‘Economic takeoff’ on a runway of mistrust

Philippine President Arroyo is reported to have said that the country is “on the threshold of economic takeoff” after the Supreme Court had paved the way for the implementation of the expanded value-added tax (e-VAT). The new tax system is Arroyo’s central and rating agencies-sensitive fiscal reform strategy to tame the budget deficit and forestall a fiscal crisis.

The opening up of the mining industry to foreign investors, another Supreme Court-abetted economic measure, is also touted by the Arroyo government as a ground-breaking opportunity for the country’s economic development.

Can we trust that the economist in Arroyo is for real or is she simply pulling a fast one on the non-economist in many of us? What are the facts and the scholarship on the matter?

Many parts of the country still retain the basic features of the so-called traditional society. A traditional society is one whose structure has limited production functions because of its incapacity to manipulate the environment through science and technology. To break from the conditions of a traditional society that put a ceiling on its attainable output, new types of enterprising men willing to take risks in pursuit of profit or modernization must come forward. The risk-taking must happen in conjunction with the appearance of institutions for mobilizing capital like banks, the investment in transport, communications, and in raw materials in which other societies may have an economic interest, and the setting up of manufacturing enterprises using modern methods. These are the “preconditions for take-off,” the stage that the Philippines notwithstanding has already reached.

Takeoff however may not occur if the transition is proceeding at a limited stride in an economy still primarily typified by “traditional low-productivity methods,” by dated societal institutions and values, and by parochial political institutions.

The key to economic progress is somehow attitudinal too and this happens when economic men and political animals judge such progress to be good not only for the material comfort it brings forth for their pioneering spirit but also for national identity and dignity, the welfare of the next generation and the common good.

Historically, the decisive ingredient during the transition is the building of an “effective centralized national state” imbued with a “new nationalism” versus regional interests, the colonial power (if any), or both. When growth becomes steady and normal and institutionalized into habits and social structure and dominates the society, takeoff is said to occur.

To economist Walt W. Rostow (his two seminal books are: The process of Economic Growth [1952] and The Stages of Economic Growth [1960]), from whose insights the above ideas are mainly culled, the takeoff is spurred not only by the investment in “social overhead capital” (such as in railways, ports, roads and education) and the expansion of technological development in industry and agriculture, but also by the rise to political power of a group dedicated to the proposition that the modernization of the economy is a national goal of paramount order. Guided by the wisdom and knowledge of this group who trust each other, takeoff happens (parsing or interpreting Rostow anew) when:

1) Heavy investment in “social overhead capital” takes place;
2) The rate of investment and savings rises to about 10% of the national income;
3) Imports of capital goods form a high proportion of total investment;
4) There is rapid expansion in new industries, generating profits a sizeable proportion of which are reinvested in new plants;
5) The new industries, in turn, spur (through their rapidly expanding requirement for workers, support personnel, and for other value-added goods and services) a further expansion in urban areas and in other modern industrial plants;
6) Expansion in the advance sector yields returns in the hands of those not content with rent-seeking but who place their savings at the disposal of those engaged in modern sector activities;
7) The new breed of entrepreneurs emerges and expands; and it places and directs the increasing flows of investment in the private sector;
8) The economy exploits untapped natural resources and discovers new methods of production;
9) Agriculture is commercialized, and more farmers are educated to accept and apply the new methods and the transformative changes brought forth;
10) The economic, social and political structures of the society are transformed to allow for a steady and sustainable growth.

While many scholars and policymakers have also criticized Rostow, I find his ideas very sound and relevant to the Philippine situation today.

If we follow the logic of Rostow, how can the Philippines pass the condition that demands heavy investment in “social overhead capital” in the first place given the gargantuan national debt that we have as well as an economy that is subject to external dictation through “structural adjustment,” for instance? Today, our self-content wealth holders would play rather safe with their money in the finance economy (half of the national debt belongs to them). What would induce them to venture into vigorous entrepreneurship in the real economy of the nation? Two quick prescriptions: First, a sense of “new nationalism,” as Rostow requires (or a “sense of country” in the language of columnist Condrado de Quiros) at least among the group (of the economic men and political animals) who is supposed to guide the country toward the attainment of its national visions; and second, simply “grow out of (this debt)” (meaning, I suppose, the economic growth should outgrow the debt) according to Dean Jorge Bocobo, a proposition that still seems to echo the Rostovian modernization model.

On the other hand, what Ricky Carandang has expressively remonstrated about the need to thaw the iceberg of mistrust cannot possibly be gainsaid as another precondition for takeoff. The sense of mutual social trust is also called social capital (the attitude and willingness of people to engage in collective and civic actions, or the Bayanihan spirit, if you will). But how can this happen if the President herself is perceived to be suffering from political (as well as perhaps, as many Filipinos also believe, moral) deficit? Thus handicapped, can she step up to the plate to lead the process of rebuilding the indispensable bridges of trust? And is there time before total distrust begins to overwhelm everyone?

Back to the buzzword of “economic takeoff.” Are we really taxiing on the runway ready to takeoff or still looking to flag a taxi at EDSA in the wee hours of the night?