The puzzle of why the Philippines has failed to develop economically has long been of interest to scholars studying the country and the region. As Paul Hutchcroft has put it, why is the Philippines in a “developmental bog?” The Philippines has widely been considered the exception to the rule or a laggard amidst the so-called economic successes of Southeast Asian newly industrialising countries (NICs). Some have attributed the cause of this problem to a weak state captured by a strong oligarchic class, while others have emphasised the historical impact of neo-colonialism and the Philippines’ continued dependence on the United States. Still others emphasise the Philippines’ poor macroeconomic policies and the country's inward-looking, protected economy.

Against the Philippines — an incessant aspirant to development — stands the contrasting example of Malaysia, a seemingly successful case of rapid economic development. Compared with the weak Philippines state, the Malaysian state is considered strong. This is because it has been consistently able to impose a development policy that seeks to eradicate poverty irrespective of race, and to restructure society by removing the identification of race with economic function. Also, Malaysia has kept an open economy and a tight rein over its macroeconomic policies. While the post-colonial political and social systems in both countries are substantially different, patronage and rent-seeking stand out as clear similarities in Malaysia and the Philippines. Yet, the persistence of patronage and rent-seeking has apparently not prevented growth in Malaysia, whereas it is considered a major explanatory variable for the continued economic underdevelopment of the Philippines.

The 1997 financial crisis that hit Southeast Asian countries brought the economic impact of rent-seeking, cronyism, and corruption to the fore. A considerable number of scholars were unanimous in blaming cronyism and rent-seeking as the root causes of the crisis. Before 1997, cronyism was a term largely used by academics and journalists to describe the Philippines and Indonesia. In fact, cronyism was coined to describe the process whereby Ferdinand Marcos distributed largesse to his family members and close friends.

This chapter discusses relevant aspects of the literature on rent-seeking, market reforms, and the state which inform this study. After expounding on the theoretical background, the fourth section deals with telecommunications reform issues in order to provide an introduction to developments in the sector and demonstrate why the case is a rich source of data for the puzzles dealt with in this book. The final section links the puzzles and arguments with the pertinent theoretical issues.

Rents and Rent-Seeking

James Buchanan, one of the founders of public choice theory, defines rent as that part of payment to an owner of resources that is over and above what those resources could command in any alternative use. Put another way, rents are incomes that are more than the income that an individual or a firm would have received in a competitive market. Some scholars categorize rents according to their origin — whether they are economic (market rents) or political rents. For them, rent-seeking is usually reserved for actions that lead to the capture of political rents. Thus, rent-seeking is sometimes defined as resource allocation by the state or through political means, as opposed to resource creation in the market. The underlying assumption is that political rents are inefficient, but market rents are not. This classification, however, misses out on hybrid forms of rents: for instance, those that originate in market performance but are sustained by the government to encourage learning, innovation, or development, and rents that are politically created but are reaped in a competitive market.

Khan enumerates no less than six types of rents: monopoly, natural resource, political transfer, Schumpeterian or innovation, learning, and monitoring. Monopoly rents emerge as a result of entry barriers, allowing a firm in protected markets to charge higher prices for their products. Entry barriers can be natural (when the technology of production involves economies of scale) or state-produced (via the creation of exclusive production rights). Natural resource rents accrue to the owners of scarce natural resources. Political transfer rents not only help redistribute incomes, but also to create new property rights, and often entirely new economic classes in developing countries. Schumpeterian rents reward innovation.

As the experience of most countries attest, re-regulation was necessary immediately after the introduction of competition to ensure that the market works. This is all the more true in the provision of public utilities like telecommunications.

This chapter focuses on regulatory reforms in the Philippines. The first two parts review the pre-liberalisation regulatory structure. A third looks at the regulator's failed attempts at liberalisation under the Aquino government. A fourth focuses on regulatory problems, specifically the weakness of the regulatory body, its lack of independence and resources, and its capture by the regulated. Next, the role of the regulator during liberalisation under the Ramos administration is considered as well as the regulatory impact of RA 7925. A sixth part looks into the problem of introducing regulatory reform and the role of a group of consultants in pushing for them. A seventh section summarises the chapter's discussion and arguments. Finally, the experience of the Philippine telecommunications reforms is summarised.

