Channels of persistence: Why some are poorer than others

We loved to cite Daron Acemoglu and James Robinson’s book “Why Nations Fail” during our previous life as a public servant to show how the Philippines managed to grow consecutively from 1999 through 2019, just before the pandemic. More than twenty years of policy and structural reforms have contributed to the increase in our economic efficiency and total factor productivity.

Acemoglu and Robinson exactly focused on the role of appropriate political and economic institutions. These outstanding development scholars attempted to explain why some nations are poor, involving around 1.3 billion people in the developing world surviving on $1.25 a day. Their book began with the observation that the average American receives seven times the average Mexican, 10 times the average Peruvian, 20 times the average sub-Saharan African and around 40 times the average worker in Mali, Ethiopia and Sierra Leone.

Instead of the usual differentiating factors such as geography, culture, and even climate, Acemoglu and Robinson focused on such institutions that promote greater inclusiveness like access to political power, education, technology and productivity. Otherwise, if we have their converse — corrupt bureaucracy instead of enlightened political leadership, exploitative oligarchs, and self-serving institutions instead of fair playing elite and more inclusive institutions, we might be going for a sure recipe for poverty, social conflict and utter failure as a nation.

As they wrote: “Nations fail when they have extractive economic institutions, supported by extractive political institutions that impede and even block economic growth.” As an example, Egypt has remained poor “precisely because it has been ruled by a narrow elite that has organized society for their own benefit at the expense of the vast mass of people.”

This may sound close to home, but after all, how does one explain the Philippines’ income inequality that remains one of the highest in the world? Based on the World Bank report “Overcoming Poverty and Inequality in the Philippines: Past, Present and Prospects for the Future” released in November 2022, the wealthiest 1% earners captured 17% of national income, while the bottom 50% shared only 14% of the total income. How does one explain the low social mobility, limited opportunities for advancement and low meritocracy in our civil service?

We may have some good institutions behind the respectable growth dynamics, but the distribution of growth is clearly lopsided. One can therefore argue that the political and economic institutions that give rise to this state of poverty and income distribution could in fact prevent us from achieving higher levels of sustainable and self-sustaining economic growth and development for our people.

In the same vein, the IMF’s Finance and Development magazine last June 2022 featured Harvard’s Melissa Dell and highlighted her own query on how societies “climb the development ladder to greater prosperity.” Hers is a very interesting and novel approach to explaining the same phenomenon.

Instead of covering nations and continents, Dell, who in 2020 received the John Bates Clark Medal as an outstanding economist below 40, trained her lens to neighboring towns and villages. She wanted local perspectives because they could provide more details and granularity on the ground.

One big contribution of Dell to the literature of development economics made possible by her micro approach was her success in identifying what she called channels of persistence. Studying a mountainous area in Peru, which was engaged in silver mining under Spanish rule, Dell’s thesis that the colonial-era system of forced labor or “mita” left some legacies on the indigenous population lasting over two centuries. Very few roads were paved, inhabitants tended to be poorer, and farming remained essentially subsistence compared to areas outside the mita.

There were many channels of persistence that Dell was able to identify, but she focused only on three: land tenure, public goods and market participation. All these would result in the lack of essential infrastructure in the areas of forced labor. There were fewer big farmlands and farm owners who could wield political clout to influence decisions on building infrastructure. Dell found that the Spanish colonial masters detested competition.

What is interesting is that Dell also discovered that in the areas beyond the mita, big landowners used their political influence to direct the building of roads to benefit their areas and allowed them to bring their produce to the market. This is neither surprising nor foreign to us because we see this happening in many areas in Philippine towns and provinces where those with political power enjoy better roads and other forms of infrastructure including big malls and chain stores. Holding elective positions also allows the local elite to get investors to put up factories and commercial centers in their localities. Helping create jobs ensures victory in the polls.

Dell also distinguished herself from the rest by her contribution in refining an econometric tool called discontinuity regression. This is normally used to study the impact of the US’ Medicare program on its recipients. Discontinuity sets in when people turn 65, the usual retirement age. Before 65, people are yet to qualify; at age 65, they qualify for the benefits of the program. Economists would want to check the impact of the program on people “who are just older and just younger than 65…”

She extended the medical application of discontinuity regression to geographic spaces with the mining mita as the reckoning boundary. Finance and Development quoted her colleagues who admitted that Dell’s refinement of the methodology brought about its greater use in various economic inquiries.

Dell and her colleagues Nathan Lane and Pablo Querubin in their study “The Historical State, Local Collective Action and Economic Development in Vietnam” also used geographic regression discontinuity and concluded that effects of two political systems in North and South Vietnam persisted even centuries later. In the north, Vietnam had strong, centralized state inspired by China and in the south, a patron-client model with landlords exacting tribute from peasants in exchange for protection.

They established that household consumption in the north was about a third higher than in the south. Politics-wise, there was greater propensity for the northern residents to participate in local civic institutions as they were more educated and enjoyed better access to health facilities.

More recently, Dell and Querubin in “Nation Building Through Foreign Intervention: Evidence from Discontinuities in Military Strategies” (2018) sifted through a gold mine of documents covering the results of surveys of 18,000 hamlets conducted by US and South Vietnamese authorities from 1969 to 1973. Responses to 169 questions on local politics, economics and security were recorded, providing insights on the people’s living standards and attitude. In particular, they found information on bombings and civil society outcomes from the hamletting strategies employed by the US and South Vietnam authorities to isolate the communists from the civil population.

After recreating the raw scores and applying discontinuity regressions, Dell and Querubin concluded that “the US strategy of overwhelming force had backfired: bombing made it more, not less, likely that villagers would support the communist insurgency, and it weakened non-communist civil activities.” The Americans intervened in Vietnam to establish a strong state to counteract the spread of communism after US withdrawal, but its rather ill-advised bombing policy produced a different result. Local government units and civil society were undermined in the process. Family members of casualties were more likely to sympathize with the communist ideology. Insurgents have been found to embed themselves more tightly among civilians, and therefore, heavy bombing only resulted in serious collateral damage. Trust between government and citizens was broken.

It was then only a matter of time — and it happened in mid-1970s — before North Vietnam reaped all the popular support it earned from the population, mostly from the backlash of ill-conceived US war policy. The same indomitable spirit of the Vietnamese people is now firing Vietnam on all cylinders into an Asian powerhouse.

As Finance and Development put it: “parts of their paper read like an indictment of US military strategy in Vietnam, which was guided largely by the Ivy League whiz kids under Presidents John F. Kennedy and Lyndon B. Johnson.” On the basis of their findings, Dell criticized advisors like McGeorge Bundy, a Harvard political scientist, and Walt Rostow, author of The Stages of Economic Growth, a book that offered some sine qua non for attaining development. To her, their theories were flashy and were rather divorced from actual data, “giving social science a bad name.”

Vietnam, based on Dell’s rigorous methodology, should be a cautionary tale in reconsidering what is now the Philippines’ anti-terror act. Red-tagging, not much different from hamletting and heavy bombing policy, can literally alienate the local population and lose their trust. In that environment, peace would be more remote and economic growth more elusive. Poverty and income inequality becomes more difficult to push back.

Diwa C. Guinigundo is the former deputy governor for the Monetary and Economics Sector, the Bangko Sentral ng Pilipinas (BSP). He served the BSP for 41 years. In 2001-2003, he was alternate executive director at the International Monetary Fund in Washington, DC. He is the senior pastor of the Fullness of Christ International Ministries in Mandaluyong.