Excellent and timely choice for the Nobel Prize in Economics. Here's a comprehensive background courtesy of Tyler Cowen as well as an overview of Krugman's New Trade Theory by Alex Tabarrok. Krugman's books The Accidental Theorist and Pedding Prosperity are among my favorites. For more, you can visit his Unofficial Web Page.
Update Oct-16-2008: Here's Paul Krugman explaining in layman's terms the work for which he was given the award.
Showing posts with label development models. Show all posts
Showing posts with label development models. Show all posts
Tuesday, October 14, 2008
Thursday, July 31, 2008
The Benefits of Sharing the Income Tax Burden: A Possible Scenario
In the my preceding post, i made some suggestions related to taxes, wages and safety nets. Depending on which segment of society you may belong to, chances are, you would have liked some portions of the proposal and disliked others. However, i believe that the proposals have to be taken as a package because there should be an element of give-and-take, where benefits and burdens are widely shared among the various Economic Classes within Philippine Society. A visual summary of the benefits and burdens allocated to each sector is shown below.
Figure 1: Tax, Wages & Safety Nets: Trade-offs Between the Classes (Click on image to enlarge)
To give a more concrete example on the potential benefits of the above, i'd like to walk through a hypothetical scenario in which the above package of recommendations were implemented back in 2006. I chose this year because this was when the most recent Family Income and Expenditure Survey (FIES) was conducted, the results of which i can then use as basis for this scenario building exercise.
A. The 2006 FIES Results
In terms of average individual incomes per segment (classified in deciles), the FIES for 2006 shows the following:
Table 1: 2006 FIES Average Income, Expenses and Savings by Income Decile
Notice that the annual savings of the richest ten percent of Filipinos (at 156K pesos) is bigger than all the other income segments combined. At the other extreme, you have the poorest thirty percent, on average, actually ending up with a deficit, i.e. having more expenses than income.
Consolidating all the individual incomes within each category, we get the total incomes per decile...
Table 2: 2006 FIES Total Income, Expenses and Savings by Income Decile
...which can in turn be represented visually below:
Figure 2: 2006 FIES Income and Savings
(Click on image to enlarge)
The 2006 FIES reveals a situation where one-third of our population is unable to meet its expenses much less save for the future (as represented by the people who are underwater in the above diagram). What then would the situation be if my mix of proposals were implemented? The rest of this entry describes one possible outcome.*
B. The Possible Impact of 12% Flat Tax and 20 pesos per day Food Subsidies on 2006 FIES Data
With the recommended twelve percent flat tax and 20 pesos food subsidy (that comes in the form of vouchers similar to the food stamps in the United States) for all adults ages 18 to 64, the individual expenses** and savings of the different income segments will become as follows:
Table 3: 12% Flat Tax and 20 pesos Food Subsidies applied to the 2006 FIES Average Income, Expenses and Savings
As can be seen above, with the flat tax and food subsidies, even the bottom thirty percent of income earners are now able to have some savings***
The resulting aggregate income would then be...
Table 4: 12% Flat Tax and 20 pesos per day Food Subsidies applied to the 2006 FIES Total Income, Expenses and Savings
...and the over-all situation**** in terms of savings improves for all segments of society (as represented by the increased number of coins in the diagram below).
Figure 3: 12% Flat Tax and 20 pesos per day Food Subsidies applied to the 2006 FIES Income and Savings
(Click on image to enlarge)
For the Upper Tier of Society, more savings***** means more funds that can be invested in housing, education or business activities.
C. Conclusion
From the above example, we can see that a combination of lowering the income tax to a flat rate of twelve percent and providing food subsidies of twenty pesos for each Filipino adult (18 to 64 years old) may (all other things remaining equal) result in a near doubling of the aggregate savings rate (809 Billion from the original 428 Billion Pesos aggregate savings).
Notes:
*Outcomes depend on factors such as the accuracy of FIES data (which i used as basis for the above), eventual tax collection efficiency as well as the propensity by which people may try to game the system to avoid paying their share.
**Expenses are reduced because taxes are included as part of household expenses. You can refer to the FIES Method of Computing Family Income and Expenses here.
***Given the assumption that the individual income earner does not choose to increase his/her expenses on other commodities and services.
****I am, of course, talking in terms of averages which means that within a given segment, there will still be those who are better and worse off. Uniformly better outcomes is highly improbable.
*****Included in this savings amount is the amount deducted for Social Security, Housing and Medical Insurance which i also proposed to be at a cumulative 12 percent of taxable income.
To give a more concrete example on the potential benefits of the above, i'd like to walk through a hypothetical scenario in which the above package of recommendations were implemented back in 2006. I chose this year because this was when the most recent Family Income and Expenditure Survey (FIES) was conducted, the results of which i can then use as basis for this scenario building exercise.
A. The 2006 FIES Results
In terms of average individual incomes per segment (classified in deciles), the FIES for 2006 shows the following:
Notice that the annual savings of the richest ten percent of Filipinos (at 156K pesos) is bigger than all the other income segments combined. At the other extreme, you have the poorest thirty percent, on average, actually ending up with a deficit, i.e. having more expenses than income.
Consolidating all the individual incomes within each category, we get the total incomes per decile...
...which can in turn be represented visually below:
(Click on image to enlarge)
The 2006 FIES reveals a situation where one-third of our population is unable to meet its expenses much less save for the future (as represented by the people who are underwater in the above diagram). What then would the situation be if my mix of proposals were implemented? The rest of this entry describes one possible outcome.*
B. The Possible Impact of 12% Flat Tax and 20 pesos per day Food Subsidies on 2006 FIES Data
With the recommended twelve percent flat tax and 20 pesos food subsidy (that comes in the form of vouchers similar to the food stamps in the United States) for all adults ages 18 to 64, the individual expenses** and savings of the different income segments will become as follows:
As can be seen above, with the flat tax and food subsidies, even the bottom thirty percent of income earners are now able to have some savings***
The resulting aggregate income would then be...
...and the over-all situation**** in terms of savings improves for all segments of society (as represented by the increased number of coins in the diagram below).
(Click on image to enlarge)
For the Upper Tier of Society, more savings***** means more funds that can be invested in housing, education or business activities.
C. Conclusion
From the above example, we can see that a combination of lowering the income tax to a flat rate of twelve percent and providing food subsidies of twenty pesos for each Filipino adult (18 to 64 years old) may (all other things remaining equal) result in a near doubling of the aggregate savings rate (809 Billion from the original 428 Billion Pesos aggregate savings).
Notes:
*Outcomes depend on factors such as the accuracy of FIES data (which i used as basis for the above), eventual tax collection efficiency as well as the propensity by which people may try to game the system to avoid paying their share.
**Expenses are reduced because taxes are included as part of household expenses. You can refer to the FIES Method of Computing Family Income and Expenses here.
***Given the assumption that the individual income earner does not choose to increase his/her expenses on other commodities and services.
****I am, of course, talking in terms of averages which means that within a given segment, there will still be those who are better and worse off. Uniformly better outcomes is highly improbable.
*****Included in this savings amount is the amount deducted for Social Security, Housing and Medical Insurance which i also proposed to be at a cumulative 12 percent of taxable income.
Sunday, July 27, 2008
Towards A New Social Contract on Taxes, Wages & Safety Nets
The recent blog entries* related to VAT and dole-outs have gotten me to thinking of a holistic package of recommendations related to both the Tax burden and Social Safety Nets.
I. Basic Principles
I believe that any such set of recommendations must be based on a set of principles by which we envision Philippine Society to operate under. The principles that i have identified (so far) are the following**:
A. Principles related to Safety Nets
A.1 No Excuse for Hunger. Given our abundance of resources, there is absolutely no reason why any Filipino (employed or unemployed) should go hungry in his own country. For starters, there is absolutely no excuse to have people resort to recycling garbage for food.***
A.2 Fair burden across sectors. In the interest of fairness and social cohesion (essential to building up social capital****), no segment of Philippine Society should be unduly burdened in sustaining the government and its social programs. In particular, the Middle Class has been feeling particularly besieged and consequently alienated. This is in no small part because they see that they are the only ones paying income taxes while the majority poor, do not.
A.3 Social Security before Taxes. A person's income should first be allocated to social security (i.e. retirement benefits, housing and medical insurance) before it is allocated to taxes. Here in Singapore, for example, the amount deducted for Social Security is higher than the amount deducted for income taxes.
B. Principles Related to Capability Building and Demand Generation
The foundation for industrial development is a healthy domestic base.
B.1 Obligation to Give-back. Every recipient of social welfare should have the responsibility to give back to Society by using his capabilities to contribute to social welfare and economic development.
B.2 Subsidies as Stimulus. In the interest of pump-priming the economy, Safety Nets should first be allocated to consumption. A study by the United State's Congressional Budget Office identified direct injections (such as unemployment or food stamps provisions) to the poor as having the biggest effect to propping up consumption which is important to avoiding a recession. In this sense, the much criticized katas ng VAT dole-outs are actually a step in the right direction in terms of its multiplier effect.
C. Principles Related to Development: Investment, Innovation and Technology
The key to economic development is to build up local capabilities to innovate and continuously improve on existing technologies.
C.1 Savings before Consumption. Tax incentives and disincentives should be structured to prioritize savings over consumption.