THE PUBLIC SERVICES COMMISSION

The Philippine Legislature passed Commonwealth Act 146 (CA 146) on 7 November 1936 creating the Public Services Commission (PSC) and empowering it to regulate the operation of public utilities such as telephone systems for the promotion of public welfare. CA 146 stated that a legislative franchise from Congress and a Certificate of Public Convenience and Necessity (CPCN) from the PSC were required for the operation of a public utility. The law also provided that permission to operate public utilities would only be granted to Philippine or US citizens, or to companies organised under Philippine laws that were at least 60 per cent owned by Filipino or US citizens.

Aside from controlling entry into the industry via the issuance of a CPCN, the PSC was vested with the authority to: (1) fix and determine “just and reasonable” rates; (2) require any public service company to construct, maintain, and operate any reasonable extension of its existing facilities; (3) require any public service to keep its books and to furnish the PSC with annual reports of finances and operations; and (4) penalise any company that violated or failed to comply with its CPCN. Because the law did not quantify what was “just and reasonable rate,” the Supreme Court established a 12 per cent rate of return on investments and assets as a fair level of profit.

The need for regulatory reform became evident after the adoption of privatisation and liberalisation policies in the telecommunications industry, as was the experience of countries worldwide. Although market opening greatly improved the availability of telephone services, regulations were needed to ensure the development of infrastructure in line with the country's needs, the presence of competition, and the protection of the public interest.

The chapter describes how Malaysia legislated regulatory policies and established regulatory institutions after privatisation and liberalisation. Interactions among state actors, the former monopolist, new private players, and international consultants shaped Malaysia's regulatory responses. International actors played an important role, but domestic political considerations were the decisive factors. In particular, the Prime Minister's strong commitment to the use of information and communications technology (ICT) and the development of information technology (IT) infrastructure as important for the country's next stage of development led to a forward-looking regulatory regime.

This chapter reviews the regulatory regime under JTM before looking into the creation of the Communications and Multimedia Commission (CMC), the new regulatory body that operates based on the principles of convergence. A final section summarises the experience of Malaysian telecommunications reforms.

REGULATION UNDER THE JABATAN TELEKOM MALAYSIA

In contrast to the Philippines, where telecommunications have always been in the hands of the private sector, a government department in Malaysia provided the services and regulated the sector before privatisation and liberalisation. Only after the corporatisation of Telekom was Jabatan Telekom Malaysia (JTM) directed to act as a separate regulator.

In 1985, the Legislature amended the Telecommunications Act 1950 authorising the transfer of JTM's operational responsibilities to its successor company, Telekom Malaysia (Telekom). Meanwhile, JTM was restructured to take on a new regulatory role while remaining an office under the Ministry of Energy, Telecommunications, and Posts. Section 3B of the Telecommunications Act spelled out the duties and responsibilities of the Director-General of the JTM:

1. The resolution of interconnection problems by drafting and promulgating clear interconnection implementation rules and regulations.

2. The establishment of a new pricing regulatory regime for wholesale services by providing guidelines for access pricing reform.

3. The establishment of a new pricing regulatory regime for retail services by providing guidelines for rate rebalancing.

4. The establishment of a new accounting regime by drawing up a uniform chart of accounts and cost allocation manual.

5. Increasing public knowledge on regulatory issues by setting up a website for the NTC and establishing an NTC-Industry Cooperation Council.

6. The promotion of convergence by commissioning a report on the regulatory reform need for convergence and drawing up a comprehensive guidelines for Internet/value-added service/Internet service providers.

7. The promotion of universal access, service, and obligation by drawing up a clear policy on the issue, and exploring the possibility of establishing a universal service or access fund.

8. The establishment of technical standards.

9. Licensing.

10. The management of frequency resources.

Outcomes of Agile Support for the NTC, as of 2002

1. The issuance of Memorandum Circular 14-7-2000 on the Implementing Rules and Regulations for the Interconnection of Authorized Public Telecommunications Entities on 14 July 2000.

2. The release of the Consultative Document on Wholesale Charging Regime, Access, and Interconnect Arrangements in July 2000.

3. The establishment in November 2000 of the NTC website, through which consultative documents, memorandum circulars, procedures for costumer complaints, and other information are made accessible.

