WORKSHOP ON INSTITUTIONAL ANALYSIS
MARCH 9–14, 2008
LOS BAÑOS, PHILIPPINES
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Excessive Presidential Discretion in Economic Policymaking:
The Case of the Philippines' Ninoy Aquino International Airport 3
Julio Santiago AMADOR III
Foreign Service Institute, Philippines
The Philippine Presidency as an institution dominates economic policymaking to an almost unchallenged state. This paper examines the Philippine Presidency's organic development and how it became dominant in economic policymaking. It will look into how the Presidency has managed to be the country's focus in economic policymaking even beyond the limits imposed by the Philippine Constitution.
A case study will also be conducted to validate theoretical observations. The case study is about the Ninoy Aquino International Airport 3 (NAIA 3). This highly controversial terminal is considered a white elephant because while it is 98% complete, it has not been used since it was finished in 2002. NAIA 3 was approved during the term of President Fidel V. Ramos and was finished during the term of President Joseph Ejercito Estrada. Due to conflicts between the Government of the Philippines and the project's main contractor, Philippine International Air Terminals Co. Inc. (PIATCO), the airport has not been operational. In an effort to buy out the operators PairCargo and Fraport AG, the Government offered $ 400 Million. Even though Fraport agreed to this amount, President Gloria Macapagal Arroyo dubbed the contract "onerous" and the government closed down NAIA 3 because of the legal battles. Eventually, the Philippine Supreme Court found the contract between PIATCO and the Government null and void. This episode shows how powerful the Philippine President is and it is worthwhile examining it in the light of institutional analysis because as North (1991) wrote, institutions ultimately define whether economic activity should take place.
The Philippine Presidency has evolved from the datu, a tribal ruler during the pre-Christian era of the Philippines,to the all-powerful chief executive that it has become now. A review of the literature on the Presidency allows us to examine its development and will help us analyze how it affects transaction costs in economic activity. This paper also attempts to give us an impact of Presidential discretion on policymaking and allows us a glimpse of how other policy actors try to overcome it in the light of this country's institutional framework.
Institutional Arrangement in the Management of Solid Waste:
The Metro Manila, Philippines Experience
Arlen A. ANCHETA
University of Santo Tomas, Philippines
Metro Manila, a megacity composed of seventeen local government units, is faced with an increasing volume of unmanaged garbage. Its increasing waste users, large volume of plastics, and inadequate unsanitary disposal facilities have resulted in the growing waste disposal problem. Despite the implementation of the law Republic Act 9003 advocating waste segregation, recycling and composting, the problem of garbage disposal remains.
This study investigates the different organizations involve in the management of solid waste in Metro Manila. Three major organizations from different sectors were identified as research participants: the Metropolitan Manila Development Authority (MMDA), a government agency; the Mother Earth Foundation, an NGO; and the Miriam PEACE of Miriam College, an academic organization.
The MMDA is a government agency mandated by law as the overall coordinating body in Metro Manila. It coordinates the implementation of urban environmental management and engineering plans, programs and project of the national government and the 17 local government units in Metro Manila.
Mother Earth Foundation is a community-based NGO. It is active in conducting information, education, and communication activities promoting RA 9003 in the barangay level. The NGO trains communities on recycling and establishment of material recovery facility.
Miriam PEACE is a private school promoting environmental education in the country. It designs environmental and community-based natural resources management programs to suit the needs of scholars, NGOs, People Organizations, government corporations and environmental organizations.
The study analyzes the arrangements of these organizations as to political orientation, available management resources, and power relations in the context of the waste stream in Metro Manila. This study argues that the weak response of the organizations to the needs of the garbage problem is fragmentation and social location in the waste stream.
The Determinants of Net Interest Margin: A Political Economy View
Institute of Public Finance, Croatia
The purpose of this study is to examine whether countries in which government's role is large and corruption widespread have higher bank net interest margins. The importance of institutions has already been taken into account when analyzing the determinants of net interest margin; widespread corruption and a weak legal system increase the cost of financial intermediation because of uncertainties they create (Demirgüç-Kunt, Laeven, and Levine, 2004). However, attention has not been given to the relationship between government and banks from the political economy view in terms of rent-seeking and interest groups. Government's role tends to be far from benevolent social planning and its policy results can be influenced by interest groups. In addition, economic history research has shown that banks have always enjoyed close relationships with political power (Sylla, Tilly, and Tortella, 1999).
This study relies on a simple notion that government's intervention in the economy can be more detrimental when it's larger and at the same time plagued with corruption, which also enables easier influence of interest groups, in this case banks. Interaction of government and banks creates rents which drive up the bank margins making banks less efficient in financial intermediation from the economic growth perspective.
