The Philippines Beyond 2000: An Economic Assessment by Ronald Yacat

0 -___.

Zy"

The Philippinesbeyond2000: An economicassessment edited by Josef T. Yap

Rahimaisa

Abdula

Myrna Austria Leilanie Basilio Marideth

Bravo

Caesar Cororaton Cristina David Alejandro Herrin Ponciano Intal Jr. Gonzalo Jurado Jose Magpantay Rosario Manasan Erlinda Medalla Blanquita Pantoja Celia Reyes Ramonette Serafica Edwin del Valle Jose/: Yap

Philippine Institute for Development Studies SuriansomgoPog-oora/Pangkaunloran ngPi_oinos

2002 by

Philippine Institute for Development 4/F NEDA sa Makati Building 106 Amorsolo St., Legaspi Village Makati City 1229, Philippines

Printed in the Philippines.

All rights

Studies (PIDS)

reserved.

The findings, interpretations and conclusions in this volume are those of the authors and do not necessarily reflect those of PIDS.

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to:

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ISBN 971-564-034-6 RP 03-02-500

STUDIES

Table ofContents Preface Chapter

vii 1

Assessment

of Economic

Performance

and An Agenda for Sustainable Josef T. Yap Chapter2

Chapter

Growth

The International Economic Environment and the Philippine Economy Ponciano 5. Intal, Jr. and Leilanie Basilio

3 -

Trade and Industrial Policy Beyond 2000: An Assessment of the Philippine Economy Erlinda M. Medalla

137

Chapter

4 -

Toward an Efficient Path to Food Security: The Philippine Case Cristina C. David

183

Chapter5

Philippine Employment and Industrial Relations

213 Policies

Gonzalo M. Jurado and Ma. Teresa C. Sanchez Chapter

6 -

Productivity Growth in the Philippines After the Industrial Reforms

253

Myrna S. Austria ChaPter

7 -

Productivity Growth of the Philippine Manufacturing Industry Caesar B. Cororaton and Rahimaisa Abdula

283

Chapter

8 -

Fiscal Adjustment in the Context of Growth and Equity, 1986-1996 Rosario G. Manasan

307

Chapter9

An •Assessment of Infrastructure Ramonette B. Serafica

Policies

395

Chapter

10 - An Assessment of the Health, Nutrition and Basic Education Sectors, 1992-96 Alejandro

439

N. Herrin

Chapter

Poverty Alleviation and Equity Promotion Celia M. Reyes and Edwin A. del Valle

Chapter

12 - Assessment and Policy Recommendations on the Social Sector Dealing with Agrarian Reform Marideth R. Bravo and Blanquita R: Pantoja

549

Chapter

13 - Assessment of the Economy and Policy Recommendations on the Social Sector

611

Dealing with Technology Jose A. Magpantay The Authors

489

Policy

655

Preface

his volume contains a set of studies that was intended to provide an economic blueprint for the Estrada administration. However, several snags delayed its publication, during which time a new president has taken over. Nevertheless, the recommendations con.rained in each study remain relevant, especially now that recovery from the 1997 East Asian financial crisis is faltering. Moreover, as the title of the book suggests, the focal point of the studies were policies that would be useful beyond 2000. One of the key messages of the book is that policy managers must give equal attention to the goals of macroeconomic stability and the enhancement of efficiency at the microeconomic level. With regard to the latter, many lessons can be learned from the East Asian experience,foremost among them are the importance of an effective bureaucracy and greater income equality cum lower poverty incidence. The former is equivalent to the current call for better governance. Unfortunately, the study on this subject intended for this volume never saw completion. The 1997 crisis has opened discussions on policy issues that had not been considered in great depth in this volume. For instance, the issue oll management of capital flows has gained prominence along with the revival of the debate on capital controls. Moreover, the current economic slump which is threatening even Singapore and Taiwan has bolstered skepticism about the efficacy of the Washington Consensus policies. Part of the volume, however, deals with the ahernative paradigms of economic development. Another consequence of the 1997 crisis is the emphasis on policy configurations at the regional and international levels. In 2000, the Chiang-Mai initiative was established and resulted in bilateral swap agreements among Japan, China, Korea and the 10ASEAN countries. A regional exchange rate arrangement in East Asia is being considered, vii

which may lead to full monetary union in the long-term. Meanwhile, the underlying theme at the international level is the restructuring of the global financial architecture. establishment of a world central way to more

modest

However, grand schemes like the bank and global currency are giving

proposals.

These developments would surely impact on the design of domestice policies, which is the focus of this study. While the aforementioned aspects of international economic policy have not been considered, this volume still contains the essential in the areas of trade, infrastructurel etc. In conclusion, the individual

authors

elements

of policy

I would like to extend

my heartfelt

gratitude

and their

for making

possible

the

associates

production of this volume. I wish to thank Dr. Mario president of PIDS, whose role in the project was marginal

B. Lamberte, albeit pivotal,

and Ms. Jennifer P. T. Liguton and the rest of the Research Information Staff (RIS) of PIDS for overcoming all the difficulties in getting this volume

to see the light of day.

*7Y

Josef T. Yap

vii

Assessmentof Economic Performanceand AnAgenda ForSustainableGrowth Josef

Chapter4

| JL

T. Yap*

resident

Joseph

Ejercito

Estrada

is in a similar

ation as his two predecessors. Like the dents, he inherited an economy reeling

unenviable

situ-

two post-Marcos presi from a crisis. Former

President Corazon Aquino presided over an economy battered by the 1984-1985 external debt crisis while immediate past President Fidel Ramos assumed office in the aftermath of the Gulf War and at a time the country was in the midst of an energy crisis. Nevertheless, the effect of the economic and social reforms implemented in the past 12 years

and the

smooth

and peaceful

transition

of government

should

provide the Estrada administration enough momentum to steer the country through the adverse effects of the financial turmoil that is gripping the East Asian region. However, it remains to be seen if subsequent economic programs will carry the Philippines into the next century under the mantle of sustainable growth and development. The current East Asian financial crisis raises very important issues. Foremost of these would be the sustainability and relevance of the East Asian miracle._ The phenomenal growth of many economies in the region

has been the subject

of rigorous

analysis

over the past ten

years. One section of this paper will attempt to explain the causes of this crisis. The discussion will help show whether certain policies and structures that were successful in the past are now ineffective and even inimical to economic nomic environment. The primary

growth

given the more open and competitive

eco-

objective

of this paper,

the

however,

is to assess

performance of the economy over the period 1986-1997 and determine how far the Philippines has come toward the goal of sustainable growth "This paper would not have been possible without the excellent assistance provided by Ms. Vanessa M. Sumo and the contributions of Ms. Maria Teresa Duefias-Caparas and Ms. Merle G. Oalvan. The usual disclaimer applies. ' This paper uses the terminology of the World Bank (1993). There are those who claim that no miracle was involved;nevertheless, what is referred to is the phenomenal growth of many of the economies of this region over the past three to four decades.

The Philippines beyond 2000: An economic assessment

and development. Special attention will be given to the economic program of President Ramos. To give an impartial and comprehensive assessment, a framework or set of criteria on which to base the evaluation must be established. One approach is to use the 1992-1997 Medium-Terna Philippine Development Plan (MTPDP) as a benchmark. The other approach is to adopt a broader framework by examining the determinants of long-run economic growth using both theoretical and empirical standpoints and see how close the Philippines has come to satisfying these conditions. The present crisis notwithstanding, valuable lessons remain to be learned from the East Asian experience. While it is acknowledged that there is no precise recipe that could be followed to replicate the performance of the tiger economies, a number of policies and condi_ tions that were undoubtedly necessary for their success have been identiffed. These will provide the empirical basis for evaluating the Philippine situation. After assessing the economy's performance for the past ten years, the next step would be to recommend a course of action that will achieve sustainable growth and development. The present financial crisis, however, complicates this task. Thns, policy recommendations will have to be modified accordingly, if not in their substance, then at least in their timing. It will be necessary to prescribe short-term measures that complement the longer-term policies to assure a smooth transition. The crisis makes imperative the evaluation of existing paradigms. There has been a serious debate on the government's intervention in the development process, and recent happenings may compel a shift to a different framework. For example, the crisis may have been brought about by adhering too closely to the neoliberal paradigm, suggesting that the associated policies carry benefits that are only transitory in nature. It may also be the case that the crisis was triggered by policies inconsistent with the accepted paradigm. Determinants of Economic Growth Sustainable growth and development refers to a steady upward trend in real per capita income combined with an improvement in. living standards. Keen interest in the study of long-run economic growth was revived in 1986 following the study of Paul Romer (1986) which signalled the advent of new theoretical models and started the proliferation of empirical models dealing with the determinants of growth. Prior to the modern growth theory, studies in this area revolved around

Chapter

the

1: Yap

standard

neoclassical

growth

model

of Robert

(1956).

model

simply

states

Trevor

Swan

higher

the more

increase

with

their

Their

capital

and/or

improvemelats

labor

Solow

that

is accumulated.

in technology

although

(1956)

and

output

becomes

Output

will also

it is not explicit

model how technological development is brought about. 2 in the standard neoclassical, framework, the determinants

economic ure

growth

1).

are factor

The faster

growth

rate

the

accumulation

growth

of output.

of capital

Hence,

are important

elements

the

administration

in the

Ramos

labor,

the

investment

rate

and

of economic

growth.

area

When

the

one result

dynamics will be

income

that

returns

to capital

does

Figure

1. Determinants

of the standard

an equilibrium

not change.

This

is because

where

a rise in the capital

/, Agriculture

Sa_,ing _1

--_

" \

Financial Sector \ Development I

are de-

a per capita marginal

stock

per worker

Growth.

,,._

Factor Pr°dactiviO'

'_ Capital gbrn.zatZon .. Hunza1_..f _" _I \. /2' . N,. _, / ,\ Macro",, N_ trition i Edvca ion ecorzor,,.ic ,,. , , t.. Stability

industrial

model run,

of diminishing

/nves{ m.enz

employment

and

neoclassical

is assumed,

Employm.ent

(Figis the

(Chapter 5). The driving in the next section.

or, in the long

of Economic

higher

The record

of emplo3anent

relations is examined by Jurado and Sanchez force of investment in East Asia is discussed

rived,

productivity

and/or

the

generation

and factor

-- Environ,'wnl

Exports

\\ Technological "-\ Developmen_".... \

O_ttward Orientation

fqea[tk l

[ International

Poverty Alleviation

Economic Environment

IT._'astrucLure

:In fmlctional form, Y =/-(K L. t) where K is capital, L js labor and r is a time trend representing technological development. The neoclassical framework implies that the functional form must satisfy certain conditions particularly diminishing marginal returns.

The Philippines beyond 2000: An economic assessment

results in a fall in the rate-of-return to capital. Thus, as more capital is accumulated, per capita income grows but at a slower rate until eventually output simply keeps up with population growth. The standard neoclassical model, also known as a conditional convergence model, supposes that after controlling for measures of government policies, poor countries tend to grow faster than rich ones. The assumption of diminishing returns to reproducible capital is also behind this result. Poor countries with low capital-to-labor ratios have high marginal products of capital and tend to grow at faster rates. A long-run constant per capita income is not consistent with historical data, and comparing the growth rates of poor and developed countries gives a mixed picture about conditional convergence (Barro and Sala-I-Martin 1995). in the standard neoclassical production function, what could bring about a change in per capita income growth is a change in t, the level of technology. But in the model t is exogenous, which implies that there are no explicit policy measures and channels by which the level of technology can be changed. Thus, the force that drives long-run economic growth is generated outside the system, which is definitely not a desirable situation. The shortcomings in the neoclassical model were corrected with the development of endogenous growth models. These models present the hypothesis that investment (either in physical capital, human capital, or research and development [R & D] activities) generates externalities that offset the decreasing returns to inputs. Externalities arise when an activity in one area or sector affects the activity in other sectors. This leads to the situation where investment in one sector does not result in diminishing returns for the aggregate economy because of its positive impact on other sectors (investment in computer technology, for example). This explains why rich countries, where technology development is more rapid, may be able to maintain or widen their lead over poor countries. Three factors could create the externalities but empirical analysis is needed to determine which factor is dominant in a particular economy. The first explanation presumes 'that increasing returns are incorporated in physical capital. As a result, an economy may growfaster ff it increases its investment rate in physical capital above the level which would have been decided autonomously by private entrepreneurs. This suggests that government investments that complement the socially suboptimal level of private investment can accelerate economic growth:

Chapter 1: Yap

A second interpretation stresses new ideas and new products, rather than capital accumulation, as the engine of long-term growth. This line of thought supports the hypothesis that international trade and foreign investment are the factors that create the externalities that make the growth process endogenous and self-sustaining. Outward orientation allows firms to have greater access to foreign technology without excessive expenses in R&D activities. The spfllover effects and the externalities of this access accelerate technical progress, raise the total factor productivity of the economic system and spur economic growth. A third interpretation stresses the importance of human capital. The increase in the stock of human capital is both the result of an increased rate of school attendance and of time spent in education, and an increase in learning related to production (learning by doing) by workers and managers. Some analysts emphasize the latter, saying that exposure to new products as a result of outward orientation accelerates the accumulation of human capital through learning spillovers. The result is a sharp rise in productivity and an increase in the technological capability of an economy. Hence, with the same level of capital and labor, growth can be accelerated if factor productivity_roughly defined as the quality of inputs into production--is enhanced through technology improvement or human capital deepening. The concepts and various measures of productivity and the Philippine record in this area are discussed by Austria (Chapter 6) and Cororaton and Abdula (Chapter 7). Cororaton and Abdula focused on the manufacturing sector, while Austria dealt with macroeconomic aggregates in measuring productivity. Some of their key findings are presented in Box 1. Meanwhile, in the endogenous growth framework, technology policy becomes an important tool for accelerating economic growth. The relevant aspects of science and technology policy in the Philippines are considered by Magpantay (Chapter 13). In developing countries, technological development and capital accumulation are not necessarily mutually exclusive processes. Advances in technology are usually embodied in new investment. While the experience of the East Asian economies in this regard vary greatly, the bottom line is that the economy must be able to absorb new technology, whatever its source. Herein lies the importance of human capital formation. The record of the Philippines in terms of human resource development is examined by Herrin (Chapter 10).

count

The Philippines

beyond

The neoclassical

production

for the depletion

of natural

ronment.

This suggests

2000: An economic

function resources

that output growth

assessment

can be modified and damage

to ac-

to the envi-

should be assessed

in terms

of its sustainability--a very important and relevant concept for developing countries. The record of the Philippines in environmental management is examined by delos Angeles (1998). To summarize, in the endogenous growth framework, long-term per capita income growth can result from spillovers either from technology diffusion

or learning

by doing.

Knowledge

of the determinants

of growth has tremendous policy hnplications for developing countries. On the one hand, policymakers can focus oll capital accumulation and employment generation and create the conditions favorable for investment;

on the other hand,

they can reduce

the emphasis

on investment

and ease the burden on the economy--nsually in the form of foregone consumption by accelerating the development of the technological capability of the economy tion from foreign sources. on this issue.

mainly through direct technology acquisiThe East Asia experience could shed light

Key Elements

Asian Miracle

of the

East

East Asia has been, the fastest

growing

region

in the world

terms of per capita income during the post-war period. A brief survey of the key issues which could help explain, the East Asian Miracle will be useful in identifying policies on which to base the assessment of the Philippine economy. Though hensive view' of the economic important

elements.

this exercise development

The reference

may not provide a compreprocess, it covers the more

to East Asia is used quite loosely in

this paper but is consistent with that in the 1993 World. Bank study which refers to the eight high-performing Asian economies or HPAEs namely, Japan, Korea, indonesia. There

Taiwan, I-Iong Kong, Singapore, has been

hind the reasons

an intense

debate

for the persistently

mies. One dimension,

spawned

Thailand,

Malaysia

and

over two key dimensions

be-

high growth of the East Asian econo-

by the work of Young

Kim and Lau (1994) and popularized

by Krugman

(1994, 1996) and (1994), considers

whether the primary source of growth was merely capital accumulation, or investment along with rapid growth in total factor productivity. The other dimension deals with the role of government intervention in the development process. While there is broad recognition that the I-IPAEs exhibit a range of government strategies, from extreme laissez-

Chapter 1: Yap

faire to extensive

intervention

in some

sectors,

and that some

of the

interventions were indeed beneficial., considerable disagreement remains over the importance and transferability of active intervention (Collins and Bosworth 1996). The essential arguments of these debates are presented in Annex At present, there

1. is no compelling

ticular

are, however,

position.

There

evidence

policies

that support

and conditions

a parthat are

accepted by the different paradigms on the East Asian are referred to as the basic supply side policies (Bertoldi

story. These 1997) or sim-

ply, the fundamentals

for their im-

portance empirical

for economic

growth3

The reasons

is described in this section. This paper does not present any evidence to show how the various economies subscribed to

these conditions. a cross-country

This is done to avoid comparative

analysis

presenting

too many

for some sectors

data since

will still be done

in the fifth section (Elements of recovery and economic growth). Two important features of the East Asian experience were earlier mentioned: human capital formation and outward orientation. They are the elements that are readily work of economic growth. Human

Capital

derived

from

the theoretical

frame-

FormatioD

Most of the recent

empirical

growth

models

introduced

an esti-

mate of human capital and found this to be a significant determinant of economic growth (e.g., Mankiw 1995). In the standard growth model, the level of employment ing. 4

is indexed

The availability facilitates

the transfer

by the level and quality of school-

of a well-trained of technology

and higlfly qualified

required

to increase

workforce

productivity.

Most empirical models, however, do not take into account the potentially significant positive implications for per capita income growth rates as increased education contributes to lower population growth rates (Collins and Bosworth 1996). The 1993 World Bank study on East Asia shows that in the 1960s, the levels of human capital were already higher in the HPAEs than in other low- and middle-income economies. Governments built on this base by focusing

education

viding

primary

universal

spending education

on the lower grades,

first by pro-

and later by increasing

the avail-

As in the statement "getting the fundamentals right." ' The model becomes Y = f(K, L' H, r), where H is an index [:orthe number of years and quality of schooling.

The Philippines

beyond 2000: An economic

assessment

ability of secondary education. Limited public funding of post-secondary education focused on technical skills, and some HPAEs imported educational services on a large scale, particularly in sophisticated vocational and technological disciplines. The result of these policies has been a broad, technically inclined rapid economic development¢ Outward entation

human

capital

base well-suited

to a

Orientation

The term outward orientation means two things: (1) export oriand (2) openness to foreign technology. Outward orientation

does not necessarily

imply an open

trade

environment

the HPAEs cannot be described as having free Kong and Singapore may be the only exception. The rapid growth of manufactured among them: (1) an accelerated economic

since many

trade

regimes.

Hong

exports has many benefits, specialization and techno-

logical progress by allowing exporting firn_s to learn by doing; (2) promotion of higher rates of capital investment in profitable export sectors, and of capital

(3) generation of foreign exchange needed goods (Asian Development Bank 1997).

