Capitalism will save Philippine democracy – BusinessWorld

I was struck by the perilous state of democracy in the United States, as described by Harvard Professors Steven Levitsky and Daniel Ziblatt, in their bestselling book, How Democracies Die, and by how a similar situation is unfolding in many countries, from Hungary to the Philippines, but also by how different the solution will be for our own country.

The basic thesis of the book is this: The United States isn’t unique in that democracy in America is not in peril. As in other parts of the world where authoritarianism has gained footholds, politicians in the US demonize the opposition, scold and intimidate the press, decry election outcomes, and seek to reverse them. This erosion of democratic norms has become mainstream with Trumpism. Social, racial and class polarization, group resentments, racial and cultural differences, and sharp income inequality have driven this movement to weaken democracy and delegitimize institutions. Something must be done to save democracy, but how?

The authors propose a social market model to attack the growing income inequality and class resentments, which are the root of growing polarization and the politics undermining democracy. They postulate that social policy in America relies heavily on means tests — available only to those who fall in a certain income threshold. And because race and poverty overlap in the US, these programs are stigmatized as given to the undeserving, and the middle class feel left out of social policy.

Instead, Levitsky and Ziblatt propose universalistic social policies or those that benefit everyone. “Social policies that benefit everyone — Social Security and Medicare are prime examples — could help diminish resentment, build bridges across large swaths of the American electorate, and lock into place social support for more durable policies to reduce income inequality — without providing the raw materials for racially motivated backlash.”

This is exactly what US President Joe Biden is trying to do now — if the US Congress will let him. His $2.2-trillion Stimulus Plan, $1.9-trillion Infrastructure Plan, and $1.8-trillion Family Plan, represent the kind of universalistic social policies that Levitsky and Ziblatt are talking about. Judging from the breadth and size of Biden’s plans, we can describe them as social engineering by Big Government on a grand scale.

In the Philippines, as in other countries, a similar dynamic of growing authoritarianism and democratic decay is happening under President Duterte. He has attacked mass media and weaponized social media, militarized the bureaucracy, expressed disdain for human and civil rights in his war against drugs, demonized his political opponents, and strengthened his hold on the judicial system.

High income inequality, widespread poverty, failures of past governments to lift the lives of the masses, resentment against a Metro Manila-based elite, forced separation of families due to the need to seek greener pastures abroad, widespread criminality fed by illegal drugs that mainly affect the poor — all of these can explain President’s enduring popularity despite — or is it because of — his attacks on democratic institutions. Elite liberal democracy hasn’t served the people well, so why not Duterte-style populist democracy?

The fact that these inequalities, institutional failures, and resentments exist tell us that democratic decay and the drift toward authoritarianism won’t be halted once Duterte exits from power.

So, how do we save Philippine democracy?

Not through a turn toward socialism or a social market economy, but capitalism. Capitalism will save Philippine democracy. Why and how?

There’s an absence of capitalism in the Philippines. Instead, what we have here is rentier capitalism and economic statism.

Rentier capitalism (or rent seeking capitalism) is a system wherein monopoly control leads to extraordinary or “super-profits” for a few without the system delivering any increased value or contribution to society. It’s also the non-market extraction of surplus — i.e., political connections, legal impediments to competition, government-granted privileges, and captured regulators — that is the basis for economic profit rather than innovation in serving the customer. It’s creating wealth for the rentier capitalist without creating wealth for society.

Such a system is predominant in the Philippines, which is the most concentrated economy in Asia with monopolies and duopolies controlling the strategic sectors of the economy, and where political connection or “penetrating the state” is the basis of profit. Fake nationalism, characterized by protectionism, is used to solidify monopolistic control.

Rentier or rent-seeking capitalism explains the country’s high-income inequality, the deep resentments against “imperial Manila,” the regionalism and tribalism, even the absence of the rule of law. Since monopoly power and political connections are the basis of profit, it’s a system, as my friend Dr. Raul Fabella says, where the rules themselves as for sale, leading to malgovernance, economic chaos, investment uncertainty, and widespread corruption.

True capitalism, on the other hand, is a system where profit is derived from innovation (say, with a better product, such as a meat-free hamburger; system of distribution, such as online selling; technology, such as cloud computing, etc.) and the capitalist constantly reinvests profit to innovate to capture “extraordinary profit.” This results in economic dynamism, or “creative destruction” in the words of economist Joseph Schumpeter.

In contrast to rentier capitalism, true capitalism prospers on the back of a “level playing field” or rule of law.

Capitalism that’s oriented to the global market is particularly dynamic, because competition is fierce. Monopolistic privileges are difficult (perhaps only with a patent or copyright) if not impossible to attain.

True capitalism is also absent in the countryside. Instead, what we have is statism, i.e., over-centralization and control of the state in economic affairs. Farmers aren’t allowed to expand beyond five hectares. Agrarian reform beneficiaries aren’t allowed to rent or sell their lands within 10 years of the grant or where they have unpaid amortizations (most haven’t paid because these very same restrictions have eroded the value of their land). To rent out your land, you need government approval. Agrarian Reform Beneficiaries can only sell to other ARBs designated by the central government. A good number still have collective titles issued by the government, robbing farmers of the incentive to improve their lands.

Statism explains why there’s lack of capitalism in the countryside — the lack of agri-entrepreneurs who will use management, science, and technology to increase productivity and therefore, improve the lives of farming communities.

Statism replaced feudalism in the countryside and made the farmers worse off. An incompetent, inefficient, and corrupt state replaced the landlord.

Statism explains the lack of economic dynamism, poor productivity, and widespread poverty in the countryside and all the social and political evils they spawn. The result is income inequality, lack of economic opportunity, widespread hopelessness, drug addiction, and rural insurgency, all of which feed a hunger for populist authoritarianism. The lack of rural capitalists means the absence of a strong middle class, which could act as a check to political dynasties.

We are told that simply changing the persons in power with genteel leaders will save Philippine democracy. That is misleading and untrue. In the Philippines, populist authoritarianism is the fruit of a system where rentier capitalism and statism rule.

Democracy is under threat all over the world, even in the United States. However, in the Philippines, the solution to democratic retreat is different. Not a social market economy, but capitalism, will save Philippine democracy.

Calixto V. Chikiamco is a board director of the Institute for Development and Econometric Analysis.

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