C.2 Culture of Entrepreneurship and not Dependence. Entrepreneurial activities should be encouraged and dependence of OFW remittances should be discouraged.
The following are the specific recommendations that are based on the above principles.
II. Specific Recommendations on Taxes, Social Security and Income Subsidies
1. Flat tax on income: For all salary and wage earners, impose a uniform income tax rate. The initial rate can be pegged at 12 percent.
Table 1: Existing***** versus New Income Taxes Update Oct-18-2008: Just to emphasize, Exemptions not applicable on New Tax Due
As shown on the above table, given this recommendation, any salary or wage earner who receives an annual taxable income of 70,000 pesos or above will receive a tax relief, while those receiving less will have additional tax burden. (Note that in the above, the subsidies for the lower income earners haven't been factored in. The effect of subsidies is shown in Table 2 below.)
2. Equal or bigger Social Security Contributions relative to Income Taxes. Similarly, impose a uniform social security contribution (includes SSS, Pag-Ibig, Medicare and/or GSIS) rate that is equal or higher than the income tax rate, in this case, the cumulative rate could also be pegged twelve percent. This deducted amount will then go into retirement, housing and medical insurance of the employee and/or wage earner's At the same time, the pool of savings can still be made available to extend credit to the contributors or to support the government's socialized housing and health maintenance programs.
The Employer's contributions could be pegged at half of the employee's i.e. six percent. (Additionally, if we want to roughly follow the Singapore model, the total contribution of both employer and employer can be capped at Ten Thousand pesos per month each.)
The benefit of the first two recommendations has to do with principles A.2 and A.3. A flat tax covering all income levels will mean that no segment of the salary and/or wage earning population would feel that they are unduly taking a disproportionate part of the burden and help eradicate the Paano Naman Kaming Mga Middle Class sense of victimhood.
3. Replace tax exemptions with subsidies for both employed and unemployed. The Fair Burden Principle (A.2) above means that the tax base should be widened****** to cover the entire working population. If left as it is, for the lower income groups, this would clash with the No Excuse for Hunger Principle (A.1). Therefore, a survival subsidy, in the form of food stamps, initially pegged at 20 pesos per day per adult (18 to 64 years old) should be provided. Table 2 below calculates the net relief across all the income brackets illustrated in Table 1.
Table 2: Net Tax Relief (Burden) Update Oct-18-2008: Just to emphasize, Exemptions not applicable on New Tax Due
The above table illustrates that the 20 pesos per day food stamp subsidy covers adults (18 to 64) of all income brackets, even those with zero income, i.e. the unemployed. This institutionalizes and systematizes the katas ng VAT and provides a basic layer of social safety net, one that addresses hunger to fulfill Principle A.1 while at the same time, helping sustain consumer demand that drives the economy (Principle B.2). This is also an improvement over tax exemptions on minimum wage earners because it also considers the welfare of the unemployed who outnumber the employed.
4. Eliminate the minimum wage.******* The minimum wage should be eliminated in order to give business enterprises the flexibility to compete in the world market (in support of Principle C.2). Since the problem is unemployment and chronic underemployment, the priority should be given to creating as many jobs as possible. By comparison, the task of increasing the wages of workers who are already employed is secondary. Besides, reducing unemployment is in the interest of labor because fewer people looking for jobs will ultimately mean a stronger bargaining position.
5. Retain VAT. This is in keeping with the principle of prioritizing savings over consumption (Principle C.1). Retaining VAT will also enable continued funding of food stamps (Principle A.1).
6. Tax OFW remittances. OFW Remittances should be included as part of income and taxed accordingly. This is in keeping with the principle of discouraging a culture of dependence (Principle C.2).
7. Implement a National ID. This National ID could be either the SSS/GSIS ID, the BIR's Tax Identification Number or a separate number altogether. Such an ID is needed to facilitate the distribution of subsidies as well as the collection of taxes and social security. To prevent abuse, the introduction of the National ID should be accompanied by increased safeguards on privacy.
III. Conclusion: A Foundation for Investment, Innovation and Technology Improvement
Each of the preceding recommendations will benefit certain segment of Society and impose a burden on another. It is therefore important to take a holistic approach in the spirit of give and take among the different sectors. Below is a visual summary of the complementary roles of Social Security Contributions and Taxes in achieving our objectives in the areas of Survival, Civilized Living, Capability Building and balancing Consumer Demand with Investment.
Figure 1: Taxes and Social Security Contributions as applied to Areas of Nation Building********
While we should not lose sight of the fact that our economic development ultimately depends on our home-grown ability to innovate by continuously improving existing as well as developing new technologies, not having to be preoccupied with matters of survival is an essential first step.
Notes:
*An initial formulation of my recommendations can be found in the comments section of this blog entry over at Manolo's. Blog entries on the VAT issue that i have read include:
**I'll update the list as and when i think of additional principles.
***Known as 'pagpag', a term i first heard from fellow blogger The EQualizer.
****I realize that, strictly speaking, social capital brings about social cohesion (and not the other way around) but i nevertheless believe that anything that increases social cohesion increases social capital as well.
***** Refer to the BIR Website for existing guidelines.
******See also Solita Monsod's criticism on the recent law granting tax exemptions on minimum wage earners. (Hat tip to Manolo.)
*******This does not mean that Labor Unions should be discouraged. On the contrary, strong Unions should be encouraged in order to have the workers' interests represented in a tripartite partnership between labor, management and government.
********Not all items shown on the diagram are discussed in this present blog entry. Manolo Quezon reintroduced the idea of Victory Gardens to mitigate the effects of the food crisis. I briefly described my version of a large scale implementation this concept in this comment.
I. Basic Principles
I believe that any such set of recommendations must be based on a set of principles by which we envision Philippine Society to operate under. The principles that i have identified (so far) are the following**:
A. Principles related to Safety Nets
A.1 No Excuse for Hunger. Given our abundance of resources, there is absolutely no reason why any Filipino (employed or unemployed) should go hungry in his own country. For starters, there is absolutely no excuse to have people resort to recycling garbage for food.***
A.2 Fair burden across sectors. In the interest of fairness and social cohesion (essential to building up social capital****), no segment of Philippine Society should be unduly burdened in sustaining the government and its social programs. In particular, the Middle Class has been feeling particularly besieged and consequently alienated. This is in no small part because they see that they are the only ones paying income taxes while the majority poor, do not.
A.3 Social Security before Taxes. A person's income should first be allocated to social security (i.e. retirement benefits, housing and medical insurance) before it is allocated to taxes. Here in Singapore, for example, the amount deducted for Social Security is higher than the amount deducted for income taxes.
B. Principles Related to Capability Building and Demand Generation
The foundation for industrial development is a healthy domestic base.
B.1 Obligation to Give-back. Every recipient of social welfare should have the responsibility to give back to Society by using his capabilities to contribute to social welfare and economic development.
B.2 Subsidies as Stimulus. In the interest of pump-priming the economy, Safety Nets should first be allocated to consumption. A study by the United State's Congressional Budget Office identified direct injections (such as unemployment or food stamps provisions) to the poor as having the biggest effect to propping up consumption which is important to avoiding a recession. In this sense, the much criticized katas ng VAT dole-outs are actually a step in the right direction in terms of its multiplier effect.
C. Principles Related to Development: Investment, Innovation and Technology
The key to economic development is to build up local capabilities to innovate and continuously improve on existing technologies.
C.1 Savings before Consumption. Tax incentives and disincentives should be structured to prioritize savings over consumption.
C.2 Culture of Entrepreneurship and not Dependence. Entrepreneurial activities should be encouraged and dependence of OFW remittances should be discouraged.
The following are the specific recommendations that are based on the above principles.
II. Specific Recommendations on Taxes, Social Security and Income Subsidies
1. Flat tax on income: For all salary and wage earners, impose a uniform income tax rate. The initial rate can be pegged at 12 percent.
As shown on the above table, given this recommendation, any salary or wage earner who receives an annual taxable income of 70,000 pesos or above will receive a tax relief, while those receiving less will have additional tax burden. (Note that in the above, the subsidies for the lower income earners haven't been factored in. The effect of subsidies is shown in Table 2 below.)
2. Equal or bigger Social Security Contributions relative to Income Taxes. Similarly, impose a uniform social security contribution (includes SSS, Pag-Ibig, Medicare and/or GSIS) rate that is equal or higher than the income tax rate, in this case, the cumulative rate could also be pegged twelve percent. This deducted amount will then go into retirement, housing and medical insurance of the employee and/or wage earner's At the same time, the pool of savings can still be made available to extend credit to the contributors or to support the government's socialized housing and health maintenance programs.
The Employer's contributions could be pegged at half of the employee's i.e. six percent. (Additionally, if we want to roughly follow the Singapore model, the total contribution of both employer and employer can be capped at Ten Thousand pesos per month each.)
The benefit of the first two recommendations has to do with principles A.2 and A.3. A flat tax covering all income levels will mean that no segment of the salary and/or wage earning population would feel that they are unduly taking a disproportionate part of the burden and help eradicate the Paano Naman Kaming Mga Middle Class sense of victimhood.
