The Political Economy of Corruption: How Social Democracy Became the Engine of Decay

 

In a world of uncertainty, no one knows the correct answer to the problems we confront and no one therefore can, in effect, maximize profits.  The society that permits the maximum generation of trials will be the most likely to solve problems through time (a familiar argument of Hayek, 1960).  Adaptive efficiency, therefore, provides the incentives to encourage the development of decentralized decision-making processes that will allow societies to maximize the efforts required to explore alternative ways of solving problems—Douglass North 

In this issue

The Political Economy of Corruption: How Social Democracy Became the Engine of Decay 

Part I: How Social Democracy Sows the Seeds of Corruption

IA. Corruption Starts with the Electoral Process

IB. Public Choice Theory and Barangay Projects: Microcosm of the National Rent Machine

IC. A Caveat: Between System and Choice

ID. Dynasties, and the Patron–Client Trap, From Adaptive to Extractive Efficiency

IE. Goodhart’s Law and the Metric Illusion: Governance by the Numbers

IF. The Limited Access Orders: Elite Stability Through Controlled Competition

IG. The Financialization of Patronage

IH. Ochlocratic Democracy and the Squid Game Parable

II. The Tragic Paradox of Philippine Social Democracy

Part II: The Political Economy of Corruption

IIA. The Pandora’s Box of Public Spending

IIB. The Fiscal Mirage: Bigger Budgets, Shrinking Revenues

IIC. The Economic Undercurrent: A Slowdown Beneath the Noise

IID. The Policy Backlash: Easy Money Meets Fiscal Decay

IIE. The Mirage of Deficit-to-GDP Ratio: When Optics Replace Substance

IIF. The Mirage of Prudence: Debt, Deception, and the Ochlocratic State

Part III: Conclusion: The Final Drift: From Rent-Seeking to Crisis 

The Political Economy of Corruption: How Social Democracy Became the Engine of Decay 

From ballot to budget, the Philippine political economy drifted from progress to patronage—where fiscal populism and elite collusion sustain the illusion of democracy 

Part I: How Social Democracy Sows the Seeds of Corruption 

IA. Corruption Starts with the Electoral Process

Figure 1

Corruption begins not in backroom deals—but at the ballot box. 

How much does a candidate spend to get elected? 

While formal spending limits exist under law, field estimates and media-monitoring data reveal that actual campaign expenditures, especially at the national level, reach hundreds of millions to billions of pesos. In urban settings, Barangay officials reportedly spend upwards of Php 500,000, city councilors tens of millions, and candidates for national seats billions. (Figure 1) (see reference) 

Given their modest stipends, what motivates them and their backers to pour in such vast sums? Patriotism? Or the expectation of returns—through power, access, and extraction? 

IB. Public Choice Theory and Barangay Projects: Microcosm of the National Rent Machine 

Here, Public Choice Theory—or as the late Economist James Buchanan artfully defined it—"politics without romance," strips away the illusion of altruistic politics. (see reference) 

Elections, far from being contests of ideals, are investments in rent-seeking. Politicians rationally pursue interventions—public works, subsidies, welfare programs—that expand budgets and open opportunities for returns. 

Barangay officials, for instance, may build health centers or basketball courts to tout “accomplishments,” while pocketing funds through overpricing, commissions, or other channels within their networks. 

At the grassroots, popular barangay projects—covered courts, health stations, road repairs—serve dual purposes: visible service and invisible extraction. These projects justify budget allocations while enabling leakage through padded contracts and favored suppliers. The barangay becomes a microcosm of the national rent machine. 

That is, the larger the government’s footprint, the larger the potential rents.

Fiscal expansion is often framed as developmental necessity. In reality, it’s a mechanism for rent distribution. More projects mean more contracts, more intermediaries, more leakage—and most importantly, more VOTES.

Politicians push for interventions not to solve problems, but to create extractive opportunities and extend their tenure.

IC. A Caveat: Between System and Choice

As a caveat, while the seeds of corruption are sown in the electoral system—where incentives reward control, manipulation, and extraction through patron–client ties and dependency-building programs—individual agency still matters. Not all who enter the system succumb to its temptations.

We must resist the fallacy of division: the idea that because the system is corrupt, every actor within it must be. While many—or even most—may exploit the structure, others attempt to navigate it with integrity, often at great personal and political cost.

Moreover, corruption is not monolithic. Its degree, visibility, and method vary:

• At the barangay level, corruption may be more modest—petty overpricing, padded logistics, or informal commissions.
• At the national level, it scales. Many officials may not directly pocket funds from projects. Instead, some exploit indirect mechanisms—through layered corporate networks, proxy ownerships, and business interests within their jurisdictions.

In such cases, transparency tools like the SALN (Statement of Assets, Liabilities, and Net Worth)—while symbolically important—often remain cosmetic. They measure disclosure, not control. As such, they are easily gamed, rarely enforced, and structurally blind to the artifice of legally structured beneficial ownership. 

ID. Dynasties, and the Patron–Client Trap, From Adaptive to Extractive Efficiency

Over time, this incentive structure breeds dynastic entrenchment. Voters become dependent on welfare, contracts, and subsidies—reinforcing the very system that sustains them.

Political families consolidate control over access to state resources, while bureaucracies serve as vehicles for loyalty rather than performance.

Here, Douglass North’s concept of adaptive efficiency becomes central. In healthy societies, innovation and problem-solving emerge through decentralized experimentation—allowing multiple actors to test ideas and learn over time.