The export performance macroeconomic framework

to finance

of the HPAEs was supported which prevented currencies

imports

by the stable from being

Overvalued. An active promotion of manufactured exports was a significant source of productivity change. In the case of the latecomers such as Indonesia, Malaysia, Thailand and China, the primary catalyst of their export sectors was the massive influx of foreign direct investment (FDI). The bottom line, however, is that export performance is directly proportional to a country's competitiveness, which in turn, is determined mainly by the nation's level of technological capability (Fagerberg 1988). 6The importance of technology can be gleaned from the recent theories

on international

trade

(Grossman

and Helpman

development of endogenous growth, theory. History shows that developing countries to foreign

state-of-the-art

to grow as rapidly spective

technology

as economies

of most developing

that closed themselves

failed to develop

or at least failed

of the East Asia region.

countries,

modern

1991) and the

technology

From the peris developed

sWorld Bank (1993),p. 15. 6A country's international competitiveness is its ability to produce goods and services that meet the test of international markets and simultaneously maintain and expand the real income of its citizens. This definition is cited in Haque (1995).

Chapter 1: Yap

abroad. The HPAEs, however, applied different modes of technology importation. Japan, Korea and Taiwan were selective on, even hostile to, foreign investment and it is no coincidence that they have the deepest local technological capability (Lall 1994). These countries preferred licensing arrangements and practiced "reverse engineering" extensively. The developing HPAEs, on the other hand, relied heavily on FDIs to stimulate their technological upgrading and enhance their productivity. A high investment rate was another important determinant of economic growth in East Asia. This element is also derived directly from the theoretical framework. Two factors are often cited as essential to rapid capital accumulation: nomic stability.

a high saving rate and macroeco-

Promotion of Saving A high level of savings provides the economy a ready source of investible funds. A larger pool of domestic savings also means less reliance on foreign sources, thus reducing the vulnerability of an economy to external shocks. The savings rates of the HPAEs were not uniformly high, though, until recently. Savings rates of developing HPAEs were lower than in Latin America in 1965 but exceeded the former's saving rates by almost 20 percentage points by 1990 (World Bank 1993). Four groups of variables appear to play an important rolein explaining saving behavior in Asia, particularly the HPAEs. These are demographic factors (including dependency ratios and life expectancy), government policies (broadly including central government savings, credit to the public sector, social security expenditures, and inflation), economic growth and financial sector development (Asian Development Bank 1997). Particular attention was placed on the financial sector which was described by Stiglitz (1998) as the brain of the economy. Policymakers in East Asia enhanced the safety and soundness of their banking systems through prudential regulation, developed the postal saving system to attract small depositors and savers in rural areas, and discouraged consumer borrowing to increase the flow of savings. Macroeconomlc Stabili(y Perhaps the most prevalent characteristic among the HPAEs was their adherence to a sound macroeconomic policy. Fischer (1993) de-

The Philippines beyond 2000: An economic assessment

fines a stable macroeconomic framework as a situation where "inflation is low and predictable, real interest rates are appropriate, fiscal policy is stable and sustainable, the real exchange rate is competitive and predictable, and the balance-of-payments situation is perceived as viable." The World Bank defines macroeconomic stability in the context of the HPAEs as a condition where "inflation was kept under control, internal and external debt remained manageable, and macroeconomic crises that emerged were resolved quickly, usually within a year or two." A stable macroeconomic framework encouraged long-term planning and investment and also contributed to the high savings rate. An environment of relatively high inflation creates price distortions. In particular, real interest rates will be negative and the currency will ap_ preciate in real terms. A high inflation rate also reduces the efficiency of investment and discourages it. Other conditions that were indispensable to the growth of the East Asian economies but were not derived directly from the theoretical model are: (1) creation of an efficient bureaucracy, (2) demographic transition; (3) agriculture development; and (4) relative income equality. Bureaucratic lgftlciency The most important contribution of the 1993World Bank study was to stress the relevance of the quality of institutions in the development process. While this is not an innovative view, the influence of the World Bank caused this factor to gain prominence in subsequent economic discussions. One of the institutional aspects is the creation of an efficient bureaucracy,which in the Asian Development Bank (ADB) report translates to effective governance, leadership and economic management, There is a general agreement that the excellent standards of the bureaucracies of East Asia are the result of their recruitment methods, of the seniority/meritocratic promotion system and of efforts made by the government to keep the administration insulated from pressure groups. There is a difference in opinion, however, on the specific role of the bureaucracies. One position asserts that a competent and efficient bureaucracy was essential in maintaining a stable economic framework and in imple_ menting superior basic supply-side policies. Eventually, in countries that intended to apply selective policies, their efficient bureaucracies

Chapter 1: Yap

were able to (1) select interventions

in sectors

with market

or coordi-

nation failures; (2) identify, through the use of performance criteria, selective interventions that did not work and abandon them; and (3) carry out policies that avoided excessive distortions in the structure of relative prices. These measures had a positive impact on growth by getting the fundamentals right and neutralizing the adverse effects of interventionist policies. classical framework. The second

This position

position

were able to organize

is largely

argues that because

efficient,

competent

supported

by the neo-

East Asian governments

and motivated

bureaucra-

cies, they were able to design and implement ambitious selective policies that transform initially backward economies into advanced industrial countries.

Rodrik

(1996) stresses

that the quality

of the bureau-

cracy enabled East Asian governments to avoid the rent-seeking ties that typically accompanied microeconomic interventions. Demograptn'c

Transit'on

The impact

of population

growth

on economic

growth

activi-

can be

positive or negative. A large population with a high dependency ratio strains the economic resources. On the other hand, a high population growth rate bloats the labor force of the country and increases the market size of the domestic from economies-of-scale. What is important

economy, though

making

it possible

is the change

to realize

in the structure

gains of the

population brought about by demographic transition. The ADB study shows that a large part of East Asia's spectacular economic growth derives from a working-age population bulge. 7 East Asia has had relatively more workers

(savers) and relatively

fewer nonworkers

(nonsavers)

compared with the rest of the world, in the case of Japan, however, this demographic "gift" will eventually become a burden. The challenge is how to make this burden less taxing. Agriculture

Development

Another factor that contributed to the strong economic growth of East Asian countries was the relatively high growth of the agricul_ ture sector. The ADB study attributes the strong performance agriculture sector largely to government policies, thus:

7ADB(1997),p. 142.

of the

The Philippines beyond 2000: An economic assessment

Green. revolution breakthroughs, mainly in wheat and rice production, were the result of public investments and management reforms in national agricultural research systems and public support for cooperative arrangements with key international agricultural institutes. The initial introduction of high-yielding varieties often simply involved a transfer of technology from international centers, but this was followed by adaptive research and extension activities organized nationally that were vital for deepening and sustaining the green revolution process. In addition, investments in ilTigation and other rural infrastructure (both public and private) in South and much of Southeast Asia were critical to the historically rapid growth rates in food production, as were the trade, commercial and industrial policy reforms that resulted in less expensive and more efficient fertilizer use. 8 The relatively strong agricultural growth in East Asia had several positive consequences: rural poverty was sharply reduced; and rising agriculture incomes improved the health, longevity and productivity of the rural poor. In some cases, higher rural incomes contributed to the relatively egalitarian structure of society which had a beneficial impact on economic growth, as will be discussed later. Higher rural incomes allowed the rural poor to invest more in education., which increased their productivity and facilitated their absorption into nonfarm emplo)Tnent. Finally, strong agricultural production helped stabilize price which contributed to the sound, macroeconomic framework. Income

D_stributlon

Contrary to the Kuznets hypothesis, the HPAEs achieved relatively low and declining levels of equality along with high economic growth. Japan, Korea, and Taiwan also had relatively egalitarian income distributions prior to the surge in economic growth. This was brought about primarily by radical land reform programs. In the case of Malaysia and Indonesia, strong inequalities existed between Chinese minorities and indigenous majority groups and, in the 1960s and 1970s, radical redistributive policies became a political priority. In the case of Malaysia, the Bumiputera policy was generally successful but a new elite class evolved giving rise to potential problems (Horii 1991). SADB (1997), p, 104.

Chapter 1: Yap

On the issue of income distribution, two key questions must be answered: (1) Is inequality harmful for growth? and (2) Are redistribution policies helpful for economic growth? A set of answers is summarized by Perrson and Tabellini (1994): 1) An egalitarian structure in society has a positive impact on economic growth. The perception that income distribution is relatively fair makes redistributive conflicts less frequent and intense. it also makes these conflicts easier to solve. 2)

On the other hand, where there are Strong income and wealth inequalities, there will be strong political and social pressure to carry out redistributive policies. If such policies create a situation where there is continnous concern for property rights and in the appropriation of returns to physical and human capital, they can become harmful for economic growth.

Perhaps the more pragmatic interpretation of the issue is that equitable wealth and income distribution is desirable but not a necessary condition for economic growth. Redistributive policies can be attempted as long as they do not create any uncertainty resulting in reduced investment levels. This is one reason why emphasis on human resource development is important. As mentioned earlier, education improves productivity and increases employment opportunities particularly in the nonfarm sector. Unlike land reform, expanding the access to appropriate education, especially for the lower income groups, is a neutral policy in terms of gainers and losers. What may be affected though is the fiscal deficit and hence, macroeconomic stability, but this is another matter. Reyes and del Valle (Chapter 11) examined the poverty and equity situation in the Philippines focusing on the Social Reform Agenda initiated by President Ramos. Bravo and Pantoja (Chapter 12) surveyed the impact of the agrarian reform program, especially its effect on agriculture productivity. Surprisingly, there is no mention of infrastructure development as a crucial determinant of rapid growth. Most likely, the level of infrastructure development during the initial growth spurts was not exceptional. But this does not diminish the importance of providing adequate infrastructure support to encourage investment and improve productivity. Serafica (Chapter 9) has evaluated the progress of the Philippine infrastructure sector over the past decade.

The Philippines

The

1997 financial

Asian miracle,

beyond 2000: An economic

crisis has cast doubt

it is therefore

imperative

assessment

on the merits

to examine

of the East

the causes

of the

crisis to determine if the fundamental supply side policies are still relevant. This is the subject of Annex 2. As a :final note on the elements of the East Asian miracle, the records

of Japan,

Korea

and. Taiwan

have been far from

exemplary

tela-ns of environmental preservation and their bitter experiences should be avoided. Unfortunately, the developing HPAEs seem to have missed out on this lesson. The latter part ofthis paper will discuss Philippines has suffered the same fate. Blueprint for Economic Development The performance of the Philippine

economy

whether

during the post-war

period has been directly linked to the fortunes of its industrial The various studies on this sector came up with the following conclusions (Medalla et al. 1995): 1)

That the more

than three

decades

costly in terms

of the inherent

of protection

penalty

the

sector. major

had been

on exports,

serious

very ad-

verse impact on resource llocation, and dynamic efficiency losses arising from lack of competition; and That a reform toward a more liberal, and neutral trade policy is necessary ization.

to propel

This is the basic

the economy

neoclassical

to a higher

view 9 which

level of industrial-

revolves

around

the

issue of comparative advantage. Economic protection in the past meant that resources of 'the country flowed into sectors where the Philippines did not possess a comparative advantage. Hence, production, particularly in the industry sector, became highly inefficient. The lack of competition deprived vative and adopt

the protected firms of the incentive to become innomore modern technology. This resulted in having

monopolistic firms that produced poor-quality goods and services at relatively high cost, the burden of which was passed on 'to the Filipino 9Aquote from Bernardo Villegas of the University of Asia and the Pacific Js a cruder but more succinct description of the neoclassical view of the Philippine development process: "The Philippines' downfall to being the sick man of Asia in the 1980sfrom a progressive economy in the 1960sis not due to commonly held reasons_ Not COla_aption-China, Vietnam., and Indonesia have con-upt governments, yet they have high levels of econolJ_icgrowth. Not resources (Japan), nor population (I-{ongKong). The basic reason is that the Philippines followed the Latin American model of mercantilism, protectionism, and state intervention."

Chapter 1: Yap

consumer. Moreover, such policies prevented export-led industrialization to take root in the Philippine economy. Filipino entrepreneurs simply made profit behind the protective cover of tariff waUs and nontariff barriers to trade, and did not aggressively seek to manufacture products where the Philippines had a distinct comparative advantage in the world market. The neoclassical framework has become the cornerstone of Philippine economic policy during the Ramos administration. Programs on deregulation (vs. mercantilism), liberalization (vs. protectionism) and privatization (vs. state intervention) have been simultaneously implemented with policies aimed at narrowing the fiscal deficit and stabilizing the exchange rate. Government intervention, as much as possible, has been limited to providing adequate infrastructure and the necessary social services to enhance human capital formation. The goal is to have rural-based industrialization that will modernize the agriculture sector, reduce such sector's employment share, increase the output share of industry, bring down poverty incidence and put exports at the helm of economic expansion. There is no compelling historical and empirical evidence in the East Asian context for making ta-ade liberalization, privatization and deregulation as the anchors of the economic program. There are other interpretations of the malaise in the Philippine economy which may lead to different policy prescriptions. For example, Rodrik (1996) contends that in describing the experience of developing countries, it has become common to lump together a wide range of policies under the label "import substitution policies." Confusion then arises because fail_ ures were often misattributed to microeconomic policies, when their sources lay either with unsustainable macroeconomic policies or bureaucratic and institutional shortcomings. The latter aspect is considered by Hutchcroft (1990, 1991), who maintains that the Philippine oligarchy has retained a dominant position over the state almost throughout the entire course of the country's modern history. The oligarchs' main economic base lies outside the bureaucracy, but they thrive upon particularistic manipulation of the pohtical machinery as the primary means of accumulating wealth. Because of the ehte's thorough penetration of the state, the bureaucracy has displayed little cohesiveness or continuity. In contrast, Thailand and Indonesia (and Japan and Korea, for that matter) are examples of more modern and stable bureaucracies. The non-insulation of the Philippine bureaucracy

from the particularistic

interests of the oligar-

The Philippines

chy can explain why selective ing activities.

beyond 2000: An economic

interventions

deteriorated

assessment

into rent-seek-

It is not surprising then that Stiglitz (1996), after a long exposition on the East Asian miracle, finally concluded that the real miracle of East Asia may be political rather than economic. 10Pursuit of this line of analysis rather ducted

is not feasible

unfortunate. to fashion Nevertheless,

in a purely

Perhaps a holistic

developmem

the economic

lowed closely the so-called

economic

framework,

which

study

be con-

a mulfidisciplinary framework

blueprint

Washington

could

for the Philippines.

in the past decade

consensus.

has fol-

This policy choice is

driven primarily by disappointment over the results of earlier import substitution regimes, frustration over the high-handedness of monopolies, the convictions of the country's economic managers and, as will be mentioned later, the dictates of the international policy environment. The effectiveness of this policy choice will be assessed in the subsequent sections. Needless to say, if the policy's programs do not yield the desired results in the future, then alternative explanations should deserve a closer look. Assessment

of Economic

Performance,

1986-1997

The Philippines has definitely come a long way from the political and economic turmoil that characterized the end of the Marcos regime.

Dttring the period 1986-1997, the Philippines

transformed

from

the "sick man" of Asia to an economy which stands to recover the fastest from the 1997 financial crisis, Gross domestic product (GDP) expanded at an average rate of 3.9 percent from 1986-1991 and 3.7 percent from 1992-1997. Per capita income measured in 1990 US dollars was US$426

in 1986 and stood

at US$502

as of 1997, an average

in-

crease of 1.5 percent per annum. Poverty incidence was 44 percent in 1985 and the last Family Income and Expenditure Survey (FIES) shows that the incidence declined to 36 percent in 1994. Accelerated economic growth from 1995-1997 has further brought 32 percent in 1997.

down poverty incidence

'to

10The critical questions that must be answered are: Why did governments undertake these policies? Why did politicians or bureaucrats not subvert them for their own selfinterest? (Stiglitz 1996, p. 174).The rhetorical question is not an m'gument for an authoritarian form of government. Rather, it is directly related to the need for good government in order to bring about successful selective intervention. However, this begs the question of how a good government is formed in the first place; hence the contention that it is a political rather than an economic issue.

Chapter 1: Yap

Other economic indicators also show a more robust economy. The consolidated public sector accounts yielded a deficit of 6.6 percent of gross national product (GNP) in 1986 but showed a surplus for the first time in 1996. Inflation has been on a downward trend from 1991 at least up to 1997. Export growth has been strong for the past six years and as a result, the share of the Philippines in the world market more than doubled, from 0.24 percent in 1986 to 0.40 percent in 1996. Despite the economic gains, there is no room for complacency. The same economic data show that the country still faces daunting problems. The number of families below the poverty threshold actually increased between 1985 and 1994, and between 1994 and 1997. Savings and investment rates still pale in comparison to the country's neighbors. Even with all the reforms in the trade and industry sector, the manufacturing sector has been experiencing a slowdown since the last quarter of 1995. And despite all the hype surrounding the economic performance, the GDP growth rate in 1996, which was the peak under the Ramos administration, was the second lowest in Southeast Asia that year at 5.7 percent. The succeeding pages will present a more detailed assessment of the economy. Economic performance will be direcdy related to the factors discussed in Sections 2 and 3. Much of the progress during the Ramos administration, for instance, could be attributed to developments in infrastructure: (a) the quick and decisive resolution of the energy crisis in 1992; (b) the deregulation of the telecommunications industry; and (c) the fast tracking of road infrastructure projects. On the other hand, the sharp peso depreciation and fiscal difficulties at the latter part of 1997 show that macroeconomic stability remains an elusive goal. It will be useful to classify the factors affecting sustainable growth and development into two broad categories. One category would be the elements of recovery and economic growth. This category would include the more aggregate factors, including trade and industrial policy, productivity trends, macroeconomic stability and infrastructure. The other category would include the microeconomic set of factors, which relates more to the sustainability of economic growth and the development aspect, encompassing technology policy, human resource development, poverty alleviation and equity promotion, and environmental management. The primary interface of these two sets of factors is productivity performance.

The Philippines

International

beyond

Economic

2000: An economic

assessment

Environment

The economic program implemented during the past decade should be evaluated vis-d-vis developments in the international environment to determine if policy measures are consistent with worldwide trends. The international economy is described as being increasingly open and integrated, which are the principal features of the globalization process. tributed to greater cific region

Major international policy developments have conopenness and competition especially in the Asia PaR

(Chapter

The General

2). Agreement

on Tariffs

and Trade

(GATT) Uruguay

Round, the most ambitious in the series of multilateral tions ill the post-war period, expanded the discussions

trade negotiato the hitherto

excluded sectors of agriculture, textiles and garments, and services. The Ulxlguay Round also deepened tariff reductions, lowered nontariff barriers and widened ment of the Uruguay

tariff bindings. But the most important achieveRound is the strengthening of the institutional

structure of international trading, especially the improvement of the dispute settlement system that came about with the establishment of the World Trade Organization

(WTO).