3. Replace tax exemptions with subsidies for both employed and unemployed. The Fair Burden Principle (A.2) above means that the tax base should be widened****** to cover the entire working population. If left as it is, for the lower income groups, this would clash with the No Excuse for Hunger Principle (A.1). Therefore, a survival subsidy, in the form of food stamps, initially pegged at 20 pesos per day per adult (18 to 64 years old) should be provided. Table 2 below calculates the net relief across all the income brackets illustrated in Table 1.
The above table illustrates that the 20 pesos per day food stamp subsidy covers adults (18 to 64) of all income brackets, even those with zero income, i.e. the unemployed. This institutionalizes and systematizes the katas ng VAT and provides a basic layer of social safety net, one that addresses hunger to fulfill Principle A.1 while at the same time, helping sustain consumer demand that drives the economy (Principle B.2). This is also an improvement over tax exemptions on minimum wage earners because it also considers the welfare of the unemployed who outnumber the employed.
4. Eliminate the minimum wage.******* The minimum wage should be eliminated in order to give business enterprises the flexibility to compete in the world market (in support of Principle C.2). Since the problem is unemployment and chronic underemployment, the priority should be given to creating as many jobs as possible. By comparison, the task of increasing the wages of workers who are already employed is secondary. Besides, reducing unemployment is in the interest of labor because fewer people looking for jobs will ultimately mean a stronger bargaining position.
5. Retain VAT. This is in keeping with the principle of prioritizing savings over consumption (Principle C.1). Retaining VAT will also enable continued funding of food stamps (Principle A.1).
6. Tax OFW remittances. OFW Remittances should be included as part of income and taxed accordingly. This is in keeping with the principle of discouraging a culture of dependence (Principle C.2).
7. Implement a National ID. This National ID could be either the SSS/GSIS ID, the BIR's Tax Identification Number or a separate number altogether. Such an ID is needed to facilitate the distribution of subsidies as well as the collection of taxes and social security. To prevent abuse, the introduction of the National ID should be accompanied by increased safeguards on privacy.
III. Conclusion: A Foundation for Investment, Innovation and Technology Improvement
Each of the preceding recommendations will benefit certain segment of Society and impose a burden on another. It is therefore important to take a holistic approach in the spirit of give and take among the different sectors. Below is a visual summary of the complementary roles of Social Security Contributions and Taxes in achieving our objectives in the areas of Survival, Civilized Living, Capability Building and balancing Consumer Demand with Investment.
While we should not lose sight of the fact that our economic development ultimately depends on our home-grown ability to innovate by continuously improving existing as well as developing new technologies, not having to be preoccupied with matters of survival is an essential first step.
Notes:
*An initial formulation of my recommendations can be found in the comments section of this blog entry over at Manolo's. Blog entries on the VAT issue that i have read include:
- On Oil Deregulation and E-VAT by Cocoy, a defense of Oil Deregulation and E-VAT.
- Scrap VAT on on Ellen Tordesillas, Senator Mar Roxas' recommendation to scrap VAT on Petroleum products.
- Will cutting taxes help the poor? By Cielito Habito, Former NEDA Secretary General Cielito Habito cautions against scrapping VAT.
- obscenely oppressive, that’s VAT! by Angela Stuart-Santiago, an eloquent plea to remove the onerous burden of VAT.
**I'll update the list as and when i think of additional principles.
***Known as 'pagpag', a term i first heard from fellow blogger The EQualizer.
****I realize that, strictly speaking, social capital brings about social cohesion (and not the other way around) but i nevertheless believe that anything that increases social cohesion increases social capital as well.
***** Refer to the BIR Website for existing guidelines.
******See also Solita Monsod's criticism on the recent law granting tax exemptions on minimum wage earners. (Hat tip to Manolo.)
*******This does not mean that Labor Unions should be discouraged. On the contrary, strong Unions should be encouraged in order to have the workers' interests represented in a tripartite partnership between labor, management and government.
********Not all items shown on the diagram are discussed in this present blog entry. Manolo Quezon reintroduced the idea of Victory Gardens to mitigate the effects of the food crisis. I briefly described my version of a large scale implementation this concept in this comment.
Saturday, November 17, 2007
Abe Margallo: The Philippine Elite's Bayanihan Pact
In his blog entry, Abe Margallo reflects on What to do with the Philippine Oligarchs. He provides a concise summary of where the recent Philippine Presidents (legitimately elected or otherwise) stand with respect to the Philippine political and economic elite. More importantly, Abe reiterates his proposed Bayanihan Pact which is...
"...an entrepreneurial arrangement where the oligarchs emerge as national business elites in partnership with the State, a representative group from the private sector, and the bureaucracy (hence, there’s no need for a bloody confrontation) in the nature of a Philippine, Inc., just as a Japan, Inc., a Korean, Inc. or a China, Inc., of recent time or the French, Inc. the British, Inc. or the American, Inc. of the old."I believe Abe's suggestion (which he first wrote about in his book aptly titled Build or Perish and further discussed in his blog entries here and here) is the optimal way to achieve economic takeoff without going through the hassle and gamble of a Civil War or a populist dictatorship.
Sunday, September 30, 2007
Prerequisites to the Singapore Model
Over at Manolo's, commenter Ramrod brought up the desirability of implementing the Singapore Model back home. Since my response is currently under moderation, i'm copying over the exchange here (as a placeholder until Manolo returns from Bacolod):
"Although a lot of people will disagree with me, I find the Singapore model attractive at this point. It has its imperfections if we look at it from theI responded that in the Philippine context, suppressing press freedom might not be such a good idea:
'American' model of democracy, especially because we are used to a free media but why not look at it differently? There is cultural and religious tolerance, the economy is very strong, the public officials are paid enough to make it justifiable to 'inhumanly' punish those who steal, and the people have this common pride in themselves as 'Singaporeans' to the point that they appear snobbish or even 'elitists.' There are no rich landed class to influence government policies, just this pervasive attitude that there is not much time, more money must be made but through honest to goodness work, work, work." - Ramrod, September 30th, 2007 at 12:40 pm
"ramrod, one of the imperfections of Singapore’s system has to do with the lack of freedom of its media. i don’t see how replicating that lack of transparency would help us at home especially after seeing how Executive Privilege is used to cover up corruption at the highest levels." - cvj, September 30th, 2007 at 1:09 pmRamrod then offered the following suggestion:
"I see your point there. Unless we can come up with a team, a 'management team' if you will, that can be accountable to run this nation, that kind of power is very dangerous indeed. Is it possible then to manage this country as a business, based on balance sheets, profit and loss analysis,wherein the team must present periodically accurate figures on how the country is faring? I noticed that our SONAs were not satisfactory as I don’t see any concrete objectives, timelines, and measurable successes. Maybe its time to move out of the 'showbiz' type of politics wherein our extremely psywar and media savy politicians and political strategists prey on our emotions and misdirect our attention from 'real' and 'serious' issues?" -Ramrod, September 30th, 2007 at 1:24 pmI responded with what i believe to be the prerequisites to implementing the Singapore (or any of our East Asian neighbors') Model:
"ramrod, a 'management team' implementing a sound industrial policy (e.g. Japan Inc., Korea Inc., Taiwan Inc.) is indeed what enabled our neighbors to take off economically. Unfortunately, giving dictatorial powers to the current management team means further enabling the Arroyos (or whoever from the elite replaces them) as well as technocrats like Romulo Neri. This is counterproductive since the best use of a dictatorship is to break the oligarchy, not to make them stronger. We need to go through this stage first before we can aspire to be like our neighbors.Update Sept-30-2007 3:28pm: My comment over mlq3's has been approved, thanks Manolo!
As i previously blogged and commented, i think the missing step is the necessary springcleaning that would purge the current political and economic elite from their position in Philippine Society. In Japan, the Meiji had to eliminate the Samurai. In China, Mao had to drive away the warlords. In Taiwan, the ex-warlords from the mainland had to redristribute lands taken from the Taiwanese landlords and Japanese colonizers. In Singapore, they had the good fortune of having to skip this step.
After Stage 1 socialist reforms (land reform and industrial policy) is in place, then stage 2 market reforms would then have their desired effect. Over here, we went directly to stage 2." - cvj, September 30th, 2007 at 2:13 pm,comment currently under moderation
Sunday, July 22, 2007
Rice and Chips: Replicating the Silicon Valley Model
In his book, Rice and Chips: Technopreneurship and Innovation in Asia, Dennis Posadas, IT industry veteran and BusinessWorld I.T. Matters columnist, identifies what he sees as the distinguishing elements (e.g. geographic clustering, universities and research institutes as catalysts, the availability of venture capital etc.) that made Silicon Valley the exemplar for high technology entrepreneurship and innovation. He then provides a survey on how these elements are being replicated across Asia (including the Philippines) as well as some pointers on how the model is (or can be) adapted to suit the local context. In this area, he touches upon the importance of an institutional framework, the role of returnee Asians from the West as well as the need to promote a culture that tolerates failure.
Much of the value of the book comes from his interviews with Asian entrepreneurs such as Deepak Amin of Covelix and Peter Valdes, Fil-Am co-founder of Tivoli Systems, a systems management software company that was eventually acquired by IBM.
Of particular interest to me is his discussion of the role of industrial policy in developing the Information and High Technology industries which he labels Techno-nationalism and defines as:
More about matters concerning the book here.
Much of the value of the book comes from his interviews with Asian entrepreneurs such as Deepak Amin of Covelix and Peter Valdes, Fil-Am co-founder of Tivoli Systems, a systems management software company that was eventually acquired by IBM.