But in a captured social democracy, decision-making becomes centralized, risk-averse, and politically motivated.

Instead of adaptive efficiency, the system evolves toward extractive efficiency—maximizing rent extraction rather than problem-solving. Every “reform” becomes another opportunity for patronage. 

IE. Goodhart’s Law and the Metric Illusion: Governance by the Numbers 

When a measure becomes a target, it ceases to be a good measure. 

Goodhart’s Law explains why governance quality erodes: once developmental indicators—poverty reduction, infrastructure spending, digitalization—become political targets, they cease to measure real progress.

Politicians and bureaucracies chase metrics, not meaning. Budgets swell to create the optics of success, even as institutional capacity stagnates. 

Despite headline growth, nearly half of Filipino families still identify as poor, and hunger rates remain stubbornly high—underscoring the dissonance between GDP triumphalism and lived reality. 

The logic of numbers has replaced the logic of outcomes. For instance, infrastructure becomes a scoreboard; social amelioration, a campaign metric. 

What cannot be measured—quality of life—disappears from governance priorities. 

IF. The Limited Access Orders: Elite Stability Through Controlled Competition 

North, Wallis, and Weingast’s framework of Limited Access Orders capture this equilibrium. In such systems, elites maintain stability by controlling access to political and economic privileges. Violence is contained not through rule of law, but through negotiated rents among dominant coalitions. 

Competition—whether electoral or market—is not eliminated, but managed to prevent instability. 

In the Philippine context, the political economy resembles a cartel: quasi-competition among elites crowds out MSMEs through the BSP’s easy-money regime and the regulatory state. 

Access to capital, permits, and protection is rationed—not by merit, but by proximity to power. 

The ruling oligarchy—masquerading as democratic elites—justifies this concentration through the promise of trickle-down prosperity. Anchored on a record-high savings-investment gap, the benefits rarely diffuse. They consolidate, reinforcing privilege and power. 

Corruption, then, is not a malfunction. It is the stabilizing mechanism of the political order. Public works and welfare programs distribute rents downward to maintain consent, and upward to preserve privilege. 

IG. The Financialization of Patronage 

The BSP’s easy-money regime acts as the lubricant of this system. Cheap credit, monetized deficits, and liquidity injections sustain the illusion of prosperity. Fiscal populism flourishes, financing both vote-buying and elite projects under the banner of “inclusive growth.”

Figure 2

Yet as public debt expands (Php 17.468 trillion in August) and private credit is crowded out (Bank compliance of MSME lending share 4.59%), efficiency dissipates, innovation recedes, and systemic risk mounts. (Figure 2, upper image)

The same elites who dominate politics now dominate finance—transforming competition into collusion. What began as political capture of budgets has evolved into financial capture of capital. Bank’s net claims on central government (NCoCG) reached Php 5.445 trillion or 31% of public debt, last August. (Figure 2, lower graph)

However, elite finance no longer thrives on production, but on asset transfers anchored in debt—rent extraction by other means.

IH. Ochlocratic Democracy and the Squid Game Parable

Social democracy becomes a shell—democratic in ritual, oligarchic in practice. Elections legitimize extraction. The state grows as both employer and benefactor. Bureaucracies serve dynasties. Welfare becomes vote collateral.

Philippine politics drifts toward ochlocracy—where collective dependency replaces civic reason, and politics becomes an auction of favors.

In the popular Korean drama Squid Game, participants vote democratically on whether to continue the deadly contest. It’s a grim parody of ochlocratic democracy—where the masses “choose” within a system they cannot change, while elites watch from above, entertained by their struggle.

Philippine politics mirrors this cruel symmetry: voters play the game of elections, but the rules—and the rewards—belong to the few who own the arena.

This is the tragedy of ochlocratic democracy: people mistake participation for power, and choice for change.

II. The Tragic Paradox of Philippine Social Democracy

The paradox is tragic. Social democracy began as an ideal of empowerment, but its penchant for populist collectivism and institutional capture devolved into systemic dependency. It rewards extraction over experimentation, and loyalty over learning and entrepreneurship.

As North warned, prosperity depends not on good intentions or efficient markets, but on institutions that foster experimentation, decentralization, and accountability. When these vanish, societies lose their adaptive capacity—and settle into the stability of decay. 

That decay now finds fiscal expression. 

The controversial 2025 national budget, packed with pork-laden projects, confidential allocations, and populist welfare programs, does not represent governance—it exposes social democracy’s rent-distribution paradigm.

It is the modern stage of our own Squid Game democracy: grand spending justified by social ideals, yet orchestrated to consolidate power. The next step forward is not reform in name, but reckoning in structure.

Part II: The Political Economy of Corruption

IIA. The Pandora’s Box of Public Spending 

The opening of the public spending Pandora’s Box exposes the government’s MIDAS touch—except that what it touches doesn’t turn into gold but corruption. From overpricing to kickbacks, bribery to ghost projects, and more, allegations of improprieties have emerged not only in flood control programs but also across farm-to-market roads, election platforms, healthcare centers, the DICT’s WiFi subscription services, LTO license plates, and more yet to come. 

The iceberg unravels. 

We recently wrote: 

Authorities hope for three things: 

• That time will dull public anger
• That the probe’s outcome satisfies public appetite
• That new controversies bury the scandal

But history warns us: corruption follows a Whac-a-Mole dynamic—until it hits a tipping point.

