July 30, 2009

Convincing Elites to Allow Reform:
Foundation Holds Forum on New Institutional Economics

Professor John Nye

Against the backdrop of a turbulent history of property rights issues, the Friedrich Naumann Foundation for Liberty (FNF) partnered with the Philippine Economic Society (PES) and the University of the Philippines School of Economics (UPSE) and hosted two sets of forums with New Institutional economists John Nye and Noel Maurer. The first forum was held on 30 July 2009 at Makati City for policy makers while the second one was held the following day at the UPSE auditorium in Quezon City for students and the public.

The forum sought to address the question frustrating many reforms in the country: “Will elites permit it?” John Nye, professor at George Mason University, started out the discussion by stating that poverty is the default position. The wealth of some nations is a recent development. The real issue is how countries can rise out of destitution, and why it is particularly difficult to do so.

Associate Professor Noel Maurer

One condition that usually brings this about is unanticipated technological transformation such as the way the mobile phone changed the telecommunication structure. Another is when some elites co-opt power from others. This was the case during the British industrial revolution when the power of the provincial elites was transferred to the city. Not only did this introduce a new power structure in the city, but it ushered in the rise of a strong middle class.

However, the usual case, Nye explained is to provide elites with incentives to permit reform. Lasting change can only be achieved through a society’s internal transformation. He cautioned against revolutions. Most of the time, they only replace one dominant interest coalition with another.

FNF Resdent Representative Siegfried Herzog

Noel Maurer, associate professor at Harvard Business School, discussed one such time in Philippine history when the dominant interests found it beneficial to allow reforms in the country. In the early 20th century, conservative elites wanted to keep the Philippines after defeating Spain, but ran into strong popular opposition. They changed the U.S. Congress’ opinion about retaining the Philippines by convincing the American public that U.S rule would be beneficial to Filipinos. One way they did that was to allow Filipinos access to property. It was believed that this would rapidly improve their material conditions. The colonial administration under Gov. Taft passed three acts that overturned the previous Spanish structure and established a stable property rights system. Unfortunately this largely failed. Only relatively few Filipinos registered their land under the new system, possibly because it was too expensive or they did not see the need for it.

Nevertheless it seems clear that with proper incentives, elites sometimes do permit reform. Resistance is minimized when change comes from within the existing structures. However, allowing that change is only the beginning. Implementing change on a gradual but sustained basis is a process that continues to be a challenge to politics.

“This forum was important as it shifted the focus of the land reform debate away from simple legislation,” said FNF Resident Representative Siegfried Herzog. “It centered on how we as a whole can move our society towards reform, towards better institutional structures,” he added. “It also shows the dilemma of democracies. Gradual reform of institutions is the best way forward, but people tend to vote for leaders who make grand promises about sweeping reforms or about generous handouts. Gradual institutional reform sounds boring and unattractive to most voters.”

Click here to listen to John Nye's complete talk.
Click here to watch John Nye's video.
Click here to listen to Noel Maurer's complete talk.
Click here to watch Noel Maurer's video.