FINANCIAL: international economy reform

"THE FINANCIAL EXECUTIVE Political economy of reform
Source: BusinessWorld 05/08/2007

What elements make economic reform, especially difficult ones that involve overcoming vested interests and imposing short-term pain, possible? What is the role of leadership that is well intentioned and acting in the interest of the people? How does leadership sustain the political and social commitment to the growth process? We struggled with these and many other questions in a recent World Bank workshop in D.C., chaired by Nobel laureate and Professor Emeritus at Stanford University Michael Spence.

The workshop brought together economists and practitioners from 20 countries in Asia, Latin America, Africa, and Europe to compare notes on ongoing case studies that attempt to surface lessons from reform experiences under a wide variety of settings - historic, geographical, social, political. This is part of a broader exercise of the 21-member Commission on Growth and Development, likewise chaired by Professor Spence.

My colleague at Lazaro Bernardo Tiu & Associates, Christine Tang, and I were tasked to write and talk about the reform experience during the Ramos years, focusing on successful reform initiatives that had an important impact on Philippine growth performance.

While the reform agenda during the Ramos presidency covered much ground, including such diverse areas as investment promotion, trade liberalization, privatization, fiscal consolidation, environmental protection, and a social agenda, we chose to focus on three discrete reform efforts which were started and completed during the Ramos presidency, and which had a clear measurable impact (benefiting the country to this day). The areas that we thought illustrate well the political economy of reform and the role of leadership are:

a) Telecommunications reform. At that time, Singapore Prime Minister Lee Kuan Yew (and others) reportedly observed that "the Philippines is a country where 98% of the residents are waiting for a telephone line and the other 2% are waiting for a dial tone." Recognizing how this sad situation impeded development, the Ramos administration moved swiftly to opened up the sector to new investors such that now, with the wide use of cellular mobile phones, there is one telephone for every two Filipinos. One of the fastest growing industries in the country - business process outsourcing - would have been completely unimaginable if this reform were not done. It has also allowed "connectivity" among Filipinos everywhere, especially the more than eight million overseas Filipino that are supporting their families-and the country.

b) Oil deregulation. Prior to the reform, deficits in the Oil Price Stabilization Fund (OPSF) were a recurring problem, contributing to fiscal risk and social tensions (whenever government raised domestic pump prices). By deregulating the oil industry, and allowing new entrants and imports to come in, the Ramos administration helped insulate the vulnerable fiscal sector from the vagaries of oil prices, especially the unprecedented escalation in the last several years. Faced with the recent oil price run- up, other countries that have failed to deregulate earlier on were forced, by price pressures, to do so, not surprisingly accompanied by political disturbances.

c) Water privatization. From a water crisis situation where many households were not getting enough or continuous water supply, and many poor households were completely unconnected, the privatization of MWSS distribution (the largest water privatization in the world) has increased water coverage from 67 % of the population to 85% ( reaching outlying poorer communities) , cut non-revenue water (in the east zone) from 61% to 35% and increased average water availability from only 17 hours to 21 hours, while halting the drain of providing for this sector from the budget.
It will take much space to describe how these were done in record time by what started out as a minority presidency. Clearly though, elements of political will, vision, communication and constituency building, and astute timing to take advantage of opportunities, came into play.
Since President Ramos, continuing political turbulence has discouraged the emergence of such vision and the persistence and consistency in the pursuit of economic reforms (save for the expanded VAT, a response to a largely self-created fiscal crisis). We can only hope that as the leadership gains confidence after a credible May election, it will devote its energies, no longer to just political survival, but to leaving a lasting legacy that will drive the country's economic performance in the next decade.

In a situation where a third of the country is in absolute poverty, where job-creating domestic and foreign investments are not happening, and where hundreds of thousands are leaving the country every year in search of a better life, muddling through - made possible by workers remittances - is an unacceptable default option. "