Here is what we missed. 

In a striking inversion of democratic logic, the Philippine Navy’s recent warning—that public outrage over flood control failures may expose the nation to foreign propaganda—reveals a deeper institutional reflex: the impulse to reframe civic dissent as geopolitical vulnerability. 

The narrative is shifting: from corruption to propaganda, from domestic failure to foreign destabilization. In this alchemy of blame, scandal becomes sovereignty, and criticism becomes treason. 

The Thirty-Six Stratagems offer an apt lens: “Let the enemy’s own spy sow discord in his own camp.” When power is cornered, it conjures enemies to restore cohesion—sowing the seeds of conflict, via diversion, to preserve its own survival. 

By invoking the specter of foreign interference, the regime deflects attention from systemic rot to imagined threats, weaponizing patriotism against dissent. 

Yet one must ask: is the Philippine military also attempting to obscure internal corruption within its own agency? 

IIB. The Fiscal Mirage: Bigger Budgets, Shrinking Revenues

Figure 3

Despite the domino trail of corruption being exposed, political authorities recently passed the 2026 budget of Php 6.793 trillion—up from this year’s enacted Php 6.326 trillion. Though this marks a 7.4% increase, it rose by Php 467 billion from last year, the fourth highest ever. (Figure 3, topmost chart) 

The House of Representatives even increased its allocation by Php 10 billion. 

However, the Bureau of the Treasury quietly revised the 2025 expenditure target downward—from Php 6.326 trillion to Php 6.082 trillion—likely after realizing it had overestimated non-tax revenue projections. 

All things equal, this translates to an 11.7% increase or ₱711 billion, the largest peso expansion in Philippine fiscal history. 

While actual spending this year may fall below the enacted budget, history suggests it will still exceed the revised target. 

In any case, because corruption is often framed in binary terms—black or white, good or evil—the 2026 budget signals that the establishment expects the scandal to breeze over and the good times to continue. 

This echoes Aldous Huxley’s warning:

That men do not learn very much from the lessons of history is the most important of all the lessons of history. 

IIC. The Economic Undercurrent: A Slowdown Beneath the Noise 

While the September Php 248.1 billion deficit was reported as having narrowed from last year—due to a 7.5% decline in expenditures amid DPWH embroilment— few noted that public revenues also fell by 5.99%. 

Yes, tax revenues grew: BIR up 4.74% YoY, BoC up 5.25%. But non-tax revenues collapsed by 65.8%. 

The quarterly and year-to-date numbers reveal a broader slowdown: (Figure and Table 3, middle and lower windows) 

Q3 2025: -3.22% revenues, +4.47% tax revenues (BIR +4.87%, BoC +3.297%), non-tax -48.24%

Q3 2024: +16.95% revenues, +11.7% tax revenues (BIR +14.7%, BoC +3.61%), non-tax +61.7%

9M 2025: +2.2% revenues, +8.6% tax revenues (BIR +10.9%, BoC +1.6%), non-tax -34.7%

9M 2024: +16.04% revenues, +10.6% tax revenues (BIR +12.73%, BoC +4.6%), non-tax +62.85% 

The bottom line: where revenues are conditioned on economic performance and administrative capacity, the Q3 slowdown signals deeper economic weakening—dragging down the 9M performance. The GDP leads tax collections. 

Yet, the public barely realizes that the economy is tacitly emaciating, while the corruption scandal, which partly curtailed spending, exacerbates the decline.

Figure 4

Despite the September contraction in public spending, 9M YoY growth slipped from 11.6% in 2024 to 5.2% in 2025. Still, public spending hit an all-time high of Php 4.484 trillion. Figure 4, topmost visual) 

As a result, the 9-month deficit swelled to Php 1.117 trillion—just 1.92% or Php 21.85 billion shy of the historic Php 1.139 trillion budget gap during the pandemic recession year of 2021 —an astounding fiscal gap without a recession. (Figure 4, middle diagram) 

A massive pandemic-sized fiscal backstop without a crisis—what is the government not telling the public? 

IID. The Policy Backlash: Easy Money Meets Fiscal Decay 

One might add: all this unfolds amid the BSP’s easing cycle—marked by interest rate and RRR cuts, plus a doubling of deposit insurance. 

All told, the economy now reels from the unintended consequences of overlapping policies:

• Bank-financed asset bubbles,
• Crowding-out of private credit,
• The soft USD-peg, and
• Implicit backstops for bank balance sheets. 

Together, these reinforce malinvestments that distort both fiscal and monetary stability. 

Once again, from our September post (bold original): 

Many large firms are structurally tied to public projects, and the economy’s current momentum leans heavily on credit-fueled activity rather than organic productivity. 

Curtailing infrastructure outlays, even temporarily, risks puncturing GDP optics and exposing the private sector’s underlying weakness. 

Or if infrastructure spending is curtailed or delayed, growth slows and tax revenues fall—VAT, corporate, and income tax collections all weaken when economic activity contracts. 

This means the deficit doesn’t necessarily shrink despite spending restraint; the “fiscal hole” may, in fact, widen—imperiling fiscal stability and setting the stage for a potential fiscal shock. 

The irony is stark: efforts to contain corruption by tightening spending could deepen the very gap they aim to close.

This means that an extended softening of GDP entails a much higher deficit-to-GDP ratio—recently adjusted to 5.5% for 2025.