We examine the determinants of bank margins on the sample of Central and Eastern Europe transition economies, as well as "old" EU countries. Time period of the sample is from 1996 to 2006, and panel analysis with interaction terms is applied. Preliminary results show that an additional increase in corruption yields a higher increase in bank margins at larger levels of state interventionism.
An Explanation of the Philippine Growth Experience
with an Institutional Flavor
Edsel L. BEJA, Jr.
Ateneo de Manila University, Philippines
The Philippine economy was an exceptional case in a region where many economies experienced sustained rapid economic growth. Why did the Philippines not have rapid economic growth? This paper is an attempt to explain the Philippine experience using concepts in macroeconomics and institutional economics. The main finding is that the Philippines was fundamentally constrained by institutional failures such that attempts to stimulate economic growth were easily frustrated; at the same time, the economy could not adjust easily and navigate the internal and external shocks because of institutional failures. In the end, the Philippines was stuck in a low-level economic equilibrium.
Institutional Structure in Corporate Agriculture
Delhi University, India and University of Maryland, USA
In this paper, I develop a state-contingent, principal-agent model to analyze the institution of input provision by a corporate firm that contracts with agents for the production of a given commodity. "Input provision" entails not only the provision and delivery of key inputs but also their purchases (or in-house production), as well as contract design to ensure their optimal use.
The provision of key inputs by the contracting company is modeled in the context of production contracts for poultry and pork, such as those offered by Perdue Farms, Smithfield Foods, and Tyson Foods in the United States. The decision in question is the levels of inputs (e.g. feed, genetic lines, and medication) that the company provides to the farmer. This decision is endogenous to the model, and facilitates comparison of production contracts (input provision) with marketing contracts (no input provision, with all inputs purchased by the farmer himself).
My theoretical model formalizes Coase's idea that an institutional arrangement emerges if the benefits associated with it exceed the costs. In particular, I characterize the case of no input provision as a corner solution for the optimal choice of inputs provided. Moreover, the likelihood of input provision under a production contract increases with an increase in the principal's market premium per unit of the quality dimension of output, and with a decrease in the principal's costs of obtaining an input, other things remaining the same. I use the state-contingent approach as it allows for a general production technology, and the inclusion of transaction costs within the framework of a general theoretical model.
This paper also examines conditions under which incentives relating to one of two output dimensions (produced by the agent) tend to zero, when both dimensions are observable and verifiable. These conditions reflect the considerable control that the principal has over the output dimension for which no incentives are provided. Even though that output dimension itself is produced by the agent, it can be viewed more as a "free" by-product that results from the principal's effort. This result provides a rationale for missing incentives that has not been captured in the literature on contracts and organization.
Institutions and Casinos on American Indian Reservations:
An Empirical Investigation into the Location of Indian Casinos
J. Anthony COOKSON
Montana State University, USA
This paper exploits plausibly exogenous sources of variability in institutions on American Indian reservations (Public Law 280 and reservations that span state borders) to shed new light on how legal and political institutions matter for economic development. To focus on the general question of how institutions matter, this paper empirically investigates the determinants of whether a tribal government invests in an Indian casino. I find evidence that the presence of Indian casinos is strongly related to variation in reservations' legal and political institutions. Tribal governments that are able to negotiate gaming compacts with more than one state government, because reservation lands span state borders, had more than twice the estimated probability (0.77 versus 0.32 elsewhere) of operating an Indian casino in 1999, holding other factors constant. In addition, tribal governments of reservations where contracts are adjudicated in state courts, rather than tribal courts, had more than twice the estimated probability (0.76 versus 0.34 elsewhere) of investing in an Indian casino, ceteris paribus. These findings suggest that state political pressures and predictable judiciaries can affect incentives to invest in casinos. This study contributes, more generally, to the literature on economic growth by providing additional evidence that low-cost contracting is necessary to take advantage of substantial investment opportunities.
A Co-evolutionary Model of Growth
University of the Philippines, Philippines
Using evolutionary games and dynamics, we propose a model of growth driven by the co-evolution of institutions and technology. Formalizing concepts from the new institutional economics literature, institutions are first defined as a type of social knowledge that are used along with 'pure' technologies to create innovations that are suitably adapted to and, hence, viable in, a particular environment. Seen in this manner, institutions become a factor in the innovation process, and as such can be purposely accumulated.
Simultaneous institutional and technological change are then captured by an evolutionary game whereby boundedly rational firms choose how much to allocate to 'good' or 'bad' types of 'institutional spending'. Specifically, firms can adopt either of two strategies: (i) shoulder the cost of upgrading institutions, thereby creating positive externalities for the whole economy - institutions being public goods; or (ii) 'free-ride' on other firms' efforts. The first strategy raises the productivity of human capital and describes a more competitive scenario, while the second is akin to 'rent-seeking' and monopolistic behavior. While the second alternative can yield higher profits, the first alternative may be a 'safer' option in that it can ensure continued marketability of innovations.
