Thursday, February 25, 2010

The Market for Rules

A recent straw poll among the business elite in the Philippines showed that an overwhelming proportion of them support the candidacy of Benigno Aquino III, the son of former president Corazon Aquino who is campaigning based on a platform of rule of law and good governance.

The demand for the “rule of law” in the Philippines coming from the oligopolistic business community is quite puzzling considering that the literature points to reasons why this demand would normally be absent in such a context.

The argument goes that the elite often prefer a system in which they can bend the rules to suit their needs. They would have a comparative advantage in capturing a weak state since they command more resources compared to the owners of small and medium enterprises. They would in fact continue to see returns from their investments in capturing rules and regulations long after such investments have been made.

The founder of Transparency International’s Corruption Perception Index, Johann Lambsdorff has in fact found that investors prefer “grand” corruption compared to petty corruption for the simple reason that under the former they feel part of an elite group that is able to influence laws and regulations.

So why are Aquino’s supporters pushing for the “rule of law”?

There are two possibilities: (a) they could be merely capitalising on public anger against corruption in government aimed at the present administration, or (b) they have seen how the absence of rule of law affects their interests and have learnt to compete on their own terms.

The first reason would cast the elite in their traditional role as opportunistic predators positioning themselves behind the leader that captures the zeitgeist during an election in order to exploit opportunities after the wave of public euphoria has passed. The second reason is a bit more interesting since it would suggest that a genuine market for rules is beginning to take shape.

Is there proof for either position?

History certainly favours the former. Studies comparing the Philippine state with that of its East Asian counterparts have categorised it as a weak incoherent state controlled by dominant business interests. The ability of the economic elite to capture state banking institutions and monetary authorities since their inception has been well documented by Prof Paul D Hutchcroft of the Australian National University.

The country’s failed attempts at implementing a genuine land reform program since the 1950s despite the backing of American aid missions and its susceptibility to protectionist crony capitalism under authoritarian rule in the 1970s to mid-80s despite the doting guidance of the IMF are proof that the legal-administrative system in the country has been under the tight control of landed and later industrial elites.

More recent history may be on the side of the latter. It was in the mid-80s after a major banking crisis and the assassination of the exiled leader of the opposition, Benigno Aquino Jr, that the business community withdrew its support to the autocratic regime of Ferdinand Marcos. This is when the yellow confetti rained down in the central business district of Manila during the height of the protest movement to depose him.

According to Emmanuel De Dios of the University of the Philippines the severe recession experienced in the 1980s led to a weakening of the import substituting industries that were standing in the way of reforms to open up the Philippine economy. Under the presidencies of Corazon Aquino and Fidel Ramos, the country began a process of liberalisation in its tradable goods and non-tradable sector (namely in telecommunications) as subsidies and protection were done away with.

As restrictions to foreign investments were gradually eliminated in all but a few sectors of the economy, a new set of economic elite comprised of small and medium sized exporters began to prosper according to De Dios. Industrialists began to see the opportunities of foreign markets as part of the benefits of increasing globalisation.

Then the Asian Crisis hit. A new populist president in the person of Joseph Estrada took office. While the country had initially outperformed its ASEAN neighbours at the height of the crisis, self-manufactured home-grown crises including insider trading and shady deals involving government pension funds in the takeover of prominent business interests were slowly unravelling the country’s image abroad.

It is in light of these events that the current actions of the business community should be assessed. The second people power revolt that unseated Mr Estrada because of his involvement in illegal racketeering was largely backed and funded by the business community. Seeing how such shenanigans connected to his maladministration affected their wealth via the stock market and how the unfair takeover of their businesses could take place under such a regime, they have begun to see the value of Western style rule of law.

The critics of “civil society” (a local euphemism for the business elite) point to the very methods used by them in unseating the former president as a violation of democratic principles and rule of law. This is where economic and political definitions of rule of law clash. The legalities of the extra-constitutional process as affirmed by the Supreme Court notwithstanding, the opponents of Mr Aquino see his support from the business community that stood with his mother since the mid-80s as a sign of his capture by vested interests.

Partly for this reason perhaps, a recent survey shows the trust rating of Aquino lagging behind the man who may win the election, property tycoon Manuel Villar, who styles himself as a champion of the poor from whose ranks he claims to come. The association of Aquino with a family owned sugar estate that has been mired in controversy ever since his mother made land reform the centrepiece program of her government does not help his case either.

Not that Mr Villar is free from criticisms himself. A censure motion was put forth by his colleagues in the Senate for a conflict of interest involving his properties that benefited from road works proposed by him as chair of the powerful finance committee. The manner by which he flouted the rules in the Senate to avoid bringing the motion to a vote bespeaks of the manipulative way in which he could govern the country. For this reason, enthusiasm for his candidacy from his counterparts in the business world appears to be dismal.

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