Crucially, few realize that further slippage in this ratio amplifies the risk of a fiscal shock—a scenario no longer theoretical but increasingly imminent.

IIE. The Mirage of Deficit-to-GDP Ratio: When Optics Replace Substance 

Yet what policymakers increasingly celebrate as "fiscal discipline" may in fact be a statistical mirage. 

The narrowing of the deficit-to-GDP ratio, often paraded as proof of resilience, conceals deeper structural decay beneath the surface. (Figure 4, lowest chart) 

For while nominal figures appear stable, the underlying engine of growth—real production, capital formation, and household income—has been hollowing out. The economy’s apparent balance is not born of strength, but of accounting illusion. 

The obsession with deficit-to-GDP optics reveals how politicians and bureaucrats chase statistical benchmarks—or what I call as ‘benchmark-ism’—over structural integrity. As the ratio falls—even while real GDP softens—authorities infer that deeper deficits carry little cost. 

Numerically, the ratio implies GDP is outperforming the deficit, either through faster nominal growth or slower deficit expansion. But this dissonance masks a dangerous illusion: debt-financed deficits now comprise a substantial and growing share of GDP. 

The economy’s rising dependency on public spending, funded by mounting debt, creates a fragile equilibrium. 

Once the extraction and redistribution mechanism weakens—manifesting as a sharp GDP decline—the ratio could spike violently. 

In all, the falling deficit-to-GDP ratio conceals the economy’s eroding capacity to absorb and repay debt. It’s not a sign of resilience, but a warning of latent fragility. 

IIF. The Mirage of Prudence: Debt, Deception, and the Ochlocratic State 

This leads us to debt. 

Media and authorities entertain us with a dramatic 71.1% plunge in BSP-approved FX borrowings in Q3 2025, projecting an image of fiscal prudence and stability. 

Officials attribute the slowdown to the “frontloading” of offshore financing earlier in the year. 

Yet BSP approved $12.28 billion in the first 9 months of 2025—up 16.1% from $10.58 billion in the same period last year. For context, BSP approved $13.8 billion for the full year 2024. 

What they fail to highlight is that the Q3 deficit—among the largest on record—pushed the 9-month shortfall to 2021 levels. This demands financing. The data suggests BSP either shifted operations through banks, reclassified borrowings via accounting gymnastics, or pivoted to peso-denominated debt.

Figure 5

What BSP’s data shows supports this view. In August, banks’ net foreign assets surged 45% year-on-year, while the BSP’s claims rose by a mere 0.7%. This divergence indicates a clear shift in FX borrowing and asset buildup from the BSP and national government toward the banking sector. (Figure 5, topmost graph) 

In effect, external leverage didn’t disappear—it was privatized, migrating into bank balance sheets where it escapes fiscal scrutiny but magnifies systemic risk. 

However, financing did slow in September, marking a second consecutive decline. This pulled 9-month financing back to 2024 levels, implying a slowdown in national debt growth—even as deficits soared past last year’s. Again, this hints at rescheduling maneuvers or creative fiscal accounting. (Figure 5, middle pane) 

We saw a similar pattern with amortization. Media and consensus proudly cited a debt financing slowdown in 1H 2025. But analyzing the June deficit, we surmised in August that this reflected one or more of the following: Scheduling choices, prepayments in 2024 and political aversion to public backlash 

Amortizations resurfaced by August, and September data reinforced the rebound. 

More strikingly, interest payments surged 15.4% in September, pushing their 9-month share of expenditures to 14.85%—the highest since 2009. (Figure 5, lowest graph)

Figure 6

Combined, amortization and interest payments in the first 9 months of 2025 already exceed 2023’s annual totals and sit just 7.5% below 2024’s all-time high— with a full quarter remaining! (Figure 6, upper chart) 

Meanwhile, foreign-denominated debt servicing fell 35% in September—its fourth straight monthly decline and the largest yet. This pulled its 9-month share of total debt servicing down from 21.04% in 2024 to 19.7% in 2025. (Figure 6, lower image) 

What’s apparent is a deliberate effort to paint macro stability by suppressing FX loan exposure. 

But in doing so, even if a fiscal shock doesn’t erupt in 2025, its shadow has: the pullback in FX loans weakens BSP’s structural defenses for its ‘soft peg’ regime. 

Finally, while we view the deficit-to-GDP ratio as a flawed metric, its relevance to consensus sentiment remains. A shock could send USD/PHP soaring, stocks plummeting, inflation spiking, rates rocketing and the economy stumbling—a chain reaction born of fiscal manipulation disguised as discipline. 

Part III: Conclusion: The Final Drift: From Rent-Seeking to Crisis 

The current flood control scandal reaffirms the lessons of the EDSA I and II Revolutions: corruption is not a binary, black-and-white event underwritten by good or bad ethics, but a symptom of a broader, deeper, and entrenched political-economic pathology called social democracy—where elections are treated as opportunities to gain both political capital and economic power through tenure-based rent-seeking. 

Thus, the systemic drift deepens toward free lunch policies—protecting the interests of a privileged few, while masking them as welfare interventions for the many. These “trickle-down” redistributions, in practice, breed dependence and disincentivize productivity. 

Intervention begets intervention, as every maladjustment and distortion calls forth another. 

As of this writing, the Philippine leadership has ordered a 50% cut in construction material prices while previously imposing both price ceilings on rice (MSRP and the “20-peso rollout”), and recently, price floors on palay farmgate prices.