Meanwhile, the ASEAN Free Trade Area (AFTA) agreement the Asia Pacific Economic Cooperation (APEC) Bogor declaration toward tandem

and aim

virtually free 'trade in the ASEAN and Asia Pacific regions. In with trade and investment liberalization, the APEC member

economies

are also of formulating

"collective

action

plans"

to address

trade and investment facilitation issues like customs procedures, standards and conformance, and transparency in government procurement. Thus, the Philippines is facing not only a more open and integrated regional economy but also one where standards of trading and facilitation as well as domestic policies are increasingly circumscribed. The latter condition is actually the most forceful argument industrial policy. As Lall (1994) points out: "...the international

against scene,

the GATT, and the pressures

exerted

coun-

tries, are inimical to selective dustrial policy are increasingly

intervention...Many instruments of inconstrained in the name of liberaliza-

by the developed

Western

tion." However, he correctly asserts that if there is a valid intervention, then there should be a review of the international the game.

case for rules of

Chapter 1: Yap

Elements

of Recovery

and Economic

Trade and Industrial of the Manufacturing where

Growth

Policy and the Performance Sector

Not surprisingly, it is in the area of trade and industrial policy reforms under the neoclassical rubric are concentrated. The pri-

mary objective is to increase the outward orientation of the economy through greater trade hberalization. After the trade reform process was disrupted

during

the external

debt crisis

in 1984-1985, major

import

liberalization programs were implemented from 1986-1988. During this period, imports for more than 1,400 items were liberalized, bringing down the percentage of import-restricted items to less than 10 percent. This was followed by the second phase of the Tariff Reform Program, which narrowed down the tariff range to mostly within 30 percent. This was implemented by the Aquino administration under Executive Order was accelerated the Ramos to 10 percent 2004.

(EO) 470 covering the period 1991-1995. Tariff reform during the third phase of the program, this time under

administration.

EO 264 calls for a tariff

by the year 2000 and a uniform

range

5 percent

of 3 percent

tariff by the year

Based on empirical studies, the impact of the trade reforms is encouraging. Medalla (Chapter 3) shows that the average Effective Protection Rate (EPR) across all sectors declined from 44.2 in 1983 to 29.4 in 1990 and to 24.1 in 1995. The gaps in EPRs especially

between

agriculture

and the

and industry,'

import-substituting although exports

and between

the exporting

sector

sector have been significantly reduced. Moreover, remain penalized by the protection stn_cture, the de-

gree of the penalty has eased. Less sectors are now artificially profitable (i.e., they are profitable only because they are protected from competition), allowing resources to flow to areas where the economy has a comparative advantage and where For the entire manufacturing

they will be used more efficiently. sector, the domestic resource cost/

shadow exchange rate (DRC/SER) ratio" went down from 1.72 in 1983 to 1.54 in 1988 and further to 1.22 in 1992. These data show that the costs of protection

have been declining

relative

to the benefits

derived.

ii The measure of efficiency used in the study of Medalla (Chapter 3). The domestic resource cost (DRC) indicates the value of resources used to produce a unit of net foreign exchange while the shadow exchange rate (SER) indicates how society truly values foreign exchange. Thus a ratio of less than or equal to one indicates efficiency since the activity is using domestic resources whose cost is lower than value of the net foreign exchange it earned or save. The lower the DRC/SERratio, the higher the allocative efficiency.

The Philippines beyond 2000: An economic assessment

The latest estimates using data from the 1994 Census of Establishments confirm the trend with a 1.18 DRC/SER ratio for 1994, a clear improvement of the increase in the overall competitiveness of the manufacturing sector. Likewise, the share of highly efficient firms (0 < DRC/SER < 1) in terms of both total number and production value increased substantially over the period 1983-1992. The share fell slightly in 1994 but is still larger than the figure in 1988 (Table 1). These data imply that there is a greater number of efficient firms and that resources are used more productively. Not only has there been a reduction in the average DRC/SER ratio for manufacturing; there has been a leveling of the ratio across sectors as well. In 1983, the DRC/SER ratios for consumer goods, intermediate goods and capital goods were 1.43, 1.81 and 2.24, respectively. By 1992, the ratios for these types of goods were 1.21, 1.23, and 1.23, respectively. Partly because of the reforms in the trade sector, both total exports and the share of manufactured exports increased during the period under study. From only US$4.8 billion in 1986, total exports surged to US$20.5 billion in 1996 (Table 2). This represents an increase in the Philippines' share of the world market from 0.24 percent in 1986 to 0.40 percent in 1996 (Table 3). Its share, however, is lower than that of most East Asian economies. The proportion of manufactured exports also increased from 55 percent in 1986 to 83 percent in 1996. Exports, however, are still concentrated in electronics and garments (at least up to 1993for garments) revealing a slow pace of change in the structure of the trade sector. While it is true that the growth rate of gross valued added in electrical machinery, which includes electronics, has been relatively high in the past decade as a share of GDP, it increased from 0.9 percent of GDP in 1986to only 2.1 percent in. 1997 (Figure 2). This implies that the country's import intensity in manufactured exports is still high. Similarly, the share of value added in manufacturing in total output (as measured by GDP) has remained stagnant for the past ten years and is even lower than the value in 1980 (Table 4). The year-onyear growth of value added in the manufacturing sector in real terms has actually declined for ten consecutive quarters (1995 Q4-1998 Q4). The sectors adversely affected were garments, tires, and iron and steel. Medalla attributes this phenomenon to three factors: (1) the adjust_ ment (sometimes a painful one) to a more open trade regime, 2) an

Table

1. Resource

DRCISER

Allocation

Range

0<DRCtSER<

1,0<DRC/SER<

1.5

Efficiency Classification Highly

efficient

Effieient-Mildly

1,5<DRC/SER<2.0

Inefficient

DRC/SER> 2,0

Highly

DRC/SER<0

Inefficient

Negative foreign exchange earner/saver Average

Source:

and Efficiency.

Estimates

DRC/SER

by Medalla

t983

in Production Value (%) 1988 1992 1994

Share in Number 1983 1988

of Establishments (%) i992 1994

18.84

39,51

43.95

41,63

19.60

30.25

33.22

22,38

28.75

22.76

29,48

37.86

17.16

27.73

3I. 17

40.45

12,30

14.68

8.36

7.56

14.20

13.00

12.69

16,30

39.58

21.77

18.07

12.94

46.01

26.61

21.87

20.76

0.53

1.28

0.14

0.01

3.03

2.41

1.06

0.10

1.72

1.54

1.21

1.18

(1997).

Table 2. Value of Exports

by Major Commodity

Group I ( In US $miIlion).

Agro-

Elecl

Tolat Exporls

Based Pr,_tucls

Fores! Produc!s

Mineral Produc_s

Pe!ro[eunt Pr_luc_s

Manufaciures

1986

4842

1216 2.'_. 11

201 4. t5

539 1t.13

94 i. 94

2672 55.16'

1987

5720

133 2, _3

7O74

243 4.25 261

462 8.08

198 8

t2 96 22.66 1442 20.38

3.6 9

764 10.8

142 7 k','.25 1393 f7.:)2 1480

i97 2.52 94 I. 15 73

I6. Z] 15 56 t.5.81

1989

7821

1990

818 6

I991

884 0

ronic GarnleJlls

Special Transactions

Re-exporls

919 18.98

751 15.51

8 _. 17

112 2.31

3430 59,97

1119 1_._56

1098 19.2

7 0,12

149 2,6

_,_ e_

162 2.2 9

4338 6"1.32

1476 20.87

1317 18.62

27 0.38

80 1.13

,'_ V.a.

82 9 10.6 723 8.83 613

95 1.21 155 I.,_,'9 175

5192 66.39 570 7 69.72 640 3

1751 22. -_'9 1964 2 L99 22 93

15 75 20.14 1776 21.7 1861

10 _. I3 19 ;_.23 17

71 &91 95 1.t6, 82 "

0.8 3 57 0.58

6.9 633 6.43

1.98 150 1.52

72.4_ 72 98 74.15

2.5.94 2753 27.97

2 t .05 2140 2t. 74

,"L19 32 0.33

0.93 98 ]

45 0.4 26

686 6.03 780

136 1.2 132

872 9 76.74 10615

3551 31.22 4 996

22 72 19.97 2375

38 I). L_ 74

165 1.4_5 181

Equip! Paris

1992

9824

199 3

11375

1994

134 83

15 76 13.85 1675

199 5

17447

12.1 20 96

Ori9 38

5.63 893

O. 9.5 171

76.68 13 868

36.(;9 7413

17.16 2570

0.53 108

f..31 273

12.01

0.22

5.12

O. 9,9

79.49

42.49

N. 73

0.62

1.56

1996

20 534

1861 9.06 1899 7.5 _

42 0.20 45 0. _

772 3.76 764 3,03

273 1.3 "] 257 1.02

17106 83. ?f 21488 85, Ig

9990 48.65 13052 .51.74

242 3 11.8 2349 o _1

15 7 0.76 263 t,04

32 3 f.5 7 512 ).03

1997

25228

to total

in italics

2Breakdown of major Manufactures Source of basic data: BSP, Selected

(Garments and Electronic Parts/Equip) Philippine Economic Indicators

,-_,

_o t,,a ._.

_, •

Chapter 1: Yap

Table 3. share

to World Export

Philippines Thailand Indonesia Malaysia Singapore

- ASEAN.

1971

1976

1981

1986

1991

1996

0.34 0.26 0.38 0.51 0.55

0.28 0.32 0.93 0.57 0.71

0_31 0.38 1.28 0.64 1.13

0.24 0.45 0.75 0_71 1_14

0.25 0.80 0.82 0_96 1,66

0.40 1.09 0_98 1,53 2.46

Source: Key Indicators of Developing Asian and Pacific Countries, 1996,

Figure

2. Ration

of GVA in Electrical

Machinery

to GDP.

2.5

1,5 O

0,5

0 1986 Source:

National

overvalued

currency,

manufacturing, A more firms some

Income

1990 Year Accotmts,

1997

NSCB.

n and 3) the switch

in relative

'this time in favor of agriculture. open trade regime inevitably weeds

almost immediately because of the deluge time before the resources are reinvested

tors, which are usually export-oriented. akin to the "J-curve" effect of a currency

protection

from

out inefficient

local

of imports. It will take in more efficient sec-

The restructuring process is devaluation. In this case, the

manufacturing sector contracts because of the closure of noncompetitive firms but it should start to grow rapidly once resources are used more

efficiently.

_2The issue of whether or not the peso was overvalued is discussed in Box 2.

The Philippines

Table 4. Production Structure (In real terms).

beyond

2000: An economic

of the Economy

Percent

assessment

Distribution

INDUSTRY

1975

1980

1983

1985

1988

1990

1993

1996

1997

1. AGRif.FISI-_ERY,F OR,ES'_'Ky a, Ab'lqctflttlz_ industry b, For_U'y

24,74 21,06 3,68

23,58 20.54 3.00

22,04 20.00 2,05

2_.28 23,66 1.62

23.80 22,07 1.73

22,19 21.18 1.01

22.37 21,90 0,47

20.21 20.10 0.10

19,62 19.54 0.08

2, IND[JSTRY SEGI'OR a, M.i_:Lh'tg& Qu;.u'a'yizlg b. MamuGtc turlng t:. ConsL/aacLion d, .EIc.ct,G_,_ as_.dW_ttur

38,48 1-27 28,39 7,01 ;..82

40.59 1,50 27.65 9.41 2,04

41.01 1,41 26,49 10.70 2,4i

36,06 2.]4 25.87 5,22 2.84

35.56 1.79 25,95 5,09 2,73

3S.28 1,53 25,39 5.78 2,58

33,67 1,55 24.27 5,13 2.71

34.30 1.19 -_-34 8,60 3,18

34.27 1,09 23,9 6.15 3.12

3, SE I_.V'.IG.[a_ Sl?.CYrOIK a. TJ_ns., Comm. & Stor, b. 'li_adta c, FiJ_u_co d. O. Dwcllings & R. l--su_l.c ,_, Priwtte Secvice_ f. Government Servlcc,_

37.04 4.77 12,55 3.36 6.49 5.18 4.69

36.05 4.79 13.04 3,94 5,20 4,91 4,.17

38,44 4.97 13.68 3,80 3.29 6.45 4.24

41,50 5,69 14,90 8.08 5,78 7,04 5,02

4l .86 5.81 14.59 3,65 5.62 6.94 4.95

42.02 5.67 14.83 4.14 3._4 6.81 5,03

42,26 5,75 15,06 4.00 5.53 6.83 5,10

41.56 5,77 14.77 4,37 5.17 6.61 4.87

41,63 5-88 14,54 4,64 _.07 6.56 4.94

G]<OSS DOMESTIC PRODUCT

100.26

100,I9

101.49

102.84

100.92

99.49

98.29

96,06

95.53

N6;I.factor 01co1:t3¢. from abroad

-0.26

-0,19

-1.49

-2.84

-0,92

0.51

_.71

3.94

4,47

GROSS N'AT/ONA.L PROISUGT"

100.00

]00.00

100,0O

100.00

100,00

Source: The National Accounts of the Philippines, NSO.

The restructuring rency was allowed

process

to depreciate

would have been smoother in real terms

following

if the cur-

the increase

demand for imports. The lower value of the peso would have acted as a cover for import-competing industries. Because of the overvaluation of the peso import-competing firms were hit with a double-whammy: lower tariffs and an artificially strong peso both of which made imports cheap. sector

The low value added of electronics also contributed to the stagnation

and garments in the export of the manufacturing sector.

But an overvalued cnrrency could also explain why exports are heavily concentrated in commodities that are import-dependent. Because it is relatively cheap to import, exporters can be sourced from abroad, making added. The slowdown nant share

focus on products whose inputs labor the primary source of value

of growth in the manufacturing

in total output

can also be traced

sector and its stag-

to low labor productivity

and high unit labor costs, two measures that are arithmetically This aspect will be considered i_ngreater detail in a subsequent In the overall, the Philippines its outward

orientation

has taken great

and is becoming

2004. This progression is dovetailed Despite the policy reforms, however,

strides to enhance

an open economy

to the process manufacturing

related. section.

by the year

of globalization. growth has not

Chapter

1: Yap

performed up to expectations (Table 5). This is related to exchange rate policy and, as will be shown later, the poor record in labor productivity and total factor

productivity

growth.

Sector

Performance

Agriculture The agriculture

sector,

which

13 accounts

20 percent of GDP and over 40 percent poorly since the 1980s. The Philippines

for slightly

than

of employment, has performed had one of the lowest growth

rates of agricultural gross value added and exports among developing Asian countries over the past two decades (Table 6). Measures of revealed

comparative

advantage

.(Table 7), land and labor

productivity

(Table 8), and shares of major agricultural exports to world trade have declined over time indicating declining competitiveness of the sector. The three

major

causes

of such

poor performance

are: 1) increased

protection of the agriculture sector especially when compared to the manufacturing sector; .(2) widening price distortions within the sector; (3) inadequate agricultural support services; and (4) distortions in the land market. The bias against

agriculture

caused

by price

and trade

policies

was corrected by mid-1990s when nominal protection rates of importcompeting agricultural commodities were raised (particularly corn, sugar, rice as shown inputs

declined

in Table 9), implicit

(fertilizers,

agriculture

tariffs

on traded

chemical/and

agricultural

farm

machiner-

ies) .and protection of the industry sector was reduced. Intervention policies have become generally more favorable to agriculture as EPRs rose to levels that are almost equal to that of the manufacturing sector in the recent period. Consequently, improvements in agricultural incentives were accomplished at the cost of greater inefficiencies in resource allocation arising

from widening

price distortions

against agricultural exports country has less comparative agricultural

exports

within agriculture,

specifically

in favor of corn, sugar, and rice where the advantage in production. The bias against

was also exacerbated

by the substantial

apprecia-

tion of the peso in real terms between 1990 and early 1997. Moreover, the rising trade protection caused the significantly higher

domestic

able agricultural detrimental

prices

of rice, corn, sugar,

products

to significantly

not only to efficient

resource

poultry

and other import-

increase,

which in turn, were

allocation

within

_3The discussion in this section is largely based on David (Chapter 4).

the crop

The Philippines

Table

Source:

5. Quarterly Growth 1994Q4-1998Q1.

National

beyond 2000: An economic

Rate

for the

Manufacturing

94Q4 9501 9502 95Q3 95Q4 9601

6.50 6-63 8.26 6.36 6.04 4,90

95Q4 9601 96Q2 9603 96Q4 9701

6.04 4_90 6_23 6.34 4.90 2,33

96Q2 960_3 9604 9701

6_23 6.34 4.90 2.33

9702 9703 970.4 98Q1

5.33 4.34 3.80 1.30

Income

Table 6. Average

Accounts,

Growth

assessment

Sector

NSCB.

of Agriculture

Value

Added

1980-1990

and Exports.

1990-1996

GVA

ExpoI_cs

GVA

Exports

Philippines Indonesia

1_0 4.9

-4_6 4.7

1.6 4.5

5.5 12.1

Malaysia Thailand

3_8 3.9

3_ 1 4.9

2_0 2_9

9.9 6.1

" 1990 - 1994 only Sources: Key Indicators,

Table

7. Trends

Revaled

Agriculture 1980 1985 1.990 1995

Includes

ADB; Trade Yearbook,

2.9 2.4 1.5 1,2

FAO; National

Comparative

Income

Accounts,

NSCB.

Advantage.

Cocomxt

Sugar

224, ] 212.3 21.0.8 1.81.2

12.1 7.6 3,8 1.5

Banana

Pinelxpple

30_4 31.2 23.3 13.8

82.2 91..6 69.7 40.5

fisheries

b Note that sugar has been historically exported than the world prices). Hence a value greater

to the US typically at a place (i.e., higher 'than unity in this case does not reveal

comparative advantage. However, the sharp declining trend a rapid deterioration in comparative advantage. Source: Trade Yearbook, FAO; International Trade Statistical

may still be intm3preted Yearbook.

Chapter 1: Yap

Table 8. Growth of labor and land productivity percent). Labor

1980-1985 1985-1990 1.990-/995 Source:

Production

Table 9. Nominal

Rice Corn Sugar Copra Coconut oil Copra cake & 1heal Bananas, pineapple, tobacco, abaca Pork Chicken

Source:

Estimates

Land

-4.4 :1.6 -0.5

Yearbook,

of the crop sector (In

Cultivated

Crop

-2,0 0,4 0.2

-1..3 1.7 2.0

FAO.

Protection

Rates.

