Why Fighting Corruption Is Not Enough

26 March 2010

By Walden Bello

After nine years of witnessing increasing poverty among the masses and spiraling corruption in high places, it is understandable that Filipinos see a strong correlation between corruption and poverty. And the judgment of many is probably correct that the candidates that are free of the taint of corruption stand the best chance of turning this country around. Moral leadership may not be a sufficient condition for successful leadership but it certainly has become a necessary condition in a country that has been so deprived of exemplary public figures like the Philippines.

Corruption, however, has become the explanation for all our ills, and this brings with it the danger that, after the elections, campaign rhetoric might substitute for hard analysis on the causes of poverty, leading to wrong, ineffectual prescriptions for dealing with the country’s number one problem.

Let me be more explicit: Corruption must be condemned and corrupt officials must be prosecuted because being a violation of public trust, corruption undermines faith in government and leads to an erosion of the moral bonds among citizens that serve as the foundation of good governance. Corruption, however, is unlikely to be the main cause of poverty. Wrongheaded policies are, and clean-cut technocrats have been responsible for more poverty than corrupt politicians.

The complex of policies that have pushed the Philippines into the economic quagmire over the last 30 years might be summed up in that formidable term: structural adjustment. Also known as neoliberal restructuring, it involved prioritization of debt repayment; conservative macroeconomic management that involving huge cutbacks in government spending; trade and financial liberalization; privatization and deregulation; and export-oriented production. Structural adjustment came to the Philippines courtesy of the World Bank, International Monetary Fund, and the World Trade Organization, but it was internalized and disseminated as doctrine by local technocrats and economists.

Prioritizing Debt Repayment

Corazon Aquino was personally honest and her contribution to the reestablishment of democracy was indispensable, but her submitting to the International Monetary Fund’s demand to prioritize debt repayment over development brought about a decade of stagnation and continuing poverty. Interest payments as a percentage of total government expenditures went from 7 percent in 1980 to 28 percent in 1994. Capital expenditures, on the other hand, plunged from 26 percent to 16 percent. Since government is the biggest investor in the Philippines—indeed in any economy—the radical stripping away of capital expenditures goes a long way toward explaining the stagnant one percent average yearly growth in gross domestic product in the 1980’s and the 2.3 per cent rate in the first half of the 1990’s.

In contrast, our Southeast Asian neighbors ignored the IMF’s prescriptions. They limited debt servicing while ramping up government capital expenditures in support of growth. Not surprisingly, they grew by 6 to 10 percent from 1985 to 1995, attracting massive Japanese investment while the Philippines barely grew and gained the reputation of a depressed market that repelled investors.

Trade and Financial Liberalization

When Fidel Ramos came to power in 1992, the main agenda of his technocrats was to bring down all tariffs to 0 to 5 percent and bring the Philippines into the World Trade Organization and the ASEAN Free Trade Area (AFTA), moves that were intended to make trade liberalization irreversible. A pick-up in the growth rate in the early years of Ramos sparked hope, but the green shoots were more apparent than real, and they were, at any rate, crushed as a result of another neoliberal policy: financial liberalization. The elimination of foreign exchange controls and restrictions of speculative investment attracted billions of dollars in the period 1993-1997. But this also meant that when panic hit the ranks of foreign investors in Asia in the summer of 1997, the same lack of capital controls facilitated the stampede of billions of dollars from the country in a few short weeks in mid-1997. This pushed the economy into recession and stagnation in the next few years.

The Estrada administration did not reverse course, and under the presidency of President Gloria Macapagal-Arroyo, neoliberal policies continued to reign. New liberalization initiatives in the next few years were initiated on the trade front, with the government negotiating free trade agreements with Japan and China. These pacts were entered into despite clear evidence that trade liberalization was destroying the two pillars of the economy, industry and agriculture.

Radical unilateral trade liberalization severely destabilized our manufacturing sector, with textile and garments firms, for instance, being drastically reduced from 200 in 1970 to 10 in recent years. As one of Arroyo’s finance secretaries admitted, “there’s an uneven implementation of trade liberalization, which was to our disadvantage.” While he speculated that consumers might have benefited from the tariff liberalization, he acknowledged that “it has killed so many local industries.”