Using the Replicator Dynamic, we show that with an initially large enough number of firms that upgrade institutions, all other firms eventually learn that it is best to follow this strategy than to 'free-ride'. Hence, the quality of institutions improves, innovations rapidly increase, and the 'good' equilibrium is achieved, whereby growth rates are relatively higher. On the other hand, if the initial effort is too small, all firms eventually learn that it is too costly to upgrade institutions. Consequently, institutions deteriorate, innovation stagnates, and the 'bad' equilibrium is reached, whereby growth rates are relatively lower.
Such evolutionary process thus features Schumpeterian creative destruction, but that which converges to a model of horizontal innovation akin to Romer (1990) as it approaches the (asymptotic) limit of balanced growth.
Does Government Spending Reflect Voter Preferences?
University of the Philippines, Philippines
This study looks at the inner workings of Philippine local governments by testing if the median voter hypothesis holds for Philippine provinces. In particular, the aim is to determine if elected local government officials use median voter preferences for public choice. Median voter characteristics such as income and tax price are examined as the main determinants of total local government spending.
Previous studies test the median voter hypothesis using mean or median family or per capita income as a proxy for median voter income. This study uses a more appropriately defined median voter income by identifying the voting population and using the median income of the identified voters for each province. Median voter income data was culled from the Philippine Family Income and Expenditures Survey (FIES) and the Labor Force Survey (LFS).
Most studies test the median voter model using the ordinary least squares estimation method getting ambiguous results. This study uses traditional estimation methods but also uses a system of equations approach to test the robustness of results. In addition, local government expenditures are examined more closely. Social service expenditures such as health, nutrition and population control; education; housing and community development; labor and employment; and social security and welfare get mixed results as the dependent variables.
To further examine the robustness of the results, another variable is used to represent median voter income. This variable incorporates the fact of asymmetric income distribution in the Philippines by presenting median voter income as a ratio of mean voter income. Aside from these traditional variables, alternative politico-institutional determinants of local government spending such as intergovernmental fiscal transfers are tested.
Do Improvement in School Institutions Improve Educational Outcomes?
Geoffrey M. DUCANES
University of the Philippines, Philippines
This paper examines whether improvement in school institutions improve the educational performance of students. If it does then it can serve as a means, in addition to targeted material inputs, to reduce wide disparities in educational outcomes in the country. Functional literacy across provinces in the Philippines ranges from 48% to 93%. Based on the National Achievement Test (NAT), which is the standardized test taken by graduating primary school students in the country, the top and bottom provinces are separated by 43 percentage points.
To test the issue of interest, this paper utilizes quasi-experimental data from a project called the Third Elementary Education Project, funded by the Japan Bank for International Cooperation and the World Bank, which gave material inputs to schools in the form of classrooms, furniture, textbooks and teacher training, and in addition made them adopt School Based Management (SBM). Here, SBM is the variable that proxies for institution. SBM involves two main things: 1) decentralization of most decision-making and greater control of the budget to the principal; 2) requirement of schools to come up with annual School Improvement Plan, which needs to be vetted by a committee comprising private community members (including parents of students) and the local government. Regressions show that institutions indeed matter: schools which adopted SBM earlier improved their NAT Scores by 3 percentage points by the end of the project, even after controlling for the material inputs of the project.
Foreign Direct Investment in Zimbabwe:
Do Legal Property Rights Play a Role?
University of Cape Town, South Africa
The purpose of the study is to examine the impact of the formal legal property rights on foreign direct investment (FDI hereafter) in Zimbabwe. The premise that capital accumulation is a critical factor in economic development implies that developing countries' access to foreign capital, particularly foreign direct investment, is also crucial. While the macroeconomic determinants of FDI have been analysed to a considerable extent, there has been a recent shift of focus to the role played by the host countries' institutional environment, particularly property rights protection and the efficiency of the legal system, Dunning (2001, 2004) and Li and Resnick (2003).
The question of the FDI-institutions link is of crucial importance to Zimbabwe, a country located in the sub-Saharan Africa region. Since the late 1990s, the country has been grappling with a continuous economic melt-down with a record high annual inflation of 15,000%. FDI inflows have dwindled from a peak of US$ 444 million in 1998 to an annual average less than US$ 60 million in the subsequent years. There seems to emerge the consensus that the central reason for the dwindling FDI inflows is the continuous weakening of legal property rights.
