This volume is a Festschrift for Arsenio Molina Balisacan – economist, professor, public servant, colleague, mentor and friend. It pays tribute to his work and honours him as an outstanding economist and public servant. Its themes reflect his research and policy interests over his professional career. These interests are central to understanding the development dynamics in the Philippines and elsewhere in Asia. The overarching theme is overcoming poverty through agricultural and rural development and complementary policies that engender a robust and sustainable structural transformation. Competition policy plays a particularly key role in combating cronyism and rent-seeking that impede that development path.

This project was conceived in November 2018 when the editors and the honouree attended the back-to-back Philippine Economic Society (PES) and the Federation of ASEAN Economic Associations (FAEA) conference held in Cubao, Quezon City, Philippines. We planned the surprise launch of this volume in time for his sixty-fifth birthday on 8 November 2022. In the Philippines, this age also marks an individual’s retirement from government service. Thus began the three-year “gentle conspiracy”, as Gerry Sicat aptly describes the project, among the editors, contributors, SEARCA and ISEAS – Yusof Ishak Institute towards the realization of this volume.

This book came to fruition with the help of many people and organizations whose tremendous support we wish to acknowledge. The enthusiastic responses from our forty-six authors from many countries are testimony to the high esteem and affection for Arsi. We thank our contributors for their fine papers and their collaboration as we worked through the refereeing and editorial production processes. We thank Peter Timmer and Gerardo Sicat for readily accepting our request to write the forewords. Special thanks to Anne Krueger for the back-cover endorsement.

A huge thank you to the Southeast Asian Regional Center for Graduate Study and Research in Agriculture (SEARCA), led by Director Glenn Gregorio, for the funding support for this volume. Many thanks to the SEARCA team for facilitating the physical production of this book, especially Benedict Juliano and Arlene Nadres. Thanks to Lily Tallafer, our excellent and meticulous copyeditor who also happens to be one of Arsi’s long-time associates.

INTRODUCTION

The Philippine government liberalized rice imports in 2019, ending the import monopoly of the National Food Authority (NFA) and lowering the effective tariff on imported rice. Earlier studies had generally suggested lifting this privilege of the NFA and allowing private sector importation at lower tariffs, among other reforms (Balisacan, Clarete, and Cortes 1992; Roumasset 1999; David 2003; Balisacan and Sebastian 2006; Dawe, Moya, and Casiwan 2006; Sombilla, Lantican, and Beltran 2006; Clarete 2008; David, Intal, and Balisacan 2009; Briones 2018.) While the proposed reform had long been pushed, Philippine lawmakers in several Congresses had consistently considered it not a priority. Not even the country’s obligation to tariffy all quantitative import restrictions under the World Trade Organization’s (WTO) Agreement on Agriculture in 1996 nor a structural adjustment programme with the Asian Development Bank at the turn of the century had pushed lawmakers to reform the NFA’s role in the rice industry. What finally persuaded legislators to pass the Rice Tariffication Law (RTL) in 2019 was the high food price inflation in 2018, which analysts traced to the NFA.

As soon as the RTL went into effect in the first quarter of 2019, private‑sector importers started to import unprecedentedly large quantities of rice. To a price-taking open economy with perfect competition, the domestic price of rice is expected to fall by the percentage reduction of the import tariff rate. However, wholesale prices of rice fell significantly lower than expected in 2019. Furthermore, consumer rice prices dropped by less than that of wholesale rice prices. To top it all, the farmers bore the largest adjustment to rice import liberalization—that is, farm-gate prices of palay plunged the most in percentage terms.

Accordingly, reform opponents claim that the domestic rice market is imperfectly competitive and has remained that way despite import liberalization. With the NFA no longer providing a countervailing check to keep retail prices down, large importers and traders control not only the local supply but also the volume of imported rice.

The policy divide surrounding the RTL has spilled into competing claims on the incidence of gains and losses from the reform.

