Our dysfunctional bureaucracy as a binding constraint

The fact of the matter is that outward looking economies have the best and most efficient bureaucracies. Taiwan, Singapore, Japan, Hong Kong, and China are all outward looking economies and they rely on their efficient bureaucracies to nurture their outwardlooking economies forward.

It’s becoming ever more clear that our dysfunctional, weak, inefficient, and corrupt bureaucracy is a binding constraint to growth and development. It belongs up there together with our low agricultural productivity, labor rigidities, and monopolies in strategic industries as major constraints for the country to attain its true growth potential.

We have an LTFRB (Land Transportation Franchising and Regulatory Board) that refuses to open the public transport sector to technological innovation and change. On the contrary, it enables monopolistic practices with its refusal to allow Gojeck to compete with Grab and its incredibly stupid decision to set an artificial cap for motorcycle ridesharing drivers and force Angkas to reduce its driver force to give way to favored new players.

We have an MWSS (Metropolitan Waterworks and Sewerage System) which passes the blame of our water shortage woes on to the private sector when it didn’t do anything in the past 20 years to create new bulk water sources.

We have both the Department of Public Works and Highways (DPWH) and Department of Transportation (DOTr) guilty of underspending and making the administration’s BBB (Build, Build, Build) program more a PPP (Powerpoint Presentations) than real achievements on the ground.

As I mentioned in a previous article, economist Mylinda

Gayle Limlengco wrote a paper for Nagoya University on how the spending of the Agricultural Department bureaucracy had a zero correlation with increased output. In other words, the Department of Agriculture (DA) might as well be abolished and the farm sector wouldn’t feel the difference. The DA’s incompetence is reflective of the rest of the bureaucracy.

I need not mention the scams in Philhealth, PNP (Philippine National Police), Food and Drug Administration, Bureau of Corrections, Customs, etc.

Probably President Rodrigo Duterte knows this, but is just not willing to deal with it. In his first two years, he appointed many Davao cronies, San Beda

Law schoolmates, and other political supporters to key institutions in government. They not only underperformed — to say the least — but were also corrupt, inefficient, or both, that even President Duterte denounced some of them. Thus, he resorted to appointing retired or former military officers to key positions in government: the Department of Agrarian Reform, the Department of Housing and Urban Development, the MMDA (Metropolitan Manila Development Authority), the National Irrigation Authority, the Department of Communications and Technology, etc. As of last count, there were more than 55 ex-military in key government positions.

The problem is that appointing ex-military in key positions of government doesn’t solve the ills of the bureaucracy. While most of them have graduate degrees, nonetheless, they lack the experience or the institutional memory to do their present jobs really well. Even if they perform well, there will be no continuity. With the advent of a new administration, there will be another turnover and new political appointees will start learning on the job.

A key problem is that our bureaucracy is highly politicized. Presidential appointments are made down to the assistant director level. This leads to lack of meritocracy in our bureaucracy

and short term thinking with a focus on politics and corruption.

The bureaucracy is supposed to be a counterweight to our elected officials in the executive and legislature who have to answer to voters during their limited term. The bureaucracy is supposed to provide the medium- to longterm thinking which our elected officials are incapable of providing because elected officials have a fixed term of only three to six years. Moreover, elected officials must pander to the short-term interests of voters while the bureaucracy doesn’t have to.

A new president will have to deal with the problem of our dysfunctional bureaucracy if ever he or she wants to sustain or surpass our current growth momentum. The failure of our bold and ambitious infrastructure program is due for a repeat unless the bureaucracy is reformed.

Alas, the politics doesn’t augur well for the next — or any — president, to reform the bureaucracy since political supporters will demand their share of the bureaucratic spoils and current laws allow presidential appointments down to the assistant director level.

I don’t believe we will ever reform our bureaucracy unless and until we become a more outward looking economy, i.e. the tradables of manufacturing and agriculture become major drivers of economic growth. That is not the present case, where services represent the largest portion and our export to GDP ratio is a mere 30% (and declining over the years), compared to other countries like Vietnam where exports are seen as crucial and represent 100% of GDP.

The fact of the matter is that outward looking economies have the best and most efficient bureaucracies. Taiwan, Singapore, Japan, Hong Kong, and China are all outward looking economies and they rely on their efficient bureaucracies to nurture their outwardlooking economies forward.

It’s not hard to see why this is so. To conquer foreign markets and win against trading rivals, producers have to have an efficient bureaucracy behind them. Samsung, Hyundai, LG, and other South Korean companies, for example, would not be able to compete in the world market if their home bureaucracy weren’t efficient. If their government couldn’t provide good infrastructure, for example, their export goods wouldn’t be able to move efficiently and competitively to foreign markets.

On the other hand, here in the Philippines, the political economy favors a weak and inefficient bureaucracy. With the oligarchy in many regulated, inwardlooking non-tradable industries (power, banking, ports, shipping, real estate, etc.), the incentive is to “capture the regulator” or prevent competition rather than support an efficient and impartial bureaucracy.

A halfway solution to the problem of a dysfunctional bureaucracy had been to do PPPs or Public-Private Partnerships. Unfortunately, President Duterte, acting as if the Philippine bureaucracy moves as quickly and efficiently as his local government bureaucracy, moved away from PPPs. This is why his BBB or Build, Build, Build program has fallen far short of expectations. He has also shown that the government is an unreliable partner, and with his threats (laden with expletives) to cancel the contracts of Maynilad and Manila Water, private investors face huge regulatory risks in doing PPP. What this portends is adverse selection — only the politically connected who can mitigate the political and regulatory risk — will bid for PPP contracts.

Frankly, I don’t know if there’s a solution to our dysfunctional, inefficient, and corrupt bureaucracy. The incentives in our political and economic systems don’t point toward bureaucratic reform. What I do know is that breaking up the country’s highly concentrated markets and getting more competition, especially from foreign investors, and an emphasis on export tradables (manufacturing and agriculture) will raise the demand for better governance.

In the meantime, it’s enough to know that our bureaucracy is a binding constraint to growth. That knowledge may help us start moving to reform it.