4. The release of a comprehensive study on the outcomes of the SAS in January 2001.

5. The issuance of Memorandum Circular 6-9-2001 on the Implementing Rules and Regulations for Retail Pricing.

6. The release of the draft Revised Rules of Practice and Procedure for the NTC on 9 July 2001.

7. The issuance of the Implementing Rules and Regulations for Competitive Wholesale Charging for Interconnection Services (Memorandum Circular 09-07-2002) on 31 July 2002.

8. The issuance of Memorandum Circular 05-05-2002 on the Rules and Regulations on the Provision of High Speed Networks and Communications to IT Hub Areas on 13 May 2002.

This chapter deals with the development of the state and business in Malaysia and the Philippines, locates the reasons behind their characteristics, and outlines their interactions and power relations. The discussion emphasises crucial events that gave birth to the types of state and business class in both countries. In particular, the purpose of this chapter is to elucidate the rise of a relatively strong state in Malaysia, where a politico-administrative elite existed as early as the advent of independence, and the roots of the weak, penetrated state in the Philippines, with a poorly institutionalised and emasculated bureaucracy. While there are substantial differences between the two countries, patronage and rent-seeking are similarities that stand out but are not normally highlighted.

Malaysia is often depicted in scholarly accounts as a plural society where the concept of race is key to understanding its political, economic, and social life. Scholars often portray post-independence Malaysian politics as a form of consociationalism, whereby bargaining and consensus building among leaders of ethnic communities are the basis of government rule. However, the May 1969 racial riots marked the turning point towards a more pronounced Malay control of state power and the rise of a strong state that resolutely pursues its developmental goals. The launch of the New Economic Policy (NEP) signalled a strategy of active state participation in the economy to create a bumiputera business and entrepreneurial class through trusteeship guided by state institutions. This strategy of institutional trusteeship was replaced with individual trusteeship and ownership once the state believed that there were enough bumiputeras capable of building and running businesses of their own. Aided by state patronage and nurtured by the state under Prime Minister Mahathir Mohamad, a class of well-connected, mostly Malay, businessmen rose to prominence. This class of businessmen became the main beneficiaries of the state's privatisation and liberalisation policies.

By contrast, most scholars portray the Philippine state as weak because an oligarchic economic elite has continually raided the state and moulded state policy in accordance with its interests. The root of this economic elite is traceable to the landowning class that emerged during Spanish colonisation.

At the end of 2005, the Philippines had 34.8 million mobile phone subscribers and 3.4 million fixed line subscribers, leading to a total teledensity of 45.1 per 100 persons. According to the National Telecommunications Commission, the industry's regulator, Filipino mobile phone users sent an average of 250 million text messages per day or an average of 6 messages per person each day in 2005.1 Because of this, the Philippines has earned the moniker “Text Capital of the World.” This situation is a far cry from the condition in 1990 when then Singapore Prime Minister Lee Kuan Yew quipped that 99 per cent of Filipinos were on queue for a phone while the remaining one per cent were waiting for a dial tone. How did this huge change come about.

This chapter examines the first stage of reforms in Philippine telecommunications. The discussion is divided into five sections. The first looks into the adoption of liberalisation as part of the government's economic reform agenda and emphasises the role of President Fidel Ramos in the process. The second focuses on how the “coalition for reform” manoeuvred to liberalise the industry and the responses of the monopolist. The third looks into the implementation of liberalisation while the fourth analyses the passage of a law ostensibly to safeguard liberalisation gains. A final section summarises the chapter's discussion and arguments.

LIBERALISATION IN THE PHILIPPINES

As Chapter 4 detailed, PLDT successfully obstructed attempts to open the telecommunications market under the Aquino administration.This chapter discusses how an historically weak and penetrated state was able to liberalise the telecommunications industry in the face of an influential vested interest. In particular, liberalisation came about through decisive executive action and support from a coalition for reform, which identified the oligarchic control of the economy as the main reason for economic underdevelopment in the Philippines. A crucial factor in the success of liberalisation was the rise to the presidency of Fidel V. Ramos, who personally sustained efforts to open the economy and made such reforms a key aspect of his administration's agenda.