China has been used by critics of the Why Nations Fail hypothesis as an example of a nation that achieved spectacular economic success in the last two decades of the twentieth century, despite continuing to have extractive political institutions under an authoritarian communist regime.  Its economy was able to grow at double-digit rates annually and an estimated 700 million Chinese were liberated from dehumanizing poverty, a feat without precedence.  The question remains, however, whether this economic success can be sustained over the long run without the need for the political institutions of China to become more inclusive.  The continuing concentration of economic power in state enterprises, the widespread suppression of the media, the decision of President Xi Jiping to rule the country for life and other manifestations of authoritarian rule may already have caused the Chinese phenomenal rise to reverse, as U.S. political scientist Michael Beckley convincingly argued in a lecture delivered at the World Knowledge Forum recently.  There a current slowdown of the Chinese economy, which is growing at much lower than the double-digit rates of 10 to 12 % annually achieved after the reforms introduced in the late 1970s by Deng Xiao Peng.   Much of the present “hangover” can be attributed to the real estate bubble (e.g. Evergrande et al).  which resulted from the Chinese State completely ignoring market rules of supply and demand in the property sector.  Even the prospects of Shanghai becoming the international financial center replacing Hong Kong have dimmed significantly, giving Singapore an even much larger lead.

            The Philippine economy may also be enjoying relatively high GDP growth rates (compared with most of our neighbors) today, despite continuing signs of extractive political institutions.  Can we sustain this “sweet spot” without eventually reforming our political institutions?  To answer this question, let us review what Acemoglu and Robinson meant by extractive and inclusive institutions?    Let me quote from a review of their book by Adrian Akram that appeared in  The Pakistan Development Review.  “Institutions, defined as the rules that govern and shape economic and political life, are of two types:  inclusive and extractive.  Inclusive political institutions are those that are sufficiently pluralistic and are politically centralized.  The institutions that  do not have these two or any of  these characteristics are defined as extractive political institutions.  Inclusive economic and political institutions secure property rights, ensure law and order, create incentives for research and innovation, and provide level playing field for all the individuals of the state.  In addition, inclusive institutions bring a broad cross-section of the society into decision making  process (pluralism) and put restraints and checks on the elites.  Extractive institutions, on the other hand, do not have these attributes.  Societies with inclusive institutions tend to be richer and more prosperous than those with extractive ones.  The pluralistic societies have political institutions that distribute power broadly, engage more people in the process of decision making and face fewer constraints in wielding power.”

            Following the definitions above, we can state that Philippine political institutions are still more extractive than inclusive because, even if we have some amount of political centralization,  our political life is still in the hands of the elite belonging to the rich and influential people, e.g. media and entertainment personalities, who either do not have the common good  in mind or do not have a clue about what is  the common good.  Fortunately, however, over the last thirty years or so a broad coalition of the academe, civil society, and the business sector have succeeded in putting pressure on the political leaders to strengthen economic institutions and introduce more enlightened economic policies.  Among the economic institutions that have benefited from enlightened leadership from some of the best and brightest appointed by our political leaders are the Central Bank, the National Economic and Development Authority, the Department of Finance, the Department of Trade and Industry, and the Department of Labor and Employment. These are the most crucial in the formulation and implementation of the right economic policies.  Today, much is expected of  the Department of Agriculture and the Department of Environment and Natural Resources whose current Secretaries are highly regarded by the private sector.  These are the agencies that have much to do with economic growth, employment and the fight against poverty. 

            The special case of the Philippines that has managed to overcome obstacles to economic growth and development, albeit at a more prolonged process than its neighbors, is now widely being recognized both by local pundits, multinational enterprises and international bodies like the World Bank and the Asian Development Bank.    The latest among foreign institutions objectively recognizing the present enviable economic progress of the Philippines is the Hong Kong and Shanghai Bank Corp.  (HSBC).  Extensively reviewed in his column for a business daily by Dr. Victor Limlingan, the HSBC issued a report entitled “The Philippines takes off:  From Stability to Prosperity:”   I was especially elated to read the report because it has confirmed what I have been saying in the economic briefings I have been giving over at least the last five years:  that the Philippines has accumulated a critical mass of strong institutions and enlightened economic policies that will enable it to attain First World status twenty years from now.  Let me also quote from the HSBC Report as Dr. Limlingan did:

            “The Philippines has built a solid runway for takeoff from two decades of hard-earned reform.  Since the beginning of the 21^st century, the country has embarked on a number of reforms, including the fiscal reforms and trade deals of the Macapagal Administration, the Sin Tax and institutional reforms of the (Noynoy) Aquino Administration, the fiscal and infrastructure reforms of the Duterte Administration, and the liberalization and fiscal reforms of today.  The country has laid a solid fiscal and economic foundation that could finance the long-term investments needed to lift its economic potential.”  Let me just add to the list of game-changing economic reforms which happened more than twenty years ago.  Even more vital were the deregulation, liberalization and privatization measures undertaken during the presidency of Fidel V. Ramos (1992 – 1998).  Our energy, water utilities and telecom sectors took giant leaps thanks to the greater competition introduced by these reforms.  The heavy presence of the private sector today in tollways, airports and other much needed infrastructures would not have been possible without those market-oriented reforms. 

            It would also be fair to point out, that despite the many justified criticisms of the Duterte Administration for human rights abuses, his presidency will be remembered favorably not only for the political will behind the Build, Build, Build program that brought up the amount spent on infrastructures by Government to 5 to 6% of GDP (from a low of 2 to 3 % in the past).  His Administration will also be credited with the almost impossible feat of creatively amending the Constitution through the passage of the Public Service Act which allowed 100% foreign equity ownership of vital transport infrastructures like airports, railways, tollways and other public utilities.  This was followed by the Renewable Energy Act which allowed 100 % foreign ownership of renewable energy projects.  In my role as a major speaker in foreign road shows organized to attract FDIs to the Philippines, these two pieces of legislation under the Duterte Administration are cited as the two most crucial in attracting large doses of FDIs in the near future.  We only have to succeed in improving the ease of doing business (especially obtaining Right of Way in infrastructure projects) for us to attract some $15 to $20 billion of FDIs annually.  

            The most recent fiscal reform under the present Administration that will really enable the Philippine economy to take off, as mentioned in the HSBC report, is the passing of the CREATE MORE act, which enhances the ability of the  country to attract FDIs by making the tax incentives regime more globally competitive, investment-friendly, predictable and accountable.  This new piece of legislation demonstrates the ability of the Philippine Government, with the feedback it gets from the business sector, civil society and academe, to constantly review and improve its fiscal regime so that we do not fall behind our regional competitors in the most important goal of attracting global investors.  The attention of the world is focused on us.  Let’s make sure they like what they see when they actually come and visit us (as was the case of 200 potential investors from Canada who recently came looking for opportunities in the Philippines).  To be continued.