1985-89

1990-94

1995

1996

1997

16 67 154 -6 7 0 0

19 76 81 0 18 0 0

68 127 104 0 10 0 0

65 69 113 0 5 0 0

49 105 60 0 0 0 0

43 39

31 74

44 84

by David

(1998)

using

Bureau

of Agriculture

Statistics

(BAS)

data.

sector (where relatively more of the scarce land resources are allocated to less socially-profitable crops), but also to the growth of the livestock and poultry sectors, and to the agro-processing sectors that were penalized by the artificially high domestic prices of feed ingredients and sugar, and resulted in lower supply of importable agricultural raw materials. The excessively high protection of major food commodities also had adverse effects on equity because the majority of rural and urban poor are net buyers of the highly-protected food commodities. High food prices also put pressure on wages making labor-intensive manu_ facturing industries less competitive relative to the low wage-cheap food economies such as Vietnam and China. The WTO agreement has not accelerated trade liberalization in agriculture. On the contrary, it has delayed the original schedule of the trade liberalization program, as new tariffs replacing quantitative trade restrictions were higher than previons book tariffs rates and the nominal protection rates computed as the ratio of domestic and border prices.

The Philippines

beyond

Thus, reductions

in tariff

by 2004 will only accomplish

rates

2000: An economic

assessment

'the pro-

grammed tariffs for 1995 as embodied in EO 470. The Philippines now has the highest nominal protection rates on major food commodities, as evidenced by a comparison of domestic prices of corn, sugar and rice across ASEAN countries. posed

Furthermore, to have been

be the mechanism ucts.

Since

the quantitative abolished under used to regulate

the new tariffs

trade restrictions which are supthe WTO agreement continue to imports

are excessively

of major

agricultural

high (100 percem

prodin many

cases), the volume of allowable imports under the lower in-quota (or minimum access volume [MAV]) is often adjusted to prevent increases in. domestic up to 2004.

wices.

Rice has 'been exempted

tariff sharp

from tariffication

The continued use of quantitative trade restrictions rather than tariffs promotes rent-seeking, reduces government revenues, incurs bureaucratic cost and worsens the National Food Authority of international Another

price uncertainties, it has also engaged (NFA) or the government in the business

trading, better left to the private sector. source of malaise in the agriculture sector is the exist-

ence of a weak property rights structure in the land market. As land becomes increasingly scarce, long-term investments in land improvements and flexibility in land market transactions (sales and rental) to facilitate

changes

in land use/cropping

patterns,

as well as land man-

agement patterns (small vs. land farm vs. contract .necessary to maintain agricultural competitiveness. Government ever, have stifled

upland, policies the efficient

and agrarian

operation

farming,

reform

etc.) are

programs,

of land markets,

how-

lowered

in-

centives for long-terna investments in land improvements and tree crops, and eroded the collateral value of land. Thus, agricultural loans in real terms and as ratios to gross value added in. agriculture and total loans have been declining since the 1980s. Most of the uplands (i.e., with a slope over 18 percent) are still classified as public land and hence, full property rights cannot be conferred,

even

agroforestry

in slightly

sloping

areas

or livestock

pasture.

The granting

suitable

for crop

production,

ofa variet_y of user rights

arrangements (Certificates of Stewardship Contracts, Community est Management, Industrial Forestry Management Arrangements) been

quite limited

and does not confer

terms

other

the very low rental, fee for pasture

hand,

of tenure

any collateral

the limited

and non-transferability

Forhas

value because of rights.

On the

leases has led to excess

Chapter 1: Yap

demand with rights to large parcels erful families. The

situation

has

been

being allocated

exacerbated

to politically

by the agrarian

powreform

program's slow and uncertain implementation, as well as certain provisions which increased distortions in land markets resulting in unintended negative effects. The threat land sales, even after land transfer, investments

because

of land refoml and restrictions in lowered incentives for long-term

of the risk of not reaping

the returns.

Although

difficult to empirically document, these largely explain, the rapid cutring of coconut trees for lumber, the limited availment of the govern•ment coconut modernization

replanting of sugar

sugar production

program, and the limited investments in the milling factories or 'in the mechanization of

despite

low milling

efficiency,

rising

real wages

relatively large farm sizes. By contrast, the performance duction, where land reform has been largely accomplished has been much better. The confusion Agrarian tional

Reform

in the implementation

tion of agrarian

reform

Comprehensive

(CARP)was aggravated

by the lack of a na-

policy and weak

since the expecta-

Program

land use or zoning

of the

and

in rice proby the 1980s,

promoted

controls

the premature

conversion

tural land use for non-agricultural purposes. One more issue in the sector's performance

of agricul-

is the inefficient

al-

location of public expenditures in agriculture. While public expenditures in this sector have recovered since the late 1980s, funds have been allocated mostly for redistributive purposes (agrarian reform and market subsidies) and for strengthening natural resources and. environmental management, rather than on long-term productivity-erffmncing investments to reverse the sector's declining competitive advantage. Close to one-fourth of public expenditures has been allocated for forest rehabilitation and protection; while another one-fourth was spent on the agrarian reform program. Although about half of the agrarian reform

expenditures

redistributive puts,

was spent

in nature

cooperative

on support

services,

most of these are

such as subsidies

for credit

programs

development,

and others.

percent of the budgetary allocation ity •to stabilize the price of rice. In contrast,

Another

went to the National

to12

Food Author-

budgetary

allocation

for irrigation--the

est item of public expenditures

between

1974 and 1984--dropped

since the Agricultural

and in-

10 percent

single largsharply

mid-1980s, constituting only about 8 percent of the total. research or technology generation was severely

The Philippines

beyond 2000: An economic

assessment

underfunded with only 0.3 percent of agricultural gross value added, in contrast to an average of 1 percent among developing countries and 2 percent to 3 percent among developed countries, and eqnivalent to only 5 percent of total agricultural public expenditures. Public expenditures for agriculture continue to be disproportionately in favor of the rice sector. tural expenditures Natural Resources

Rice accounts

for about

half of agricul-

(excluding the Department of Environment and [DENR] appropriations) but accounts for less than

15 percent of the gross value added of the sector. Aside from the budgetary allocations for irrigation and price stabilization, other expenditures that favoured rice production are in extension, land redistribution, credit programs, subsidies for feeds, fertilizers, farm machineries and post-harvest facilities. In contrast, budgetary allocations for the exportable subsector have been qui_e meager tax imposed by the overvalued peso. The issue is not only the level of public

considering

the implicit

expenditure

and its allo-

cation, but eqnaUy important are the inefficiencies caused by weaknesses in the bureaucracy in terms of its organizational structnre, incentive problems and instability tem, as well as the weak linkage to promote modities.

technological

Employment, The common

in leadership. A fragmented R&D sysbetween research and extension failed

development

in many major agricultural

Wages and Productivity thread that links the performance

com-

of the agri.cul-

ture and manufacturing sectors is their low level of labor productivity and the adverse impact of an overvalued currency. Productivity trends will be discussed in this section while the exchange rate policy will be considered in flae section on macroeconomic stability. A simple framework adopted variables. dard

from

Haque

(1995) will be used to relate

all the relevant

A country's per capita income, taken as a measure of the stanof living, can be expressed as the product of labor productivity,

the proportion

of the labor force that is employed,

the labor force par-

ticipation rate and the country's terms of trade with respect to the rest of the world. The exact relationship can be described as follows: v =

Y,P

. L N*

. N* N

Chapter 1: Yap

In this case,

real per capita

per employed

person

output

income

v is equal

(Y.P/L) deflated

to the value

by the cost of living index

d, and multiplied by the product of the rate of employment L/N* and the labor force participation rate N*/N. Y is total output or GDP in a given period, P the price of output, L the number of persons employed, N* the size of the labor force, and N the size of the population. Let the cost of living index d be measured by the geometric mean of domestic and foreign prices (P and P* respectively) with proportional

weights

come spent written as: v

where

(that is, d _ pc. p,(7-b)), where on domestic

goods.

Y • [P'hcJ'_)

Then the above

Y/L is output per employed

P* is the ratio of domestic This section

b is the proportion

can be re-

. N*

worker,

to foreign

equation

of in-

or labor productivity,

prices,

will look at the behavior

or the terms

andP/

of trade.

of labor productivity

and

employment and their contribution to economic growth. An exchange rate depreciation generally leads to an improvement in the terms of trade.

That

is why an overvalued

currency

is detrimental

to growth.

Meanwhile, movements of N*/N capture the demographic that was generally beneficial to the HPAEs.

transition

Data show that employment grew by a net of three million during the perio d 1993-1996 or an average of one million a year (Jurado and Sanchez in Chapter 5). This is short of the MTPDP target of 1.1 million per year, but the performance is quite commendable. The improvement led to a decline of the open unemployment rate from 8.6 percent in 1992 to 7.4 percent in 1996, an extension of the trend since 1987 (the beginning of the Aquino ment rate stood at 9.1 percent.

administration)

when the unemploy-

The direction of movements in nominal wages, however, is upward while labor productivity is stagnant (Table 10). Compared to other ASEAN countries

and China,

the Philippines

is at the tailend

in terms

of productivity performance between 1975 and 1996 (Table 11). As a result, unit labor cost in the Philippines, which is the ratio of nominal. wage and labor productivity, and 1995. For the entire while

has significantly

Philippines,

for the manufacturing

sector

increased

between

1987

unit labor cost rose by 19 percent, the unit labor

cost rose by 21 per-

The Philippines

Table

10.

Philippine

Nominal

Yea:" 1987 1988 1989 1990 1991 1992 1993 1994 1998

Wage

Table

Indexes,

1987q995

An economic

assessment

(1992=1.00).

Averag_ Labor Pr<Muetivtty

Real Wage

U_xit Labor Cost

Share of Labor in GDP

(p) 0.59 0-65 0.70 0,80 0.93 1,00 1,07 1,17 1.26

(h) 0.99 1.02 1,06 1.06 1.04 ] .00 1.00 1,02 .1,04

(w/p) 0.85 0.86 0.96 1,00 1,00 1.00 1.00 1,05 1.06

(w/h) 0.50 0.55 0,63 0,75 0,89 1.00 1.07 1.2I 1,29

(w/ph) 0.86 0.84 0,91 0.94 0.96 1.00 1.00 1.03 .[,oa

by Jnrado and Sanchez (1997).

11. Indices ture

2000:

implicit GDP Deflator

(w) 0.50 0.56 0,67 0,80 0,93 1.00 ] .07 i.23 1,34

Source: Estimates

beyond

of Average

and

Labor

Manufacturing

Productivity

Overall,

Agricul-

(1975_-100).

1975

1980

1985

1990

1996

ChiJaa

over_

100

122

131

140

_..

Indonesia. (1993 prices)

overall agri. mftg

DO _ DO" 100 :_

126 104 J.55

13J ] 21 194

148 114 242

204 b 160 b 310 b

Malaysia (1978 prices)

overall agri mftg

100 100 1.00

125 133 104

138 158 ]18

161 20:1 143

216 281 1.81

Philippines (1985 prices)

overall agri ml:tg

100 100 100

119 117 119

92 100 96

102 109 108

99 108 100

Singapore (1985 prices)

overall agri rnftg

100 100 100

116 11.4 115

137 194 128

171 177 171

233 288 272

Thailand (1988 prices)

overall agr:i mftg

100 100 100

116 101 121

132 1.i13 133

181 118 178

297 234 210

1976 b 1995 Data sources: Intal (1996); ADB Key Indicators,

1988 and 1997.

Chapter 1: Yap

cent. Judging from the simple model above, the problem is more with stagnant labor productivity than with rising nominal wages.14 Real wages have remained practically constant over the period 1989-1995 and econometric studies have shown that wages are not the primary source of inflationary pressure m the Philippines. As pointed out earlier, wages respond strongly to food prices. The high food prices in the Philippines, in turn, can be traced low productivity in the agriculture sector.

to the price distortions and Ultimately, it is productivity

that drives the movement of unit labor costs in the Philippines. The sluggish labor productivity is mirrored in the trend, of total productivity_

Econometric

estimates

by Austria

(Chapter

6) show

the

erratic behavior of growth in total productivity with most of the values in the negative axis (Box 1). A cross-country study conducted by Collins and Bosworth (1996) shows that the Philippines has the lowest average growth in total factor productivity between 1986 and 1994 (Table 12). What then are the causes of the sluggish performance in labor productivity and total productivity? Based. on the model on economic growth

specified

earlier,

one factor

is a low domestic

which means that not enough capital labor force. Because of limited capital diminishing creases.

returns,

Table 12. Annual

1960-73 1973-94 1973-84 1.984-94 1960-94 Source:

Collins

labor

Growth

productivity

Rate

investment

stagnates

as employment

in n

of TFP, ASEAN.

Philipplales

Malaysia

Indonesia

Thailand

0.7 -1.1 - 1.3 -0.9 -O.g

1.0 0.9 0,4 1.4 0,9

l.l 0.7 0.5 0.9 0.8

1,4 2.1 I. l. 3.3 1,8

and Bosworth

rate

is accumulated to support the resources and the operation of

(1997).

_4The variable wage, w, is not explicit in the model and does not affect per capita income v. It can be surmised though that w and P have a positive relationship. Hence the conclusion that low labor productivity Y/L is the more critical reason for high unit labor cost.

The Philippines

Two other factors

beyond 2000: An economic

are infrastructure

development

assessment

and social sec-

tor' policies, particularly underinvestment in human

those related to education. Persistent resource development has had a cumula-

tive impact on productivity ever, were able to improve

growth. The East Asian economies, howtheir productivity mainly through enhanc-

ing their

technological

capability.

Investment

in R&D partly

explains

this phenomenon. For the developing HPAEs (i.e., indonesia, Malaysia and Thailand), technological upgrading came principally through foreign direct investment

(FDI). The importance

of FDI in enhancing

productivity

the Philippine case is verified by the econometric results of Austria (Chapter 6) and Cororaton and Abdula (Chapter 7). Data on FDI also show that the Philippines garnered lower shares than ASEAN members who are also HPAEs (Table 13). China, by far, had the largest chunk of FDI and this explains

Table

13. Average countries

its phenomenal

growth

during

the last decade.

Share in Total FDI (of developing of the ADB).

Cou.nlry

1985-90

1990-95

Philippines Indonesia Malaysia Thailand Vietnam China

5.71 8.15 15.85 ]3.89 0_11* 41.64

3.20 7_72 17.57 9.69 0_17 54.61

member

"1988-1990only Source: Key Indicators 1997,ADB.

This finding then raises the question host country. By studying the behavior sures conducive to foreign investment, tracting

winners"

rather

of what

attracts

FDI to the

of FDI and implementing meapolicymakers cma focus on "at-

than on "picking winners."

Some studies

have

shown that the key determinants of FDI are political stability and macroeconomic stability (De Jong and Vos 1994). The econometric results of Mercado-Aldaba (1995) and Lamberte (1993) indicate that the real effective exchange rate is a significant variable in explaining the amount of FDI inflows into the Philippines. The lesser the real appreciation of the peso, the greater tion of macroeconomic

the inflow of FDI. This is the closest stability in their models.

representa-

Chapter 1: Yap

The exchange

rate emerges

as a key variable

in the discussion

far. It must be properly managed to maintain macroeconomic stability and competitiveness. The challenge becomes greater in a more open and integrated

international

economy,

Investment, Saving, and Macroeconomic Investment

Fiscal Adjustment Stability

is at the heart

of economic

growth.

Data in Table 14

show that the Philippines has a very low investment rate compared to the HPAEs and China. This is probably the most crucial factor in explaining the mediocre performance of the Philippines and the concomitant poor labor productivity. One reason for the low investment rate in the Philippines is its low savings rate. It was noted earlier tionally

that the HPAEs exhibited

high saving rates. This is gleaned

Table 14. Gross

Domestic

Phili.ppincs Thailand Indonesia Malaysia Singapore Ch.i.r_a

Investment

from

excep-

the data in Table 15,

(In percent

of GNP).

1971_1980 Average

1981

1986

1991

1996

26.7 25_9 24.8 20_5 41.1 34.2

30.6 26.3 25_4 35.0 46.3 27.8

12.9 22.0 28.9 26.0 38.2 38,7

20.2 42.7 32,0 35.8 35.1 35.4

23 _7 41.0 39.0 41..0 34.5 38_7

Source: Asian Development Outlook, various years.

Table 15. Gross

Domestic

Philippines Indonesia Korea Malaysia Thai.larld

Saving

Rate (In percent

of GDP).

1971_80

1990

1996

1997

23.4 21..6 22,3 30.4 22.2

18.7 32.3 36.2 33.4 34.2

18_8 30.2 35.2 42.6 33_7

19.2 31.0 34.5 43.8 3J .0

Sources: ADBKey Indicators and ADO 1998,

The Philippines beyond 2000: An economic assessment

Both the low investment and savings rates in the Philippines are related to the country's poor' record in macroeconomic stability. The economy has been. plagued by periodic boom-bust cycles, making it difficult to maintain a stable environment suitable for long-term decisions. This is the gist of the options approach to investment behavior (Box 3). During the period 1992-1997, the Philippines showed marked improvement in terms of macroeconomic stability. Inflation was on a downward trend, the current account deficit was under control and the consolidated public sector account recorded a surplus for the first time in two decades. Added to this was a rising M3/GNP ratio (Figure 3) which indicated a greater amount of savings flowing into the formal financial sector and the economy's increased ability to absorb credit into 'the system without generating inflationary pressure. It was in this period, however, that economic managers faced new threats to macroeconomic stability and at the same time had to contend with old ones.

Figure 3. Ratio of M3/GNP (1980-1997). 45

_' 20

...........................

..............................

_5 .................... 10 ..................................................................

5 .......................................................................................................... 0" 1980

1981

I982

1983

1984

1985

1986

1987

1988

1989

[990

1991

1992

1993

1994

1995

1996

1997

t_LfiO

Sources:

Selected Philippine Economic

'Indicators, BSP.

The liberalization of the capital account in 1992 and the surge in global capital flows has significantly changed the parameters of macroeconomic policymaldng and financial regulations in the Philippines. Table 16shows the composition of foreign exchange flows of the country from 1990-1997 focnsing on the capital account. Medium- and longterm loans, rather than FDI, have been greater sources of financing, similar to the external borrowing episode in the mid- to late-1970s. Unlike

Chapter 1: Yap

that period, however, private sector debt.

MLT loans

in recent

The FDI flows were dominated early 1990s and privatization proceeds indicates

that

the Philippines

export-oriented on a net basis sharply

times

have been primarily

by debt conversions during the especially in 1994 and 1995. This

is still a laggard

in terms

of attracting

FDI_ Contrary to popular perception, portfolio capital is relatively low although the level of gross flows rose

in recent

years.

