[In This Economy] Why the Philippines failed
I love the Nobel Prize season every October. It gives me a chance to geek out on economics among friends and in this column.
Last October 14, the Nobel Memorial Prize in Economics was awarded to three exemplary economists — Daron Acemoglu, Simon Johnson, and James Robinson — who have dedicated their scholarly lives to study institutions and why they matter for long-run economic development.
Their winning the Nobel Prize is hardly surprising. Many economists have long thought this was just a matter of time.
All three economists have gained a boost in popularity in recent years, with their bestselling “big history” books. In 2012, Acemoglu and Robinson wrote Why Nations Fail, which elaborates on their earlier work on the role of “extractive institutions” and how they pull down societies. This was followed by a sequel of sorts, The Narrow Corridor (2019), which focused on liberal democracy.
Most recently, in 2023, Acemoglu and Johnson published Power and Progress, which looks at the role of technologies in economic growth, and challenges the purported benefits of artificial intelligence.
There’s a ton of insights from these books, and I recommend them all.
Extractive institutions
Economists have long recognized the role of institutions in growth and development. But Acemoglu, Johnson, and Robinson have brought this idea to new heights, and put empirical rigor to back up the old theories and ideas.
Earlier in their careers, in 2001, the trio of economists co-authored a paper titled, “The Colonial Origins of Comparative Development: An Empirical Investigation,” published in the American Economic Review — one of the best journals in economics. This is one of the most cited economics in the 21st century; on Google Scholar, it has no less than 18,620 citations.
What’s the big idea in the paper? They introduced the notion of “extractive institutions,” which are systems, structures, or policies in a society designed to enable a small group of elites to extract wealth and resources from the rest of the population. Think of colonial regimes, autocratic governments, or oligarchies.
In particular, they looked at the economic development of former colonies near the equator. They wondered why countries nearer the equator tended to be poorer. Possible reasons include the weather and the prevalence of diseases like malaria or yellow fever.
They then noted that some European colonizers avoided the tropics because they feared catching these potentially deadly diseases. They opted instead to colonize countries in more temperate regions, like today’s US, Canada, and New Zealand. In these regions, they had reason to stay long and therefore established European-style institutions like property rights and limited government.
By contrast, other colonizers brave enough to go to the tropics did not intend to stay too long, and set up extractive institutions instead. Specifically, they set up institutions only to the extent that these institutions enabled them to extract and profit from natural resources. Unlike other colonizers, they did not promote institutions promoting property rights or limited government. In time, colonizers left these countries, but the extractive institutions remained as the new elites took over.
What this all means is that colonization patterns centuries ago may be crucial in shaping economic outcomes in the modern world.
Enter Acemoglu, Johnson, and Robinson. They came up with clever economic and statistical techniques to show empirically the hypothesized link between colonization patterns and measures of economic development.
The graph below summarizes their big idea: they demonstrated that in countries where the mortality rates of settlers were low, the economy by 1995 tended to have higher incomes than in countries where settlers’ mortality rates were high.
Correlation, of course, is not causation. That’s a basic lesson in economics. But this particular finding was no mere correlation: the economists showed that there’s a reasonable causal link showing that settler mortality rates had an impact on the wealth of nations today.
Source: Acemoglu, Johnson, and Robinson (2001).
This seminal paper would inspire many economists to pay closer attention to the role of institutions in determining prosperity, spawning a large literature in the succeeding years. This is but a sample of the extremely large body of work of Acemoglu, Johnson, and Robinson. Their Nobel Prize is richly deserved.
The Philippines’ failure
How can we relate this Nobel-winning work to Filipinos’ daily lives?
At the UP School of Economics, I currently teach Martial Law economics. And the Marcosian system of crony capitalism, a unique and distinguishing feature of Marcos Sr.’s dictatorship, is an excellent example of an extractive institution.
Crony capitalism was, in fact, coined in 1981 by a journalist describing the gross abuses and excesses of Martial Law. Merriam-Webster now defines crony capitalism as “an economic system in which individuals and businesses with political connections and influence are favored (as through tax breaks, grants, and other forms of government assistance) in ways seen as suppressing open competition in a free market.”
Right now, in the middle of the semester, we’re discussing crony capitalism in loving detail. I see from my students’ faces that they’re scandalized by all the details on how the Marcoses and their cronies plundered the Philippine economy.
The scale of corruption was truly mind-boggling. By the end of the regime, the estimated ill-gotten wealth of the Marcoses was about $5-10 billion, a colossal sum. Succeeding governments have recovered, as of 2020, about P174 billion of the Marcoses’ ill-gotten wealth, with at least P125 billion more to be recovered.
Crony capitalism and economic mismanagement would snowball into the Philippines’ worst postwar economic crisis in the mid-1980s. Later, it would cause the so-called “lost decades of development” of the Philippines.
In essence, Martial Law pulled down the economic trajectory of the Philippines. The Philippines is a perfect example of how extractive institutions can cause countries to fail. I discussed all this in my book, False Nostalgia: The Marcos “Golden Age” Myths and How to Debunk Them.
Fast-forward to 2024, another Marcos sits in Malacañang. State efforts to go after the Marcoses’ wealth have stalled. One by one, courts are dismissing cases against the Marcoses and their cronies, owing to weak evidence and perhaps some lingering degree of influence from the Marcos family.
Disturbingly, Marcosian extractive institutions seem to be making a comeback, by way of the Maharlika Investment Fund and unconstitutional transfers from government corporations to the public coffers.
If there’s one lesson from the work of this year’s exemplary Nobel Prize-winning economists, it’s that institutions matter, and extractive institutions are a disease. We need to rid the Philippines of these extractive institutions if we are to have any hope of developing fast and catching up with our much more progressive neighbors in Asia. – Rappler.com
JC Punongbayan, PhD is an assistant professor at the UP School of Economics and the author of False Nostalgia: The Marcos “Golden Age” Myths and How to Debunk Them. In 2024, he received The Outstanding Young Men (TOYM) Award for economics. Follow him on Instagram (@jcpunongbayan) and Usapang Econ Podcast.