Regulations, institutions, and economic performance : the political economy of the Philippines'telecommunications sector

The author addresses the puzzle of sluggish investment in the Philippines'dominant telecommunications firm, PLDT. This case allows a study of the underlying causes of success or failure in a privately owned infrastructure sector in a developing country. Since its inception, PLDT has been privately owned and has had direct access to international capital markets. But its services have been deficient, in quality and quantity, since the early 1960s. Using a transaction costs approach, the author hypothesizes that contracting problems between various economic players are important determinants of observed outcomes. Poor services are attributed to factors that impede implementation of performance - improving implicit or explicit contracts, including regulatory rules and regulations. After reviewing PLDT's responses to events in the last six decades, the author demonstrates that the problem can be traced to lack of commitment to regulatory policies beyond the term of each administration - because a relatively weak legislature and judiciary are dominated by the executive branch. This system of governance is linked to the nature of Philippine society: a small elite engaged in competitive politics among themselves tries to bar the rest of the population from active participation, without actually denying their citizenship. The president of the coutry has great leeway in setting and implementing regulations, so the elite group associated with the president can unilaterally modify telecommunications policy in a way that serves its interests. Those in control of PLDT find investing in the company's highly capital-intensive facilities risky if they are not connected to the president's circle. As a result, the government has an incentive to redistribute quasi-rents through regulatory mechanisms. This imposes a strong"political business cycle"on PLDT's growth pattern: investment rises only in the early years of"friendly"administrations and remains low at all other times. The author establishes this relationship by empirical analysis. Despite the failure of cyclical investment, no attempt has been made to reform the regulatory system because most solutions require an institutional commitment to a set of rules and procedures that are either infeasible or contrary to the interests of the elite. Certain reforms are becoming increasingly feasible, however, as a new middle class develops and elite alliances shift.