Each measure deepens the drift toward centralization or socialism. 

The entropic consequences of the ochlocratic–social democratic regime are now manifesting even in embellished government data—suggesting that worsening conditions can no longer be shielded by the gaming and manipulation of marketplace and statistics (GDP, CPI, fiscal deficit, and debt among the most politically sensitive). 

The more the state intervenes to sustain the illusion of stability, the faster its underlying contradictions compound. 

The emergence of deeply seated corruption amid an ongoing economic slowdown exposes not only the late-cycle phase transition—but also Kindleberger’s drift toward the age of swindles, fraud, and defalcation. 

In the end, because both political and economic structures are ideological and self-reinforcing, reform from within is improbable. 

The deepening economic and financial imbalances will not resolve through policy, but will ventilate through a crisis—again the lessons of the post-1983 debt restructuring of EDSA I and the post-Asian Financial Crisis of EDSA II. 

____ 

References 

Based on legal caps under RA 8370 and RA 7166 and independent estimates (PCIJ, Inquirer, SunStar), actual campaign spending in competitive areas far exceeds statutory limits.

Prudent Investor Newsletters, The Philippine Flood Control Scandal: Systemic Failure and Central Bank Complicity, Substack, October 05, 2025 

Prudent Investor Newsletters, When Free Lunch Politics Meets Fiscal Reality: Lessons from the DPWH Flood Control Scandal, Substack, September 07, 2025 

Prudent Investor Newsletters, June 2025 Deficit: A Countdown to Fiscal Shock, Substack, August 03, 2025

 

The War on Drug’s 'Crowding Out' Syndrome Emerges on Government Budget! The Path toOchlocratic (Rule of Mob) Dictatorship and the Mechanics of Mass Surrenders

In this issue

The War on Drug’s 'Crowding Out' Syndrome Emerges on Government Budget! The Path toOchlocratic (Rule of Mob) Dictatorship and the Mechanics of Mass Surrenders

-Follow the Money Trail: Crowding Out Syndrome Emerges, President’s Pork Barrel Zooms to Php 7 Billion!

-The Path to Ochlocratic (Rule of Mob) Dictatorship

-A. Selective Application of the War on Drugs

-B. Buying the Support of the Military and Police, Undermining of Other Political Institutions Through Personal Attacks

-C. Romancing the NPA

-Conclusion

-War on Drugs: Valuable Excerpt on the Mechanics of Mass Drug Surrenders; Cracks on Bolivia’s War on Mining: Protests Against Socialism!

In fact Socialism is not in the least what it pretends to be. It is not the pioneer of a better and finer world, but the spoiler of what thousands of years of civilization have created. It does not build; it destroys. For destruction is the essence of it. It produces nothing, it only consumes what the social order based on private ownership in the means of production has created. Since a socialist order of society cannot exist, unless it be as a fragment of Socialism within an economic order resting otherwise on private property, each step leading towards Socialism must exhaust itself in the destruction of what already exists.-Ludwig von Mises

Follow the Money Trail: Crowding Out Syndrome Emerges, President’s Pork Barrel Zooms to Php 7 Billion!

Even prior to the assumption of the new left leaning regime I warned that

The essence of which is that of the tendency for leftist governments to expand government size relative to the economy. In doing so, a bigger government would command a relatively greater amount of resources. The government’s larger use of resources would imply of the crowding out the private sector, increased financing requirements and higher operating costs for businesses. Since government activities signify as consumption, such would entail of less efficient use of resources, deadweight losses, corruption as well as, diminished productivity. Furthermore, the government will resort to financial repression to corral citizens’ resources especially during economic slowdowns. Part of financial repression will be manifested through increases in debt, taxes and or inflation or a combo. Moreover, a torrent of regulations would imply of restrictions or proscriptions on economic activities

While the “crowding out” syndrome has yet to become apparent in the private sector, symptoms of intense competition for resources and funds or the crowding effect has already emerged in the government.

From Philstar/Yahoo (August 26): President Duterte has cut funding for agriculture by P3.4 billion, from P54 billion this year to P50.6 billion in 2017. When queried by congressmen during a budget hearing yesterday, Agriculture Secretary Emmanuel Piñol could not explain why Duterte reduced funding for his department.  The lawmakers said the reduction is contrary to the President’s pronouncements that he would like the agriculture sector to grow since farmers are among the poorest sectors of the population.

Let me use the refinement of the law of demand in analyzing the story above.

When the cost of an activity rises, people do less of that activity.

A short background: The Philippine agriculture political economy has signified as one of the most politically protected industries. In other words, prices, investments, fund or credit flows and trade, or economic activities in general have severely been restricted by a labyrinth of regulations, mandates and edicts. And this has been one of the key reasons why commodity market/s has not existed even when almost all major ASEAN neighbors has incorporated them as part of modern day market based ‘reform’

And given the great wall of restrictions, investments and financing have now become substantially reliant on the government.

And now the government declares a cutback!

The budget reduction on agricultural spending presently involves “various programs recommended by local government units.” (Woe to federalism! Under the current financial setup, this means that local governments will be starved out of funds to sustain the local agricultural economy in favor of the national government. So how will the grassroots embrace federalism when local governments will be painted financially shut?)