Of particular interest to me is his discussion of the role of industrial policy in developing the Information and High Technology industries which he labels Techno-nationalism and defines as:
"a desire to free their economies from an over reliance on Western technologies, and to be recognized internationally for the ability to develop their own cutting-edge technologies. Most Asian economies drive innovation through national programs rather than market-driven research and development"This observation squares with what i have previously written about concerning industrial development. The role of the State has been a contentious issue (for example in the comments section here). Nevertheless, i believe that the author remains relatively agnostic about this matter and acknowledges the useful role that multinationals play in driving innovation.
More about matters concerning the book here.
Thursday, May 03, 2007
Unconditional Convergence and a Theory of Economic Miracles
Economist-blogger Dani Rodrik points to a paper by one of his students which concludes that:
"Rapidly growing countries are those that are, counterintuitively, farther away from the productivity frontier of the goods that they export. Diversification of production acts like a convergence machine: it enables countries to get into the lower rungs of taller ladders."
The above seems to support what Nobel Prize winner Robert Lucas wrote* when he did a comparison between the diverging growth trajectory of the Philippines and South Korea:
"Consider two small economies facing the same world prices and similarly endowed, like Korea and the Philippines in 1960. Suppose that Korea somehow shifts its workforce onto the production of goods not formerly produced there, and continues to do so, while the Philippines continues to produce its traditional goods. Then according to learning spillover theory, Korean production will grow more rapidly. But in 1960, Korean and Philippine incomes were about the same, so the mix of goods their consumers demanded was about the same. For this scenario to be possible, Korea needed to open up a large difference betweeen the mix of goods produced and the mix consumed, a difference that could widen over time.Thus a large volume of trade is essential to a learning-based growth episode"
Will have to study further and, if i can, blog more about this later, but in the meantime, this entry serves as a placeholder.
*Source: Making A Miracle from Lectures on Economic Growth, Robert E. Lucas Jr, 2002.
"Rapidly growing countries are those that are, counterintuitively, farther away from the productivity frontier of the goods that they export. Diversification of production acts like a convergence machine: it enables countries to get into the lower rungs of taller ladders."
The above seems to support what Nobel Prize winner Robert Lucas wrote* when he did a comparison between the diverging growth trajectory of the Philippines and South Korea:
"Consider two small economies facing the same world prices and similarly endowed, like Korea and the Philippines in 1960. Suppose that Korea somehow shifts its workforce onto the production of goods not formerly produced there, and continues to do so, while the Philippines continues to produce its traditional goods. Then according to learning spillover theory, Korean production will grow more rapidly. But in 1960, Korean and Philippine incomes were about the same, so the mix of goods their consumers demanded was about the same. For this scenario to be possible, Korea needed to open up a large difference betweeen the mix of goods produced and the mix consumed, a difference that could widen over time.Thus a large volume of trade is essential to a learning-based growth episode"
Will have to study further and, if i can, blog more about this later, but in the meantime, this entry serves as a placeholder.
*Source: Making A Miracle from Lectures on Economic Growth, Robert E. Lucas Jr, 2002.
Wednesday, May 02, 2007
Industrial Development: Hamilton vs. Hamilton
Two weeks back, i promised to post my feedback on Abe Margallos's The Fiction of American Free Market Model. Abe's main point is that the United States, in order to industrialize early in its history as an independent nation, followed a mercantilist approach as advocated by Alexander Hamilton:
"Alexander Hamilton, instead of pursuing laissez-faire free trade capitalism reverted to mercantilism, or neo-mercantilism. Although opposed by Jefferson* who believed that which governs least governs best, Hamilton succeeded in calling for an active (federal) government in infrastructure development and industrialization fortified by tariff protection against British manufactured goods. Hamiltonian economics later became known as the “National System” of the USA, Inc., the key postulates of which were:
1) Protecting industry (new factories or infant industries) through selective high tariffs and later via government subsidies;
2) Government expenditures in infrastructure development targeting internal improvements such as road building and other public works;
3) Creation of big banking such as national banks along with policies promoting productive enterprises."
He then cited Japan as following the same model:
"Little wonder the first Miracle of Asia, Japan, Inc., was built by its own founding fathers, the Meiji leaders, according to Hamiltonian economics under the guiding hand of the state. And the roaring “Tiger, Inc.” and now the awakened Dragon, Inc. simply followed suit in adopting the American way."
While i agree that Japan followed Hamilton's approach, i also believe that there are important differences that have to do with Abe's point #1 above. For one thing, Japan's tariffs were never as high as that of the United States during a similar stage in its development. Going back to what Amsden states in her book The Rise of the Rest:
"In one critical - and ironical - respect the American pattern was very easy to follow: it had high tariffs" [emphasis on the original] "In its early stage of development, the United States adopted tariffs that were among the world's highest. In 1913, the United States average was almost twice that of Japan."
Source: 'The Rise of the Rest', Table 7.6 page 175
"Japan's tariff (and its variance) rose between 1893 and 1938, but overall remained 'moderate' - only 24 percent at its peak in 1931 compared to a peak of 50-60 percent in the United States."
Moreover, Amsden notes that Japan had a stronger link between its import substitution and export activities:
"The linkage between import substitution and export activity in Japan began to be forged soon after the Meiji restoration. All modern industries were started as import substitutes, but exporting became concentrated in a small number of products and bean almost at once...In 1913, the production-export ratio was 77 percent for raw silk, 25 percent for cotton fabrics, and 30 percent for cotton yarn. Persistently high production-export ratios signal an orientation on the part of producers that trade is not just a 'vent-for-surplus' or a means to dispose of inventory that cannot be sold in the domestic market. Instead exports are built into import substitutes through long-range capacity planning." [Emphasis on the original]
[By contrast], "...export promotion in American history was largely restricted to information-gathering by diplomatic consuls, externsive technical assistance for agriculture, and military expenditures to develop defense-related products...These supports apart, American export promotion was virtually nil: 'Foreign sales (in 1893-1921) were achieved for the most part without assistance from the US government'**"
Amsden then states the reason why this is so:
"American exports began to be undertaken primarily by big businesses on the basis of innovative technologies. Therefore, U.S. exporters required little government help and the United States became a poor model for export promotion."
The United States did not need government initiated export promotion because its businesses , This, among other things, enabled American firmsto possess first mover advantage. Japan, being a latecomer early in its development history, by necessity, followed the approach of a second mover.
There is clearly a difference in applying Hamilton's approach depending on whether one is a first- or a second-mover. Amsden and Chu, in their book Beyond Late Development: Taiwan's Upgrading Policies summarize both the challenge and potential benefit to a latecomer country:
"The first latecomer firm to make a three-progned investment - in optimal size plants, technology and management, and distribution - gains 'second-mover advantage' in world markets." [Emphasis in the original] "The more numerous a latecomer's second movers, the better its national economic performance is likely to be."
In choosing which model to replicate, we have to answer the question, to which category do we belong? (Of course, we also have to be open to the question of whether we need to create another category for ourselves.)
*I posted about the distinction between Hamilton's and Jefferson's approach here.
**As cited in W.H. Becker (1982), The Dynamics of Business-Government Relations: Industry and Exports, 1893-1921, Chicago: University of Chicago
"Alexander Hamilton, instead of pursuing laissez-faire free trade capitalism reverted to mercantilism, or neo-mercantilism. Although opposed by Jefferson* who believed that which governs least governs best, Hamilton succeeded in calling for an active (federal) government in infrastructure development and industrialization fortified by tariff protection against British manufactured goods. Hamiltonian economics later became known as the “National System” of the USA, Inc., the key postulates of which were:
1) Protecting industry (new factories or infant industries) through selective high tariffs and later via government subsidies;
2) Government expenditures in infrastructure development targeting internal improvements such as road building and other public works;
3) Creation of big banking such as national banks along with policies promoting productive enterprises."
He then cited Japan as following the same model:
"Little wonder the first Miracle of Asia, Japan, Inc., was built by its own founding fathers, the Meiji leaders, according to Hamiltonian economics under the guiding hand of the state. And the roaring “Tiger, Inc.” and now the awakened Dragon, Inc. simply followed suit in adopting the American way."
While i agree that Japan followed Hamilton's approach, i also believe that there are important differences that have to do with Abe's point #1 above. For one thing, Japan's tariffs were never as high as that of the United States during a similar stage in its development. Going back to what Amsden states in her book The Rise of the Rest:
"In one critical - and ironical - respect the American pattern was very easy to follow: it had high tariffs" [emphasis on the original] "In its early stage of development, the United States adopted tariffs that were among the world's highest. In 1913, the United States average was almost twice that of Japan."
| Country | Tariffs 1908-1912(%) | Tariffs on Manufactures (%) |
| U.S. | 0.21 | 44 |
| Japan | 0.09 | 25-30 |
"Japan's tariff (and its variance) rose between 1893 and 1938, but overall remained 'moderate' - only 24 percent at its peak in 1931 compared to a peak of 50-60 percent in the United States."