INTRODUCTION

Informal lending is one of the more common sources of household financing in many developing countries, including the Philippines. Informal finance arrangements through business counterparts and extended family members, pawnshops, rotating savings and credit associations (ROSCAs), and informal money lenders often prove more efficient than their formal counterparts around the globe (Adams and Hunter 2019). Despite the wide acceptance and integration into society of these informal financing institutions, studies on them are few, especially in the context of developing countries (see, e.g., Agabin et al. 1989; Agabin 1993; Nagarajan, David, and Meyer 1992; Floro and Ray 1997; Adams and Hunter 2019).

Surveys by the Bangko Sentral ng Pilipinas (BSP, Central Bank of the Philippines) point to a growing share of informal money lenders among households’ funding sources in recent years, despite the regulators’ push to encourage a more inclusive financial sector, such as utilizing microfinance institutions and digital banks and easing regulatory requirements to entice households to join the formal financial system (Karlan and Morduch 2010; Kritz 2013; BSP 2018, 2020). The 2019 Financial Inclusion Survey of the BSP shows that informal money lenders held a significant role in various financing decisions of households (BSP 2020).

The expansion of the informal financing channel does not refer only to the increased client base, but also to product innovations that money lenders introduce. For instance, collaterals accepted by money lenders have evolved from goods, jewelries, land titles and household appliances to, recently, automatic teller machine (ATM) or debit cards.

This study takes a close look at a newly emerged credit arrangement called Sangla ATM or debit card pawning. Sangla ATM is an informal loan arrangement where a borrower uses as collateral an ATM card linked to an account that receives a regular salary or other forms of income. The borrower surrenders the ATM card and its personal identification number to the lender, who then uses the card to withdraw the loan repayment (principal and interest) on a regular frequency (typically twice a month) until the entire amount is fully repaid.

The popularity of debit card pawning in the Philippines has reached a broad range of borrowers who have access to an ATM‑linked bank account—from conditional cash transfer recipients of the government to private-sector employees and even government personnel (ABS‑CBN 2018, 2020).

INTRODUCTION

No controversy in the history of agricultural economics has been more perennial than the relationship between farm size and productivity. From the days of Chayanov (1926) to the present, the dominant view has been the inverse relationship (IR) between farm size and productivity, particularly when productivity is measured by physical yield or gross value of production per hectare (e.g., Barrett, Bellemare, and Hou 2010; Larson et al. 2014; Delvaux, Riesgo, and Paloma 2020). Feder (1985) theoretically demonstrates that large farms tend to be less productive than small farms because they tend to use hired labour more intensively than small farms, and because hired workers do not work as hard as family workers. Based on this IR, Lipton (2012) advocates redistributive land reform as it is supposed to be conducive to both efficiency and equity.

However, Otsuka (2007) argues that the IR is partly a consequence of land reform programmes that suppress land rental transactions between less productive large farmers and more productive small farmers. He points out that the IR is found primarily in South Asia, where land reform programmes were widely implemented, but not in Southeast Asia, where they were not implemented rigorously, except in the Philippines. Otsuka (2013), Estudillo and Otsuka (2016) and Otsuka, Liu, and Yamauchi (2016a) also maintain that by nature, small farms in Asia employ labour-intensive production methods. Since the wage rate has been rising sharply in many high-performing Asian countries, the production cost of small-scale farming has been increasing also. This has resulted in agriculture’s loss of comparative advantage in this region. This argument suggests that the IR has been weakened in Asia because small farms’ labour-intensive production is no longer advantageous. Using cross-country data from 1980 to 2010, Otsuka, Liu, and Yamauchi (2013) confirm the decline in the efficiency of smallholder agriculture. Thus, Asia as a whole may become a major importer of food grains unless farm-size expansion and large-scale mechanization take place (Yamauchi, Huang, and Otsuka, 2021).

