Want to address corruption? Cut that sleazy nexus!

IS the Philippines really the most corrupt country in Asia? The PERC says so based on the perception of more than 1,400 expatriates doing business in the country. Perceptions are not necessarily accurate, but foreign investors base their investment decisions on that, so the issue can’t be ignored.

Can we really address corruption? Yes, with the right diagnoses. There are many explanations (e.g., lack of visionary leaders, lack of patriotism, the failure of institutions like the church and educational system to instill the right values), but the most credible explanations seem linked to the high cost of running for public office. Someone eyeing the presidency or even a seat in Congress needs billions to run a credible campaign.

Where would a politician get that kind of money? An incumbent faces temptations to steal from public coffers or squeeze the private sector to build up that cash. Those out of power would naturally solicit funds from those willing—as an investment—to place their bets on a probable winner. Once in power, the winners will repay the “investors”—with monopoly privileges, “fiscal incentives,” special safeguard duties for industries threatened by competing imports, and sweetheart deals.

Campaign finance reform and similar measures should address this problem. But it begs the question why, despite the high financial barriers to public office, many are still willing to kill and be killed just to get elected. It’s because the prize is even higher. There are overwhelming economic incentives for capturing public office. That is why it attracts criminals, thieves, robbers, murderers and all those dark creatures who sold their souls to the devil.

If we don’t address this deeper problem (of public office being so materially tantalizing because avenues for graft are many and easy), campaign finance reform alone won’t improve the situation—because then, simply lowering the cost of political campaigns is like giving even more scoundrels cheap tickets to a lucrative office.

At the heart of the corruption problem is the way wealth is created here. There are two major ways of creating wealth. The first is through “profit seeking,” where an entrepreneur or investor engages in the production and delivery of goods and services, and derives profits from the business in an environment of competition and fair play. Profits are made through innovation, foresight and application of knowledge while one contributes to society’s progress.

The second, the dominant mode in the Philippines, is rent-seeking which, according to political economist Anne Krueger, means deriving uncompensated value from society through the manipulation of the economic environment either through influencing government policies, rules and regulations, or just plain graft and corruption.

Rent-seekers in this context are those who accumulate wealth simply through access to political power, manipulating it to yield “infant industry” protection, high tariff walls against competitors, monopoly privileges, special import privileges, fiscal incentives (tax holidays), and access to government budget allocation for public procurement activities. Elected politicians and bureaucrats at all levels get their share of the booty simply by facilitating those sleazy transactions.

While these people get rich, the economy suffers as the kind of business and economic transactions that they perform, while squeezing value from society through extra-economic means, contribute nothing productive to its development. Instead of spending money on research and development, innovative technologies, and the training of manpower, they would rather buy the bureaucracy to get things done.

So we have in our midst an alliance of groups profiting from the nexus between wealth creation and the political system. Since the Spanish times, the powers that be designed the State and its related institutions to strengthen this rotten nexus. In turn, it has been attracting all sorts of rogues.

Consider the so-called fiscal rationalization law. Until now, Congress has failed to pass that owing to strong opposition from vested interests, politicians and bureaucrats. Why? It’s because the public actually foregoes the collection of at least P300 billion in taxes from favored companies. Will bureaucrats give away that kind of money without getting something in return?

It’s in this context why, despite all the criticisms, those in power would rather keep that tangle of regulations. Imagine having to secure 11 signatures just to get a business permit? Yes, those regulations are exactly intended to extract “rents,” or uncompensated value from society.

What are the solutions? First, maximize whatever resource we have to speed up growth. With an expanding pie, people don’t have to fight like stray dogs thrown a few scraps of meat. Remember Harvard economist Benjamin Friedman: There are positive moral consequences to economic growth; people tend to get virtuous as the economic pie expands.

But corruption per se could be a limiting factor to growth; hence, the real need to cut that sleazy nexus between wealth creation and the political process.

A first step could be putting in place a Freedom of Information Act (FOIA) so everyone has access to documents that government men forge with private contractors and service providers. We don’t have such a law; that is why even Neda, according to its former chief Cielito Habito, has no access to important contracts, even though the Neda Board’s Investment Coordination Committee theoretically has first pass over big, crucial projects.

If we had a FOIA in place, Neda, or whatever relevant agency, could have scrutinized more thoroughly those notorious IPP contracts in the Ramos administration.

Another reform: simplify business registration procedures (some states in the US require only one signature) and take away from Congress the power to grant franchises and transfer this to a transparent body. The idea is to maintain an open economy by lessening barriers to entry and exit as much as possible.

Meanwhile, maintaining low and neutral tariff rates across commodities will spare importers from having to “negotiate” with people at Customs for a favorable tariff line.

Another option: replace fiscal incentives with a low corporate tax, say 15 percent to 20 percent (as Hong Kong and Ireland did). That way, several state agencies can be collapsed into one investments promotion body, saving billions in salaries and wages.
Right now, with the high corporate tax of 35 percent, companies are tempted to “negotiate” with the Board of Investments for fiscal incentives and the Bureau of Internal Revenue for allowing them to “cook” the books.

There are many ways to cut this nexus. The idea behind these reforms is to remove the “economic motive” in people’s decision to run for public office. When there is no money to be captured in politics, the Devil’s acolytes will lose interest in public service—which then becomes attractive only to people with the heart and skills for true public service. (Wrote this as Editorial for the BusinessMirror, March 15, 2007)