The breakdown

of portfolio

capital

reveals,

however, that nonresident portfolio investment has been positive and increasing since 1991. The accumulated nonresident portfolio investment for 'the period 1991-1996 is slightly over US$5 billion. Given that the foreign exchange reserves of the Bangko Sentral ng Pilipinas (BSP) hover around US$10 billion, large and sudden movements in nonresident portfolio variables. Based rea,

capital will have a tremendous on the experience

the periods

impact

of Southeast

of large net capital

inflows

on macroeconomic

Asian countries were associated

and Kowith rapid

expansion in the banldng sector, in their foreign liabilities, deposits and domestic lending. The Philippine experience in the past three years seems to indicate a similar trend. The sharp rise in foreign liabilities of commercial banks contributed to the rapid, increase in loans and advances to the private sector and the total assets (Tables 16, 17, 18 and 19). Thus, it is apparent

of the banking system that the soundness of

banks' credit decisions has a large bearing on whether the capital flows will eventually result in a robust economy or undemaine the growth process. This situation makes prudential regulation by the BSP a very important function and greater transparency in the bank lending process a significant issue, is The greatest mize asset

challenge

price volatility

to macroeconomic

in the face of these

managers capital

flows.

is to miniFigure

shows that among the ASEAN countries and China, the Philippines had the highest appreciation of the real effective exchange rate between 1991 and 1996. Because of its sharp devaluation in 1994, China had a real exchange rate depreciation. The extent of the appreciation may have been higher if the Bangko Sentral ng Pilipinas had not bought dollars in the market to increase demand for foreign exchange. This intervention, however, had limited effects

because

of International

tsQuoted from Intal and Llanto (1998).

Monetary

Fund

(IMF)-imposed

ceil-

The Philippines

Table

16. Foreign

Exchange

beyond

Flows

2000: An economic

assessment

(In US$ million).

I990

1_191

I992

I993

I994

I995

1996

1997

'l.i-ade Balance

-4020

-32H

-4695

CcuYcnt

-2567

-869

-858

-6222

-7850

-8944

-11342

-10708

-3016

_2950

-3297

,,391q

ShorI-T{_rm C_LplLOLl ,13el MT21"LO_tllS, rl_:(

I9 674

349 835

-,1303

660 633

-148 3155

10(12 I313

-56 1276

54{1 !090

495 4688

b'J)t, _¢t

528

PO_'LfO[iO, net

-5t5

_529

_/5

864

1289

1361

133_

1117

I,25

-52

269

248

- 170

-4_

Levels Account

Non-residents,

rlct

-52

1,25

I55

897

90I

I485

2101

-55

603

289

-299

674

1574

42II

119

Share to CDP "ll'adc Balance Curt'cut Accourlt

-9.07 -5.79

-7.07 -1.9I

-8.86 -I.62

-11.44 -5.55

-i2.25 -4,60

-i2.(/8 -4,45

-I3.54 _,67

-I 2.87 -5,17

$ho_l.-'l_tJ_n Capital.net M.LT Lomls, n_:L l"J)[, nC:t. Pot-tfolio, net Non-vcsiclu nts, nck b213s

0,04 1.52 1.19 -0. t3 -0,12 1.36

0,77 1.84 1, I6 (/.28 0,28 (I.09

1,25 1.19 ].27 0. I2 0,29 0.55

-0,27 4.52 1.59 -0.10 1,65 -0.55

1,56 2.05 2.01 0.42 1,41 1.05

,,0,08 1.72 1,84 0.33 2,/1(I 2.12

0,6..I 3.21 1.60 -0.20 2,51 5.03

0,59 5.63 1,34 -0.55 -0,0? 1.43

K:B,_

Sources: BSP, Selected Philippine Economic Indicators.

ings on monetary

aggregates.

The BSP had to sterilize

the monetary

effects of its dollar purchases in the market and this put upward pressure on domestic interest rates. This, in turn, attracted more capital inflows

which partly offset the sterilization

measures.

Lamberte

estimates the offset coefficient at 0.88 for the Philippines, than estimates for ottler countries (Leung 1996).

(1995)

which is higher

Sterilization measures also carried a quasi-fiscal cost owing to the interest differential between domestic and international interest rates.

High interest

ment spending. The most sustained

rates

effective

prudent

also have a dampening response

fiscal policy.

influence

to large foreign It makes

monetary

on invest-

exchange

flows

policy

more flex-

ible and reduces pressure on the domestic interest rate by reducing the public sector borrowing requirements. The challenge is how to maintain a tight fiscal policy without sacrificing much-needed public sector expenditures particularly in infrastructure. In her review of the fiscal policy for the period (Chapter

8) commends

decade.

From

the depth

during

public

secShe was

due to the large

and

ditures

inflow

expenditures

(MOOE) which

of GNP in 1986, the consolidated

the last

tor deficit reached a surplus in 1996 equal to 0.2 percent of GNP. notes, however, that the bulk of fiscal adjustment in recent years government

6.6 percent

1986-1996, Manasan

of fiscal adjustment

of privatization

proceeds.

on maintenance suffered

major

Capital

outlays

and other operating

cutbacks

during

expen-

the adjustment

Table I7. Foreign

Exchange

Liabilities

1990

199I

$6 Share Amounl _

of Debt

Medium arid Long-'R_rm IMF Otlaers Short-'_rm Trade Non-Trade By B ormv_

as of the dates indicated 1992

_ Share

to "_,141

_tmo_nt

to "R)tal

28349

100

29956

100

24.73 997 2_176

84._ r 3.49 8138

25129 1165 2_64

4376

t5.33

_R399 277

14.36 097

1993

% Share Amount

(In US$ million). 1994 a

% Share 1o Total

19517 •

_ Share Amount

to"_tal

1997

_ Share Amount

._tmot:nl

to "R_tal

30934

100

34282

100

_I079

100

37778

100

41875

I03

45433

100

83.$9" 3.89 80.00

25Rr8 It,83 2c_95

83.01 3.82 79.18

292_ 1_12 27935

85._1 3.83 81.49

:81882 1I_9 307_3

85.98 3.07 82.91

3:_99 814 31685

86_03 2.15 83.87

34668 405 34263

82.79 0.97 81.82

36994 8_9 3{t05

81.43 1.96 79Ar7

4627

I6.11

5256

16.99

5035

t4.69

5197

I4.02

5279

13.97

7207

1721

18.57

4589 2_

15.62 0.79

4937 819

15.96 1.O3

3495 I540

10.19 4.49

3401 1796

9.I7 4.84

2874 2835

7.08 6.90

4Cf36 3111

9.78 7._

4082 4407

8.$7 9.70

1,.-'2

3777_

1430

28549

10,3

2_-* 56

100

30934

100

34282

103

37079

45433

100

20744

72.66

2"2_,91

75.08

21_20

86._58

31_79

92.9".*

34052

91.84

3T591

88.92

33244

79.:a_

34768

76.53

16958

59.40

18453

61.60

ZI'J_.5

70.29

8786

13.26

4038

13.48

4975

16.08

26583 2_'69 1_14 5296

77.54 72.83 4.71 I5.45

27193 25526 l.r_ " 6859

73.'44 68.84 4.50 18.50

26340 2_.886 1454 7251

69.72 65.S7: 3.85 19.19

23_132 22943 1189 9112

57.63 54.79 2.84 21.76

22271 21303 77_ 1_97

49.02 q7.09 [ .93 27.81

7805 5481

27.34 I920

7465 5325

2¢l.Wz /7.78

4214 2303

13.62 7.44

2403

7D1

3027

8_16

4187

11.08

8632

20:t

10664

23.4r7

6.18

1288 1115

3.76 8.25

855 2172

2._ 5.86

I212 2975

8221 7.87

1-_5 72.U

3.3_ 1723

2q99 8165

5.50 17.97

Banking Central, Banglm 13ank_

Bank

of th_ PhJl_.

Senta'a]

ng pitipina_ 2324

B"3 Cre_dtor B&nks da Other 8tapp_e_ Mul tila _eral Bilateral O r_hor_

Fin_'ldal

Irtst.

8.14

Zlq0

285q9

11491 2312 6005 8547 194

40.28 8.D 21.03 29.94 0.68

7.14

1911

29"-*56

1,30

3,9934

leo

342/52

10,3

37079

37778

lC,3

41875

1_3

45433

I00

11007 2802 6499 9_;72 76

36.74 9.35 21.70 31.95 0.25

9407 2963 7168 11328 68

30._ 9.58 23.D 86.62 0.22

5985 5185 7949 13360. 3799

17.46 929 23.19 Y<03 I1.97

5529 3_9 8216 15033 4752

14.91 9.57 22.16 40.54 [ 2._2.

63q5 2587 8028 14_3 6426

16.80 6.85 2125 38.D 17.01

8373 2.588 _634 134_ 8._,41

20._ 6.18 20.62 32.09 21.11

D/76 23'$9 8638 13307 10953

22.40 5.19 19.01 29.29 2_,11

° As adjusted; excludes "Due to Head Office/Branches Abroad" accounts Includes cumulative foreign exchange revaluation on US$ denominated end-1996, $417 million for Mar 1997 and $$87 million for Jun 1997. Source:

Bangko

Sentral

ng Pilipinas

41875

Amount

Non-Banking Public Public (b/3 & Others) Central Bank - BDL Private

1C,3

to "It'*tail

_a Share

to qa>tal

Amount

to "R_tal

I996

% Share

(BSP)

amounting to $519 million for end-1994 and $861 million for end-1995, multi-currency loans from World Bank and the ADB of $817 million for

The Philippines beyond 2000: An economic assessment

Table 18. Loans Outstanding

of Commercial

A. Classified by Economic Activity I- AgtJculture Fisheries. & Forestry 2. Mining & Quarrying 3. Mantffacturing 4, EIectlJcity, Gas, & Water 5, Construction 6. WhoIesale& Retail Trade 7. TransportalSon, StoJ:age, & Commun,ication 8, Fin lnst,, Real Estate, & Bus. Se:cvices 9, Community Social & Personal Servi,ces TOTAL B. Growth Rate (%) 1, Agri.cu.ltore, Fisheries, & Forestry 2. Mining & Quan'ying 3. Mantffaetming 4. Electricity, Gas, & Water 5. Co_lstruetJon 6, Wholesale & Retail Tra&: 7, Transportation, Storage, & Comnaunication 8. Fin Inst., Real Estate, & Bus. Services 9 Con_munity. Social, & .Personal Services TOTAl,, C. Share (%) •/. Ag_Seultm-e, Fishcri.es, & Forestry 2. Mining & Quarryirtg 3. Manufaeturi'ng 4, Electric ty Gas, & Water 5. Co_struct, ion 6. Wholesale & Retedl. Trade 7. Transpoctation StoJ'age & Conamullicatioll 8. Fin hast,, Real l_state, & Bus. Services 9. Commmlity Social & Personal Servi.ces TOTAL 1 Peso and Foreign Accounts preliminary. Source: Commercial Banks

but excluding ,Monthly

1994

1995

1996

1997

49845.0 5585.6 1.89457.5 13199.4 18019.6 95089.6 25988.4 99333,7 46277.0

59603,0 87]0.6 253638.9 16460.3 24759.8 130568.1 44708.0 1.23943.9 74867.8

63433,9 9529.3 361555.9 31368.9 431.32.1 180281,4 68556.7 244422.1 117984,2

70705 1623 424255 4,2024, 51590 230765 101253 348477 131485

542795.8

737260.4

I]20264.5

1416785

8.1 _48,1 32,5 25,7 32.3 39,8 53.8 37,4 -10,4

1.9.6 55.9 33.9 24.7 37.4 37,3 72.0 N.8 61.8

6,4 9,4 42.5 90.6 74.2 38.1 53.3 97.2 57.6

11.5 70.3 17.3 34,0 19.6 28.0 47.7 42.6 11.4

25,4

35.8

51.9

26.5

9,2 1.0 34.9 2.4 3.3 17.5 4,8 18.3 8.5

8.1 1.2 34.4 2.2 3.4 [7.7 6.1 16.8 10.2

5.7 0.9 32.3 2.8 3.9 I6.I 6.1 21.8 10.5

5.0 1. 29.9 3.0 3,6 ]6,3 7. 24.6 9.3

100.0

i00.0

100

of local banks'

foreign

transactions

Statements

Banks x(In P million).

offices

o,f Condition,

period have not been restored to their normal levels. With the impending sharp fall in tariff revenue following the 'tariff reduction program, it remains to be seen whether the fiscal position is sustainable. Following the 1986 Tax Reform Package, the tax effort of the Philippines has reached a level comparable with its Asian neighbors (Table 20). Direct taxes experienced the highest increase with revenue from individual tax being the fastest growing item in the period 1987-1996 (Table 21). Corollarily, there was a general downward trend in individual tax evasion rate during the same period.

Chapter

1: Yap

Table

19. Indicators

of Banking

Activity*,

1980-1997

(in percent

GDP).

Year

Total Assets

Total Deposits

1980 1.981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

56_8 58.5 60.2 69.5 57.1 51.9 43_5 42.1 42.8 45_4 50_3 48.1 51.1 58.6 62.5 70.7 85.4 90.0

30.7 29.0 30_0 32,3 26.2 26.0 24.0 23.0 24.9 27.3 29.0 29.4 31.6 37.8 40.7 45.8 51.0 53.2

*Commercial Banking System Sources: BSP Statistical Bulletin, various search

Figure

4. REER

250 -1

200

1SO

r I_

.. .''_ Ph,bppmcs

I_PROC !_

of Selected

Loal_s& Advances to Private Sector 30.9 32.4 32.7 36.3 23.7 19.4 1.3.9 15.5 15.0 16.8 18.9 17.6 20.2 25.7 29.1 37.2 49.3 51.8

yem-s; BSP Department

Asian

Countries

of Economic

1975-1996.

[ I

Thailand

--N-- Ir_donesia

]

L"_-M_!_'w_!(L--I

1Or3

Year

Sources: Estimates by Intal and Basilio (1998).

Re-

The Philippines

Table 20.Tax

Effort

percent

beyond 2000: An economic

in Selected

Asian

Countries,

assessment

1991/1994

(In

of GDP).

Indonesia Malaysia Philippines Singapore Thailand South Korea

1991

1994

17.2 21_2 1.4.6 15.8 17.6 14,9

15.5 21.4 16.0 16.9 16.8 16,9

Source: Estimated by Manasan (1998) using revenue data from the Govenament Finance Statistics and GDPdata from the International Finance Statistics,

revenue

Revenue from import duties was the fastest growing source of from 1987-1992 but the growth phinged during the period 1993-

1996 as a result

of the tariff reform

program.

Despite this development,

the Philippines still has the highest tariff revenue effort compared with its Southeast Asian neighbors. This is an indication of the extent of •adjustment

the Philippines

open trade regime. A cause for concern

has to undertake

as it moves toward

is the deterioration

in the overall

a more

tax buoy-

ancy coefficient from 1.41 in 1987-1992 to 1.15 in 1993-1996 (Table 22). Buoyancy measures the percentage change in tax yield given a percentage change in the tax base. tax administration. Onthe tal spending

expenditure

The decline

is a reflection

side, the unabated

does not sustain

economic

decline

growth.

of a less effective in MOOE and capi-

Aggregate

capital

out-

lays of the national government shrank from 4.6 percent of GNP in 1975-1985 to 2.9 percent in 1986-1991 before settling at 2.7 percent for the period 1992-1996. The total public sector investment, however-which incorporates the national government, government corporations and local government units--increased from 4.3 percent of GNP m 1.9861991 to 5.2 percent from 1992-1996. A more detailed analysis of the structure of the Consolidated Public Sector Deficit (CPSD) reveals, however, that the government overadjusted

its fiscal position.

surplus surplus. include

is consistently higher than a computed sustainable primary This condition holds even if transitory adjustments which temporary revenue measures, underspending on MOOE and

capital

outlays,

and one-shot

Manasan

privatization

shows

that

the actual

receipts--are

primary

accounted

for.

C3 r_

Table 21. Ratio of National Government Revenue to GNP, 1976-1996 (In percent).

TOTAL

REVENUe.

197"5-1985

I986-]99]

1992-1996

1986

1987

19_8

1989

1990

1991

1992

•i99g

1994

1995

1996

12.90

15.97

18.18

13.29

,5.39

14.25

16.71

17.44

17.52

17.36

_9.36

lg.44

lg.01

10.98

I2.81

11.4t

i3.43

14.0[

i4.40

15.06

L5.34

i5.62

15.85

16.15

"IAX REVE

NTUE

11.26

I3.12

15.67

lncome

and

2,85

4.07

5,4.5

3.21

3.25

3,46

4, I2

4.56

4,82

5,06

4.99

3.29

5,58

5.98

1.46 1.10 0.23

1.75 1 30 1.02

2,60 1,90 0,94

1.44 1,00 0.78

1.90 t.11 0.34

1.64 1,00 0,82

1.67 1.2t 1.25

1.78 1,45 1.37,

1,92 1.65 1,25

2.2l L.h5 1.20

2.39 1.70 5._9

2.53 1.97 0.79

2.65 1.94 0.99

2.99 2.10 0.90

2,02 2.31

2.59 2.76

2,11 3.61

2,75 2, _7

3,38 2,98

2.47 2.48

2.73 2,82

2,67 2.98

2.0l 2.85

1,99 3.02

2,02 31,66

2,28 3.33

2.10 3.71

2,I2 4,07

PrrJ:t]Is

CorT, or art', lndiv-ldual O_hers' Excise S_cs T,ax_VAT and

L]ccnses

Other

Domestic

0.91

0.62

0.94

0.54

0.50

0.75

0.65

0.67

0,57

0,74

_.65

[,2._

0.9g

0.96

lmporl

"D_lqies

Ta)_es

2,91

3.08

3.57

2.21

2.70

2,24

,t.10

3.13

4A5

4.25

4,04

3.47

3.48

3.00

Exporl

Taxes

0.26

0,03

0.1t

0.002

0.0004

1,64

2,,$4

2.50

2.31

2.58

2.g4

3.28

2.70

3.04

2,45

. 2.02

3.74

2,59

1,84

1.47 0.19

1.94 0.54

J..72 0.15

1,2_ 1.06

1.72 0.67

1.83 0,_4

Z. 12 0,7£

t .90 0.41

. 2,34 0.37

2.04 0.27

1.77 0,13

i ,97 0.04

1.37 0.05

I.$9 0,02

0.48

0.70

0.19

0,76

0.46

0.39

0.33

0.14

0.11

1.72

1.17

0.25

NON-TAX REVIZ, NUE of xvhich: Collecti*,n Granl_ Sale

frona

O(hd21' O _fic_2s

of Asset_

Source." Estimates

by Manasan (1997) using government

revenue from Bureau of Treasury; GNP from National Statistical

Coordination

Board

The Philippines

Table 22. Overall 1996.

Buoyancy

TOTA b "lAX .[_ldixdch_al

I._lcome

Coefilclents

assessment'

of Major Tax Groups,

1976-

!.976-1986

[987-1996

i987-1992

1993-1996

0.93

1,31

1,41

1, I5

Tax

0,62

!-02

1,67

1.53

T_LX .I.,,iten s,es

0.90' 0.95

1,00 1,52

1,57 1-43

1.67 1.67

!#,£VENU_

Co_,'por_t e It]come Sales "15x/VAT alld

beyond 2000: An economic

Excise

21t×_s

.l.22

0.80

0.60

1.14

Import

Duties

0.71

1.25

1,88

0.29

_'Refersto average for 1980q986. Source: Estimates by Manasm_(1998).