A recent meta-regression analysis of roughly 1,000 cases by Delvaux, Riesgo, and Paloma (2020) shows the following results: (1) a strong IR tends to be found when gross value of output per hectare or physical yield is used to measure productivity;

INTRODUCTION

The Philippines has a complex development history. Initially regarded as one of Asia’s prospective stars, by 1980 it had clearly failed to live up to such a lofty expectation. It parted company with its dynamic East Asian neighbours during the 1980s, and experienced prolonged and deep twin crises, both economic and political. Popular commentary over this period labelled it “the sick man of Asia”, “the East Asian exception”, a “crony capitalist economy”, “Asia’s Latin American economy” and various other unflattering descriptors. It appeared at that time that poverty and inequality were deeply entrenched, that agriculture lacked the resilience of its neighbours, that the ethno-religious conflict in Mindanao was beyond resolution, and that macroeconomic adventurism was consigning the country to a bleak period of recurring debt crises. Many of its best and brightest citizens relocated abroad; the prospect was that the Philippines would become a “remittance economy”.

However, just as the earlier optimistic prognostications proved to be mistaken, subsequent developments have been unkind to the 1980s doomsayers. The Philippines transitioned to a workable, decentralized democracy with governments that (mostly) enjoyed electoral legitimacy. Economic reforms introduced in the wake of the 1980s’ crises resulted in economic recovery and a return to growth, which, in turn, generated significant improvements in living standards. Prior to the COVID-19 pandemic, the country had enjoyed more than 70 quarters of continuously positive economic growth. Moreover, from 2000 to 2019, its growth was not far short of those of Asia’s most dynamic economies. Viewed from the crisis decade of the 1980s, both these outcomes would have been unimaginable.

Just as this renewed prosperity appeared to be durable, the COVID-19 pandemic struck with unexpected ferocity. The Philippines experienced one of the most severe economic downturns, with its 2020 decline in gross domestic product (GDP) almost three times the global average. It introduced one of the world’s most severe lockdowns, partly in recognition of the weak capacity of the country’s under‑resourced public health system. Poverty and inequality have increased substantially as many of the poor and near-poor have been unable to sustain their livelihoods, and social protection measures have limited reach.

INTRODUCTION

Effective international cooperation can bring enormous benefits to developing countries, such as by providing access to markets and facilitating technology transfer and investments for development. With much deeper global economic integration, there is an even greater need for coordinated policy actions by countries to avoid beggar‑thy‑neighbour policies and adverse spillovers and, instead, create conditions to lift global welfare. Achieving international cooperation that serves development, however, is not always forthcoming nor easy to promote in existing international forums. A key challenge for policymakers in developing countries is to extend their attention beyond implementing national policies to also finding the means to influence support for international measures that serve their respective countries’ interests.

This paper explores the interplay of national policies and international regimes in the areas of trade policy and corporate tax policies to illustrate how international cooperation has shaped their impact on development. It draws on the substantial body of analytical work on these areas to highlight some key challenges faced by developing countries in reflecting their interests to influence international rules and practices. The first part discusses lessons from the rules-based international trading system. The second part reflects on the challenges of reforming the international corporate tax system, especially from the perspective of developing countries. The third part considers other policy areas where international cooperation will be important for developing countries.

LESSONS FROM A RULES-BASED INTERNATIONAL TRADING SYSTEM

The textbook economic case for international trade—the law of comparative advantage—says that two or more countries can gain from specialization and trade of goods. Free trade also offers dynamic benefits, such as from the pressure on companies to be more productive to be able to compete internationally. History shows, however, that countries also have incentives to limit imports to protect local production in specific sectors, gain terms of trade advantage and/or raise fiscal revenues. Countries have used trade agreements as mechanisms to seek reciprocal commitments to reduce barriers to trade and provide greater access to markets.

Evidence shows that the world has benefited from the rules-based international trading system.

INTRODUCTION

It has been understood, at least since Plato’s Republic, that trade between two entities can be beneficial to both. The reason why that applies to countries was made very clear two centuries ago by Ricardo (1817) with his theory of comparative advantage. Yet most countries have restricted their international trade in products at various times. True, in the mid‑19th century following the repeal of Britain’s protective Corn Laws, the richest countries of Europe began opening their national markets, especially in farm goods, as they took more advantage of agricultural development opportunities in their colonies to secure food and fibre supplies. That globalization wave came to an end with World War I, and trade suffered further in the 1930s and early post-World War II. But during the lifetime of Arsenio M. Balisacan, empirical analyses of the effects of trade policies—including in the Philippines—have added to theoretical reasons for opening up to international trade. Arguably they have contributed to reforms of these policies since the 1980s, and thereby to the accompanying latest globalization wave.