As for agriculture, the liberalization of our agricultural trade after we joined the World Trade Organization in 1995 transformed the Philippines from a net food exporting country and consolidated it into a net food importing country after the mid-1990’s. The year 2010 is the year that the China ASEAN Trade Agreement (CAFTA) negotiated by the Arroyo administration goes into effect, and the prospect of cheap Chinese produce flooding our markets has made our vegetable farmers fatalistic about their survival.

Depressive Fiscal Policy

What likewise became clear during the long Arroyo reign were the stifling effects of the debt repayment-oriented macroeconomic management policy that came with structural adjustment. With 20-25 percent of the national budget reserved for debt service payments owing to the draconian Automatic Appropriations Law, government finances were in a state of permanent and widening deficit, which the administration tried to solve by contracting more loans. Indeed, the Arroyo administration contracted more loans than the previous three administrations combined.

When the deficit reached gargantuan proportions, the government refused to take the necessary steps to contain the key factor acting as the main drain on expenditures; that is, it refused to declare a debt moratorium or at least renegotiate the terms of debt repayment to make them less punitive. At the same time, the administration did not have the political will to force the rich to take the brunt of bridging the deficit by increasing taxes on their income and improving their collection. Under pressure from the IMF, the government levied this burden on the poor and the middle class via the adoption of the expanded value added tax (EVAT) of 12 percent on purchases. The tax was passed on to poor and middle class consumers by commercial establishments, forcing them to cut back on consumption, which then boomeranged back on small merchants and entrepreneurs in the form of reduced profits, forcing many out of business.

Facing the Policy Challenge

The straitjacket of conservative macroeconomic management, trade and financial liberalization, and a subservient debt policy kept the economy from expanding significantly, resulting in the percentage of the population living in poverty, according to the World Bank, increasing from 30 to 33 percent between 2003 and 2006. By 2006, there were more poor people in the Philippines than at any other time in the country’s history.

The country’s plight under the lash of wrong policies over the last four administrations becomes even clearer in a comparative perspective. According to the United Nations Development Program Human Development Report, the Philippines registered the second lowest average yearly growth rate, 1.6 percent, in Southeast Asia in the period 1990 to 2005 —lower than that of Vietnam (5.9 percent), Cambodia (5.5 percent), and Burma (6.6 percent). The only country registering average growth below that of the Philippines was Brunei, which, being an oil-rich high-income country, could afford not to grow.

So yes, we must wage an unrelenting campaign against corruption because it destroys faith in government and weakens the moral fiber of the country. And yes, let us by all means punish corrupt officials and elect morally unquestionable people to power. But let us not mistake corruption as the principal cause of poverty and believe that anti-corruption crusades provide the main response to the country’s economic ills. The main source of our lack of economic dynamism is a wrong policy paradigm that we have allowed ourselves to be straitjacketed into.

It is disturbing that the policy errors that have led to our present state are hardly mentioned in the presidential debates. It is unfortunate that we are not taking advantage of the current international economic crisis that has dragged down our local economy to debate the wisdom of the policies of globalization and liberalization that have brought us to this impasse. Yes, the issues of corruption, management experience, and bureaucratic reform that dominate these debates are vital, but unless the winning team has the courage to reverse 30 years of failed neoliberal economic policies, the country will remain in the economic doldrums, unable to take off, with poverty possibly rising to the point of no return.

16 Responses to Why Fighting Corruption Is Not Enough

  1. March 27, 2010 at 5:14 am
    niknok

    Very nice article but incomplete. It failed to include marcos administration who introduced the massive corruption in philippine government and the unprecedented foreign debts which we are still paying for after 24 years.

    Before his administration, we are not far behind economically with any asian country.

