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

(Part 1)

National Artist Nick Joaquin, way back in 1966, wondered how our obsession and “timorous clinging to smallness” — with tingi-tingi (bit by bit), the sari-sari (sundry) store, the “jeepney conveyance,” the purchase of cigarette by a single stick — all started. He wondered how this preference for the “small” spills over to a mindset biased against thinking big.

On Feb. 28, 2023, Senate Resolution 44 urged the Land Transportation Franchising and Regulatory Board (LTFRB) to postpone the planned phaseout of the traditional jeepneys (PUVMP) by June 30, 2023. On Aug. 7, 2024, President Ferdinand “Bongbong” Marcos, Jr. rejected the postponement of the program, which had been postponed several times since its promulgation in 2017. By now, some 80% of the jeepney stakeholders have signed up to the program. The dwindling number of oppositors went to the Supreme Court (SC) to nullify the PUVMP program. On March 7, 2024, the SC denied the petition.

But by June 4 this year, all Malacañang could deliver was the statement that the PUV Modernization Program will proceed but that it will not be imposed hastily without proper preparation of the affected sectors. That was music to the oppositors’ ears! The message from Malacañang is: “We are waiting to deliver a perfect program!” That signals a tolerance for delay of another decade! We will then continue to wallow in chaotic traffic snarls that cost us billions of pesos a year, not to say destroying our public’s health by the forcible breathing of heavily polluted air.

True, the PUV Modernization Program is far from perfect. It is, for example, a letdown that it resorts to consolidation via the cooperative management which, apart from the much simpler credit union cooperatives, has in the Philippines proven to be a recipe for failure.

True, the cooperative movement has definite allure to the small stakeholder, to the communitarian viewpoint, reflected in its fundamental decision rule “one-man-one-vote.” Or, as our Visayan brothers say with endearment: inato. But not all societies have what it takes to make it work. And so it has for the most part managed to run the businesses under its wing to the ground.

By contrast, the sustainable modality in capitalist market economies has been the more impersonal “one-share-one-vote” rule which ensures that those with more skin in the game are given greater authority. By contrast, the one-man-one-vote scheme ensures that the most popular — not the most competent — holds managerial authority.

As for funding, it is also true that the budget for the PUVMP remains inadequate to cover the cost of national coverage. But PUVMP need not be implemented in one go. Metro-Manila — where the returns to modernization would be highest — can go first. The more affluent regional capitals can follow suit.

But note that despite the flaws, the PUV Modernization program is a step in the right direction from the status quo. If we had more mettle we should get started now, if only in stages. Waiting for perfection is Waiting for Godot: he (it) never comes.

A similar story on how our fascination with the small has cost the country involves how electric power is distributed in most of the archipelago.

In the Philippines, electricity is distributed in many regions by quasi-state entities called “electric cooperatives,” each empowered with a legal franchise, and each with “one-man-one-vote” governance. Each has the state treasury on standby to cover operational deficits. Their lack of scale and the bevy of operational inefficiencies associated with the absence of bottom-line discipline (chronic and growing deficits equals bankruptcy) have contributed to the higher average cost and poorer electric service in the country as a whole.

Attempts at privatization and consolidation have invariably failed due to the inconsistent requirement of approval by a majority vote of the franchise owners (everybody) to give up their cozy state-backed franchises. Provinces that could be served efficiently and sustainably by one sizeable distribution company are not. Like Occidental Negros, which is served instead by three small ones with their consequently higher average cost of electricity borne invariably by the consumers.

Where bottom-line discipline is nonexistent, electric cooperatives incur operational deficits and wait for the government to bail them out. But privatization and consolidation for greater efficiency cannot be implemented without this voluntary nod to democracy.

Privatization and consolidation also imply that electric power distribution service will now be delivered by larger, more impersonal and distant business corporations which will care less for the little man — the subtitle of Small is Beautiful which goes, “Economics as if the little man mattered.”

What, if any, is the accountability of the economics profession for this preference for the small entangled with a bias/animosity against the large?

That market power is a hindrance to market efficiency was baked into the Western economic tradition in the post-WWII era and which our foreign-funded scholars learned and imbibed in western universities. That production technology must be homogenous of degree one (no-scale economies) as a requirement for the most revered First Fundamental Theorem of Welfare is central to our story. Homogeneity of degree one means that size does not matter for productive efficiency — the average product of an input remains the same for a firm employing one unit of capital and one unit of labor, and for another firm employing 100 units of each. This is called constant returns to scale. No scale economies!

This became translated in agriculture among our mostly US-trained experts as production efficiency being agnostic as to farm size. A one-hectare farm is just as efficient as a 100-hectare farm. The break-up of large farms by land reform is therefore costless in terms of economic efficiency but desirable in terms of land ownership equity. Land reform was intended to smash the landed aristocracy, not quibble over efficiency. Worse yet, it was argued that small farm size is more productive due to more intensive cultivation. The break-up of farms also ignored that other sectors ancillary to the farm sector, such as the formal banking sector, are not blind to farm size especially in the granting crop loans. Since small farms exhibit a higher tendency to default on the loans, the land reform beneficiaries were effectively exiled from the formal credit market. They therefore had to resort to very costly informal lenders. Without adequate financing, the now landed farmers were destined for poverty.

The best agrarian reform modality to improve farm household welfare is also the least intensive in government inputs — agrarian reform by contractual revolution (replacing by law the 60-40 contract in favor of landholders by the 40-60 share contract in favor of tenants) leaving the technology intact. Instead, farming technology was upended when share tenancy contracting was also declared illegal to expedite the forcible purchase of land and its distribution to the landless.

Secondly, since economic agents in the Arrow-Debreu economy own private property, private property has to be protected lest some agents become wealthy by simply expropriating the property of others. Most significant market exchanges involve formal contracts which themselves need safeguarding. Who protects private property and guarantees the integrity of contracts? The government, of course. None of this is atomic science if public ordering is being supplied by the Samuelson’s Benevolent Central Planner (BCP) — it does not matter what intricacies are introduced by the chosen modality, the BCP will set it to right.

But if the government or its organs are weak, the choice of modality becomes very important. A more complicated modality will not be implemented because of weak governance and limited budget. This wrinkle in governance was discovered only in the 1960s by R. Coase and J. Buchanan who insisted that human factors in bureaucracy made governments very fallible and weak, and thus the choice of modality for programs like land reform is all important. The transactions cost economics which won Oliver Williamson the Nobel Prize in Economics in 2009 was re-discovered only in 1975 but was largely ignored by mainstream economics. Our boys became aware only in the early 21st century.

When the government and its organs are weak, the best option is to adopt programs that require as little government resources and safeguarding as possible. In an environment of weak governance, land policy is the contractual reform modality, not land acquisition and redistribution by government. Instead, in 1988 the Philippines adopted the much more governance-intensive land acquisition and redistribution modality. And to top it all, it was mindlessly extended to all crops regardless of the returns to scale character of each crop. But with the frenzy of the people’s revolt in the mid-1980s, nothing but the forcible breakup of the landed aristocracy was good enough.

This view was widely applauded among economic public intellectuals grounded in post-WWII Western thinking. Moreover, this policy prescription also jibed with the romantic slogan “Small is Beautiful,” made famous by E.F. Schumacher (1973). This became popular in the academic community, especially among young idealistic teachers and students in the 1970s, nurtured by socialist-leaning clergy and communist-leaning faculty steeped in colored histories of T. Agoncillo and J.M. Sison. That is partly how “Small is Beautiful” became baked into our regulatory worldview.

(To be continued.)

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.