New Institutional Economics and the Philippines

Institutions and Dynamic Strategies: the Political Economy of the Philippines
Paul M. Bushmiller
Econ 315
Theresa Thompson instructor
22 April 2000



  1. Brief Introduction
  2. Overview of the current state of the Philippine Economy and review of the postwar/independence period through end of Marcos era
  3. Discussion of main tenants of New Institutional Economic analysis moving into the sort of particulars relevant to LDC NIC countries (note determine what the prevailing tag for the Philippines is)
  4. Application of these described processes of institutions either using examples from the NIE books , the Philippine back ground notes, and an application of NIE to examples from the Phil/Thai book and/or the Phil/Asian Tiger Book
    All this should show a republic trying to show some independence from superpower strategic client state dominance by attaching strongly to Indian planning style and strong import substitution. Devolving into profound rent seeking autocracy ending with the closing of the U.S. Bases. A new democratic Government, generally successful attempts to come to terms with various political turmoils and a less successes full attempt to continue the classic post colonial go it alone strategies before overwhelming debt forces even socialist politicians to adopt World Bank restructuring with mixed results .This part should trace the post Marcus period to present
  5. Conclusions

New Institutional Economics offers a way to examine the dynamics of growth -particularly with an eye toward explaining the problems of slow growth in developing economies, where market systems may be presumed to be weak or incomplete. I will review these concepts within the framework of the Philippines, a sizable country with a rich and diverse set of resources, which; however, is not achieving significant growth

At present the Philippines is in a depressed albeit not grim state. It remains firmly enmeshed in the World Banks lower middle income category of nations with a GDP per capita of $1,050 (U.S. 1998 Atlas method). 38% of the Philippines population is below the national poverty line. And it has one of the higher population growth rates in the region at 2.7% which will double the population within 30 years if continued1. Growth rate of GDP per capita in the period 1988 to 1998 was only 1.3%. Its total debt in 1998 was 73% of Gross Domestic Product and this is a growing percentage through the last decade. The overall story on exports is not clear, but traditional export products and categories (sugar, coconut oil /related products, rice, and timber) are not growing. Perhaps the most notable element is the degree to which it has not shared in regional growth. As noted by Yoshihara Kunio, relative per capita GNP between the Philippines and Thailand has reversed in the last 40 to 50 years (Yoshihara, 2). One reason for this is the tremendously damaging twenty year government of Ferdinand Marcos which among many other things left the county in an extremely indebted state at the onset of a world wide recession in the late 1980’s. A period of relative political instability followed left the country unable to to respond the upswing which Thailand, Singapore, Taiwan, and South Korea caught with more globally oriented exchange rates and export manufacturing policies. Ironically the Philippines responding to its proceeding debt crises with willing and successful participation in structural adjustment programs it has had less trouble with the regions recent financial crises.

New Institutional Economics2 takes as its point of departure the form of Neoclassical market economics characterized by the “Arrow - Debrau”3 model of the market. New Institutional Economics originally a theory of historical analysis does not see Markets as encompassing the allocation of all goods and services within a society - perfectly and without cost. For Bates this is a market where individuals maximize utility (through individual choice), firms maximize profit and Pareto Optimality holds. That is the notion that there is a point of a societies production and indifference curves where an individuals subjective feeling of well-being cannot be increased without decreasing another's. Bates sees this as both collectivist “built up from the choices of individuals“, but also individualistic “...respects the inviability of the individuals judgment of his or her own welfare” (Bates, Harriss et al, 28). Toye agrees with this and also that the firm is a critical element. Households on the demand side can reasonably reduce to individual utility choice, but firms on the supply side never can, they are not just agents but administrative organizations. Their structure and being, seemingly tied to the existence of costs within the market. Barbara Harriss-White even characterizes firms as being a “command economy in microcosm” (Harriss-White, Harriss et al, 88). Harriss-White for her part sees markets as abstractions “not-institutions“ with “supply and demand schedules [constructed] on the assumption that buyers and sellers react as though any price could be the equilibrium price...prices are if expectations and memories were eliminated”. There is a difference between this market and the “actual existing bundle of ‘legal, customary, political, and other social arrangements’ in which parties act with Procedural Rationality”4 (Harriss-White, Harriss et al, 88)