This chapter surveys the findings of these empirical studies as they affect incentives in agricultural markets. A focus on policies affecting farm products is warranted because they adversely affect food security globally, and in particular the world’s poorest households, which are mostly found in rural regions of developing countries.

More specifically, the chapter traces the impacts of these trade, farm and food policy developments since the 1950s, particularly in East Asia. It does so by subdividing the period into the years to the mid‑1980s, which were characterized by anti-trade policies that added to the volatility of international food prices and to poverty and inequality in most developing countries, and the subsequent two decades, which saw the gradual undoing of these price- and trade-distorting policies. The chapter looks at both the extent of interventions insofar as they alter prices, and the market and welfare effects of these policies at home and abroad. During the most recent dozen years, international prices of farm products spiked and the government of the Philippines and of many other countries reacted in ways that aimed to insulate their domestic markets.

INTRODUCTION

A notable feature of the Philippine economy post-Asian financial crisis and until fairly recently had been the slow response of income poverty to fairly robust economic growth (Balisacan 2011; Balisacan 2010; Balisacan 2009; Ducanes and Balisacan 2019; World Bank 2011; ADB 2009). This contrasts with the experience of China and Vietnam (Balisacan, Pernia, and Estrada 2003), where poverty markedly declined as their economies grew in the decade following the Asian financial crisis, as well as with other countries in the region whose economies grew even earlier, such as Thailand and Malaysia. The income elasticity of headcount poverty was estimated to be only −1.3 in the Philippines, compared with −2.3 for East Asia as a whole (World Bank 2011).

We argue in this paper and show empirically using regional-level data that the reason for the slow response of income poverty to economic growth in the Philippines is the erstwhile pattern of economic growth, which had been dominated by higher-end services. From 2012 to 2015, as the pattern of economic growth began to favour industry, a strong poverty response has been observed.

The transformation of rural employment from a largely informal to a largely formal sector activity as the root cause of modernization and development follows the Ranis-Fei model (Ranis and Fei 1964). The Ranis-Fei model of growth envisions a dual economy with, on one hand, a backward economy serving as a sink for surplus labour and with a low fixed wage level and, on the other, a modern sector with rising productivity and high wages, courtesy of modern technology, large capital complement and scale economies. The transfer of labour from the backward sector to the modern sector underpins economic growth and the rise in income. As the process unfolds, average incomes of households in the backward economy are pulled up and poverty drops. A clear case is Taiwan’s development in the 1960s, where rural incomes rose and rural poverty incidence fell with the increasing availability of rural non-farm employment (Anderson and Leiserson 1980).

Another development paradigm apropos the relationship between industrial structure and poverty reduction is development progeria, which applies to low-income countries.

INTRODUCTION

Many developing countries have adopted competition law in the recent few decades. There are more than 130 competition law regimes in the world today (Cheng 2020). Competition agencies in developing countries tend to emphasize that their competition policies aim at contributing to economic development and social inclusion (Evenett 2005). For example, Arsenio M. Balisacan, the first chairperson of the Philippine Competition Commission (PCC), stresses that “the PCC, a young competition agency, has to quickly develop its enforcement capacity, in light of expectations for enforcement to contribute to sustaining rapid economic development and achieving inclusive development” (Balisacan 2020, 13).

The competition agencies of Korea and Japan have traditionally acted against late payment by large firms to small and medium enterprises (SMEs) in retailing and wholesaling, as well as subcontracting. In 2011, the European Commission (EC) strengthened its Late Payment Directive by including a provision that if firms do not pay their invoices within 60 days, they will be forced to pay interest and reimburse the reasonable recovery costs of the creditor. The policy was adopted because a number of SMEs have gone bankrupt each year while waiting for their invoices to be paid and because late payment deprives jobs and stifles entrepreneurship (European Commission 2011). The government of the United Kingdom has been intensifying its efforts to bring about a culture change in payment practice. Few studies have been conducted on payment practices in the developing world, however, and the competition agencies and governments in these countries seem not to be determined to combat late payment to enhance inclusive development.

