At my advanced age, I always find it rejuvenating to give economic briefings to and to mentor young people almost one-fourth my age.  Just recently, I gave an informal talk in the house of a friend to some 40 young men and women in their twenties.  I told them that they are facing an economic future exactly the opposite of what we, the baby boomers, experienced in our long lives.  When I was in high school in the 1950s, we were told that the Philippines had one of the most promising economies that could follow the footsteps of Japan in Asia.  We were way ahead in economic development of our neighbors such as Singapore, Taiwan, Hong Kong, South Korea, Thailand and Vietnam.  What really happened, however, was that by the end of the last century, we were singled out as “the sick man of Asia.”  Our East Asian peers surpassed us in per capita income beginning in the 1970s and later, with Vietnam as the last one to do so in 2020.  In contrast, the Philippine Z generation of today will see the Philippines transition from the “sick man of Asia” to a First World economy during the decade of 2040 to 2050.  Today, the Philippines is being celebrated by outside observers as one of the fastest growing economies in the Indo-Pacific region.  As mentioned in an earlier article in this series, the multinational bank HSBC just reported to the foreign investment world that the Philippine economy will “continue to grow in size and influence, creating many opportunities for foreign and local investment.”

            With the increased popularity of the hypothesis of the book “Why Nations Fail” of Daron Acemoglu and James Robinson, who with Simon Johnson were awarded the Nobel Prize in economics of 2024, it is relatively easier to explain to the young generation why the Philippine nation failed during the generation of the boomers and the X generation.  I just have to use the trio’s well-known dichotomy between extractive and inclusive institutions.  I could just say that the Philippines failed because we had “extractive political institutions” who were in the hands of leaders who were more interested in protecting their respective vested interests than in promoting the common good of Philippine society.   This political state of affairs led to the nurturing of extractive economic institutions that led both to slower economic growth and to the concentration of income and wealth in the hands of a few.  When they follow this line of argument, they tend to conclude that we must have already succeeded in attaining inclusive political institutions considering that the Philippines is no longer the sick man of Asia and is performing quite well economically, as attested to by HSBC and other independent international institutions.  That’s when  I have to hem and haw and point out that, though our political institutions continue to be extractive, there have already been a minimum of economic policy reforms, such as those related to fiscal discipline, economic deregulation, more focus on infrastructure spending, market deregulation and privatization, etc. that partly counteract the harmful effects of extractive political institutions which clearly still characterize Philippine society today.

            As in the case of all generalizations, especially in the social sciences (“he who generalizes generally lies”) there are always notable exceptions.  Among the most fatal economic policies that explain the failure of the Philippine economy that we can attribute to extractive political and subsequently extractive economic institutions were the inward-looking, import-Import substitution and capital-intensive industrialization strategy   that our leaders implemented in our first two decades after obtaining independence.  This was  in stark contrast with the export-oriented and labor-intensive strategies followed by our neighbors.  We can attribute this policy error to the vested interests of the Filipino elite who were the only ones with enough capital to start the first large-scale manufacturing ventures that would serve the domestic market.  They moved heaven and earth to protect their investments from cheap imports.  Gladly colluding with them were the U.S. multinationals who were given “parity rights” until 1974.  The victims were obviously Filipino consumers who had to pay more for their manufactured products.   Suffering even more economic hardship were the unemployed and underemployed Filipino workers who could not benefit from an export-oriented, labor-intensive strategy that our East Asian neighbors followed.  An even more serious policy error was the utter neglect of countryside and agricultural development that accounted for massive poverty in the rural areas.  This can also be explained by the vested interests of the political elite who were most interested in diverting as much public resources to support their investments in the inward-looking industries that were mostly in the urban centers, especially in the monstrous National Capital Region.  Unfortunately, there was no constituency for the millions of small farmers, except of course, for the communist National People Army (NPA).  The third most harmful policy error was the long-time “Filipino First” policy that prevented the inflow of major foreign direct investments that significantly benefited the likes of Singapore and Malaysia and more recently communist Vietnam who, unlike the Philippines until 2022, allowed foreigners to own 100 ownership of major infrastructure projects.  This Filipino First policy was backed by the Filipino elite who were the only ones with sufficient capital to put up these protected public utilities that became monopolies or oligopolies to the great harm of the consuming public in such sectors as in energy, water and telecom.  To be objective, however, this “Filipino First” policy was also strongly supported by a coalition of so-called “nationalists” from the right to the left of political ideologies who sincerely believed that it was for the common good of the Filipino nation to prevent foreigners from owning these public utilities (which for a while included the retail trade). I witnessed this in the deliberations in the Constitutional Commission that drafted the Philippine Constitution of 1987.  The large majority voted for the provisions severely restricting foreign direct investments in vital sectors of the Philippine economy.

            What I had to explain to my young mentees is how major economic policy reforms were achieved, despite the fact that for the last twenty or thirty years, Philippine political institutions continued to be mainly extractive and unfortunately corrupt.  That is where I had to bring in the concept of technocracy, which to my mind was ignored by Acemoglu and Robinson in their Why Nations Fail.  The first time I came across the term “technocrat” was in Spain where I spent a post-graduate year after I obtained my Ph.D. in economics at Harvard in 1963.  Spain then had a per capita income less than the Philippines.  Today, Spain is a First World country with a per capita income of more than $30,000.  From 1939 to 1975, Francisco Franco led Spain as a dictator.  He was accused of many human rights violations.  His political regime was characterized by what Acemuglo and Robinson would call extractive political institutions.  He was prudent enough, however, to recruit the best and the brightest from the academe and the business sector to occupy key positions in his Cabinet in the fields of public administration and economic and fiscal management.  Thanks to the enlightened economic policies and inclusive economic institutions introduced by these “technocrats”, Spain under Franco built the foundations for long-term economic growth.  After his death in 1975, Spain gradually evolved into a working parliamentary democracy and joined the developed countries of Europe. The Spanish model showed that extractive political institutions can co-exist with inclusive economic institutions.   To be continued.