Trapped in vicious cycles

I HAVE long believed that our country lagged behind its comparable neighbors in terms of development because we were trapped in vicious cycles or chicken-and-egg situations that we could not extricate ourselves out of. If in recent years we have finally managed to break out and emerge as the fastest-growing economy in the region, it’s because we’ve at last found a way to pull ourselves out of such vicious cycles that held us back in the past.

Any student of economic development would be familiar with the vicious cycle of poverty, or the poverty trap that keeps many nations in the grip of poverty seemingly indefinitely. Simply put, poverty or low incomes lead to low savings, low savings lead to low investments, low investments lead to low production, and low production leads right back to low incomes and poverty. Conceptually, the way out of the predicament would be to break out of the cycle through any of the links therein.

We can, for example, induce people—especially the more moneyed among us—to save more (rather than spend too much on luxuries), given the low domestic saving rate of Filipinos (17 percent of GDP) compared to our neighbors (from 29-35 percent). With more savings, more investments can be funded, leading to greater production and ultimately higher income. Another approach would be to supplement our low domestic savings by attracting foreign investments to spur the increased production we need. Still another would be to address production directly by raising productivity through improved infrastructure, technology and education, and other interventions. Better business confidence since 2010 has led total investment to grow by double digits, helping us break out into faster growth.

Another vicious cycle persisting in our system revolves around public sector inefficiency, or what we would now commonly term as weak governance. Public salaries in the Philippines are low compared to similarly placed counterparts in the private sector, and in comparison to public officials and employees in countries around us. It should be no surprise, then, that among the most serious obstacles to Philippine development has been the inadequate quantity and quality of government services, marked by lack of professionalism and dedication, and in too many cases, graft and corruption.

Low public salaries lead us to an “adverse selection” problem in the way government positions are filled up. In the same way that high-risk individuals are more likely to buy insurance policies, government positions, whether elective or appointive, tend to attract more of the “high-risk” individuals as well—in this case, those who have a propensity for corruption. As the saying goes, if you pay peanuts, you’ll attract monkeys. This is not to say that all public servants are misfits or thieves. To be fair, there are many who join and stay in government in spite of seemingly sacrificial salaries, out of a sense of mission and idealism, and they must be affirmed and recognized. But given the choice and opportunity, a competent and honest job seeker will probably opt for the private sector, where the pay tends to be higher.

Why have public salaries in the Philippines been low? Historically, government hasn’t made enough revenues to be able to afford a higher salary structure. Why are government revenues so low? It’s certainly not for lack of taxes. It’s already well-known that tax rates in the Philippines are higher than in most of our neighbors, whether we’re talking about income taxes or taxes on transactions. It’s for this reason that there is a strong clamor for fundamental tax reform in the country. But it’s in tax enforcement and compliance that we have always fallen short.

Why is tax enforcement poor? Where the salaries of revenue officials and employees are low, honest and dedicated tax officials will be hard to come by. At the same time, tax compliance will be poor where taxpayers feel they are being overtaxed, and are not getting their taxes back in responsive government services. On top of that, there is wide perception that their taxes are being misused.

Such lack of dedication and integrity on the part of tax authorities, and public officials and civil servants in general, tends to be attributed to, and even rationalized on the argument of low salaries—and we turn full circle. The bigger tragedy in our society is that such rationalization leads many to seemingly tolerate and even condone these faults in the public bureaucracy. It has become the accepted culture such that the honest public official, being the odd man out, is often the one who gets into trouble for refusing to behave like everyone else. The recent resignation of Customs Commissioner Sunny Sevilla is widely seen as yet another example of this reality in Philippine governance.

How do we break out of this vicious cycle? One cannot simply upgrade public salaries overnight, even if government finances now seem ample enough to permit it, as this would reward the misfits and the corrupt along with the truly deserving. Upgrading the quality of governance will be a long, deliberate and difficult process. A substantial adjustment in salaries of government workers is a crucial element. But it would also require systematically weeding out from the bureaucracy the incompetent and the corrupt, and introducing innovative mechanisms and incentive systems for sustained quality control in the public service.

The good thing about vicious cycles is that they can turn into self-reinforcing virtuous cycles once one manages to break out of the trap. The hardest part is finding where and how to break out of it.

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