This chapter presents the case of late payment practices in the shoe industry in the Philippines circa 2000, using interview materials and survey data of shoemakers. In those days, shoemakers did not have the option of using digital platforms to sell goods directly to customers; their direct buyers were retailers and wholesalers. Although none of these buyers dominated the entire domestic market for shoes, it seems that they had buyer power, allowing some of them to delay payment to shoemakers for an extended period, which could be more than a year.

INTRODUCTION

The Philippine microfinance sector encompasses banks, non‑governmental organizations (NGOs) and various non-bank financial intermediaries (e.g., cooperatives and credit unions) providing financial services to customers that most mainstream financial institutions deem too costly or risky. The sector has transformed over the years, both in terms of the number of institutions providing microfinance services and the number of clients served. From the late 1980s when NGOs and similar not-for-profit institutions used to dominate microlending, the sector has steadily grown, attracting commercial players, chiefly banks of varying orientations (e.g., rural, thrift and cooperative banks), encouraged by the business potential of tapping a large, hitherto underserved, market. The microfinance clientele has similarly grown from a few thousands to several millions (MCPI 2016).

The growth of the sector can be traced in part to a wider acceptance of the view that broadening access to finance is an effective strategy for poverty alleviation. The pessimism that grew out of the failed subsidized credit programmes of an earlier period has given way to a more sanguine view of “banking with the poor”, based on the celebrated successes of models like the Grameen Bank and the Association for Social Advancement (ASA) of Bangladesh and BancoSol of Bolivia. A key element in these successful experiments has been the application of sound banking principles emphasizing financial sustainability, challenging microfinance institutions (MFIs) to rely less on government or donor subsidies while serving more of the poor.

At the institutional level, the creation of a policy environment more hospitable to financial inclusion supported the paradigm shift from one of subsidy dependence to financial sustainability. This included the adoption of microfinance standards for NGOs as well as the encouragement given banks to get involved in microfinance. In 1997, the Philippines rolled out the National Strategy for Microfinance (NSM) to provide the framework for the promotion of microfinance as a sustainable activity. The strategy called for government policies directed at enlarging the role of private MFIs in financial services provision for low-income groups. It also provided the basis for subsequent laws and issuances on financing poverty alleviation measures.

INTRODUCTION

Cross-border dispersion of the different stages/slices of production processes within vertically integrated global industries has been a key structural feature of economic globalization in recent decades. This international division of labour, which we label “global production sharing” in this chapter, opens opportunities for countries to specialize in different slices (tasks) of a production process within a global manufacturing value chain (GMVC). Trade based on global production sharing—that is, trade of parts and components and final assembly within GMVC—has primarily driven the dramatic shift in the geographical profile of world manufacturing exports from developed to developing countries. High-performing developing countries in East and Southeast Asia have been the main beneficiaries of this structural shift in world trade. In the early 1970s, the Philippines had a promising start in export‑oriented industrialization by engaging in GMVCs. But subsequently, its growth trajectory has not lived up to the initial expectations.

This chapter aims to document and analyse the Philippines’ engagement in GMVCs from a comparative Southeast Asian perspective. This has been motivated by two related objectives: (a) to inform the policy debate in the Philippines on the feasibility and desirability of export‑oriented industrialization by joining GMVCs and (b) to contribute to the wider literature on GMVC participation as a vehicle for global economic integration of developing countries and the related policy issues. The importance of this phenomenon in designing national industrialization strategies is now widely acknowledged in both academic and policy circles. However, there is a dearth of time-profile studies of individual countries, which are needed to broaden our understanding of how government policies and the overall investment climate condition a country’s potential for export-oriented industrialization by joining GMVCs. The Philippines provides a valuable laboratory for a case study of this subject, given the country’s engagement in global production sharing since the early years of the GMVCs’ arrival in the region and its mixed achievements in the ensuing years compared with other Asian countries.

