Bernardo M. Villegas

Manila Bulletin Business

November 26, 2024

Why the Philippine Nation Failed (Part 1)

            The 2024 Nobel Prize for economics has been awarded to university professors and professional economists Daron Acemoglu, Simon Johnson and James Robinson for their work on income and wealth disparities between nations.  Acemoglu and Johnson are professors at the Massachusetts Institute of Technology (MIT) while Robinson is a professor at the University of Chicago well known for free market economists like Milton Friedman.  It would be useful to understand the explanations the trio give for the failure of some countries and the success of others to get better insights into the Philippine experiences in economic development. Although the Philippines is now being celebrated as one of the fastest growing economies in the Indo-Pacific region (together with India and Vietnam), it cannot be denied that for most of the last thirty years (at least since the 1986 EDSA revolution), we were known as the “sick man of Asia.” This dark reputation of the Philippine economy especially caught the attention of the world because it was well known that in the 1950s and early 1960s, there were a good number of economists and political scientists who referred to the Philippines as the most promising economy to follow the footsteps of Japan as a highly developed and industrialized country. We were way ahead in economic development compared to our neighbors like Thailand, Malaysia, Singapore, Taiwan, Hong Kong, and South Korea.

Unfortunately for the generations of the “baby boomers” and Generation X, in the decades of the 1980s and 1990s, the first set of “tiger economies” (Singapore, Taiwan, Hong Kong and South Korea) began to surpass us in per capita income and industrialization.   Then as we struggled in the midst of the political turmoils resulting from the EDSA revolution in the 1990s and the first decade of the twenty first century, it was the turn of our ASEAN peers, i.e. Malaysia, Thailand, Indonesia and finally Vietnam, to leave us behind in terms of per capita income and in the most crucial area of agricultural and countryside development.  There is no doubt that the Philippine nation failed for most of the decades following the Second World War up to the second decade of the 21^st century.     

            Can we find light in the research findings of these current Nobel laureates to understand the roots of our previous failures so that we can continue to strengthen the institutions and pursue further the economic policy reforms that explain why we are no longer the “sick man of Asia” and being complimented by foreign observers like the World Bank and the Asian Development Bank as well as leading international personalities as Elon Musk as one of the most promising emerging markets in the coming decades. Just recently the Hong Kong Shanghai Bank referred to us as the emerging star of Asia.  Let us then summarize briefly their major hypotheses found in the last Chapter of the book entitled “Why Nations Fail.” 

            In explaining why some nations fail (and others succeed), the authors operated on two levels.  The first is the distinction between extractive and inclusive economic and political institutions.  The second is the explanation for why inclusive institutions emerged in some parts of the world and not in others.  The first level of their theory is about an institutional interpretation of history.  The second is about how history has shaped institutional trajectories of nations.  Central to their theory is the link between inclusive economic and political institutions and economic success or prosperity.  How did they define “inclusive” institutions?   They are those that enforce property rights, create a level playing field, and encourage investments in new technologies and skills.  These types of institutions are more conducive to economic growth than the “extractive” ones that are structured to extract resources from the many by the privileged few and that fail to protect property rights or provide incentives for economic activity.  Inclusive economic institutions are in turn supported by, and support inclusive political institutions, that is those that distribute political power widely in a pluralistic manner and are able to achieve some amount of political centralization so as to establish law and order, the foundations of secure property rights, and inclusive market economy.  In the same way, extractive economic institutions, are synergistically linked to extractive political institutions, which concentrate power in the hands of a few, who will then have incentives to maintain and develop equally extractive economic institutions for their benefit, using the resources they obtain to continue holding on to their political power.   

            Are extractive political and economic institutions inconsistent with economic growth?  The authors answer in the negative.  They say that every elite, all else being equal, would like to see as much growth as possible so that they can extract more.  Experience shows that extractive institutions that have achieved a minimum degree of political centralization are often able to generate some amount of growth.  The trouble is such growth is difficult to sustain for two reasons.  First, sustained economic growth, as brilliantly theorized by the great Harvard professor Joseph Schumpeter in his book Economic Development, requires innovation (by the entrepreneur). This required innovation cannot be decoupled from creative destruction (just think of how the smart phone has completely made the Kodak camera obsolete). Creative destruction replaces the old with the new in the economic realm, thereby destabilizing established power relations in politics.  Because the elites who dominate extractive institutions fear creative destruction, which is the engine of sustained economic growth, they will resist it.  Thus, any growth that germinates under extractive institutions will be short-lived.

            The second reason why sustained economic growth under extractive institutions cannot be attained is that the ability of those who dominate extractive institutions to benefit greatly at the expense of the rest of society implies that political power under extractive institutions is highly coveted, making many groups and individuals fight to obtain it.  This can be illustrated in our own political history by the case of the powerful “sugar bloc” fighting for political control before and after martial law imposed by the late President Ferdinand Marcos Jr.   Because of the advantages given to those who are in control of extractive institutions, there will always be powerful forces pushing societies under these institutions toward political instability which is incompatible with sustained economic growth.

            A major criticism of the  theory about extractive vs. inclusive institution is based on the phenomenal economic success of the Chinese economy over the last thirty years, ever since the market- oriented reforms that were unleashed by Premier Deng Xiao Peng in the late 1970s. Despite the appearance of a market economy, however, China continues to be under the authoritarian control of a single party which continues to exercise extractive political control.  Any billionaire capitalist can be summarily jailed if he crosses the path of the Communist party.  While scores of private companies are now profitably operating in China, many elements of the economy are still under the command and protection of the party.  As pointed out by Acemoglu and Robinson, journalist Richard McGregor reports that on the desk of the head of each of the biggest state companies in China stands a red phone.  When it rings, it is the party calling with orders on what the company should do, where it should invest, and what its targets will be.  China can be referred to as having a “market” economy only with great reservations.   It still has prevalent extractive political institutions. Thus, Acemoglu and Robinson conclude that growth under extractive political institutions, as in China, will not bring sustained growth and is likely to run out of steam. Today, as China’s GDP growth has slowed down to below 5 % annually (in contrast with the 12 to 14 % during the heydays of the 1980s and 1990s), we may be seeing the predictive validity of the hypothesis of the book “Why Nations Fail.”  To be continued.