With the concepts of “Social Dilemma” and “Opportunism” Bates and Toye respectively turn to the notions of Market Failure they believe demonstrate and document the reality of economic institutions. “Social Dilemma arises when radical individualism becomes inconsistent with social welfare...Institutions provide mechanisms whereby rational individuals can transcend social dilemma” (Bates, Harriss et al, 29). The market failures he identifies are positive and negative externalities. Public goods are another similar condition arising on the utility function of the individual rather than on the production function of firms. Imperfect information he views as containing two further subtypes: “hidden-action” and “hidden-type”, difficulties in adjudging effort and personality. Hidden action he explains with an example of a Landlord - Tenant farmer relationship in which the determinant of what economic activity takes place are factors not explicitly spelled out, based on traditional and informal practices to assign responsibility and reward for risk and mitigate costs associated with monitoring effort. Hidden type involves the character/ personalities of the actors in a transaction and the information held. Here he uses a “market for lemons” type argument with a labor pool, an employer and varying wage rate adjusting to the mean. The market will collapse unless the high quality workers find a low cost way to signal their type and gain the wage they want before their non participation lowers the wage in a spiraling regression (Bates, Harriss et al, 32-33).

Toyes’* version of this is opportunism, Which he defines as “self-interest seeking guile” (a somewhat pejorative moralistic tatement). This he sees as leading to “agency problems” His example is an insurance contract and the errors are ‘Moral Hazard’ and Adverse Selection’ the former a condition where a contract may encourage or not discourage the insured against activity, the latter one where the contract is far more advantages to one party than the other where the penalty for potential risks is not assessed evenly (Toye, Harriss et al, 55). These examples are intended to show the general problem of asymmetrically held information and those that would try to take advantage of it. Toye goes on to make a specific point that Bates only hinted at - that some studies have strongly suggested that sharecropping rather than a perversity is an institutional arrangement to allow production in a situation where the costs of measurement and risk assessment may be too costly to accurately calculate. So that sharecropping is a compromise between risk and incentive (toye, Harriss et al, 56-57). Toye sees similar arranges in examinations of marine fishing where inherently high transaction costs of maintaining a boat, vagaries of the weather and bartering between owner, crew and wholesalers determine the arrangement of share. Toye notes the traditional strong reliance on kinship ties in fishing communities (Toye, Harriss et al, 57-58). All this meets well with Bates’ depiction of the economies of the developing world as “characterized by pervasive market failure” but marked by a number of non market institutions that may substitute. Such as clan, family ties, ethnic associations, etc. for explicit property rights. This “environment facilitates calculations of the appropriate level of trust and the density of social ties increases the cost of loss of reputation” (Bates, Harriss et al, 36). Both Bates and Toye cite studies showing the effectiveness of village based institutions in arranging communal water and grazing privileges and protecting them from over utilization (Bates, 37) (Toye, 59).

Barbara Harriss-White finds that markets are not monolithic, but are comprised of a number of associated sub and supporting markets. The character of the firms involved is marked both by the diversity of the forms of the firms and diversity in the functions carried out by these firms. Firms appear organized around formal market features of the landscape; such as marketing boards, other government activity/intervention, and transaction costs. With a Follow-the-Sack methodology these firms can be seen as vertically arranged encompassing transactions within firms or at routinized junctures between firms (Harriss-White, Harriss et al, 101-2).

Douglass North in his paper is concerned with how and why institutions change: “modifications occur because individuals perceive they could do better by restructuring exchanges...the rate of learning determines the speed of economic change” (North, Harriss et al, 24). This is dependent on competition and the payoff of the “institutional matrix” (North, Harriss et al, 24). Institutions will form around, and organize whatever mode -production or rent- the (pre) existing institutional framework rewards. In his own words:

Institutions are made up of formal rules, informal norms and the enforcement characteristics of both, and it is the admixture of rules, norms, and enforcement characteristics that determine economic performance. While rules can be changed overnight, the informal norms change only gradually. Since it is the norms that provide the essential legitimacy to any set of formal rules, revolutionary change is never as revolutionary as its supporters desire. (North, Harriss et al, 25)

North goes on to admit that largely the “shaping...and defining” aspects of economic performance are political in nature, that this is in its formal aspects a theory of political economy or having a political dimension (North, Harriss et al, 25). This mirrors Bates‘ view of NIE as ‘Functionalist’ “the needs of forth non-market organization”(Bates, in Harriss et al, 44). Bates reads Coase’s theorem as ultimately a matter of political economy. Institutionalism's facts are political facts. While set in the milieu of individual choice political solutions are imposed solutions (Bates, Harriss et al, 46.) North sees the essential logic of New institutional Economics is one of an “adaptive rather than allocative efficiency.