The study recognises the problem of obtaining valid empirical indictors of property rights. Existing property rights indexes such as those produced by the Heritage Foundation are truncated in time to inspire their usefulness in country-specific time series studies. Using the Delphi technique, we construct a de jure property rights index for Zimbabwe for the period 1946-2005. In building up this indicator, the work examines in detail the evolution of the legislation governing immovable property.
The study then uses the constructed property rights index together with other macroeconomic data to empirically establish the impact of legal property rights on net FDI flows for the period 1965-2005. Here we use the vector error correction approach to time series modelling. Our hypothesis is that well secured property rights should have a positive effect on FDI inflows.
The Link Between Credit Markets and Self-Employment Choice
Among Households in Rural China
Linghui HAN, Research Institute for Fiscal Science, Ministry of Finance,
Denise Hare, Reed College, USA
Our paper examines how credit markets operate through wealth to influence households' entrepreneurial choices. Our results show that the banking withdrawal policy implemented in China has a significant negative impact on credit availability to rural households. At least among households in the middle of the wealth distribution, we observe reductions in household wealth accumulation in response to credit contraction and subsequently these households become less likely to choose self-employment. Expansion of the formal banking system is expected to increase community economic vitality and therefore generate incentives for middle-class households to diversify into self-employment. Wealthy households exhibit less sensitivity to credit contractions. Interestingly, poor households may benefit more from informal versus formal credit, such that formal sector expansion may have little (or possibly negative) impact on their opportunities for self-employment.
What is the Original Source of China's Economic Growth?
An Empirical Study of China's Textile Sector
Zhe HE and Linyan Sun
Xi'an Jiaotong University, China
For a long time, the original source of China's economic growth has been a hot and hard topic in economics. Different scholars and schools have different opinions. Some think that investment, the growth of population, the growth of international trade, foreign direct investment, and technology innovation may be the source of economic growth. However, new institutional economics considers that the series of institutional transitions is the main driver of economic growth. Who is right?
In the past 20 years, China has gained a huge success in economics. Today, everyone can buy "made in China" almost everywhere in the world. So, we have to ask the question "What caused that huge growth?" There are many explanations such as the huge low cost labor, the huge land and resources, huge foreign direct investment and international trade, etc. But there is an undoubted truth that after a series of institutional transitions, China gained huge economic growth. Therefore, to research the relationship of China's institutional transitions and economic growth will help us answer the question "What is the original source of growth?"
The textile sector is a typical industry sector in China: much more low-cost labor force, enough big quotient in world (50% of the world textile production), enough and fast growing international trade, etc. The most important thing for our institutional research is that it is the sector which has the biggest institutional transformation. Before 1990, almost all textile firms were state-owned, but by 2007 less than 3% of firms were state-owned. So, if we can say that the China is a very good laboratory for NIE, then we also can say the textile sector is the best sample in the laboratory.
In this research, we focus on what caused the growth of the textile sector in China. We measure the effect of different factors such as capital accumulation, labor and international trade. We also introduce institutional variables such as the types of property rights and some specific policies, for example, subsidies. Through this method we can learn much about the growth of the textile sector in China; also it is helpful for us to understand the successful growth in China.
The Effects of Training and Extension on Insecticide Use
in Philippine Rice Production
Nelissa JAMORA, International Rice Research Institute, Philippines
David Dawe, Food and Agriculture Organization of the United Nations, Italy
While the current level of insecticide use in Philippine rice farming is low, farmers are still slightly overusing insecticide from the economic point of view, without even taking into account the environmental and health costs of using these chemicals. Previous studies have indicated that enlightening farmers on the true productivity of insecticide in rice production is the key to reducing its use. In this regard, a preliminary analysis of nearly 3,900 rice farmers from 30 provinces across the Philippines suggests that individual consultations with extension service agents, as opposed to training in larger groups, are more effective at influencing farmers to reduce insecticide use. Further, it appears that it is more important to consider how the information is given or transferred than who gives the information. Rola and Pingali (1993) pointed out that where insecticide use is low, poorly implemented IPM programs could actually increase the amount of insecticide applied. This point might have broader implication for the future of agriculture in the promotion of new technologies.
The goal of this study is to analyze the impact of training and extension on affecting insecticide demand in rice farming. Because the IPM program is information-based, it relies heavily on training programs and extension work of both public and private agricultural agents. However, how education in crop protection affects insecticide use is still less clear from literature. The analysis will be based on farm-level cross-sectional data sets from three time periods -- 1996-1997, 2000-2001, and 2006 -- conducted by the Philippine Rice Research Institute (PhilRice), in coordination with the Philippine Bureau of Agricultural Statistics (BAS). "Training" is defined as an instruction or workshop of large groups on pest management. "Extension", on the other hand, is the individual consultations of farmers with extension service agents. Except for Jamora and Dawe (2004), no previous studies have examined the effects of training and extension on insecticide use in the Philippines with a large farm-level sample, covering thousands of rice farmers in different time periods. Furthermore, we are able to distinguish between public and private providers of each of those services.
