Inclusive?

Inclusive growth is the latest buzzword.  We have heard many convoluted explanations of this elusive phenomenon.  Most explanations eloquently describe the outcome but miss the origin of the problem.

The tragedy of most discussions on inclusive growth is that the search for solutions suffers from pre-emptive thinking by those whose business fortunes are threatened by the true solution to the problem.

I refer specifically to the dominant participants of the value chain.

Who are the participants in a value chain?  In an agricultural activity, the participants are the input suppliers, the small farmers, the processors, and the buyers.  In a manufacturing activity, the participants are the raw material suppliers, the entrepreneur-craftsmen or the workers in the production line, the manufacturer, and the buyer.

We are made to believe that massive job creation, especially in the under-developed regions of the country, is the silver bullet to inclusive growth.

Whether it is hysterical blindness or feigned blindness that causes some intellectuals to articulate this laughable view of inclusive growth, the poor are not amused.  The problem is not lack of jobs.  No matter how many jobs are created, growth will not be inclusive if the reward obtained by each participant in the value chain is not commensurate with his input. Neither is the problem regional under-development. No matter how we develop the poor countryside including Muslim Mindanao, if the value created from development is not shared fairly by all those who created that value, growth will not be inclusive.  What part of this fundamental truth don’t some intellectuals understand?

The problem obviously is abuse of market power.  In a value chain, the various participants exercise varying degrees of market power.  The weakest participants often have no choice and are at the mercy of the strongest participants.  Fairness and equity are defined by the strong according to their own notions of how much largesse is enough for the weaklings.  The problem is made worse by an ecosystem dominated by intellectually lazy institutions.  I attended one forum on value chain financing where a senior executive of a financial institution crowed about his organization’s small farmer lending program.

The program was being passed off as an innovative scheme where small farmers get production credit provided they have an off-take arrangement from a Big Brother.  Who is Big Brother?  He is the large corporate buyer of the small farmers’ produce.  On the strength of purchase orders issued by him to small farmers, the latter get production loans.  Ergo, the small farmer has no option but to sell to Big Brother.  Ergo, the small farmer has no option but to accept the price set by Big Brother.  Ergo, the small farmer has no option but to abide by Big Brother’s payment terms.  It does not require a super sensitive nose for anyone to smell lopsided market power here.  Will Big Brother abuse this market power or not?  The answer, my dear, is written in the faces and pockets of our small farmers today.

How could have the financial institution done better?  Wasn’t it prudent risk management to require the small farmer proof of the marketability of his product?  Yes, except that proof need not be the easiest one available.  If it did its homework, the financial institution could have educated itself better on the demand-supply dynamics, including the distribution and post-harvest issues that impact the marketability of the product.  The financial institution could have used analytics to discriminate between the potentially good borrowers and the potentially bad borrowers.  Are these tools and information available to the financial institutions? Yes, they are available but our country’s financial institutions have never been known to invest adequately in these tools.  Everyone just intuitively moves with the herd, guided only by his outdated concept of good and bad risk. In terms of investment in product development and analytics, the financial institutions are not any better than the Philippine government whose notorious under-investment in long-term value-creating projects has brought about the predicable boom-bust cycles of the last several decades.  The only difference is that the financial institutions enjoy cyclical windfalls from the one-dimensional, high-risk trading business that masks their under-developed core revenue streams.

But then again, credit availability is not all that fuels market power.  Even if small farmers were to obtain production credit without having to pledge that precious purchase order from Big Brother, the latter would still wield tremendous power because of its deep pockets.  Here is where government must come in.  People create governments to protect them and to ensure fairness and equity in the market.  I am not suggesting price controls or price buffers.  Neither am I suggesting restraints on private contracts and trade transactions.  It has been proven time and again that these mechanisms don’t work.  But what is wrong with creating a registry for encumbered purchase orders so that financial institutions will have more confidence lending against these documents?  What is wrong with enacting a law criminalizing any breach of the conditions of this purchase order so that Big Brother will think twice before unilaterally altering his payment commitments to the small farmer?  What is wrong with emplacing a regulation that bans off-market priced contracts?  What is wrong with re-orienting the franchise of guarantee agencies so that they will exist not only for the lenders but also for the small farmers who face real risks in the production process and post-harvest stage?

The objective that we must not lose sight of is inclusiveness.  Whether the growth is big or small, it must be inclusive.  The fruits of any economic activity must be equitably distributed.  Any prescription that does not directly attack the lopsidedness of value chains will never acquire a life beyond the esoteric forums and academic discussions of the “learned.”

(The article reflects the personal opinion of the author and does not reflect the official stand of the Management Association of the Philippines. The author previously served as MAP president. He is the president and CEO of the Philippine Veterans Bank. Feedback at <[email protected]> and <[email protected]>.  For previous articles, please visit <map.org.ph>)