Moreover, Amsden notes that Japan had a stronger link between its import substitution and export activities:
"The linkage between import substitution and export activity in Japan began to be forged soon after the Meiji restoration. All modern industries were started as import substitutes, but exporting became concentrated in a small number of products and bean almost at once...In 1913, the production-export ratio was 77 percent for raw silk, 25 percent for cotton fabrics, and 30 percent for cotton yarn. Persistently high production-export ratios signal an orientation on the part of producers that trade is not just a 'vent-for-surplus' or a means to dispose of inventory that cannot be sold in the domestic market. Instead exports are built into import substitutes through long-range capacity planning." [Emphasis on the original]
| Incidentally, with its success in following a combination of import substitution and export-led growth, Japan's Meiji government has in effect demonstrated what Tyler Cowen points to as the key benefit of international trade i.e. additional output or, in other words, contribution to economic growth. Conversely, it also means that to a certain extent, Cowen (who is known for his libertarian leanings), is employing the logic behind import substitution, something that Dan Rodrik notes with some perceptible degree of glee in his post, where he says: "the reason the" [Tyler Cowen's explanation] "made me jump is the similarity it has to arguments that proponents of import substitution often make in support of trade protection." |
[By contrast], "...export promotion in American history was largely restricted to information-gathering by diplomatic consuls, externsive technical assistance for agriculture, and military expenditures to develop defense-related products...These supports apart, American export promotion was virtually nil: 'Foreign sales (in 1893-1921) were achieved for the most part without assistance from the US government'**"
Amsden then states the reason why this is so:
"American exports began to be undertaken primarily by big businesses on the basis of innovative technologies. Therefore, U.S. exporters required little government help and the United States became a poor model for export promotion."
The United States did not need government initiated export promotion because its businesses , This, among other things, enabled American firmsto possess first mover advantage. Japan, being a latecomer early in its development history, by necessity, followed the approach of a second mover.
There is clearly a difference in applying Hamilton's approach depending on whether one is a first- or a second-mover. Amsden and Chu, in their book Beyond Late Development: Taiwan's Upgrading Policies summarize both the challenge and potential benefit to a latecomer country:
"The first latecomer firm to make a three-progned investment - in optimal size plants, technology and management, and distribution - gains 'second-mover advantage' in world markets." [Emphasis in the original] "The more numerous a latecomer's second movers, the better its national economic performance is likely to be."
In choosing which model to replicate, we have to answer the question, to which category do we belong? (Of course, we also have to be open to the question of whether we need to create another category for ourselves.)
*I posted about the distinction between Hamilton's and Jefferson's approach here.
**As cited in W.H. Becker (1982), The Dynamics of Business-Government Relations: Industry and Exports, 1893-1921, Chicago: University of Chicago
Wednesday, April 25, 2007
Industrial Development: Hamilton vs. Jefferson
Readers of mlq3's blog who have followed Hvrds' comments would notice that he makes frequent references to Alexander Hamilton (e.g. here) and the Hamiltonian model (e.g. here). For his part, Abe Margallo has proposed a Philippines Inc. model to economic development which favors Hamilton's approach over that of Thomas Jefferson's.
What exactly is behind Hamilton (and Jefferson's) model? While both Abe and Hvrds, in their respective posts, provide clear explanations of the model(s), Alice H. Amsden and Wan Wen Chu in their book Beyond Late Development: Taiwan's Upgrading Policies , are able to give additional insight in distinguishing the two, and it has to do with what kind of firm acts as the primary agent of industrial development:
"Two classic approaches offer conflicting answers. One may be characterized as 'Jeffersonian' and the other as 'Hamiltonian' in perspective.
The [Jeffersonian model]...emphasizes collectivity and cooperation. The relatively small, highly specialized firm is the agent of progressive change. It is able to cut bureaucratic costs through individual initiative and achieve speed and flexibility in entering new industries by being networked. What it lacks internally it overcomes by being part of a cluster of firms that mutually create 'external economies' (as analyzed by Alfred Marshall in his Principles of Economics). Such economies promote innovation and the efficiency needed to compete abroad.
[Hamilton's model], on the other hand, attributes modern manufacturing success to big business and internal economies, with Joseph Schumpeter as one of its most prominent partisans (see his Capitalism, Socialism and Democracy). It posits that in the course of economic development, as more and more physical and human capital is applied to manufacturing, the agent of change becomes the firm that makes a 'three-pronged' investment in (1) plants with minimum efficient scale, (2) in managerial hierarchies and proprietary knowledge-based assets, and in (3) global systems of marketing and distribution. The 'first mover' to do so enjoys advantages in the form of entrepreneurial rents that arise from scale economies, novel products and processes, and the managerial skills and capital to diversify into still newer industries."
In terms of the relative standing of these two theories in the marketplace of ideas, Amsden and Chu has this to say:
"By far, Jeffersonianism has proved to be the more attractive of the two theories. It champions individualism, cooperation, and democracy. In especially the United States, whose economic theories tend to dominate the global marketplace of ideas, the ideology of the small entrepreneur is supreme. The hero is imbued with the attributes of innovativeness, eficiency, and flexibility."
They then assert that in the real world, the situation is reversed:
"Arguably however, Hamiltonianism has in fact ruled the modern industrial world. The visible hand and internal economies may be said to predominate in most modern industries over the invisible hand and external economies. Whatever the tendencies toward disintegration and greater specialization, firm-level expansion has increasingly taken the mode of diversification, merger, and acquisition."
From the above passages, we are able to notice more than passing (but not exact) similarities in the recent debate between Manolo's Cult of the Market and John Nery's Myth of the State which i referred to in this post. Most specifically, embedded in the mental models of proponents of private initiatives for entrepreneurship are the ideas behind the Jefferson model, particularly that of the heroic entrepreneur. On the other hand, for those (like Abe Margallo and Hvrds) who believe that Hamilton's model is the key to economic take-off, the hand of the State is absolutely essential with the 'Cult of the Market' taking on the status of a false religion.
Update (04-28-2007): Over at mlq3's, hvrds has stated that "That dichotomy no longer exists.". From the discussions in this blog as well as in Abe's and mlq3's, i believe this dichotomy is still pretty much alive.
What exactly is behind Hamilton (and Jefferson's) model? While both Abe and Hvrds, in their respective posts, provide clear explanations of the model(s), Alice H. Amsden and Wan Wen Chu in their book Beyond Late Development: Taiwan's Upgrading Policies , are able to give additional insight in distinguishing the two, and it has to do with what kind of firm acts as the primary agent of industrial development:
"Two classic approaches offer conflicting answers. One may be characterized as 'Jeffersonian' and the other as 'Hamiltonian' in perspective.
The [Jeffersonian model]...emphasizes collectivity and cooperation. The relatively small, highly specialized firm is the agent of progressive change. It is able to cut bureaucratic costs through individual initiative and achieve speed and flexibility in entering new industries by being networked. What it lacks internally it overcomes by being part of a cluster of firms that mutually create 'external economies' (as analyzed by Alfred Marshall in his Principles of Economics). Such economies promote innovation and the efficiency needed to compete abroad.
[Hamilton's model], on the other hand, attributes modern manufacturing success to big business and internal economies, with Joseph Schumpeter as one of its most prominent partisans (see his Capitalism, Socialism and Democracy). It posits that in the course of economic development, as more and more physical and human capital is applied to manufacturing, the agent of change becomes the firm that makes a 'three-pronged' investment in (1) plants with minimum efficient scale, (2) in managerial hierarchies and proprietary knowledge-based assets, and in (3) global systems of marketing and distribution. The 'first mover' to do so enjoys advantages in the form of entrepreneurial rents that arise from scale economies, novel products and processes, and the managerial skills and capital to diversify into still newer industries."
In terms of the relative standing of these two theories in the marketplace of ideas, Amsden and Chu has this to say:
"By far, Jeffersonianism has proved to be the more attractive of the two theories. It champions individualism, cooperation, and democracy. In especially the United States, whose economic theories tend to dominate the global marketplace of ideas, the ideology of the small entrepreneur is supreme. The hero is imbued with the attributes of innovativeness, eficiency, and flexibility."
They then assert that in the real world, the situation is reversed:
"Arguably however, Hamiltonianism has in fact ruled the modern industrial world. The visible hand and internal economies may be said to predominate in most modern industries over the invisible hand and external economies. Whatever the tendencies toward disintegration and greater specialization, firm-level expansion has increasingly taken the mode of diversification, merger, and acquisition."
From the above passages, we are able to notice more than passing (but not exact) similarities in the recent debate between Manolo's Cult of the Market and John Nery's Myth of the State which i referred to in this post. Most specifically, embedded in the mental models of proponents of private initiatives for entrepreneurship are the ideas behind the Jefferson model, particularly that of the heroic entrepreneur. On the other hand, for those (like Abe Margallo and Hvrds) who believe that Hamilton's model is the key to economic take-off, the hand of the State is absolutely essential with the 'Cult of the Market' taking on the status of a false religion.
Update (04-28-2007): Over at mlq3's, hvrds has stated that "That dichotomy no longer exists.". From the discussions in this blog as well as in Abe's and mlq3's, i believe this dichotomy is still pretty much alive.
Monday, April 23, 2007
Kerala: Human Development without Industrial Development
While the recent discussions in the blogs i've visited focus on how to invest in industrialization, the Kerala Model offers something different. What is peculiar about this Indian state (population 30 million) is that it has attained life expectancy, literacy and population growth rates comparable to that of countries that have a much higher GDP. As indicated in this article What is True Development? The Kerala Model by Bill McKibben:
"with a per capita income estimated by various surveys to be between $298 and $350 a year, about one-seventieth the American average...