Next year’s budget cuts will include: “Socsargen (South Cotabato, Sarangani, General Santos) integrated food production program” and…the “implementation of Payapa at Masaganang Pamayanan (Pamana) program, whose beneficiaries are rebel returnees”, (pls hold THIS thought as the romance with the NPA has been rekindled), “Philippine rural development project” and “funding for farm-to-market roads”.

What’s the idea for all these subsidies and spending? Well the short answer is to REDUCE the underlying costs of the agricultural economy.

Let me cite for instance farm to market roads. The objective for this is to reduce transport cost. A reduction in transport cost should translate to lower overhead, more earnings and thereby increased output. Meanwhile, “integration program” have been intended to LESSEN operating costs via the economies of scale, while expanding potential market.

So by restricting spending on a protected industry heavily dependent on the government, guess what happens to output? Will this grow or shrink (materially)?  Now what happens to agricultural prices, will they fall or rise (sharply)?

Because government spending comes out of the pocket of taxpayers and currency holders, diminished government spending IS a wonderful idea. But given the current setting, such has to be replaced with the increased participation of the private sector, who would take up the slack from the government. This entails liberalization, or market based reforms. Part of which SHOULD be the establishment of commodity market/s.

Unfortunately, this has NOT been the essence of why funds will be pared.

The real reason? The shift of funds has been meant to finance the rapidly expanding POLICE state!

From the Time Magazine (August 25): “Duterte has given huge funding boosts to the police and military by slashing the country’s health budget by 25%, and reducing expenditure on critical sectors like agriculture, labor, employment and foreign affairs. On the other hand, the budget for the presidential office has increased tenfold, and now includes a provision of $150 million for “representation and entertainment.” (bold mine)

The said budget adjustments have reportedly excluded “funding requirements for Duterte’s promise to double the salaries of soldiers and policemen”. (Philstar August 21)

Fans of the administration say that health budget was merely transferred to the ambit of government monopoly casino operator PAGCOR. However, media says that PAGCOR (Rappler August 23) will only finance parts of the health budget.

Regardless of the budget technicalities, vastly increased spending by the military and police will come from the cutting of spending elsewhere. Hence, the crowding out.

And the path of political spending will be predicated on present and expected future tax collections, borrowings and bank financed credit expansion. And this is why the government has been first transferring funds to what it perceives as areas of priority as against areas which has been deemed as lesser priorities.

And the area of priority now includes a massive increase in pork barrel for the Office of the President!!! To emphasize, from Philstar (August 21): “Duterte is substantially increasing the budget for his own office, from P2.9 billion to P20.030 billion. The increase includes P2.5 billion in intelligence funds and more than P7 billion for representation and entertainment expenses.”

 “My GAD”!!!!!

Yet there is no such thing as a free lunch!

And it’s not just the military and police who will get a raise, the present government has approved the carrying over of the four tranche wage hike scheme (Interaksyon, August 23) for the government employees as part of the previous program by the administration.

And since manpower represents scarce resources, this entails that the expansion of political budget for government employees would draw more people from the labor pool that would come in competition with the private sector. As I wrote in “Welcome to the Philippine Police State!”:   “This essentially “crowds out” the private sector. And for the private sector to compete with government, they would have to RAISE wages SUBSTANTIALLY. This serves as an indirect minimum wage hike!”

Compounding on this would be the government’s war on labor contractualization or “ENDO”. This implies for more reduction of the labor pool for the private sector. More importantly, higher labor costs assures the shriveling of the private sector economy. Meanwhile, the Department of Labor and Employment (DOLE) has declared a one month moratorium on the war on ENDO (Philstar August 18)

From a budget perspective, the war on drugs has gotten out of control!

The Path to Ochlocratic (Rule of Mob) Dictatorship

Now I’ve never really believed that the war on drugs signifies as the ultimate aim for this regime. Rather, the war on drugs has been used as a means to justify an end. The end of which, as I have predicted, is to establish a revolutionary government/dictatorship

So to attain his "revolutionary government", Mr Duterte needs to groove his comrades into the system. His comrades must blend into the mainstream so they will get the sympathy of the military. When they get such their desired support that’s when they’ll move to launch the "revolutionary government". Changing the System is a Time Consuming Process; Duterte’s Backdoor Strategy (May 18, 2016)

A. Selective Application of the War on Drugs

One symptom: the divergent or selective application of the war on drugs.

The regime seems to have whitewashed drug activities within exclusive wealthy villages. From GMA (August 26): Why is the government's campaign against illegal drugs focused on susects in urban poor communities? Aside from saying that wealthy drug lords are running their illicit business from outside the country, President Rodrigo Duterte said there's no shabu trade in exclusive villages like Forbes Park in Makati City…."But cocaine and heroin are not as destructive as shabu because itong cocaine and heroin are manufactured out of the derivatives of a poppy, tanim iyan parang marijuana. So it is not as destructive to the mind as meth, which is just really a combination of a deadly mix of chemicals," Duterte said. Duterte said the poor mostly use shabu or methamphetamine hydrochloride, which is sold in not so well off communities.

So from campaign of “Rich or poor, I do not give a shit…"My order is to destroy" to “Rich use drugs…which are not as destructive”.

Given how fast the political leadership vacillates on an issue or how fluid the political environment has been, it’s really hard to give an immediate interpretation on this. 

