State capture among the World Governance Indices

Daniel Kaufmann was the speaker at the Dec. 1 seminar at the UP School of Economics. He is the “Kaufmann” of the “Kraay and Kaufmann” tandem of the World Governance Index (WGI) of the World Bank, arguably the most cited tandem in the macro-econometric studies space. Almost every researcher on cross-country economics has cited them, perhaps a multiple number of times. For this and for their part in canonizing “good governance” as the patron saint of successful development, they deserve our heartfelt thanks.

There are currently six indices in the WGI roster, viz., 1.) Voice and Accountability; 2.) Political Stability: the process by which those who hold political power are selected and replaced; 3.) Government Effectiveness; 4.) Regulatory Quality: the capacity of government to formulate and implement policies; 5.) Rule of Law; and, 6.) Control of Corruption: the respect for institutions and laws that govern interactions among citizens and the state.

In the 2022 version, the only news about the Philippines is the steady course of raging mediocrity — invariably among the lower 10-40% percentile. These indices have been available for 200 countries starting from 1996 at www.govindicators.org. When the data are run against such performance indicators as such as GDP growth per capita, poverty reduction or the investment rate, they invariably register positive and significant correlation contributing to the global consensus on the culprits lurking behind development failures. And this observed tendency is not just over the last half century. Acemoglu and Robinson (Why Nations Fail, 2010) has tracked the careers of most economies through multiple millennia and concluded that the formula for failure invariably boils down to the non-protection of property rights and non-enforcement of contracts (the narrow definition of the rule of law).

The 2023 version of the WGI will include an innovation: the index called “state capture.” State capture includes the capture of state organs by those they are mandated to regulate (regulatory capture) and the capture by vested interests of rule-making bodies (legislature and the executive). The capture of rule-making bodies results in the promulgation of rules (laws and statutes) that, despite the ringing pro-public preambles, often serve to trample upon the public weal. Let’s elaborate.

First, there are flavors of state capture based on motive. In a weak governance environment, predation on value-creators is rife but as much by lawless state as nonstate actors. Market players often need to defend themselves against state predation; they do so by “vertically integrating” into political arena where, as the saying goes, not having a seat on the dinner table risks becoming part of the menu. Economics Science Nobel laureate, O. Williamson, calls this “private ordering.”

Second is the flavor rooted on provenance: the WGI “control of corruption index” primarily targeted implementation or administrative corruption that represent clear violations of existing laws (e.g., diverting part of tax collection to private pockets or the overpricing in the purchases by government agencies). Control of corruption programs has become increasingly focused on what may be called “retail corruption.” The Commission on Audit and the Office of the Ombudsman are the point agencies to fight such retail corruption.

The state capture index is meant to highlight and prevent what we may call “wholesale corruption”; those that are enabled by laws properly passed by the legislative or executive authorities. They are thus “over the table” rather than “under the table” variety.

There is a world of difference between “under the table” and “over the table” corruption: the latter, being legal, cannot in theory be prosecuted in the ordinary courts of law; it rather requires proving the unconstitutionality of the enabling laws — adjudicated by no less than the Supreme Court. The Supreme Court is normally reticent to declare as unconstitutional laws which passed the accepted procedural rules of the co-equal branch, Congress.

There is then the delicate issue of interpretation connected with over-the-table corruption: since the associated resource transfer in the latter are covered by the laws passed by duly constituted authority, the question is how much of it is by the consent of the governed and how much of it is from greed of the captors. Consider the Ferdinand Marcos, Sr. Presidential Decree 750 granting the monopoly to import cigarette filters to crony Herminio Disini’s Philippine Tobacco Filters Corp. or the one mandating of the Oil Price Stabilization Fund which monopolized the import of petroleum (enabling massive wholesale corruption). They can, and were, defended as part of the government development programs approved by duly constituted executive or parliament and thus, in theory, based on the consent of the governed. Outsiders may view the resulting rents as corruption, but such rents were defended as bankrollers of additional investment.

The issue thus shifts to the legitimacy of government and a priori to the legitimacy of the formal exercises that give it power. In the musky new world of “fake news,” “thought bubbles,” and “echo chambers,” the appeal to the Condorcet jury theorems (that democracy beats monarchy in judgmental competence where the voters have better-than-average judgmental competence) seems empty. Although on average, the truism “democracy is a ‘bad’ collective choice regime but for all its rivals” may still apply, does the average apply to us? Every nation, the Philippines included, considers itself exceptional and above average. Just don’t invoke the 2018 and the 2022 PISA (Program for International Student Assessment) results, as well as the 2022 and antecedent governance indices, as witness.

Is humoring vote chasing populist sentiment by politicians a form of state capture? Here one makes a distinction between “popular” and “populist”: the first is the North Star of every politician — the state of affairs that “democracy” was intended to capture; the second is a convenient excuse for unearned rents by scoundrels. Senator Ralph Recto lost his senate seat correctly championing the anti-populist upward adjustment in the value-added tax. A more recent example: the midnight insertion to the PPP (public-private partnership) bill at the bicam stage that mandated the claw back of profits in excess of what is “reasonable” to the Treasury. The already thin interest on the Philippine PPP projects by foreign investors who see in motherhood term “reasonable” a “co de word” for contract fragility in weak governance environment, can be blown away. If the reward of their economy and risk-taking becomes by law expropriated by the Philippine government, they will go to Vietnam.

Politicians couldn’t care less about the investment rate as long as reflecting populist sentiment will win the next election. Who is to say that the very low investment rate of the Philippines (<25% of GDP vs. 30-40% of GDP in East Asia) is not a faithful copy of the popular preference of the Filipino voters to “eat, drink and be merry” today? One can rage over our educational system failing to imbue a sense of hard-nosed data sensibility among our students rather than a sneaky sense of deviltry among investors; which, by the way, even the 1988 Constitution seems to suggest. And isn’t this also the shared sentiment of the bulk of our teacher-hood, itself schooled over decades on the “pedagogy of the oppressed”?

Isn’t being a consistent bottom dweller also exceptional, if only “in inverted commerce,” as the Brits would say? One can charge it to bad governance and villainous state actors. Just don’t forget: bad governance has its own phalanx of defenders who may just constitute a plurality! In a democracy, that plurality can anchor “tokhang” type tyranny.

When the University of the Philippines (UP) men’s basketball team lost all its matches but one in 2012 and 2014, the common cynical smirk (as per my colleague Prof. Emmanuel Esguerra) was: “Sayang! A perfect season blemished by one lousy win!” But some denizens responded with the more hopeful “No way but up!” and these seeded the UP Fighting Maroons’ winning the UAAP crown in 2021! Hope springs eternal and sometimes gets it right.

Merry Christmas and a Hopeful New Year.

Raul V. Fabella is a retired professor at the UP School of Economics, a member of the National Academy of Science and Technology, and an honorary professor at 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.