property rights chaos, it had been fleeing. Since these are all about traded goods production, it augurs well also for our Manufacturing sector besides our food sectors.

Would that these ventures make as much money as they would in the non-traded goods sector. Would that other deep pockets find the farm sector and the traded goods sectors — for so long condemned to what Nick Joaquin called our “timorous clinging to smallness” — congenial for investment.

(Read Part 1 here: https://tinyurl.com/2xv75o4x )

Raul V. Fabella is a retired professor of the UP School of Economics, a member of the National Academy of Science and Technology, and an honorary professor of the Asian Institute of Management. He gets his dopamine fix from tending flowers with wife Teena, bicycling, and assiduously, if with little success, courting the guitar.