The overadjustment ernment following

may actually reflect the prudent stance of the govthe debt crisis in 1984-1985 and its continuation

should help in riding out the present crisis. The overadjustment of the fiscal position public

sector

cannot

be relied upon

to contribute

also implies

that the

substantially

to an

increase in the savings rate of the economy in the future. Apart from fiscal prudence, the impact of foreign exchange flows can be mitigated by deepening the capital market activities, which in turn will allow capital surges to be accommodated without having to raise domestic interest rates to temper the inflationary pressure. Capital market deepening, however, has to be supported by an increase in the level of domestic savings. Improvements incorporated sector,

should which,

come mainly from the household and ununfortunately, experienced a steady de-

cline over the past decade (Figure 5). determinants of saving behavior, direct

But based on the analysis of measures to increase savings

are limited. A compulsory saving scheme like the Central Provident Fund of Singapore can be implemented. Other recommendations will be discussed in a subsequent section.. Two important implications arise from First, that achieving a sustained mestic savings rate are medium-

the previous

discussion.

fiscal surplus and increasing the doto long-term issues. They cannot be

relied upon in case there is another surge in. foreign capital within the next few years. This puts a great deal of pressure government to i:mplement a sound monetary spite the underspending over the past decade, to grapple

with a widening

fiscal deficit.

inflows for the

policy. Second, that dethe new government has therefore,

must be

placed on the revenue side, particularly on tax administration. will be discussed further in a later section of this book.

Emphasis,

This

Chapter 1: Yap

Figure

5. Philippine

Savings

Rates

(1970-1996).

3.5 50

25 _a

2f)

15 10 5 0

Year Gross Naticmal Saving ,L Net National Saving • Gross Savlrig o[:Coi]Doration ----e-- Households and Uninco_'porated

Enterprises

Source: National income Accounts, NSO.

Infrastructure Infrastructure

development

has been described

as the weak link

in the economic growth chain. During the 1980s, the expansion of infrastructure in the Philippines lagged behind that of other Asian countries in terms of paved roads, electricity generation capacity, electricity production, telephone main lines, railroad tracks and access to sanitation. It is only in the area of access to safe water that progress is notable (Table 23). This explains why the Philippines was not a favorite destination of FDI and why productivity has stagnated. Part of the neglect uted to the country's

in infrastructure

macroeconomic

investments

can be attrib-

crisis and the need to apply dra-

conian stabilization policies. As noted in an earlier section, capital expenditures and MOOE have not been restored to their normal levels. The National

Economic

and Development

Authority's

(NEDA) own es_

timates indicate that the gap in infrastructure spending (i.e., the difference between programmed and actual expenditures) amounted to nearly P81 billion for the period 1986-1992. Serafica (Chapter 9) analyzed major problems that beset the various infrastructure sectors. In the area tion had access

of power

to electricity

generation,

only 60 percent

'the

of the popula-

as of 1994. Data show that compared

The Philippines

Table 23. Growth

Counny

beyond

2000: An economic

in Infrastructure

Stock

and

assessment

Services,

Period

Growth

Rates

(In percent).

Paved Road

Elec. Gen, Capaci W

Elec. Prod'n,

Tel Main Lines

Raihoad _i'ack.s

Ac_e_.s[._ S_e Wa_er'

Actress to Sanitation

-20

-5S

-2

I05

107

120 36 69

134 107 142

/97 143 206

299 301 262

38 7 6

18 15 14

,,,

Philippines '_ Chiua Korea Malaysia "l?haJlarld

' % change in coverage z (For paved roads) According to DPWH'sBureau of Maimenance, the decrease of the length of road network was due to correction and/or revision in the measurement of physical length. Source: Harinder Koh]i, Infrastructure Development in East Asia and Pacific (WB 1994).

Indonesia, Malaysia and Thailand, Philippine electricity rates are higher. This is aggravated by the fact that electric intensity in GDP for the Philippines is also higher. From telephone spectively.

1984-1994, the compounded

growth

lines and pay phones were 8.2 percent This is less than half the compounded

of Indonesia, pines

annual

in terms

takes a typical installed, much

the country

whose

state

of phone

density

in 1993.

consumer an average lower than Indonesia's

The number

one transportation

rate for main

and 5.9 percent, reannual growth rate

was most similar This would

to the Philipexplain

why it

of 8.9 years to get a telephone 0.4 year waiting time (Table 24). problem

of the country

relates

to the maintenance, rehabilitation and upgrade ture, particularly of the road network. Building

of current infrastrucnew infrastructure is

not considered

has evaluated

a priority

since the government

the road

network to be adequate and the railway already extensive though quite under-used. For domestic shipping, most passenger services, especially in the third class, were substandard in terms of comfort and safety. Finally, for pm_ts, rated as inadequate and unsatisfactory were the cargohandling equipment, port land and storage areas. An archipelago like the Philippines

should have fully developed

As for the water

situation

port facilities.

in the country,

the population

had access

to potable

water

and

of residents

in Metro

Manila

58 percent

respectively, of unpriced

had access to potable water. raw water and under-priced

only three-quarters

in 1992.

Only 62 percent

and other

urban

areas,

There is the general problem treated water that threatens

Chapter

Table

h Yap

24. Infrastructure

Indicators

Telephone Mainlines per 1000 pop 1990 1995 Philippines Indonesia Malaysia Thailand

10 6 89 24

21 17 166 59

% of Roads Paved 1986 1994 13 305 .,, b 87

Water Coverage (%) d 1990 1995

17 45.5 c. 75 : 92

71 25 _ 100 r 79

67 _" 27 l_ 100 82

" World Development Report 1994 and World Bank Competitiveness Indicators, 1996 (internet edition) u 1988 data used instead of from the World Development Report 1994 q995 data used from the World Bank Competitiveness Indicators, 1996 (internet edition) dWater Utilities Data Book and The Second Water Utilities Data Book, ADB Figures are represented by the service coverage of the water utility of the major city of each country: Philippines - Metropolitan Waterworks and Sewerage System (Manila) Malaysia- Selangor Waterworks Department (Kuala Lumpur) IndonesiaPdam Dki Jakarta (Jakarta) ThailandMetropolitan Waterworks Authority (Bangkok) Other sources of water for the rest of the population are mostly dug mid deep wells; water vending is common; data as of 1991 tBulk supplies 'to condominiums and flats provide coverage not reflected tmder domestic use but under institutional and others; data as of 1991 _Most areas not served by MWSS depend on wells hestimate given by utility is 38% (the given figm-e was computed); other sources of water for the rest of the city population are tubewells and rain collectors

the viability of the water supply. It is ironic then that the poor, particularly those in the urban areas, have to rely on expensive vended water. budget,

Given the various competing needs that confront the government it was imperative that other resources be tapped to increase

investments and improve service delivery in infrastructure. Toward the latter part of the Aquino administration, the Build-Operate-and-Transfer (BOT) law was enacted signaling greater public-private in infrastructure development. The Ramos administration

cooperation sealed this

new partnership by adopting bold policies that placed greater reliance on the private sector and the market. Privatization, deregulation and liberalization of the various infraslructure sectors were undertaken to spur development. On the overall, beneficial

in terms

the outcomes

of increased

of service,

all acquiring

ticularly dustries.

in the liberalized

of the sectoral

reforms

have been

supply, lower rates, and better

high marks

quality

in terms

of public satisfaction,

par-

telecommunications

and transportation

in-

The Philippines

beyond 2000: An economic

assessment

overall private

To end the power crisis that crippled industrial production and economic growth in 1992 and 1993, the government engaged the sector in power generation through EO 215. The reform re-

suited

in several

fast-track

posed bill to unbundle industry. The measure ers and., in time, bring

power

projects,

in the pipeline

is a pro-

the generation and distribution aspects of 'the generally aims to open the sector to new playabout lower tariffs, total electrification of the

country and secure electric power for the coming years. The privatization of the National Power Corporation (NPC) and 'the consolidation of regulatory functions into a single agency are anaong the proposals. Explicit provisions against market dominance and anti-competitive

behavior

are also contained

The telecommunications

in the proposed

industry

bill.

experienced

unprecedented

market activity beginning 1993 when the government opened the market to competition. Executive Orders 59 and 109 mandated the interconnection

of networks

and required

licensees

of lucrative

cellular

and

international franchises to provide fixed-link telephone service in underserved parts of the country. From a waiting period of 8.9 years, this figure dwindled to a mere 2 - 30 days for a 'business line and 14 - 385 days for a residential line. By the end of 1998, most municipalities expected to have access to telephone services. Aviation

and shipping

can be identified.

The opening

three

companies:

new local

are the two sectors up of civil aviation Grand

International

where

major

were reforms

ushered

the entry of

Airways,

Inc_, Cebu

Pacific Air and the Air Philippines Corp. Although Philippine AMines remains to be the major industry player, the iberalization policy brought about lower rates as offered by the new airlines. In shipping, EO 185 likewise opened the domestic transport water industry to new opera_ tors. Correspondingly, there was a sustained increase in the number of vessels approved for acquisition from years 1994 to 1995. One obvious manifestation

of the liberalization

luxury passenger vessels mate those being offered In March the water

of this sector was the deployment

ira major routes by hotels).

1996, the government

supply and sanitation

(with amenities

transferred

to the private

the responsibility sector

that approxi-

to induce

over

changes

and drastic improvements in water provision. For the operation, tenance and upgrade of the infrastructure, two concessionaires

mainwere

awarded (through Sewerage System

public bidding) akhou.gh the Metropolitan Water and (MWSS) still retains ownership of all fixed assets.

The service

of the two concessionaires

areas

were geographically

di-

Chapl'er 1: Yap

vided into the east and west zones. The fierce competitive bidding brought down water rates by almost half for the west zone and more than half for the east zone. Wimgng concessionaires were required to attain certain performance targets in the areas of water supply, sanitation, sewerage and nonrevenne water. For example, in just five years, water coverage should be at 87 percent--up from 67 percent in 1996. Meanwhile, nonrevenue water should go down. from 56 percent in 1996 to 37.1 percent in just five years. There is strong doubt, however, about the sustainability of the initial price scheme. The winning bid price was quite low and will likely lead to losses on the part of the concessionaire. In addition, the institutional structures for water supply planning and operations, pollution control and watershed/ground water protection remain weak and fragmented. Elements of Sustainabiiity Human Resource Development Health, nntrition and basic education comprise a nexus that has a significant long-term impact on labor productivity. The relationship can be described as follows (Herrin in Chapter 10): l) The mutually reinforcing effects of malnutrition and poor health among infants and young children reduces the survival chances of these children; 2) Among the survivors, malnutrition and poor health will adversely affect the mental and physical development of children; 3) These mental and physical handicaps are carried forward to the time when these children are of school age, contributing significantly to low levels of achievement and early dropping out of school; 4)

Upon entering the labor force, these children who are now young adults are doubly handicapped: first by the effects of poorer mental and physical development during early childhood; and second, by less schooling and poor achievement in school; As a consequence, these young adults will become less productive members of the labor force, thus significantly reducing the overall productive potential of the economy.

This set of relationships is reinforced by two other important factors: poverty and high fertility. Poorer households have less capacity to obtain adequate nutrition and health care, and to provide better edu-

The Philippines

beyond 2000: An economic

assessment

cation for its members. Higher fertility adversely affects infant and child health survival, child nutritional status and child care, and schooling performance the mother,

of children. Lower fertility not only benefits the health of it also enables the household to invest more resources and

time in improving mance_ Recent

each child's health,

trends

indicate

nutrition

and schooling

that there is still much

perfor-

to be done in these

areas. For example, infant mortality rate fell only from 65.2 in 1980 to 59.9 in 1990 after the drastic improvement from the 1970 level of 93.8. Despite

a reduction

to 48.9 in 1995, tlle rate is still very high compared

to other countries provinces exist.

(Table 25). 16 Moreover,

Table 25. Infant

Mortality

Rate (Per 1,000 live births).

1988

1989

1991

1992

1994

Philippines Indonesia

44 84

44 73

42 68

44 58

36 53

Malaysia Thailand

24 38

23 27

15 28

13 37

12 29

Singapore

Development

ReporL

large

differentials

among

Source:

Human

UNDP,

tween

Some progress has been achieved in reducing malnutrition be1987 and 1993 but the rates remain high, and large variations

across regions are still prevalent. Access to health services has been lower when compared to other Southeast Asian. countries (Table 26). In education, the performance of Philippine students continues to falter in international tion has also been

achievement tests. Public on the low side (Table 27).

Table 26. Access

to Health

Source:

expenditure

Services. 1991

1993

1995

Philippilles Indonesia

75 80

76 80

Malaysia Thailand

90 70

Singapore

1.00

100

Human

Development

Report,

_6Data in Table 25 are different from that make international comparison

on educa-

UNDP. those quoted possible.

in the text_ This is due to adjustments

Chapter 1: Yap

Table 27. Public

Expenditure

Philippines Indonesia Malaysia Thailand Singapore China

on Education

(In percent

of GNP).

1970

1985

1.990

1995

2.6 2.8 4.4 3.5 3.1

1_4

2.9 1_1 5.5 3.6 3. ] " 2_3

2.2 1.3 5.3 4_2 3.0 2.3

6.6 3.8 4.4 2.6

Source: UNESCO Database.

Realizing the gravity of the situation and the importance of development in fostering sustainable economic growth, the gov-

human ernment

has embarked

on a number

of programs

and implemented

policies to achieve set targets in quantitative terms. MTPDP (1996-1998), some of these targets were: 1) For health and nutrition: increased life expectancy

In the updated from 68.7 years

in 1995 to 69.7 years in 1998; reduction in infant mortality rate frona 48.9 in 1995 to 44.3 in 1998; and an increase in per capita

energy intake ries in 1998.

from

1,872 kilocalories

For education:

increased

simple literacy

in 1993 to 1,977 kilocalorate from

95,8 percent

in 1995 to 98 percent in 1998, and functional literacy rate from 83.9 percent in 1995 to 84.2 percent in 1998; and increased elementary and secondary level participation rates from 91.1 percent and 61.2 percent

in 1995 to 95.8 percent

and 65.8 percent

1998, respectively. Several key programs were implemented during the past ten years. In 1991, the Local Government Code, which devolved substantial political and administrative

authorities

with the hope that greater delivery of basic services, to be devolved.

to local governments,

was enacted

decentralization will lead to more efficient Health and education services were the first

The implementation

of the program,

however,

has been

bogged nancial

down by problems. These include concerns regarding the fisupport which centers on the equitable distribution of internal

revenue, people's

participation organizations

of devolved

personnel

of nongovernment organizations (NGOs) and (POs), and problems arising from the transfer from

national

to local govenmaent

units.

The Philippines beyond 2000: An economic assessment

The National Heakh Insurance Act provides for universal health insurance coverage by subsidizing premium payments of indigents. The Act was meant to be an improvement over Medicare (which covered only 40 percent to 50 percent of wage and salaried workers and whose premium contribution was largely regressive) but little progress has been observed in terms of membership and in creating a more progressive premium contl_bution scheme. The main problem is that the extent to which the national insurance can subsidize the premium payments of the poor depends on the budget. Unfortunately, not enough. budget had been provided to make a significant impact. The Early Edncation and Development (ECCD) program was designed to respond to the problems of a) poor health and nutritional status among 0-6 year old children due to economic problems and b) a high dropout rate among Grade 1 pupils resulting from. poor adjustment to schools. A specific ECCD project, the Early Childhood Development Project, was approved for funding and will be implemented in three regions for six years beginning in 1998. The success of this project in an actual field situation needs to be closely monitored so that lessons can be drawn for possible wider adoption. Two critical areas in elementary education remain to be a wide variance in terms of outcomes and adverse social selectivity. As summarized by the World Bank and quoted by Herrin: Most children have access to school but only 68 percent complete elementary education. For many of those who complete, little learning takes place as evidenced by low mean achievement scores. Moreover, there are great variations around the mean, both student scores and school scores, and urban-rural differences were particularly pronounced. This suggests that raising quality would require not only increasing average performance but also reducing variations across students and schools by targeting the worst schools. The more ftmdamental problem in human resource development, however, is still insufficient funding. Despite the emphasis of the Aquino administration on spending for social services, the share of this sector in the budget is only one-half of the UNDP norm of 40 percent and also below the 32-35 percent average of selected countries surveyed by the

Chapter 1: Yap

UNDP in 1988. The structure of expenditures administrations is almost the same. Corollary to this fiscal constraint cess to health, nutrition, and education

for the Aquino

and Ramos

is the relationship of poor acservices and the problems of

poverty and high fertility. A vicious circle of poverty --) inadequate hnman development ") low productivity --) low-income growth --) poverty may be a more accurate reflection of the existing situation. Breaking this vicious circle through strategic government intervention sectors themselves has limited viability because of budgetary tions brought

about by low income

cycle, the most realistic duce poverty

solution

growth.

in the restric-

To put a stop to this vicious

is to spur economic

growth

and re-

equality

improve

via other sources.

Poverty

Alleviation

The reduction social cohesion

and

of poverty

which,

Equity

Promotion

and greater

in turn, promotes

income

a collective

action

among

eco-

nomic agents. This is the lesson from the experience of the HPAEs. Poverty alleviation also means freeing up resources among households for investment in health and education services, which improves productivity and impacts on long-run economic growth. While poverty incidence in the Philippines declined and 1994, the number of poor families actually increased similar

pattern

was observed

there is a core segment affected very minimally

between

between 1985 (Table 28). A

1994 and 1997. This implies

of the population by developments

that

that is marginalized and is in the mainstream of society.

Compared to other countries in East Asia, the country is near the bottom of the rung in terms of poverty alleviation (Table 29). Liberalization and deregulation measures have been shown to increase economic growth but do not improve from the 1997 Family Income and Expenditure

Table

28. Poverty

Poverty Number Urban Rural

equity (Yap 1997). Data Survey (FIES) show a

Indicators.

Incidence (%) of poor families

1985

1994

1997

44.2 4,355,052 1.250,398 3,104.655

35.5 4,531,170 1,521,882 3.009,288

32.1 4.553,387 1,246,173 3,307,215

Source: Economic and Social Statistics Office, NSCB.

The Philippines

Table

29. Poverty

in East

beyond

2000: An economic

assessment

Asia ($1 per day PPP). Headcount

least Asia Philippines China Indonesia Thailand Malaysia

(%)

1985

1993

1995

37.4 32.4 37_9 32.2 10.0 10.8

27.9 27.5 29.7 17.0 <1.0 < 1.0

21.2 25.5 22.2 11.4 <1.0 <1.0

Source: Estimates by Ahuja et al. (1997).

sharp deterioration in equity with the GiDi ratio rising from 0.45 in 1994 to 0.49 in 1997. This is the worst state of income distribution in nearly

four decades. The adoption

administration

of the Social Reform

is therefore

timely

Agenda

(SRA) by the Ramos

and necessary.