The life expectancy for a North American male, with all his chairs and cushions, is 72 years, while the life expectancy for a Keralite male is 70.
After the latest in a long series of literacy campaigns, the United Nations in 1991 certified Kerala as 100 percent literate. Your chances of having an informed conversation are at least as high in Kerala as in Kansas.
Kerala's birth rate hovers near 18 per thousand, compared with 16 per thousand in the United States--and is falling faster.
Demographically, in other words, Kerala mirrors the United States on about one-seventieth the cash."
How has Kerala been able to achieve so much with the little it has? Nobel Prize winning economist Amartya Sen explains*:
"The explanation of Kerala's success in the important space of basic capabilities has to be sought in the history of public policy involving education (including female literacy) and health services (including communal medical care, and to some extent, food distribution, in contrast with the rest of India.
There are also other factors involved, including a more favourable position of women in property rights and in inheritance among a substantial and influential section of Kerala's population, and the greater public activism connected with educational campaigns as well as politics in general. The history of public action in Kerala goes back a long time, with remarkable literacy campaigns in the native states of Travancore and Cochin in the nineteenth century" [Emphasis mine]
Why do i bring up the Kerala experience? There is always a chance that any industrial policy may fail, simply because the wrong industry has been targetted, deficiencies in execution or simply bad luck. There is also the very real possiblity that our present deadbeat Philippine elite won't be up to the historic task unlike their counterparts in East Asia and India. We may have to bide our time while we let the process of replacing the current elite with a more functional one (from the ranks of the poor and middle class) takes place. In the meantime, the welfare of the rest has to be looked after. The policies implemented in Kerala is one which a future Philippine government can consider emulating.**
Related links:
A Kerala experience by R. Krishnakumar - Kerala honors Amartya Sen, and worth reading for his quotes on education, democracy, globalization and inequality.
Tyler Cowen's blog post over at marginalrevolution regarding Questions about Sen which got me started on this entry. He provides a fair summary on Sen's contributions. Especially relevant to the discussion is his point #5 i.e. "If there any shortcoming of Sen’s thought or his theory, what would it be?"
An article in Salon about Open Source Software and Kerala's Socialist government.
*Inequality Reexamined by Amartya Sen
**I also wouldn't rule out the possibility of industrialization policies being implemented side by side with Kerala's social welfare oriented policies. After all, India was able to pursue this track.
Update (04-25-2007): Abe Margallo provides his analysis and critique on the above here. The message i get from his post is that the strategy of expanding human capital without developing local industry is, ultimately, a limited one. As he explains:
"So after a successful capacity expansion, Kerala, I believe, must take the next sequence - which is opportunity expansion. This is where Kerala, Inc. as in my proposed Philippine, Inc., must be pursued. Without opportunity expansion, the human capital they have produced, just as Philippines’ best and brightest, will emigrate to where there are opportunities."
"with a per capita income estimated by various surveys to be between $298 and $350 a year, about one-seventieth the American average...
Demographically, in other words, Kerala mirrors the United States on about one-seventieth the cash."
How has Kerala been able to achieve so much with the little it has? Nobel Prize winning economist Amartya Sen explains*:
"The explanation of Kerala's success in the important space of basic capabilities has to be sought in the history of public policy involving education (including female literacy) and health services (including communal medical care, and to some extent, food distribution, in contrast with the rest of India.
There are also other factors involved, including a more favourable position of women in property rights and in inheritance among a substantial and influential section of Kerala's population, and the greater public activism connected with educational campaigns as well as politics in general. The history of public action in Kerala goes back a long time, with remarkable literacy campaigns in the native states of Travancore and Cochin in the nineteenth century" [Emphasis mine]
Why do i bring up the Kerala experience? There is always a chance that any industrial policy may fail, simply because the wrong industry has been targetted, deficiencies in execution or simply bad luck. There is also the very real possiblity that our present deadbeat Philippine elite won't be up to the historic task unlike their counterparts in East Asia and India. We may have to bide our time while we let the process of replacing the current elite with a more functional one (from the ranks of the poor and middle class) takes place. In the meantime, the welfare of the rest has to be looked after. The policies implemented in Kerala is one which a future Philippine government can consider emulating.**
Related links:
A Kerala experience by R. Krishnakumar - Kerala honors Amartya Sen, and worth reading for his quotes on education, democracy, globalization and inequality.
Tyler Cowen's blog post over at marginalrevolution regarding Questions about Sen which got me started on this entry. He provides a fair summary on Sen's contributions. Especially relevant to the discussion is his point #5 i.e. "If there any shortcoming of Sen’s thought or his theory, what would it be?"
An article in Salon about Open Source Software and Kerala's Socialist government.
*Inequality Reexamined by Amartya Sen
**I also wouldn't rule out the possibility of industrialization policies being implemented side by side with Kerala's social welfare oriented policies. After all, India was able to pursue this track.
Update (04-25-2007): Abe Margallo provides his analysis and critique on the above here. The message i get from his post is that the strategy of expanding human capital without developing local industry is, ultimately, a limited one. As he explains:
"So after a successful capacity expansion, Kerala, I believe, must take the next sequence - which is opportunity expansion. This is where Kerala, Inc. as in my proposed Philippine, Inc., must be pursued. Without opportunity expansion, the human capital they have produced, just as Philippines’ best and brightest, will emigrate to where there are opportunities."
Friday, April 20, 2007
Abe Margallo on the American Free Market Model
Here is Abe Margallo's take on the Cult of Market vs. Myth of State discussion that Manolo Quezon and John Nery started over at Inquirer's Current blog and which i commented upon in this post.
(I'll update this entry with my reactions as soon as time permits.)
Update (05-02-2007): My update is here.
(I'll update this entry with my reactions as soon as time permits.)
Update (05-02-2007): My update is here.
Saturday, April 14, 2007
Authoritarianism: What is it Good For?
Tyler Cowen of marginalrevolution gives his take on Bong Austero's bargain* in response to this question - "Is authoritarianism excusable or permissible - for any length of time - if it is justified by a need for economic growth/reform (e.g. Lee Kwan Yew, Pinochet, Park Chung Hee)?"
You can read it here. From the comments section, i learned of a Nigerian proverb - "He whose head is used to open the coconut does not get to participate in the eating."
As for me, i have given my views on what authoritarianism (in the Philippine setting) may be good for in this comment over at mlq3's which i am reproducing in part below:
"If we were to map the various combinations of democracy/dictatorship and elitist/populist arrangements, i would rank the following from best to worst (with corresponding role models identified) as follows**:
1. Populist Democracy - the ideal arrangement from a political and economic standpoint. Possible Role Models: India, Brazil, Chile, Venezuela, Bolivia etc.
2. Populist Dictatorship - good track record for economic take-offs Possible Role Models: China (Phase 1 Mao's revolution, Phase 2 Deng's reforms) and Vietnam (Phase 1 Ho Chi Minh, Phase 2 'Doi Moi' Reforms). Negative Role Model: Zimbabwe under Mugabe
3. Elitist Democracy - where we are now. Other countries: Russia
4. Elitist Dictatorship - where Gloria and her middle class supporters want to take us. Role Model: Singapore. IMHO, this option sucks."
If it ever has to come to a dictatorship***, from the above you can guess whose heads i would prefer to use as coconuts.
*"we are prepared to lose our freedoms and our rights just to move this country forward." - Bong Austero
**I have speculated on how these various situations may come about in a previous post.
***Which i've repeatedly made clear i do not want to happen.
You can read it here. From the comments section, i learned of a Nigerian proverb - "He whose head is used to open the coconut does not get to participate in the eating."
As for me, i have given my views on what authoritarianism (in the Philippine setting) may be good for in this comment over at mlq3's which i am reproducing in part below:
"If we were to map the various combinations of democracy/dictatorship and elitist/populist arrangements, i would rank the following from best to worst (with corresponding role models identified) as follows**:
1. Populist Democracy - the ideal arrangement from a political and economic standpoint. Possible Role Models: India, Brazil, Chile, Venezuela, Bolivia etc.
2. Populist Dictatorship - good track record for economic take-offs Possible Role Models: China (Phase 1 Mao's revolution, Phase 2 Deng's reforms) and Vietnam (Phase 1 Ho Chi Minh, Phase 2 'Doi Moi' Reforms). Negative Role Model: Zimbabwe under Mugabe
3. Elitist Democracy - where we are now. Other countries: Russia
4. Elitist Dictatorship - where Gloria and her middle class supporters want to take us. Role Model: Singapore. IMHO, this option sucks."
If it ever has to come to a dictatorship***, from the above you can guess whose heads i would prefer to use as coconuts.
*"we are prepared to lose our freedoms and our rights just to move this country forward." - Bong Austero
**I have speculated on how these various situations may come about in a previous post.
***Which i've repeatedly made clear i do not want to happen.
Friday, April 06, 2007
Amsden's Reciprocal Control Mechanism
This is a continuation of the discussion over at mlq3's on Abe's proposal. Over there, Abe asked me to explain Amsden's concept of reciprocity.
In Amsden's framework, the concept of reciprocity is an alternative or supplementary control mechanism to that of the free market.
