~ 1 ~ The Logic of the Natural State in the Philippines Miguel Antonio B. Garcia Department of Economics University of San Carlos Abstract The Philippines remains entangled in a web of economic, political, and social difficulty. Many have already pronounced the Philippines as a ȁdevelopment puzzleȂ or the ȁsick man of ‚sia.Ȃ The problem actually involves less of deeming the Philippines as impossible to revive the country towards development but more of recasting the problem with perspectives that would fit in addressing the issues. The path breaking framework proposed by North, Wallis, and Weingast (2009) appears to provide that promise of shedding more light to the compounding problems in the Philippines. We use GarciaȂs ǻŘŖŗŗǼ model of asymmetric equilibrium to describe the natural state. In the Natural State, there exists an asymmetric equilibrium creates various two types of elitesȯleaders and ordinaries. Leaders play Stackelberg when faced with ordinaries while ordinaries play Cournot-Nash with leaders. It turns out the institution of the Natural State and its rules in controlling violence naturally emerges when elites have asymmetric levels of power, that is, they cooperate and compete within their elite group. Keywords: The Natural State, Philippine Development, Asymmetric Equilibrium 1.0 Introduction The Philippinesȯas a state, an economy, and as a societyȯor in any way we may see it for that matter, is in a relatively bad shape: stagnating economic growth, debilitating corruption, and an identity crisis that has segmented our nation as Filipino. The country today, as Nye (2011a) illustrated, has writhed with increasing poverty and inequality, high unemployment, sluggish and disproportional economic growth across the country, low investments, a shrinking industrial sector, distortional yet high minimum wages, and the continuing Diaspora of high-skilled Filipino workers overseas. In addition, the Philippine economy lagged behind from our East Asian neighbors like China, South Korea, Taiwan, Thailand, and even Vietnam. Balisacan and Hill (2003) expressed that what may be insult to injury to our unfortunate state is when we know that the Philippines, compared to these countries immediately after the Second World War, was in a relatively better position with functioning infrastructures, a well-educated labor force, and strong commercial and military support from the United States. But since then, as De Dios and Hutchcroft (2003), Balisacan and Hill (2003) and Hutchcroft (1998) described, the health of the Philippine economy was failing. It