The next section presents a brief typology of GMVCs to provide the analytical context for the ensuing analytical narrative.

INTRODUCTION AND OVERVIEW

I am delighted to contribute to this Festschrift in honour of Dr. Arsenio M. Balisacan, a professor of economics and colleague at the UP School of Economics, who has reached the mandatory retirement age in government. He was appointed on special detail in 2012 and served up to 2016 as director-general of the National Economic and Development Authority (NEDA) and concurrent secretary of socio-economic planning in the President’s Cabinet. As a professor, Dr. Balisacan has made important contributions to understanding poverty and income inequality in the Philippines. During his tenure at NEDA, he coordinated the preparation of the medium-term Philippine Development Plan (PDP), which has inclusive growth as theme—essentially, sustained and broad‑based economic growth. This is a timely opportunity for me to visit and explore the current challenge of growth with high income inequality and some rising episodes of such inequality in the country.

The post-World War II economic history of the Philippines shows that the real gross domestic product (GDP, adjusted for inflation) expanded about 34.4 times between 1946 and 2016—an annual real GDP growth rate of about 5.4 per cent. The GDP expansion was accompanied by high and, in some years, increasing income inequality, however. For instance, the Gini index was 0.44 in 2015 and worsened to nearly 0.48 in 2018. The basic data come from the Family Income and Expenditure Survey (FIES), which the Philippine Statistics Authority (PSA) collects and releases every three years.

Growth with high income inequality has long been a concern of the Philippine government under a succession of administrations since 1986. The inequality problem persists amid a variety of policy interventions geared towards inclusive growth. By no means has the problem been solved at this point. Is there something the Philippines can do to arrest growth with high income inequality, often decried as lack of distributive justice?

Several economists view lack of distributive justice as the result mainly of unequal distribution of initial endowments, which a market system tends to replicate across time. And so instead of interfering with the workings of markets, many economists counsel collective actions designed to correct the inequitable distribution of initial endowments.

INTRODUCTION

Does the expectation of upward mobility influence an individual’s preference for government redistribution? We investigate the relevance of the prospects of upward mobility (POUM) hypothesis in the context of eight Southeast Asian countries to explain individual attitudes towards redistribution. As originally expounded in Benabou and Ok (2001), the POUM hypothesis suggests that when people expect redistributive policies not to change for some time, those with income below the mean but who anticipate better fortunes may not support such policies. The reason is that the upwardly mobile people, though currently poor, foresee themselves subjected to progressive taxes that would be difficult to amend. Such attitudes towards government redistribution may be reinforced by insights from older family members whose own efforts proved more important than exogenous factors (such as government aid) in their social advancements (Picketty 1995). Contrary to the median voter theorem that relates redistributive preferences to current income status (Meltzer and Richard 1983), the POUM hypothesis relates them instead to future income status, thereby explaining why a redistributive policy may not be supported by some of its intended beneficiaries (Alesina and La Ferrara 2005).

The POUM hypothesis builds on the assumptions that policies are stable and individuals, including the poor, are not too risk averse. Most studies on this hypothesis are about developed countries where policies and institutions are fairly durable. Using US survey data to construct both objective and subjective measures of mobility, Alesina and La Ferrara (2005) find some corroborating evidence. Similarly, Alesina and Giuliano (2011) report a negative relationship between preference for redistribution and several social mobility indicators in the United States. Alesina, Stantcheva, and Teso (2017) show broadly similar findings based on both survey and experimental data from France, Italy, Sweden, United Kingdom and the United States. Whereas earlier studies use employment or occupational status to proxy risk attitudes, Cojocaru (2014) use a direct measure and find evidence consistent with the POUM hypothesis in countries belonging to the European Union (EU), but not in countries outside the EU. Investigating the possible mediating effect of political ideology on mobility expectations in Dutch households, Lemeris, Garretsen, and Jong-A-Pin (2018) find that only right-wing individuals conform to the POUM hypothesis, while left‑wing individuals prefer redistribution regardless of their expectations of upward income mobility.