According to Amsden,
"A control mechanism is a set of institutions that imposes discipline on economic behavior. The control mechanism of 'the rest' revolved around the principle of reciprocity. Subsidies ('intermediate assets') were allocated to make manufacturing profitable - to facilitate the flow of resources from primary product assets to knowledge-based assets - but did not become giveaways. Recipients of subsidies were subjected to monitorable performance standards that were redistributive in nature and results-oriented.
The reciprocal control mechanism of 'the rest' thus transformed the inefficiency and venality associated with government intervention into collective good, just as the 'invisible hand' of the North Atlantic's market-driven control mechanism transformed the chaos and selfishness of market forces into general well-being. The reciprocal control mechanism of the North Atlantic minimized market failure. The reciprocal control mechanism of 'the rest' minimized government failure."
We should note that by 'the rest', it does not only mean just the East Asian tiger economies. In this classification, Amsden includes Argentina, Brazil, Chile, China, India, Indonesia, Korea, Malaysia, Mexico, Taiwan, Thailand and Turkey. These are the countries that, after World War 2, "had acquired enough manufacturing experience in the production of silk, cotton textiles, foodstuffs, and light consumer goods to move into mid-technology and later high-technology sectors. The 'remainder'" [which includes us] "which comprised countries that had been less exposed to modern factory life in the prewar period, failed thereafter to achieve anywhere near 'the rest's' industrial diversification."
[Source: The Rise of 'The Rest' - Here's a concise summary (and critique at the end).]
In Amsden's framework, the concept of reciprocity is an alternative or supplementary control mechanism to that of the free market.
According to Amsden,
"A control mechanism is a set of institutions that imposes discipline on economic behavior. The control mechanism of 'the rest' revolved around the principle of reciprocity. Subsidies ('intermediate assets') were allocated to make manufacturing profitable - to facilitate the flow of resources from primary product assets to knowledge-based assets - but did not become giveaways. Recipients of subsidies were subjected to monitorable performance standards that were redistributive in nature and results-oriented.
The reciprocal control mechanism of 'the rest' thus transformed the inefficiency and venality associated with government intervention into collective good, just as the 'invisible hand' of the North Atlantic's market-driven control mechanism transformed the chaos and selfishness of market forces into general well-being. The reciprocal control mechanism of the North Atlantic minimized market failure. The reciprocal control mechanism of 'the rest' minimized government failure."
We should note that by 'the rest', it does not only mean just the East Asian tiger economies. In this classification, Amsden includes Argentina, Brazil, Chile, China, India, Indonesia, Korea, Malaysia, Mexico, Taiwan, Thailand and Turkey. These are the countries that, after World War 2, "had acquired enough manufacturing experience in the production of silk, cotton textiles, foodstuffs, and light consumer goods to move into mid-technology and later high-technology sectors. The 'remainder'" [which includes us] "which comprised countries that had been less exposed to modern factory life in the prewar period, failed thereafter to achieve anywhere near 'the rest's' industrial diversification."
[Source: The Rise of 'The Rest' - Here's a concise summary (and critique at the end).]
Monday, April 02, 2007
Abe Margallo on Foreign Debt & Development, Sparks on State Reform
Here's a proposal by Abe Margallo, on a strategy for handling foreign debt and implementing industrial development.
"Our economic elites (who own half of the debt burden), imbued with a deep sense of country, consider the possibility of entering into some form of “forbearance” with the national government with a view to a short-term moratorium on debt service payment, say, an 8-year temporary cessation. (This indulgence by the elites is in a way a matching counterpart to the acknowledged sacrifices of the OFWs, serving to keep the ship of the nation afloat.)
During the moratorium, the government in partnership with the same forbearing private sector, or vice versa, ventures into vigorous investments, targeting specific industries such as: the manufacture of the imported component of the electronic exports; bio-fuel as alternative source of energy; or exploration in the extractive sector. (I’d prefer to treat the forbearance as some sort of passive investment on the part of the economic elites; after all, the first beneficiary of dependable institutions and infrastructures, productive workforce and booming economy would be none other than the elites themselves.)
What’s withheld as otherwise rent payment, which, doubtless, is a considerable sum, may now be available for physical and social (certainly together with educational) infrastructure outlays as well as for state support for R&D. On the other hand, appropriate incentives like “tax holidays” for entrepreneurs directly involved in these targeted sectors are worked out.
Aside from moratorium on debt service and on capital strike, similar challenge is posed to the labor sector to bite the bullet by committing to a moratorium on labor strikes and other concerted actions during the experimental phase.
Foreign creditors and investors, not being importuned to make a change of position, are expected to regard the arrangement as a real honest-to-goodness resolve for internally driven strategic economic plan. On the other hand, in virtue of its ownership by local leaderships, the initiative is perceivable as one designed with a visceral sense of stewardship (to have lasting positive consequences for the next generation of Filipinos); hence, stabilizing and producing the effect of strengthening the country’s creditworthiness and standing in the world economy."
In a later comment, he added his thoughts on development models, particularly the ones followed by South Korea, Taiwan and China:
"I have also considered as viable alternative the South Korean route. South Korea, a highly homogeneous society, took the innovative route of (officially) embracing crony-capitalism while subjecting it to strict discipline by imposing performance standards, down to the activities in the shop floor, upon business recipients of state largesse. The chaebols then assumed industrial leadership by risking into productive enterprises instead of simply preserving their rent-seeking activities. The state subsidy (from borrowed foreign funds) for diversification into new industries proceeded in tandem with the decision to invest heavily in education. Official cronyism and education, while still conforming to market mechanism, lay at the heart of the late-industrial expansion of South Korea. With fewer multi-national corporations in Korea than in any late-industrializing countries, its economy took off on the basis of nationally owned firms.
I’ve likewise looked at Taiwan as another best practice model. Through broad distribution of land ownership and capital, and high returns to labor (this may be address what cvj calls as “a program of promoting equality”) the individual Chinese was greatly motivated to produce much of the rapid growth of Taiwan’s economy. Taiwan’s small-scale capitalism (“letting a thousand flowers boom”?) as a base for industrial development can indeed serve as just another paradigm for accumulation.
There certainly are other economic models that could be investigated for the best practices we can learn from or from which we could “indigenize” our own. (The China model, playing the globalization game by the Hamiltonian or Keynesian rule-book, stares us in face today.) But the ones that appear to stand out as common denominators for success are:
1) the reciprocal relations between the state and the private sector (businesses, as well as civil societies I wish to add),
2) extensive investment in education and
3) the grandiose ambitions of their pioneering leaders." [emphasis mine]
The above models obviously require active participation by the State to which Sparks, in this comment poses a valid challenge:
"If we assume that the State must play a central role in development, as it has in countless other examples, then we have two tasks:
1. Reform the state
2. Selectively eschew the neoliberal orthodoxy to which we have blindly subscribed through our WTO and IMF commitments.
The question is how do we first reform the state, then enable the state, when neoliberal policies have weakened the state in favour of the private sector? Can we reverse a process that has gone on for 20 years?"
I have taken a stab at a response, but i realize that this is a complex issue and much more is required before we can resolve these interconnected questions.
"Our economic elites (who own half of the debt burden), imbued with a deep sense of country, consider the possibility of entering into some form of “forbearance” with the national government with a view to a short-term moratorium on debt service payment, say, an 8-year temporary cessation. (This indulgence by the elites is in a way a matching counterpart to the acknowledged sacrifices of the OFWs, serving to keep the ship of the nation afloat.)
During the moratorium, the government in partnership with the same forbearing private sector, or vice versa, ventures into vigorous investments, targeting specific industries such as: the manufacture of the imported component of the electronic exports; bio-fuel as alternative source of energy; or exploration in the extractive sector. (I’d prefer to treat the forbearance as some sort of passive investment on the part of the economic elites; after all, the first beneficiary of dependable institutions and infrastructures, productive workforce and booming economy would be none other than the elites themselves.)
What’s withheld as otherwise rent payment, which, doubtless, is a considerable sum, may now be available for physical and social (certainly together with educational) infrastructure outlays as well as for state support for R&D. On the other hand, appropriate incentives like “tax holidays” for entrepreneurs directly involved in these targeted sectors are worked out.
Aside from moratorium on debt service and on capital strike, similar challenge is posed to the labor sector to bite the bullet by committing to a moratorium on labor strikes and other concerted actions during the experimental phase.
Foreign creditors and investors, not being importuned to make a change of position, are expected to regard the arrangement as a real honest-to-goodness resolve for internally driven strategic economic plan. On the other hand, in virtue of its ownership by local leaderships, the initiative is perceivable as one designed with a visceral sense of stewardship (to have lasting positive consequences for the next generation of Filipinos); hence, stabilizing and producing the effect of strengthening the country’s creditworthiness and standing in the world economy."
In a later comment, he added his thoughts on development models, particularly the ones followed by South Korea, Taiwan and China:
"I have also considered as viable alternative the South Korean route. South Korea, a highly homogeneous society, took the innovative route of (officially) embracing crony-capitalism while subjecting it to strict discipline by imposing performance standards, down to the activities in the shop floor, upon business recipients of state largesse. The chaebols then assumed industrial leadership by risking into productive enterprises instead of simply preserving their rent-seeking activities. The state subsidy (from borrowed foreign funds) for diversification into new industries proceeded in tandem with the decision to invest heavily in education. Official cronyism and education, while still conforming to market mechanism, lay at the heart of the late-industrial expansion of South Korea. With fewer multi-national corporations in Korea than in any late-industrializing countries, its economy took off on the basis of nationally owned firms.