Example: Because of criticism of summary executions, the administration threatened to pull out of UN (CNN August 21). But after a hailstorm of brickbats from international opinion, this prompted for a backpedaling, for the leadership to say it was all a “jest” (Inquirer August 23). Then again, a turnaround to lambast the UN: “I’m the President!” (Inquirer August 26)

Nevertheless, if the regime insists on keeping the wealthy off the war on drugs, then it could imply the following:

one) the administration could be apprehensive of the risk of capital flight from his biggest taxpayers,

two) this could be part of the payment of political electoral debt from which necessitates keeping their residences beyond popular politics, and or

three) this has been part of the stratagem to setup the financial elites for the next phase of the war on oligarchy and

four) a combination of the above.

Let us apply the refined law of demand to the president’s exemption on wealthy villages.

When the cost of an activity DECREASES, people do MORE of that activity.

The president’s implied exemption represents a tacit subsidy for particular drugs (cocaine and heroin), and also on drug using income class (wealthy).

If the political sentiment by the administration is sustained, then drug usage will move out of “restricted” meth to “allowable” cocaine or heroin (and or other innovative forms) other than stated.

And if sustained, trading hubs for drugs will shift into wealthy exclusive villages.

And this is why I said that this could be part of the stratagem to setup the financial elites as fall guys for the war on oligarchy. Once the latter gravitates into a center for drug trafficking, then the local version of populist social justice warriors would fervidly demand for “equality”, and this will give the regime license to crackdown on them.

But of course, the administration can’t do this immediately because of the latter’s potential to move capital out of the country. So this will have to be timed. And only when doors to capital movements would have been shuttered will such option become palatable.

In short, such conditions will be ripe only when martial law and emergency power/s have been declared.

B. Buying the Support of the Military and Police, Undermining of Other Political Institutions Through Personal Attacks

AS one would observe war on drugs and vices, corruption, media, mining, oligarchy, endo, the latest war on the “enemies of the state” (GMA, August 25) and coming forms of political wars… needs unwavering support from the military and police, which are of course, the essence of all forms of government.

And the substantial pivot for the outpouring of funds and of privileges to such militant institutions not only means the buying of support but of their loyalty. The critical objective is to attain the fealty of the military and police to the administration’s coming courses of actions.

And yet the ultimate objective appears as the establishment of a dictatorship founded on ochlocracy (government of mob rule). 

Symptom: any lodged criticism on the regime’s pet agenda will be met with strident ad hominem politics. Hence, legality and or morality becomes subject to the vehemence of trial by publicity or mob rule politics.

The halo effect from the superhero political dynamic allows the administration to essentially freehandedly undermine other branches of government through personal attacks. It doesn’t matter whether the accusations have been true, what matters is that of the populace’s perception of the leadership’s convictions. The leadership's utterances, of course, has been deemed as gospel truth! 

And by destabilizing popular support for established institutions, such paves way for administration’s usurpation of power!

With the military and the police in his pocket, and with popular opinion solidly with the administration, what should stop the trampling of the present institutions for the administration to metastasize these into an Ochlocratic “revolutionary government”???

Well the short answer is economics or resources expressed through MONEY!

C. Romancing the NPA

This leads to the third symptom. Romancing the NPA.

Even after being flouted and scorned by the NPA on his war on drugs (GMA August 13) and the violation(Manila Bulletin July 27) of the post SONA declared arbitrary ceasefire (CNN July 25), the administration’s soft heart for the renegade group prompted for the government’s release of the leftist prisoners (Inquirer August 19) that led to a unilateral ceasefire declared by the NPA (Rappler August 19) which the government reciprocated (Inquirer August 21).  An agreement that should pave way for an indefinite ceasefire was signed by both parties in Norway last week (Philstar August 27).

It’s not just the military and police, but the NPA will also be showered with providence of  material benefits and privileges!

From Philstar/Yahoo (August 26): President Duterte is ready to distribute public lands to  members of the New People’s Army if peace negotiations in Oslo, Norway succeed. He said he is willing to “give more” to the Left, aside from providing money and public lands to communist combatants… “I am joining the Communist Party of the Philippines in its desire to seek peace for this nation. That is my plea to everybody – communists, soldiers, police – to understand that there is always a time for everything,” he said. “We cannot be at war at all times.” “I am not a President who would enjoy waging war against the citizens of this Republic,” he said. “It pains me deeply to see people dying for an ideology that we can talk over peacefully, just like now.

Since addicts and junkies have been portrayed as not humans (Inquirer August 28) they cannot be reformed and thus should be condemned for extinction. Of course, this comes with an exemption: that’s unless you are from the exclusive villages! Money buys one’s humanity!

Of course waging wars have not been limited to junkies but expands to miners, to smokers, drinkers, oligarchs and entrepreneurs who employ subcontracted labor.  While one is addressed with direct violence, the rest are resolved with indirect violence: threat of confiscation, and or business closures.

However, “ideology” based criminality, which largely applies to the higher ups and not to the underlings, should be rewarded.

But how does the government intend to distribute lands? From the same report: In talking of land reform, Duterte said the lands to   be distributed will not come from the landowners. “It is a genuine land reform,” he said. “But I will not confiscate lands (or) get it from people who own… there’s so much land in the Philippines… just tell me and I would give them everything.” Duterte said he is not willing to do land reform   similar to what has been done in the past, where the government would buy land from landowners and distribute it to farmers or the landless who would eventually end up selling the property back to its original owner. “I will not do that, that would be an injustice,” he said. 