Bargaining Solutions to Water Resource Management
in Metropolitan Cebu, Philippines
Francisco M. LARGO
University of San Carlos, Philippines
My proposed research concerns the viability of win-win approaches to civil society coalitions in the face of massive governance failure in the institutional landscape of the Philippines. In particular, I intend to examine the efforts of an existing coalition of civil society organizations in Cebu Province called the Cebu Uniting for Sustainable Water (CUSW) that is composed of private and non-government institutions that have banded together to call attention to what it perceives to be the rapidly diminishing quantity and quality of water resources in the province. The nature of the governance failure is glaring. Cebu sources more than 90 percent of its potable water requirements from groundwater aquifers. Unmitigated pumping of groundwater has resulted in documented saltwater intrusion of as far as 2 km inland. The domestic public water utility is barely able to serve a third of total households in its service area. This has been compounded in recent years by conflicting statutes on the use of the resource at various levels of government. This coalition is based on collective stands on several issues, but foremost among them has been the protection and preservation of inland watersheds as the primary means of obtaining a long-term solution to water resource problem. The rationale and scientific bases for this stand have not been without question, but the coalition has been the most vocal and visible advocate of watershed protection and consequently the acknowledged vanguard of conservation interests.
I intend to examine whether the current institutional setup is conducive to the achievement of broad-based collective efforts that CUSW insists on. In the face of this insistence, I would like to ascertain the nature of coalitions that would result under current institutions. My conjecture from a cursory look about how the coalition has developed is that its emphasis on a win-win approach has led to a stable but inefficient coalition, i.e., the coalition can be improved on by another if the latter approach is abandoned. My second objective is to determine under what institutional conditions such a win-win approach would lead to an efficient but stable coalition.
Mainland Chinese Buy Bare Flats, Hong Kong Chinese Buy
Furnished Flats. Why?
University of Hong Kong, China
This paper aims to study the reasons behind two different contractual arrangements for residential properties in Hong Kong and China.
It is common to have pre-sale residential units in China and Hong Kong. Nevertheless, there is a large difference in fittings provision. In China, it is common that builders provide bare flats; this is what they call "Mo Pei Fang." Flat owners still need to buy tiles, water closet, etc. In contrast, residential flats in Hong Kong are well-decorated. Residential developers there usually provide floor tiles, air-conditioners, refrigerators, sanitary fittings, etc. Some developers even provide red wine cupboards and bathroom TVs for buyers. Fantastic fittings and decoration within the residential properties have become one of the selling points.
Here, one might conclude that there are two kinds of contractual arrangement: developers in China only make contracts with the concrete suppliers, builders, etc. Residential owners then need to make their own separate contracts with electrical appliance suppliers, painters, sanitary fittings providers, etc. Hong Kong developers, however, have already made contracts with all the suppliers mentioned. The residential owners there do not need to make a separate contract with the plumbers, etc. before they move in.
Since different research methods have their merits and shortcomings, data and method triangulation will be applied for this paper.
Does Public Policing Deter Violations of Water Pollution Standards?
Evidence from Central Visayas, Philippines
Lourdes O. MONTENEGRO
University of San Carlos, Philippines
Growing concern in the Philippines over declining environmental quality has led to the legislation of more comprehensive and more market-based pollution control regulations. However, the efficacy of these regulations rests not only with their design but also with their implementation. In this paper, we examine these implementation issues and report initial results from an analysis of the impact of regulatory actions on environmental compliance choices of water pollution sources in Central Visayas, Philippines. In particular, we investigate the effect of government inspections and enforcement on self-reported biological oxygen demand (BOD) concentrations, using a facility-level panel dataset of all major point sources of water pollution in Central Visayas, Philippines for the years 1993-2006. We find that the increased probability of inspection and legal enforcement did not significantly reduce BOD concentrations; in contrast, higher compliance cost had a significant and positive influence on BOD concentrations. The weakness of the deterrent effect of inspection and enforcement found is at variance with empirical results from developed countries. This may suggest that in a developing country like the Philippines, programs that aim to lower compliance costs may be more effective in bringing about lower pollution discharges compared to the traditional policing approach.
Do 10 Years in Jail Reduce Corruption?