I’ve likewise looked at Taiwan as another best practice model. Through broad distribution of land ownership and capital, and high returns to labor (this may be address what cvj calls as “a program of promoting equality”) the individual Chinese was greatly motivated to produce much of the rapid growth of Taiwan’s economy. Taiwan’s small-scale capitalism (“letting a thousand flowers boom”?) as a base for industrial development can indeed serve as just another paradigm for accumulation.
There certainly are other economic models that could be investigated for the best practices we can learn from or from which we could “indigenize” our own. (The China model, playing the globalization game by the Hamiltonian or Keynesian rule-book, stares us in face today.) But the ones that appear to stand out as common denominators for success are:
1) the reciprocal relations between the state and the private sector (businesses, as well as civil societies I wish to add),
2) extensive investment in education and
3) the grandiose ambitions of their pioneering leaders." [emphasis mine]
The above models obviously require active participation by the State to which Sparks, in this comment poses a valid challenge:
"If we assume that the State must play a central role in development, as it has in countless other examples, then we have two tasks:
1. Reform the state
2. Selectively eschew the neoliberal orthodoxy to which we have blindly subscribed through our WTO and IMF commitments.
The question is how do we first reform the state, then enable the state, when neoliberal policies have weakened the state in favour of the private sector? Can we reverse a process that has gone on for 20 years?"
I have taken a stab at a response, but i realize that this is a complex issue and much more is required before we can resolve these interconnected questions.
Wednesday, March 28, 2007
From HVRDS: Employment, Industrialization and Development Models
Here's an analytical gem from fellow mlq3 commenter hvrds which i would like to cut and paste here:
"Government tells us that a little over half of the labor force actually earns a wage or salary. The other half are self-employed or unpaid family workers. We massacre the definition of employed in this country to be able to ape the economic accounting construct of advanced mechanized integrated industrial economies.We are told to use to this type of measurements which really is a joke.
Labor force – population 15 years old and over, whether employed or unemployed, who contribute to the production of goods and services in the country. 36M +
Employed – persons in the labor force who are reported at work or with a job or business although not at work during the reference week.
Unemployed* – persons in the labor force who did not work or had no job/business during the reference week and were reported looking and available for work.
Underemployed - employed persons who desire to have additional hours of work in their present job or in a additional job, or to have a new job with longer working hours.
Visibly Underemployed – employed persons who work for less than 40 hours during the reference week and still want additional hours of work.
Invisibly Underemployed – employed persons who work for 40 hours or more during the reference week and still want additional hours of work.
*Persons not looking or who have given up looking for work are not considered unemployed. They are considered voluntarily unemployed. They are not counted at all.
In the more developed industrial economies the description for those who are employed are as follows:
Non-farm payroll workers (full time, part time and temporary) Farm payrolls and government payroll’s (is distinguished from the private sector.)
Self -employed and family owned enterprises are not considered in the same classification as employed.
In the Philippines the term employed is stretched to include this. Tenant farmers(sharecropers),coastal fisherman are all considered employed under this defintion.
Having said that one should recall the words of Adam Smith who reminds us that:
“Servants, labourers and workmen of different kinds, make up the far greater part of every great political society. But what improves the circumstances of the greater part can never be regarded as an inconveniency to the whole. No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable. It is but equity, besides, that they who feed and clothe and lodge the whole body of the people, should have such a share of the produce of their own labor as to be themselves tolerably well fed, clothed and lodged.”
Henry Sy, the Tantocos and the Ayalas have nothing to do with farming nor sewing nor building. The indolent Filipino that I read about in some comments feed, cloth shelter and wipe’s the ass for some of you.
Industrial economies in food production alone through continuing advances in technology have multiplied the productive capacites of land, labor. In the past a 4-6-fold return on seed planted for wheat was considered normal, then a 10-fold return was considered exceptional Today it is 40-45 fold and higher. That is what productivity through a carbon based industrialization has wrought. (man made fertilizers are carbon based)The West subsidizes this production to insure stable prices and price stability. After all food is the currency of currencies. This revoltuion in agriculture in conjunction with the industrial revolution (you remember this) moved most people into cities.
The issue of hunger is prevalent simply because the economic model we persist in using is still the same installed by the colonizers.
It is interersting that a lot of sup[posedly knowledgeable people support the views of Washington Sycip about the drawbacks of democracy pointing to the authoritrian forms of our neighbors. he forgets to point out this one important fact. The chopsticks economies he refers to have a long history of formal national fedual structures in place. But they all followed a national mercantilist dirigist economic paradigm along the same lines as proposed by the then father of U.S. industrial mercantilism Alexander Hamilton.
If we had followed this paradigm at the end of the second world war then we would have destroyed the landlordism in the country by force and installed a genuine agrarian reform program that means that there would have been no parity rights for the Americans and all multinational corporations would have been nationalized and there would have been no Washington Sycip. That is what Japan, South Korea, PRC and Taiwan did. It is precisely Washington Sycip who benefitted from the policy framework of the Washington Consensus. His major clients are the multinationals who would have been tossed out until they are invited in like the PRC under the framework of a national dirigist economic paradigm. He has become rich though the policy of debasing the national currency. - hvrds March 28th, 2007 at 12:36 pm"
It's an empirical fact that the former colonies of Japan have done better than former American colonies in terms of economic growth. Will blog more about this in the future.
"Government tells us that a little over half of the labor force actually earns a wage or salary. The other half are self-employed or unpaid family workers. We massacre the definition of employed in this country to be able to ape the economic accounting construct of advanced mechanized integrated industrial economies.We are told to use to this type of measurements which really is a joke.
Labor force – population 15 years old and over, whether employed or unemployed, who contribute to the production of goods and services in the country. 36M +
Employed – persons in the labor force who are reported at work or with a job or business although not at work during the reference week.
Unemployed* – persons in the labor force who did not work or had no job/business during the reference week and were reported looking and available for work.
Underemployed - employed persons who desire to have additional hours of work in their present job or in a additional job, or to have a new job with longer working hours.
Visibly Underemployed – employed persons who work for less than 40 hours during the reference week and still want additional hours of work.
Invisibly Underemployed – employed persons who work for 40 hours or more during the reference week and still want additional hours of work.
*Persons not looking or who have given up looking for work are not considered unemployed. They are considered voluntarily unemployed. They are not counted at all.
In the more developed industrial economies the description for those who are employed are as follows:
Non-farm payroll workers (full time, part time and temporary) Farm payrolls and government payroll’s (is distinguished from the private sector.)
Self -employed and family owned enterprises are not considered in the same classification as employed.
In the Philippines the term employed is stretched to include this. Tenant farmers(sharecropers),coastal fisherman are all considered employed under this defintion.
Having said that one should recall the words of Adam Smith who reminds us that:
“Servants, labourers and workmen of different kinds, make up the far greater part of every great political society. But what improves the circumstances of the greater part can never be regarded as an inconveniency to the whole. No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable. It is but equity, besides, that they who feed and clothe and lodge the whole body of the people, should have such a share of the produce of their own labor as to be themselves tolerably well fed, clothed and lodged.”
Henry Sy, the Tantocos and the Ayalas have nothing to do with farming nor sewing nor building. The indolent Filipino that I read about in some comments feed, cloth shelter and wipe’s the ass for some of you.
Industrial economies in food production alone through continuing advances in technology have multiplied the productive capacites of land, labor. In the past a 4-6-fold return on seed planted for wheat was considered normal, then a 10-fold return was considered exceptional Today it is 40-45 fold and higher. That is what productivity through a carbon based industrialization has wrought. (man made fertilizers are carbon based)The West subsidizes this production to insure stable prices and price stability. After all food is the currency of currencies. This revoltuion in agriculture in conjunction with the industrial revolution (you remember this) moved most people into cities.
The issue of hunger is prevalent simply because the economic model we persist in using is still the same installed by the colonizers.
It is interersting that a lot of sup[posedly knowledgeable people support the views of Washington Sycip about the drawbacks of democracy pointing to the authoritrian forms of our neighbors. he forgets to point out this one important fact. The chopsticks economies he refers to have a long history of formal national fedual structures in place. But they all followed a national mercantilist dirigist economic paradigm along the same lines as proposed by the then father of U.S. industrial mercantilism Alexander Hamilton.
If we had followed this paradigm at the end of the second world war then we would have destroyed the landlordism in the country by force and installed a genuine agrarian reform program that means that there would have been no parity rights for the Americans and all multinational corporations would have been nationalized and there would have been no Washington Sycip. That is what Japan, South Korea, PRC and Taiwan did. It is precisely Washington Sycip who benefitted from the policy framework of the Washington Consensus. His major clients are the multinationals who would have been tossed out until they are invited in like the PRC under the framework of a national dirigist economic paradigm. He has become rich though the policy of debasing the national currency. - hvrds March 28th, 2007 at 12:36 pm"
It's an empirical fact that the former colonies of Japan have done better than former American colonies in terms of economic growth. Will blog more about this in the future.
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