With the exception of a few voluntary choirs, the essence of government is force. The same applies to government properties which are obtained, in essence, through force. Government revenues (taxes, tariffs and fees) are acquired through force. Unless you can use legal loopholes to avoid taxes, skirting taxes means penalties via fees, jail time or garnishment/confiscation of one’s properties. Force. 

From revenues to expenditures it is all about force. Even when government buys land through eminent domain, it is channeled through confiscation or “compulsory purchase”.

And just which public lands will be given by the government as "trophies" to a renegade ideological but largely spent political force?

How much more will be required for the government to spend, not only for rehabilitation of rebels but to help secure their assimilation to the mainstream?

Yet what ensures the productivity of these rebels?  And what if lands alone will not suffice for a return of peace? What if there has been lack of economic opportunities to sustain them? And because of this, what if rebel beneficiaries sell these and subsequently head back to the banditry profession? Or what if habit dictates a return to hills?

Yet going back to the reduction of the agriculture budget which includes “Payapa at Masaganang Pamayanan (Pamana) program, whose beneficiaries are rebel returnees”, so where and how will government get its funding to finance NPA’s welfare? From the Php 7 billion pork barrel of the office of the president?

And who will pay for the dole outs of land and other welfare for NPA beneficiaries? Again by how? Raising taxes, increase borrowing or inflationism?

Unless “manufactured” or through reclamation, supply of land is largely limited. Thereby as a matter of opportunity costs, land bequeathed to rebels would mean land that would be stripped off from other political uses (military installations, infrastructure, areas for squatter transfer, temporary shelters for disasters, public schools, and etc…). Alternatively why NPAs? Why not also MILF, MNLF or other rebel groups? Or why not non rebels or government employees? Squatters? Or why not as public housing among the many other interest groups for doleouts?

What’s so special with NPAs?

Yet will NPAs eventually be absorbed into the military and police? Would such stir up the hornet's nest? 

Conclusion

Like markets, politics is a time consuming process. Yet amazingly, the speed and fluidity of current developments seem to chime with my expectations on the directions of the developing trend of Philippine politics.

Socialism Latin American version here we come!

Whether or not a revolutionary government or martial law will be established, what’s truly more interesting will be the economic impact from the incumbent government’s presumptuous and profligate ways and actions.

Yet differentiating substance from forms matters alot. On one hand, the government may have a penny pinching inauguration menu (Rappler June 27) as a populist signal of prudence, on the other hand, ironically the government can imperceptibly lavish with taxpayers resources for supposed implementation of a political moral agenda (with practically no accountability on “discretionary” public treasury expenditures!).

Public Choice rules!

Moreover, such populist undertakings have all been hinged on the belief in free lunches or third party, or specifically, taxpayer largess for what has been portrayed or sold as a moral issue.

Yet the economic costs of the war on drugs have been mounting! The unforeseen adverse socio-economic cost will soon surface too.

War on Drugs: Valuable Excerpt on the Mechanics of Mass Drug Surrenders; Cracks on Bolivia’s War on Mining: Protests Against Socialism!

Two final post script observations

-Remember the regime’s war on mining? And the proposed cooperative takeover by the government to replace environmentally “destructive” miners?

Well Bolivia’s experience show us why this will fail.

In socialist Bolivia which has nationalized mines, protesting miners kidnapped and killed a cabinet minister (Deputy Minister of the Interior) last week because they had been “protesting for their right to work directly with private companies” (CNN August 27)

Miners were in essence protesting socialism and demanding government bring back capitalists into the mining industry.

As I wrote before “Why the War on Mining Will Fail!” (June 26, 2016), cooperatives will not work. Why?

Because…

“Mining is a capital and technology intensive industry. Just where will cooperatives get funds and expertise?”

Writes Tim Worstall at the Forbes.com (bold mine)

The background to this is that Evo Morales nationalised the mines (and all of the country’s mineral resources) soon after being elected in 2006. The cooperatives are able to gain a licence to mine such deposits. Great – but the government insists that such cooperatives cannot then team up with private sector companies. And that’s what the protest is about. Because the miners have realised the thing about mining – it’s a capital intensive business and cooperatives don’t really have any manner of raising large amounts of capital

Amen!

-Oh about those huge numbers of drug related people who reportedly has surrendered due to the regime’s war on drugs. Awesome insight from the Time Magazine (August 25) [bold mine]

Rightly fearing for their lives, Filipinos are surrendering in droves. More than half a million people have turned themselves in to the authorities for drug-related offenses, according to police data, since Duterte took office. Although, as Joseph Franco, an expert on the Philippines at Singapore’s Nanyang Technological University, tells TIME via email, “Surrender is a very loaded term.”

The police draw up lists of suspected drug users and dealers, he explains. The lists are then sent to the barangay, where community leaders are pressured to endorse them and include additional names — something done with little verification or oversight, if any.

“So you can put on those lists neighbors with whom you have an ax to grind” without worrying about a detailed vetting process, Franco adds. In this way, the poor are turned on each other.

Once named, an alleged drug user has three options. To risk being murdered, to wait to be picked up in a potentially lethal police action, or to report to the authorities. If they choose the latter, they are made to sign a waiver saying they will swear off illegal substances — or face the consequences if they begin using drugs again.

During elections, the opposite of this would be called as “hakot” (bused in or ferried in crowds) of usually paid supporters.

In the contemporaneous war of drugs, mass “surrenders” comprises mostly compulsory enlistments through repression!

War on drugs? Or war on the poor?