A Natural Experiment from Former Czechoslovakia
Mendel University of Agriculture and Forestry in Brno, Czech Republic
Do more severe punishments reduce the level of corruption in governmental organization? In this paper, I evaluate the experience of the former Czechoslovakia in the fight against corruption after 1998. I use the principal-agent theoretical concept to describe the particular measures realized by both governments. For broad theoretical suggestions for public policy, I use the logic of the simple economics of crime model (Becker, Stigler, 1974).
Then I focus on the empirical description and evaluation of anticorruption measures in both countries. First I present the officially published data by which governments usually measure the success of their own policies. The Slovak government improved its monitoring system and pursued a repressive strategy that emphasized punishment and enforcement. The Czech government concentrated almost entirely on monitoring. According to government statistics, the Slovak government was more successful than the Czech government. However, as Hayek demonstrated in the problem of knowledge, success of the government might not mean that governmental measures concur with the opinion of the public, which is supposed to be superior in democratic regimes. Therefore to evaluate the Czech and Slovak efforts to eliminate corruption in both countries, I use the CPI index published by Transparency International and personal survey data provided by the European Bank for Reconstruction and Development (2007). Through the observed time period there were no statistically significant differences in the CPI of both countries. Moreover, the methodologically consistent EBRD survey concludes that corruption in the Czech Republic is not as bad as in the Slovak Republic.
The Slovak republic was more successful according to the hard data statistics, but not successful according to the CPI and personal survey. It could be asked if it is "success" for society when there are more corrupt people executed. From the CPI and personal survey perspective, the repressive strategy did not pay for the Slovak government, therefore one could doubt about functioning of this strategy.
Do International Customs Agreements Lead to Better Trade Facilitation?
Ruby Ann PIMENTEL-PRENIO
University of the Philippines, Philippines
The paper will look at the impact of accession to World Customs Organization (WCO) agreements on members' trade facilitation efforts. In a broader sense, it will provide supporting empirical evidence on the necessity of strong enforcement mechanisms, such as dispute resolution and sanctions, for international agreements to be effective.
Interest in the role of trade facilitation in improving trade activity is growing now that tariffs and non-tariff barriers have been significantly reduced through unilateral, multilateral or regional efforts. Trade facilitation refers to the simplification of border procedures, reduction of physical bottlenecks to trade, and increasing capacity of developing countries to engage in international trade. Recent studies by the World Bank, OECD, APEC, among others, estimate significant economic gains from improvements in trade facilitation. The WCO is an international body specifically focused on promoting best practices in customs procedures, which play a major role in facilitating trade.
This paper will show if accession to the various WCO conventions have an impact on the trade facilitation performance of its members. In addition, this study will provide insight on why governments enter international agreements that often do not involve enforcement mechanisms. WCO has several customs conventions that are adopted by members on a voluntary basis, and these agreements are characterized by the absence of provisions for dispute resolution and penalties for non-compliance. This goes against conventional wisdom that stronger enforcement mechanisms would be preferred by economic agents to maximize the gains from entering a contract. Analyzing the specific case of the WCO may shed some light on the noticeable preference for this type of arrangement given the pervasive absence of enforcement mechanisms in international trade agreements.
An Experimental Investigation of Self-Regulatory Mechanisms
and Auditor Liability Regimes
Andrew Adrian Yu PUA
De La Salle University, Philippines
Arens, Elder, and Beasley (2003) define audit failures as the issuance of an erroneous audit opinion as the result of an underlying failure to comply with the requirements of generally accepted auditing standards. To minimize the occurrence of the said audit failures, governments introduced auditor liability, since credible auditing can increase economic efficiency of capital markets by reducing adverse selection and moral hazard. Amidst this backdrop, there have been frequent calls to instill in auditors a sense of duty to maintain the public's interest. Usually, self-regulation mechanisms accomplish this role.
Aside from auditor liability, can we actually create a self-regulation mechanism that will reduce the frequency of audit failures? Using experiments, can we determine whether a combination of self-regulation mechanisms and auditor liability regimes can reduce the frequency of audit failures?
We start with the construction of a 3 x 2 x 2 factorial experiment simulating a usual audit dilemma populated by senior accounting students to take on the role of verifiers who are hired to verify an investment outcome. Subjects make effort choices linked to particular success and failure outcomes. We measure the effects of different treatment combinations involving legal regimes, damage apportionment rules and self-regulation regimes to determine the extent of audit failures and the behavior of subjects over time.
We need to determine whether the institutional setups can actually reduce audit failures or will they create perverse incentives that might increase the probability of audit failure. We also need to determine if the factors that compose the proposed institutional setup offset each other or not.