In his book the Landscapes of Globalization John Kelly portrays the Philippines as a country whose position on the periphery of world trade schemes and dependence on primary sector exports has left it outward looking, vulnerable to globalism. By which he means “...the increasing porosity of physical as social barriers to world wide flows, of capital goods, people idea’s imagery and institutions.” The march to modernity is one of ‘strucuration’, a spatial dislocative, dis-embedding, knowledge aware, but ultimately reflexive way of being (kelly 5-6). Its cultural logic is the intensification of ‘Global Consciousness’. Globalism reletivizes scale and privileges global scale. It is not a politically neutral act, but one that embodies power relations (Kelly 7).

An important factor in the history of the Philippine extending through and before the colonial period was the involvement in and control of trade by an internal minority - ethnic Chinese. Kunio Yoshihara relates the following story in his book: “Thomas Confesor Director of the Bureau of Commerce told a group of local businessmen in 1933 that if they wanted to supplant the Chinese they must develop the same economic efficiency as the Chinese and perform for the community the same services performed by the Chinese. He told Filipino businessmen that they should not use political means to supplant the Chinese as that would not serve national interests“ (Yoshihara 18). In later chapters Yoshihara describes this efficiency of the Chinese as owing much to the relationships and smoothness of operations within their community, and the degree to which they kept transaction activity within it. As well as their skill in dealing with international financial customs and expectations. Nonetheless in 1953 in a wave of post independence nationalism the Philippine government passed the Retail Trade Naturalization Law effectively barring the Chinese from their 400 year traditional commercial activities. Yoshihara believes the Philippines may have lost the benefit of not only this activity but also much investment from Hong kong and Taiwan later on because of this. This episode illustrates much of the main tenants of the NIE and demonstrates its close relation to overt political economy. In recent years there has been a rehabilitation and resurgence of the Chinese community as an effective entrepreneurial class (Yoshihara 20-21).

The Import Substitute Industrialization program of the 1950s served to expand the middle and upper class beyond traditional elites. For reasons related to this, while not effective, it did not pass away until well into the 1970s. Much of President Marcos’ strategy for staying in power was in creating/benefiting elites and playing them off against each other. While the green revolution for rice cultivation was born in and centered in the Philippines, it was as much a technological fix to avoid radical land reform and maintain the aristocracys’ status quo as anything else (Boyce 10).

The main point the NIE can make for a situation like the Philippines is that the key is always the accrued benefits from increased trade, which lower costs of transactions engender. Whether one views institutional arrangements as a substitute for proper markets and property rights in situations where they do not exist, or as a marker of the need for such, its clear they are patterns of behavior which will always exist and amend any situation.

Works Cited

Boyce, James K. the Philippines: the Political Economy of growth and impoverishment in the Marcos era . Honolulu: Univ. Hawaii press, 1993.
Frolich, James & Joe Oppenhiemer. Modern Political Economy. Englewood Cliffs NJ: Prentice Hall, 1978.
Harriss, John& Janet Hunter, Colin Lewis (eds) The New Institutional Economics and Third World Development. London/New York: Routledge, 1995.
-North, Douglas C. “the New Institutional Economics and Third World Development.” Harriss 17-26.
-Bates Robert H. “Social Dilemmas and Rational Individuals: an assessment of the New Institutional Economics.” Harriss 27-48.
-Toye, John “ the NIE and its Implications for Development Theory.” Harriss 49-70.
-Harriss-White, Barbara. “Maps & Lndscps: Grain Markets in S. Asia.” Harriss 87-108.
Kelly, Philip F. Landscapes of Globalization: Human Geographies of Economic Change in the Philippines. London/New York Routledge, 2000.
U.S. State Department. Background notes: Philippines, August 1999. Washington DC .
-1999 Country Reports on Economic Policy and Trade Practice U. S. Dept. of State March 2000 (Philippines PDF ,obtained from internal link previous cite).
World Bank. Philippines at a glance (PDF). Washington D.C .
Yoshihara, Kunio. the Nation and Economic Growth: the Philippines and Thailand. Kuala Lumpur/Oxford: Oxford Univ Press, 1994.

1 these figures and those that follow are from the world Banks web site “at a glance” nation series with some additional data from the U.S. State departments’ national background notes web site.

2 This section of the paper relies on a series of essays from a 1993 conference edited by John Harriss. The papers are by Douglas North, Robert Bates, John Toye and others)

3 Arrow is Arrow and Hahn. General Competitive Analysis .(1971), Debrau?. Theory of Value. (1951)

4 Quotes within the quote are Harriss-white quoting a further source: Hodgeson 1988, 174 Italics are from Harris-white