  2. March 27, 2010 at 7:13 pm
    buko nut & halo-halo

    yeah…that’s the problem with our media institution, media practioners and journalists, they are the purveyors of distorted values, mis-guided speculation and personal intrigues and the only reason why our political exercise, like elections, have not elevated the political maturity of the electorate to pick the right kind of national leaders and even local leaders. The pillars of Press Freedom should have the emotional balance/maturity to self-censorship and discipline to inform and not for (en) development issues unrelated to needs of the marginalized for food,shelter, job and respect. Their concern for the bottom line on net profit is paramount than objecting to the Election laws on Political advertisements, etc. ad naseum. That’s why, candidates run on monetary values rather than ethical and social-redeeming values which even the Catholic hierarchy has lost its authority to influence the moral beahviour of elected leaders towards crafting laws with the end-goal of achieving the social-economic development of the country.

  3. March 27, 2010 at 11:44 pm

    I just don’t understand Mr. Bello. What is so wrong with buying cheap food and electronics from China and exporting medical and BPO and tourism services? Why should we try to out-manufacture Taiwan or Malaysia when we don’t have engineers and scientists? And why should we bury our head in the sand by not repaying debt (when the correct solution may be going after those who benefited from that debt)?

  4. March 29, 2010 at 11:46 pm
    buko nut & halo-halo

    To @Orlando R[:)=Simply lang po Mr. Orlando. We are an agricultural country and the main contributor to our GNP which sustains our economy and absorbs the majority of our labor force. Secondly, we import electronics from China/Taiwan/malaysia to supply the consumer needs of the families and dependents of OFWS who brings in $billion dollars. besides, when we import elecronic parts we buy it to assemble and export them without any value-added to generate income for the local industries because this import-substitution-industries supposed to be be a transfer of technology are only conduits of foreign-owned subsidiary of multi-national corporation who are remitting their profits abroad,.so… what are we gaining from these imports?…nada…it only raises consumption spending and does not encourage savings and investments for the exploited OFWS.

    my 5 pisos worth of opinion only.

  5. March 29, 2010 at 11:58 pm
    buko nut & halo-halo

    To @Orlando R:

    On Foreign debt-repudiation=mag-babayad ka ba ng utang di mo naman napakinabangan at dagdag pa nito ang proceeds or ang pera na para gamitan sa basic infra-structure or utilities ay nasa Swiss-bank ng mga pinunong midllemen para uling mapa-utang sa iyo kapalit ng iyung pag-mortage ng lupa at bahay mo.
    Bakit maraming Euraopean banks sa atin at nag-papa-utang, dahil alam nilang uto-uto ang ating govbierno na huthutin ang ating pera. Ika-nga ng sabi ng mga economista, ginigisa tayo sa sariling mantika.

  6. March 30, 2010 at 11:02 pm

    @buko nut and hh,
    We are perhaps a hardheaded agricultural producer, in the sense that you seem to want the farmers to toil at something that is not their comparative advantage. And you also seem to want the consumers to buy expensive local produce. What happened to their freedom to choose an occupation, or from where to buy? Do you presume to dictate unto them?

    There is value added in the export processing zones, otherwise, the activity would not be there. You are free to complain about who gets the value added, but the set up there is voluntary. No one was coerced into producing electronics, etc. And of course, the employers there have to follow the labor laws, etc.

    Maybe the external debt is partly the result of corruption. If so, the solution is not to repudiate, but to get the corrupt who started it to do the paying. Perhaps the problem is not really that easy to solve. But more recently, new debt seems to have been “clean,” being subject to veto by the central bank.

  7. March 31, 2010 at 11:46 pm
    UP n grad

    Noynoy made a big pronoucement that his major platform is “Marcos wealth”.
    Except for the palabas of saying he will go after Marcos wealth, I expect (especially because many years and lots of effort have been expended already) that Noynoy gets zero-dollars from pursuing Marcos wealth. Palabas, yes, real results, no.

    But if Noynoy ever recovers any Marcos wealth, then after paying for the airplane tickets and hotel expenses plus the salaries of PCGG investigators, then whatever is left can be used to pay off part of the external debt.