The SRA is a pack-

age of government interventions aimed at integrating society's vantaged groups into the political and economic mainstream. Reyes

and dd Valle (Chapter

11) identified

some

disad-

weaknesses

the implementation of the SRA. Additional resources for the program, called the Poverty Alleviation Fund (PAF), are actually very limited since a bulk of the funding

earmarked

for the SRA already

existed.

More-

over, the budget allows allotments for only three of the Dine flagshi p projects. The second phase or PAF-2 has an even smaller amount than PAF-1. Funding for individual programs is inadequate. For example, the P850 million reserved for communal irrigation fund can finance only 4.9 percent Region accords

of unirrigated

lands

in the Cordillera

Autonomous

and in Mindanao. The Local Government Empowerment Fund P4.5 million for each of the 20 priority provinces for the con-

struction of public markets and post-harvest of Public Works and Highways, however, market costs P5 million to construct. Aside from

satisfying

for new laws, programs social welfare

basic economic

and processes

of the poor. There

facilities. estimates

The Department that one public

needs,

the SRA also calls

that work toward

are 10 priority

der the SRA and eight have been passed however, still have to be implemented.

improving

the

social reform

bills un-

into laws. Majority

of these,

Part of the social reform process under the SRA is the direct and constant participation of different disadvantaged groups in identifying

Chapter 1: Yap

sectoral and local problems and folznulating solutions to these problems. One commendable aspect of the SRA is the volunteerism fostered among residents of beneficiary barangays. Reyes and del Valle caution, however, against prematurely evaluating •the final impact of the SRA. The paucity of poverty data precludes a more careful analysis. It must also be understood that the SRA encompasses a wide spectrum of social problems, and poverty reduction is just one of the many goals. Moreover, the SRA takes an institutional approach to tackling social problems; hence, it will take some time for the intended effects to be realized. As for the centerpiece of the government's eqnity promotion program, the Comprehensive Agrarian Reform Program (CARP) continues to be mired in bureaucratic inefficiency. From 1972d996, the program covered only 53 percent of the agricultural lands initially targeted for redistribution. The slow pace can be traced, primarily to the land valuation problem, which has often been the source of dissatisfaction among land owners. A significant amount of resources of the Department of Agrarian Reform. (DAR) has been allocated to support services when its main function is land redistribution. Despite 'this emphasis, the productivity levels of Agrarian Reform Beneficiaries (ARBs) are not significantly' different from the national average. In terms of income distribution, the status of ARBs is not different from that of farmers taken as a whole. A majority still fall below the poverty line. In fact, sharing arrangements have worsened for those who remained as share tenants. CARP's lack of focus and slow pace of implementation has led to a situation where 10 million Filipinos in the uplands have uncertain and unstable land tenure. There is also a lack of a basic policy and of legal instruments that deal with the issue of forest land tenure. It should also be recognized that poverty, like progress in human resource development, is very much a reflection of the country's overall progress. Thus economy-wide policies that promote output growth, rather than specific anti-poverty programs, may have greater impact on the objectives of poverty alleviation and equity promotion. Technology Policy The increasingly integrated global economy generates greater competition among firms for export markets. Enhancing a firm's competitiveness and improving a country's comparative advantage require

The Philippines

the development country's national

beyond 2000: An economic

assessment

of technological capability or, more broadly, innovation system. This has been 'the emphasis

the new trade theory and endogenous in an earlier section of this book.

growth

framework

a of

mentioned

Based on standard indicators, the technological development in the Philippines is at an early stage compared to other Asian countries. The country

lags behind

in terms

of the ratio of R&D expenditures

GNP (Table 30), the nnmber of scientists and engineers per million population, the share of manufacturing to GDP (Figure 6) and the growth of total productivity

(Table 12). It has also been observed

that the science

and technology sector is not effectively integrated with productive activities. Moreover, the dependence on foreign firms in the sectors of telecommunications, inputs and machinery,

power generation, transportation, machine tools, pharmaceuticals

electronics manifests the low capability nologies (Chapter 13).

in second

agricultural and consumer

and third wave tech-

Table 30. R&D Indicators. Scientists & Engineers (per rail. pop.)

Gross Expenditure on R&D

1.52 173 181 326 1284 11128 334

0.2 0.2 0.2 0.1 0.9 0_5 0.4

Philippines (1992) Thailand (1991) Indonesia (1988) Malaysia (1992) Singapore (1984) China (1991) Vietnam (1985) Source: UNESCO Statistical Yearbook.

The science

and technology

as the "principles

and methods,

tive

required

provisions

country's

scientific

(S&T) policy--defined

together

to stimulate,

and technological

by UNESCO

with the legislative mobilize

potential"--is

and

and execu-

organize

the

more than progams

and institutions. It involves inculcating a culture in the people. Magpantay laments the way technology is treated as a cost to be minimized rather than as an investment that must be managed well. He also describes the educational system as being weak in science and technology at all levels.

:in 19:90:i:::The major ...........................

Straiegies are: sectorS:: through

massive

gn som:ces; :d activities

:: tech, i

ii i:

::: in high

ii::

....

gln StimtiOn::buil&

i :i

first strategy

ShOuld

: : ::: :: ::

Since it deals wi.th ex:

'i:@proachiThe ::::: :

the:::demand

p_fll:: appioach

::ii

and wtiat:: is Zon41 gpantaycrifiCizeS .................... ::

/:as::being::t;:o::

programiunder

pull:oriented. He spe for:National: omponent

i : ::: :

::::::::

of isttiatareas:identi._::::::

: :( i ::":iT:::)::fflF:7:::i:):171 .......

The Philippines beyond 2000: An economic assessment

these are either relatively successful or areas where technological requirements are not too demanding. Moreover, DOST has no control over' factors that are crucial to the success of some of these sectors. In the case of the coconut industry, the fortunes of this sector depend a great deal on the resolution of disputes over coconut plantations under the agrarian reform program. Magpantay proposes a combination of demand-pull and supply-push strategies and perhaps their roles with regard FDIs should be fleshed out. Specific recommendations shall be given later. Environmental Management The depletion of natural resources and degradation of the environment adversely affects the country's capacity to meet the increasing needs of a growing economy and population. Environmental management, thus, becomes the core of a sustained of economic growth. There is a serious call to set aside sufficient natural capital stock so as to allow for nondeclining income through time. This may be investigated through an indicator termed "genuine savings," which includes adjustments for both human and natural resources. Table 31 reflects the adjustments as follows: (a) add expenditures on health and education to investment in produced assets to reflect investment in human capital; and (b) include estimates of natural resources depletion and environmental degradation as components of depreciation. Resuks for the period 1988 and 1992 reveal a 3 percent decline in genuine savings which may be interpreted as an early signal of the economy's tendency toward unsustainable growth. As data may show, key natural resources have depreciated, with the problem being more severe for the potentially renewable natural resources, fish and/ forests, and an increasing problem in the case of depletion of upland soils. While the current state of natural resources is the result of a long period of extraction until the 1970s, the more important issues to address in the 1980s and 1990s are the: (a) population pressure in the uplands and coastal areas; (b) open access to these areas; and (c) fostering of conditions that would encourage investment in resource renewal. Table 32 shows that the Philippines has the lowest protection rate of natural areas. Estimates indicate that 6 million hectares of forest land, or 20 percent of the country's land area, remain unallocated and unprotected. The main reason for this is that the decline in timber harvesting license areas--whether caused by cancellation, expiry or

Chapter

1: Yap

Table

31. Genuine

Savings

for the Philippines,

1998

(In P million).

1988 Gross Investments Produced Assets _ Public expenditure on Education _ Public expenditure on I_Iealth_ Less: Foreign Borrowings

169,189 149,193 15,100 4,896

Gross Savings Less: Depreciation

of Produced

Assests b

Net Savings Less: Depreciation Forests Fisheries Minerals Soils

of Natural

1992

resources

(15,484)

15,067

1.84,673

185,420

67,162

65,871

117,511

119,549

2,508 936 838 354 380

Degradation of Environment _ (Environmental Damages) Health damages from air pollution Health damages from water pollution Off site damages

200,487 174,155 20,852 5,480

7,680 504 6,560 26 590

2,710 1,297 596 817

Genuine Savings _

3,372 1,942 615 815

112,293

108,497

Sources of Basic Data: _Revised version of Hamilton and Lutz (1996), with expenditm'e on Education and Health; bNational Statistical Coordination Board (personal communication); CDepartment of Budget and Management(1988 and 1992); d Bangko Sentral ng Pilipinas (personal communication); _IRG, Edgevale and REECS (1996). The items cited here are depreciation figures as computed net of appreciation from growth and increases in real values.

Table 32. Protection

of Natural

Areas 1994.

Philippines indonesia Korea Malaysia

2.0 9.7 7.0 4.5

Singapore Thailand

4.5 13.7

Source: World Resources

(1996)

The Philippines beyond 2000: An economic assessment

the selective logging ban has not been adequately followed through by an increase in the areas identified for watershed protection held by small holders and indigenous peoples. This lack of tenure for approximately 10 million people was earlier mentioned in the discussion of CARP. The Ramos administration's efforts to promote equitable access to upland and coastal resources is noteworthy considering the following: community based-forest management through EO 231 (1995); the rights of cultural minorities are finally recognized by the state through RA 8371's Indigenous People's Rights Act (1997); and the Fisheries Code of 1998 (RA 8550) which extends the delineation of the municipal waters from 7 to 10kilometers from the shoreline. The implementing rules and regulations that specify the mechanisms for clarifying the property rights related to these measures have yet to be formulated. It should be noted that while clarifying property rights is an important first step to improving the management of environmental and natural resources, the other ingredients to resource conservation--enforceability and transferability of rights, and favorable relative prices of inputs and outputs that predispose individual users to conservation technologies-have yet to be addressed. in the case of environmental degradation, the pollution of air and water has caused damages that is at least equivalent to natural resource depletion. Air pollution in Metro Manila alone caused damages of P2 billion in 1992 (at 1988 prices) as a result of increased incidence of respiratory ailments and hypertension. Damage was caused mostly by fine particulate matter and lead emissions from motor vehicles, transport fuels and power generation. The phase-out of lead in gasoline is targeted for the year 2000 (EO 246, 1997) and the interim measure to impose higher taxes on low-lead gasoline over unleaded gasoline are important steps that need to be followed through by similar reforms. Overall Assessment Two key statements could summarize the economic performance over the past ten years. First, despite the significant gains in almost all the sectors, the Philippines still lags behind its neighboring countries. Per capita income in PPP terms is still lower than most East Asian economies and improvement in the quality of life as measured by the UN Human Development Index has not been as dramatic as these countries over the

Chapter 1: Yap

past fifteen years (Table 33). It is of little comfort that some East Asian neighbors are in a deeper rut as a result of the 1997 financial crisis. Despite the less adverse impact on the Philippine economy, it would still take some time before the country can reach the development level of Malaysia or Thailand. Table 33. Economic

Indicators.

Per Capita 1985-88 Philippines Indonesia Malaysia Thailand China Source:

Human

Income

2,170 1,820 5,070 3,280 2,470 Development

Report,

(PPP$) 1994

1980

HDI 1994

2,681 3,740 8,865 7,104 2,604

0.557 0.418 0.687 0_551 0.475

0 672 0.668 0_832 0.833 0.626

UNDP

Second, while there has been a marked improvement in the investment climate through greater outward orientation, better infrastructure and more sound macroeconomic fundamentals, there has been a notable lag in the progress of microeconomic reforms. The poor record in technology upgrading, persistent underinvestment in human resource development, and extremely slow pace in poverty alleviation and equity promotion has prevented potential gains from being realized. Meanwhile, the sharp deterioration in the quality of the environment poses a threat to the sustainability of economic growth and development. The inappropriate exchange rate policy has also contributed to the generally disappointing growth performance particularly in the manufacturing sector. It is in this sector where policy inconsistencies are magnified. Despite the trade and industrial reforms that were implemented and the apparent efficiency gains, the performance of the manufacturing sector has been disappointing. An inappropriate exchange rate policy has not only hurt exporters and import-competing sectors; the lack of a clear cut technology policy has also prevented backward linkages to be developed. As a result, employment generation is low, import dependence of Philippine exports is high, and productivity is stagnant. At this juncture, it would be circumspect to scrutinize more closely the economic program anchored on trade liberalization. While greater opeimess (in terms of reduced tariffs and dismantling of nontariff bar-

tiers)

The Philippines

would definitely

beyond 2000: An economic

lead to greater

outward

condition.

This is borne

cient but not necessary

orientation,

assessment

it is a suffi-

by the experience

the developed HPAEs and, to some extent, some of the developing HPAEs which relied greatly on foreign direct investment. Concerns have been raised as to the alacrity in the reduction tariff reform could have been dovetailed development and to the crafting accelerate technological progress. Unfortunately, ternational

policy

agreements

of tariff levels. The pace of to the level of technological

of an industrial

options

have been

policy

designed

circumscribed

like the WTO and any reversal

by in-

in the pace

liberalization, even if optimal from a domestic perspective, may invite retaliation and reduce foreign investor confidence. But if there is enough evidence later to merit a review of the mainstream economic program (i.e., the Washington international This would should

be within

Economic

a well-designed

Agenda

Despite enough

Consensus),

then

perhaps

enough

effort

on an

scale should be mustered to restructure some agreements. allow developing countries some policy leverage but this transparent

framework.

for the Year 2000 and Beyond

the many

evidence

and

shortcomings

to castigate

in the economy,

the basic

economic

program

there

is not

set by the

Aquino and Ramos administrations. A prudent approach would be to give it the benefit of the doubt and simply gear up the country for the increased integration of the world economy. The direction of the economy,

however,

must be vigilantly

monitored

and its performance

continuously assessed in an objective manner, Paradigms proven to be ineffective must eventually be discarded, The financial turmoil in East Asia should forms

not also distract

policymakers

from

the fundamental

re-

that must be implemented to achieve sustainable growth. These are outcomes from the PIDS assessment of the Philippine

economy based on the framework derived from growth theories and the policies and conditions that worked for East Asia. The recommendations are grouped into four major categories according to their primary objective: (1) Macroeconomic Stability; (2) Productivity and Efficiency;

(3) Social Cohesion;

and 4) Environmental

J7Seefor example the comments of Lall (1995) cited in Annex 1.

Management.

Chapter 1: Yap

Macroeconomic Stability Capital Markets Must be Further Developed to Spur Domestic Resource Mobih'zation. is There are two elements which could lead to the deepening of the capital markets. First, the savings rate must be increased. Second, savings must be increasingly mobilized by the financial system. While the latter may not necessarily bring about an increase in the savings rate, it will definitely improve efficiency in the allocation of funds, resulting in higher economic growth and greater return to savings. Econometric results indicate that economic growth is still the primary source of increased savings. Harrigan (1996) found income to be a "weakly exogenous" determinant of savings in his econometric study of ASEAN economies. Hence, the major task of economic managers is to push the Philippines toward the virtuous cycle of higher economic growth -) higher saving ") higher investment ") higher economic growth. This is largely a medium-term issue hence; short-term measures must focus on the second element of savings mobilization. One area where domestic resources could be mobilized is small savings which, when pooled together, will be quite a substantial amount. Hence, small savers must be given access to the financial system by offering them financial instruments that suit their preferences. This is the logic behind the proposal for small savers instruments, one example of which are treasury bills with smaller denominations. The promotion of the mutual fund system is another alternative. Another area that must be studied closely is pension reform. The existing government-initiated pension system is a reserve-funded system and not one characterized by pay-as-you-go type. Some of the issues that merit attention are: (1) Transportability of the benefits when a member moves from the government to the private sector and viceversa. One way to achieve this is to merge the two systems; (2) Protection of the actuarial value of the premia by doing away with subsidized credit; and (3) Improvement of fund management in order to increase the returns. One way is to deregulate the investment allocations of pension funds to enable them to earn higher returns on their investments. Under their charters, the Government Service Insurance System (GSIS) and Social Security System (SSS) are required to hold a certain proportion of their investment portfolio in government securities. _8Theauthor wouldliketo acknowledgethe contribution ofMarioB. Lambertein this section.

The Philippines beyond 2000: An economic assessment

Chile is often cited as an example of a success story in pension reform. It encouraged private sector-initiated pension systems that competed for investible funds. Contrary to the view that this resulted in a sharp increase in the saving rate, Solimano (1996) presented data indicating that the rise in the Chilean saving rate was due to an increase in retained earnings by private corporations. In this regard, the private corporate secf'or could be another possible source of added savings for the Philippines. Lastly, the Securities Act must be revised to enable the capital market to adopt to international standards. Some of the issues that must be addressed are greater transparency and participation by small investors. Fiscal Prudence Must be Maintained to Make Monetary Policy More Flexibie. To enhance its revenue performance, the government must shift its attention away from enacting new tax laws and instead focus on improving tax administration. Manasan (Chapter 8) listed a number of measures: (a) improve monitoring of stopfilers; (b) install selective audit policy and procedures; (c) collect third-party information; (d) improve performance evaluation system for revenue officers; (e) train fronfline personnel to prepare them for a computerized regime; and (f) create data centers. Manasan also recommended that capital outlays and government expenditures on maintenance and other operating expenditures must be restored to their levels, as a percentage of GNP, prior to the 1984-1985 external debt crisis. The amount can be adjusted to account for the increased involvement of the private sector but it is most likely that only government capital outlays will be affected. The government must put emphasis on maintenance and operating expenditures since the adverse effect of underspending on the upkeep of infrastructure is cumulative and manifests itself mostly in the medium term, creating severe disruptions and damage to the economy. Monetary Policy Must Continue to be Prudent and an Appropriate Exchange Rate Po_cy Must be implemented. The fiscal problem that emerged in the latter part of 1997 proves that macroeconomic imbalances still pose a serious threat to sustainable growth. Dealing with the government deficit and the aggregate

Chapter 1: Yap

savings rate are medium4erm issues, that is, no lasting solutions are expected in the next three to five years. Under this scenario, monetary policy will be crucial in maintaining macroeconomic stability, particularly in dealing with the more open capital account. The BSP must implement an appropriate exchange rate policy and the corresponding monetary measures that define sharply its intermediate targets to make it more effective. The recent debate focused on using net domestic assets rather than the aggregate base money variable to provide greater flexibility in accommodating foreign capital flows. Corollary to this, the BSP must calibrate its sterilization measures to the existing demand for money so as not to tighten liquidity unreasonably. To enhance the ability of the BSP to carry out its mandate in a more integrated financial environment, its capitalization must be strengthened. The national government must accelerate its remaining financial commitment of P10 billion. Financial Reforms Must be Implemented to Maintain Investor Cont_dence in the Economy. The 1997 East Asian crisis has emphasized the need for a robust financial system. Despite being among the least affected by the crisis, the Philippines must push harder for financial reforms at least to placate investors. Some proposed reforms that touch on strengthening the capacity of banks for supervision and examination and the improvement of the surveillance system are outlined in Annex 2. In addition to these measures, the General Banking Act can be amended to create a level playing field for banking institutions and to address the safety and soundiaess of the financial system. It will also be useful to develop an appropriate merger and consohdation policy to increase the flexibility of the financial system. The problem of volatile foreign capital flows must also be dealt with. Strong financial systems may not be enough to cope with the effects of a sudden reversal in capital flows. As an analogy, developing countries have been likened to small ships in a very rough sea (Stiglitz 1998). The best that economic managers can do is steer the ship well and keep it sturdy. With greater financial integration, the role of serffulfilling hypotheses and contagion effects become amplified, generating potentially huge waves that put the small ships in a more vulnerable position. A number of proposals are outlined in Annex 2 with the

The Philippines beyond 2000: An economic assessment

central message being that efforts on an international sary to deal effectively with this problem.

scale is neces-

Productivity and Efficiency The primary concern in this area is the stagnant manufacturing sector and the declining agriculture sector. While trade liberalization gave industry a boost, the expansion was constrained by basic problems such as insufficient infrastructure and low labor productivity. Meanwhile, price distortions and infrastructure bottlenecks continue to hamper the performance of the agriculture sector. The First Consideration Must be to Raise Investment Rate to Improve Productivity. An increase in the savings rate would be the most critical element to support a rise in the investment rate. This would, of course, be accompanied by a more stable macroeconomic framework. Infrastructure development should give a tremendous lift to the private sector's "animal" spirits. Since higher savings and improved infrastructure are mediumterm issues, the government must step up its efforts to attract FDI to the Philippines. The experience of developing HPAEs shows that the inflow of large amounts of FDI should make domestic investment more profitable, particularly those designed to support foreign investment. The Policy Regime Governing Must be Further Reigned.