Institutional Compatibility and Foreign Direct Investments
Rommel Flores RABANAL
University of the Philippines, Philippines
Do similarities or differences in institutions matter in determining bilateral foreign direct investment flows between countries? While it is a well-established empirical regularity that countries with better institutions and lower transaction costs attract higher FDI inflows, the issue of institutional compatibility has yet to be sufficiently examined. Do multinational firms invest more in economies with relatively similar, or vastly different, institutions compared to those in their own home countries? It may very well be that institutions are simply another source of comparative advantage, and countries with different institutional frameworks transact more with each other to capitalize on cross-market niches.
However, a more interesting proposition is that similarity in institutional qualities actually increases the cross-border flow of FDI between partner countries. Such "institutional compatibility" can result in higher bilateral investment flows for a number of reasons. First is familiarity or prior knowledge. Firms operating within a particular institutional framework already possess valuable information on how to function effectively in similar environments; how to work within or possibly circumvent established rules and regulations; the shadow costs involved and the resulting profit potentials. This information advantage reduces uncertainty and increases the possibility of a firm establishing operations in more familiar settings overseas.
Another related factor is self-selection. Firms develop internal institutions in response to the external institutional framework and may therefore seek other matching locations for minimal adjustment while maintaining efficient operations. Also, firms may be designed for either efficient competition or for rent-extraction, depending on the quality of the prevailing institutional environment in their respective home countries. Efficiency-seeking by firms designed for competition directs them toward economies with good institutional frameworks, while rent-seeking objectives lead other firms to countries with generally inferior institutions.
This paper attempts to empirically establish the link between institutional compatibility and bilateral FDI flows. Using a panel dataset of countries from all over the world over an extensive period of time, the results obtained should provide useful insights in the field of international economics, and may also have interesting implications for important issues such as the persistence of institutions and incentives for reform in developing countries.
Are Local Political Clans Inherently Bad for Local Growth and Development?
A Principal-Agent Model of Philippine Local Political Relationships
Nico M. RAVANILLA
University of the Philippines
Are local political clans inherently bad for local growth and development? To address this question, this paper presents a principal-agent model under imperfect information of the contractual relationship between society and local politicians. Rents, transfers, as well as the constituents' participatory behavior emerge naturally in the model. The model explains many stylized facts about the typology of local leaders, and the emergence and development consequences of the various types of local clan leadership (e.g. clientist, bossist, fiscal broker). The most important result is that local political clans are not inherently bad, but bossist-types adversely affect local development and more so when constituents are not participatory. The model is illustrated using examples from the Philippine local political landscape.
Minority Size and Voter Competence:
Some Notes on the Two-Party Condorcet Jury Framework
Emmanuel A. SAN ANDRES
University of the Philippines, Philippines
The Philippine democratic experience has been marked by episodes of extra-institutional changes, exemplified by peaceful People Power uprisings. During these episodes, institutional methods of change were short-circuited by groups of like-minded people—i.e., the demonstrators on EDSA—whose preferences were imposed on the entire country. Despite the romance and loftiness of peaceful popular revolutions, what is lost during these episodes is dissent and discourse—essential elements in any society that purports to call itself "democratic".
Using the Condorcet Jury framework, what is the impact of such popular revolutions on social outcomes? What is the impact on expected outcomes whenever a subset of the population imposes its will on the entire country? What conditions are required so that these revolutions will be welfare-enhancing? Are popular revolts and juntas substitutes for the institutions of representative democracy?
The model takes off from the Condorcet Jury model laid out by Fabella (2001). It begins with a brief recap of the base model on how individual voter competence is transformed into social outcomes, followed by a few notes on the first- and second-order partial derivatives of this model with respect to voter competence. The implications of changing the minority size are then examined, in the process arguing that splitting the citizenry (i.e., enlarging the minority) is beneficial when voter competence is low. A way of applying the model using public opinion survey data and comparing across constituencies with vastly different bases is then explored. Finally, it is argued that the participants of extra-institutional processes such as coups or uprisings should show that their judgemental competence is significantly higher than that of the general electorate or parliamentary representatives.
Toward a Public Index Linking Judicial System Performance
with Social and Economic Development
Rodrigo do Nascimento SANTOS
National Institute for Judiciary Quality, Brazil
This abstract seeks to propose the establishment of a public INDEX, somewhat like an inflation index, which will monitor the connection between judicial system performance and economic and social development in Brazil.
The INDEX will track specific indicators of incremental improvements in judicial system performance and trace corresponding changes in economic and social activity patterns. The INDEX will periodically report the aggregate of these increments, thereby keeping the public informed of ongoing trends and building consensus for system improvements.
Several dozen indicators on which the INDEX will be based will be drawn from two sources. From within the judicial system, data will reveal specific sources of judicial dysfunction, such as undue delay, and patterns of judicial bias. From sources external to the judicial system, time series data already gathered by various organizations will be used to trace discrete consequences of specific judicial dysfunction. For example, judicial bias against eviction of non-paying tenants in some cities diminishes the stock of available apartments, driving rents upward. Existing data will be mined to track such trends.