  8. April 1, 2010 at 9:06 pm
    Die_Hard Noypi

    To UPngrad-(:=) Perhaps as part of Noynoy”s campaign to have a closure on all crimes committed to the Filipino people is the just and rightful return of “stolen wealth” which started from Marcos regime. He can run after Marcos’s wealth to remind the govt that all efforts to “clean and start” with righteous governance is to claim what is due to the people. Althoug it is not easy to sequester hidden wealth stashed in foreign banks, it is the political will of new administration and perhaps by way of enforcing the “extradition of criminals” treaty will cover extradition of financial assets obtained thru violations of international Anti-Laundering Banking laws.
    Let us not thwart any motives that will unite the aspiration of our people for a just and lasting solution to our economic and political woes. Regardless of who will lead us, the new govt needs the support of those learned people especially like you, graduates of UP who are “scholar ng bayan” to correct what is historically an unjust set-up.

    Die Hard Pinoy from Riyadh,KSA :)

  9. April 2, 2010 at 7:34 am
    UP n grad

    If Noynoy will disregard any and all Pilipinas Supreme Court decisions then getting cash back from the Marcoses, the Cojuancos, the Romualdezes becomes easy. Surely these groups will get the Supreme Court to issue temporary restraining orders against asset seizures. All Noynoy has to do is disregard such supreme-court-issued TRO’s and, well, seize the assets.

    If Noynoy can not do that, then I return to my statement — after all the years and efforts expended, other than getting votes, the odds are against anything much from Noynoy’s “…go after Marcos wealth”.

  10. April 3, 2010 at 10:46 pm
    Die Hard NoyPi

    To UPngrad(:)=I am sure Nonynoy is aware of the big legal struggles especially if the oligarchy will stone wall and use the veil of Constitutional shield to block the reform agenda of good governance but that is evidently the mark of a true and committed leader who inspire and makes a platform of government relevant to all who clamor for change and that’s why I believe we are all stakeholders in this campaingn to eradicate corruption and that the first step is to suceed in this election. He must also have the full support of all the sectors of society including you and every one who believes in peaceful change of power. As one Chinese great leader has said “to get ahead you have to step back one foot to leap a hundred feet forward”. Fighting corruption in whatever form is the moral duty of every one and our national leaders must spearhead and provide the vision and the challenge to overcome the odds against this struggle. The Ruwanda president has declared its govt victory over corruption in his interview with CNN to the amazement of inernational aid donors, why can’t we do it in our backyard??

  11. April 3, 2010 at 11:27 pm
    buko nut & halo-halo

    to OrlandoR(:=): The export processing zones are just like the “Duty Free shops” at the airports. The investors in these special enclaves enjoy all the tax-haven exceptions as new industries. Besides, they are being used for various smuggling activities so what’s the economic value-added there if they can un-declare their sale.
    Secondly, by buying cheap Chinese produce like rice,frozen chickens,etc., does not mean we are helping our farmers enjoy the comparative advantage of being displaced. On the contrary, it depresses the productivity in our agricultural sector and creates unemployment in the countryside where poverty is more pervasive. The problem of going after these bad debts is that you cannot put into jail the whole government of the Filipino who guaranteed these bad loans.

  12. April 7, 2010 at 3:26 pm
    manuelbuencamino

    There’s a book called Confessions of an Economic Hit-man. It exposes the corruption that drove those IMF-WB structural adjustment policies.

    In other words, it is corruption and not simple pure and saintly wrong-headed ivory tower thinking that was at the bottom of structural adjustment policies.

    As a sociologist more than an economist, Bello could have looked at the culture of the Chicago school, it’s ties to Wall Street and the movers and shakers of the empire. Then he will see that corruption was at the root of it all. One does not kill a tree by picking at its fruits, one has to go for its roots.

  13. April 7, 2010 at 7:04 pm
    jojie umali-riyadh

    @manuelbuecamino:=) I am really surprised why our faked president, GMA, who had a Ph.D in economics, an Ateneo lecturer, did not foresee the ill effects of policy prescriptions towards globalization and liberaliation by Westernized technocrats and even rush to join the elite club of the WTO without carrying the status of well-developed or atleast near-industrialized economy and beefing up nationalistic laws as safety-nets to filter corruption and unfavorable trade practices.

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