Using well-tested familiar formulas, economists will link, weight and aggregate the data comprising the internal and external indicators to produce the INDEX. This proposal seeks funds for the planning required to design the INDEX in detail and to gain support from the numerous organizations that will collect and maintain the needed data.
Yield and Optimal Input Application with Endogenous Adoption
of Hybrid Rice among Filipino Farmers
Harold Glenn A. VALERA
Bureau of Agricultural Statistics, Philippines
This paper examines the effects of hybrid rice adoption on yield and optimal input application. A treatment-effects model that incorporates endogeneity is employed using full maximum likelihood. Findings suggest that adoption of varieties is endogenous to other production decisions, and that the latent characteristics of hybrid adopters influence yield outcomes. Yield regression results indicate that the use of a seed subsidy is not worthwhile for farmers who adopt hybrid varieties with subsidy and for farmers who would not adopt hybrid varieties in the absence of subsidy. Simulation to study a hypothetical removal of a seed subsidy indicates that the optimal rates of input application are slightly varied with little drop in yields and profits.
Institutional Analysis of Rural Land Markets to Support Sustainable Livelihoods
Ha Thuc VIEN
Nong Lam University, Vietnam
Land markets can play an important role to rural livelihoods by (1) providing land access to those who are productive, but who own no or little land; (2) allowing the exchange of land as the off-farm develops; and (3) facilitating the use of land as collateral to access to credit markets where conditions for doing so exist. Moreover, the ability to transfer land also increases the incentive to undertake land-related investments (Deininger 2003:79). Because of their importance, land markets have been specially paid attention by not only economists but also scholars from different disciplines. However, as Hurrelmann (2005) stated, despite the large amount of work on this topic, there are still many unanswered questions related to land markets. Most of the past analysis has concentrated on particular areas of the land markets – such as sharecropping, land reforms, titling and registration of land – while other fields have been largely ignored (Hurrelmann 2005:1).
Following economic reforms (Doi Moi reform) in 1986, land property rights have been reformed towards market economy. Land rights are allowed to be transferred, exchanged, leased, inherited, mortgaged, used as capital in joint venture arrangements, and re-leased. Nevertheless, it doesn't mean that market-activated land rights reforms have promoted the land markets work well, practically. Reviewing literature done on land markets in Vietnam shows that though a certain amount of work has been done on this field, academic research from the institution-driven approach has been neglected. In order to fill such gap in academic and empirical knowledge, this research aims, therefore, to provide insights into the determinants of land markets from the institutional perspective. The research will try to answer four questions as follows: (1) how do the existing land policies and regulations affect rural land markets; (2) on what basis do farm households participate in land transactions and chose types of land transactions; (3) how do institutions and properties of transaction jointly influence the land transaction design; and (4) what influences do land transaction markets have on rural livelihoods.
On a Special Kind of Transfer Mode of SOE's Property Rights in China
with the Constraint of Non-Price Objectives
Huazhong University of Science and Technology, China
It is an important point for resource association to realize the efficient combination of high-quality human capital and enterprise capital. With the frame of classical economics, the efficient combination can be realized through price signal on market. In the existing literature, the main transfer modes include negotiation, bid, and auction, which are often assumed independent and repellent each other. As long as the enterprise's property rights are transferred to the investor who offers the highest price through one of these three modes, resource association is efficient. However, in the case of the transfer of property rights of a state-owned enterprise (SOE) in China involving benefits readjustment of its stakeholders, the design of the transfer mode is not only to sell the SOE with a high price but also to realize other non-price objectives such as rearrangement of original employees, compensation of managers, future development of the enterprise, etc. Therefore, a new transfer mode is needed.
This paper constructs a special transferring mode with the constraint of these non-price objectives needed in SOE's property rights transfer in China. In the process of this special mode, three main transfer modes (negotiation, bid, and auction) are integrated into one chain with continuum. Three transfer modes are three steps of one transfer series, and the degree of competition determines which step will be advanced. With the concerns on non-price factors, state-owned property rights are traded through an integrated auction based on benchmark objectives, which require investors to settle down a certain quantity of former SOE employees in the new enterprise, compensate the former managers, and give some promise about the future development of the enterprise. The transferability becomes realistic and multi-objectives can be realized through this special mode, which is also efficient with the constraint conditions. In one word, the case of SOE's property rights in China provides a special efficient transferring mode different from existing ones. Moreover, if these taches such as evaluating assets, appraising bid-files and setting threshold in the process of the mode could be improved, SOE's property rights would be transferred more freely and efficiently with lower transaction costs.