Infrastructure

Serafica identifies five critical areas for reform. First, the government must be proactive in creating a competitive environment. Liberalization or deregulation does not automatically lead to effective competition. For instance, where only a segment of a vertically integrated monopoly is opened to competition, the incumbent still retains control of the bottleneck facility where he can engage in non-cooperative behavior. Second, agencies must be better equipped to deal effectively with the demands of a market-oriented policy regime. Third, the lead agencies in charge of infrastructure must be organized in such a way that facilitates coordination and strategic planning. Fourth, even as the private sector takes a bigger role in infrastructure development, the government must be prudent in assuming and managing contingent liabilities. Lastly, addressing the infrastructure problem requires proper delineation of national-local government roles.

Chapter 1: Yap

FDIs, Especially Export-Oriented Ventures, Must be Encouraged. Without doubt, FDIs would be the deus ex machina for the Philippines in a more integrated global economy. It would directly lead to capital accumulation, be a major source of technology and give access to export markets. The determinants of FDImust be studied more closely but macroeconomic and political stability are expected to remain as crucial factors and perhaps less emphasis must be placed on incentives. Strategic HRD and S&T Interventions Must be Implemented to Improve TechnologicaI Capabih'ty. There are four key areas in this proposal: (a) technology transfer mechanisms must be made more effective; (b) R&D effort must more focused and integrated; (c) human resource development must be oriented to improve factor productivity; and (d) the functions of the Department of Science and Technology must be streamlined. Technology Transfer Mechanisms Government must first set clear strategies for technology development-whether adoption, modification, or generation by industry. This recommendation hints of an industrial policy, but given that technology does not have the standard characteristics of a commodity (in economic jargon, it is "nontradable'), government intervention may be justified. Government intervention can be effective if "carefully designed, sparingly granted, strictly monitored and offset by measures to force firms to aim for world standards of efficiency." Magpantay (Chapter 13) identified four advanced technology areas for aggressive supply push strategies: microelectronics, materials science, information technology and genetic engineering. The private sector must be encouraged to practice "mirroring" in their ventures with multinational corporations. As Magpantay explained, regardless of the initial arrangement of technology transfer, the Koreans instituted incremental changes to absorb the technology, like replacing foreign personnel with local people, substituting local engineering for foreign engineering, doing forward and backward integration, and others. Similarly, multinational corporation-local enterprise technology transfer programs, similar to what Singapore and Malaysia did, must be encouraged.

The Philippines beyond 2000: An economic assessment

R&D Effort The R&D capability must be enhanced to eventually achieve technological self-reliance. The linkages among the government, private sector and academe must not only be strengthened along specific technological programs but at the same time, their roles must be clearly delineated. For example, the responsibility for developing advanced technologies will rest primarily with the public sector. There should also be some investment in industry-linked R&D institutions and universitylinked basic research in selected areas. For this to succeed, there should be greater investment in R&D. The government must appropriate a larger fund for this purpose. Private investment in R&D can be encouraged with greater competition, by strengthening laws related to patents and intellectual property rights (IPR) and by implementing incentives (e.g., tax breaks) to increase fund allocation toward R&D. Finally, institutional gaps that weaken the linkage among technology generation, adaptation and use must be addressed. For example, •the government can support pilot testing of inventions to determine their commercial and technical feasibility. Human Resource Development A well-educated labor force is the sine qua non of technological development. The government can start with the basics by strengthening education in the primary and secondary levels. Magpantay proposes that mathematics and science must be tanght in the regional language during the elementary phase to ensure that basic concepts are well assimilated. At the tertiary level science, engineering and other laboratory intensive courses should have government support. To remedy the incentive system, salaries of professors in centers of excellence must be exempted from the salary standardization law although a strict accreditation system for the faculty should also be in place. The country should train its manpower for the higher stages of production activities to prepare qualified skilled workers not only for jobs in developed countries but also for future shifts toward higher skill-intensive domestic production activities (Orbeta and Sanchez 1997). This should complement the rising labor costs relative to countries like Indonesia, China and Pakistan. This can be supported by government and private sector investments in industry-lir&ed polytechnics and HRD programs.

Chapter 1: Yap

Trade Liberalization Must be Continued.

and Reduction

in Tariff Dispersion

The economic program initiated m 1980, continued in 1986 by the Aquino government and pursued relentlessly by the Ramos administration must be carried to its logical conclusion. Between now and the year 2004, when a uniform 5 percent tariff will be imposed, governmerit must remedy the existing structure to eliminate or minimize price distortions that create inefficiencies. The primary focus in this area should be the restructuring of agriculture tariffs. The recent devaluation of the peso presents an opportunity to correct the high protection rates of major commodities such as rice, corn, sugar, livestock and poultry and other minor crops. As the peso cost of importables increased by 50 percent to 55 percent, the out-quota tariffs may be similarly lowered without reducing the nominal prices of agriculture commodities. At the same time, a market based-approach (i.e., auctioning) must replace the current system of in-quota imports of these commodities, as specified by the minimum access volumes, to transfer to the general public the rents received by quota holders. In the case of livestock and poultry, this suggestion will benefit small growers who become less competitive vis-d-vis large hog and poultry producers who have access to lower-cost corn imports. Other Reforms in the Agriculture's Tertiary Sector 19 Aside from increased public expenditures for agriculture, more efficient allocation within agriculture and a streamlined bureaucracy are required to strengthen support services to agriculture. A greater proportion of the budget for agriculture must be spent for productivity-enhancing investments, especially agricultural research, development and extension, market infrastructure and irrigation support. Moreover, the organizational structure of the Department of Agriculture (DA) and other related agencies, the DAR,DOST's Philippfile Council and Agricultural and Resources Research and Development, and the Philippine Council for Aquaculture and Marine Research and Development must be rationalized and streamlined to enable more efficient operations of their necessary functions. In particular, a functional, rather than a commodity-based organizational structure that consolidates aU technology R&D efforts of the above institutions, un_9Taken mainly from David (Chapter 4)_

The Philippines beyond 2000: An economic assessment

der the Department of Agriculture, will greatly strengthen public sector's ability to generate new technologies. Together with the shift of support service activities of the DARto DA, these institutional reforms will help streamline and strengthen the link between local and central governments in delivering better quality support services to the sector. The legislation of national land-use or zoning policy is a key step toward minimizing premature land conversion induced by the CARP, The CARP rules must be also modified to increase the collateral value of land by allowing private land sales after full transfer has been effected. Likewise, after land redistribution, share-tenancy and other voluntary labor and land market arrangements must be allowed so as to avoid lower production efficiency. A package of incentives and support services for the agrarian reform beneficiaries must be designed to facilitate the transition from tiller to owner without a significant drop in productivity and output. This would include investment counseling, provision of additional capital and technical assistance. Such a function should be under the purview of the DA. Social Cohesion Reforms in this area center on the access of low income groups to basic services that will help improve their general well-being. These also call for faster access by underprivileged groups to both physical (including land) and human capital to enhance their prodnctivity. The CARP Must be Reinvigorated to Push Forward Agrarian Reform. The existing land valuation formula must be reviewed to arrive at more acceptable land values for all parties involved. This would help accelerate land transfer and resolve land titling problems. Meanwhile, the DAR must focus its attention on land distribution problems and leave support services for the agrarian reform beneficiaries to the DA. In addition, the DARmust cooperate with the DENR in addressing the tennre problem in the upland areas. Targeted equitr interven_'ons should be improved the vicious cycle of pover(y _ inadequate human ment _ lowproductivity _ low economic growth poverty alleviation.

to break develop_ slow

Chapter 1: Yap

The critical elements of effective poverty alleviation and equity are: (a) broad-based economic growth that can generate gainful employment and livelihood projects especially in the rural areas; (b) improvement of the efficiency of basic social services that could alleviate poverty (basic education, health, nutrition and rural infrastructure); ( c) redirection of focus of programs on poverty groups rather than on geographic areas; (d) well-targeted safety nets for the poor during the transition period toward a globalized economy; and (e) operationalize a monitoring system to identify beneficiaries. Details of the recommendations for basic services have been outlined by Herrin (Chapter 10), as follows:

Public Health Programs The problem of mismatch of internal revenue allocation (IRA) and cost of devolved functions must be resolved by amending the Local Government Code. The backlog in the upgrading and maintenance of the physical facilities/infrastructure that were devolved to local governments must be reduced. New structures for coordination, technical supervision, and monitoring and evaluation to deal with the administrative fragmentation of the health care delivery system that resulted from the devolution must be developed (e.g., through regional-local and inter-LGU cooperative agreements).

In the area of personal health care, access can be improved by getting the National Health Insurance program off the ground. This can be achieved if the following pending issues are addressed: mechanisms of enrollment; design of benefit and contribution structures; provider payment modes; provider accreditation; and protection of consumers in the areas of drugs and providers. Nutrition and Education The effectiveness of nutrition programs can be improved if the government focuses on few interventions that can be adequately financed and properly implemented. This would include redesigning the interventions to improve cost effectiveness. Addressing protein energy malnutrition requires food assistance and increasing access to related health services. Similarly, micronutri-

The Philippines beyond 2000: An economic assessment

ent deficiency disorders can be corrected by diet supplementation fortification.

and

What the appropriate reference for estimating malnutrition prevalence rates has been an old issue that needs to be resolved. The published data from the FNRI are based on the Philippine reference rather than on an international reference and the results obtained from these two benchmarks differ considerably. This must be resolved to assure more effective intervention programs. The main challenge in basic education remains to be the low survival rate in elementary and secondary education and the low achievement scores, particularly among the low income groups. Many issues, some fundamental, still have to be addressed. They are: financing and budget allocation issues, decentralization of school management and allowing schools more flexibility in administrative matters, and an improvement in teacher effectiveness. Other system-wide issues include the adoption of bilingual medium of instruction, an additional year of basic education (one more year of high school or financing kindergarten) and program issues. The latter cover the proposed multigrade program, preschool or early child development and the dropout intervention program. The Population Mainstream.

Management

Program

Must be Put in the

Underlying the problems in health, nutrition and basic education are the uneven economic performance and continued rapid population growth. Demographic transition would also boost the savings rate. Unfortunately, the population program has not been given sustained attention, and this is because it is not clear what aspect of fertility decisionmaking justifies government intervention. This needs to be clarified as a basis for forging a stable consensus on the role of government in population matters (Herrin, Chapter 10). Restructure Labor-Management Rela_'onslu'ps Emphasizing Improved Work Conth'tions, Security of Tenure and Human Resource Development. Housing Needs of the Low Income Groups Also Have to be Addressed. To make the housing program for the poor more effective, market-oriented interest rates must be allowed to prevail in the mortgage market for low-cost housing. Subsidies should not be transferred in

Chapter 1: Yap

the form of concession loans; rather, they should be sourced from budgetary appropriations and directly transferred to poor beneficiaries. Finally, infrastructure should be provided in order to open up new lands for low-cost housing. Environmental Management The environmental conservation and management agenda revolve around the issues of correct pricing of the use of natural resources, reform of property rights, and strong monitoring and enforcement of prices and property rights. As earlier mentioned, the DAR and DENR should work closely to formulate property rights in the upland areas, Moreover, the DENR should be equipped with dispute settlement capabilities to enforce these property right s . Effective management requires adequate and timely information. The DENR must coordinate with information technology bodies and the National Mapping and Resource Information Authority (NAMRIA) to generate timely such up-to-date information Concluding Remarks As the Philippines embarks on a new phase in its quest for sustainable growth and development, it is evident from the analysis and evaluation that many basic reforms still have to be designed and implemented. Even the fundamental framework anchored on the Washington consensus should not be regarded as sacrosanct. However, the policy agenda derived from this framework cannot be readily changed given the risk of international censure. Policymakers should then direct their energy at micro level reforms to ensure a more sustainable economic growth. Until such time that a global critical mass develops and effectively challenges the orthodoxy, the overall development framework will continue to be based on globalization policies.

The Philippines

beyond 2000: An economic

assessment

References Amsden, A. H. 1994. Why Isn't the World Experimenting with the East Asia Model to Develop?: Review of the East Asia Miracle. World Development 22(4). Asian Development Bank. 1997. Emerging Asia. Manila: ADB. Bertoldi, M. 1.997. Asian Regional Economic Development: How important Have Policies Been? Economic Planning ing Paper No. 56. Japan: Department of Research Economic Research Institute. Collins, S. M. and B. P. Bosworth. 1996. Economic Accumulation vs. Assimilation. Brookings Activity

Agency WorkCooperation,

Growth in East Asia: Papers on Economic

De Jong, N_ and R. Vos. 1994. Theoretical and Empirical Approaches to Direct Foreign Investment: A Survey of the Literature. institute of Social Studies (ISS) Working Paper Series on Money, Finance and Development

No. 57.

Delos Angeles, M. S. Unpublished. tal Management Policies: Philippine

Institute

Natural Resources and EnvironmenAssessment, 1990-1996. Makati City:

for Development

Studies.

Felipe, J. 1997. Total Factor Productivity Growth in East Asia: A Critical Survey. Manila: ADB. Felipe, J. and J. S. L. McCombie. 1997. Some Methodological Problems with Recent Analyses of the East Asian Miracle. Manila: A'DB. Fischer, S. 1993. The Role of Macroeconomic Factors in Growth. Journal of MonetaT?/ Economics 32. Gochoco, M. S. 1992. Targets, Instruments,

and Monetary

Policy in an

Open Economy: A GARCH Application. Working Paper NO. PB9204. Federal Bank of San Francisco, Center for Pacific Basin Monetary and Economic Studies. Goldfajn, I. and R. O. Valdes_ 1997. Are Currency Crises Predictable? IMF Working Paper 97-159. Washington, D.C: International Monetary Haque,

Fund.

L ul (ed). 1995. Technology and Competitiveness. In Trade Technology and International Competitiveness. Washington, D_C: The World Bank.

HmTigan, F. 1996. Saving Transitions in Southeast Series No. 64. Asian Development Bank.

Asia. EDRC Report

Chapter l: Yap

Hattori,

T. and Y_ Sato.

1997. A Comparative

Mechanisms in Korea and Taiwan: Developing Economies 35 (4). Horii,

Study

of Development

Introductory

Analysis.

K. 1991. Disintegration of the Colonial Economic Social Restructuring in Malaysia. The Developing (4).

Hutchcroft,

P. D. 1990. A State Besieged:

Elite Relations

in. the Philippines.

Hutchcroft, P.D. 1991. Oligarchs The Politics of Patrimonial Kaminsky, G. and C. M. Reinhart. Banldng

Historical Issues

The

Legacies and Economies 29

Patterns

of State-

and Letters" 1 (4)_

and Cronies in the Philippine State: Plunder. World Polilics 43 (3). 1996. The Twin Crises: The Causes of

and Balance_of-Payments

Problems.

nance Discussion Paper No_ 544. Washington: nors of the Federal Reserve System.

International Board

Fi-

of Gover-

Krugman, P. 1994. The Myth of Asia's Miracle. vember/December).

Foreign

Affairs

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Krugman, P. 1995. Dutch fairs (July-August).

Markets.

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Tulips and Emerging

Krugman, P. 1998_ What Happened to Asia? Foreign Affairs. (January). Lall, S. 1994. The East Asian Miracle: Does the Bell Toll[ for Industrial Strategy? Lall, S.

World Development

1995. The Creation

22 (4).

of Comparative

Advantage:

The Role of

Industrial Policy. In I. ul Haque (ed.) Trade Technology and International Competitiveness. Washington D.C.: The World Bank. Lamberte, M. B. 1993. Attracting Foreign Direct Investment to the Philippines_ Development Makati City: PIDS.

Research

News Vol. 22. January-Febru

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Lamberte, M. B. 1995. Managing Surges in Capital Flows: The Philippine Case. Journal of Philippine Development 22 (1). Leung, S. E. 1996. Capital Flows, Monetary Policy and Exchange Rates in the Asian Region. Manusclipt. Australian National University_ Mankiw, N. G. 1995. The Growth of Nations. Brookings Papers on Economic Activity. Medalla, E. M. G. R. Tecson, R.M. Bautista J. H. Power and Associates (eds.)_ 1995. Catching Up With Asia's Tigers Volume Philippine Institute for Development Studies.

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beyond 2000: An economic

assessment

Mercado-Aldaba, R. A. 1995. Foreign Direct Investment in the Philippines: A Reassessment. In Catching Up With Asia's Tigers Volume 1 by E. M. Medalla, G. R. Tecson, R.M. Bautista J. H. Power and Associates. ies.

Makati:

Philippine

institute

for Development

Montes, M. F. t997. The Currency Crisis in Southeast Institute of Southeast Asian Studies. Orbeta,

Asia.

Stud-

Singapore:

A. C., Jr. and M. T. C. Sanchez. 1997. The Philippines in the Regional Division of Labour. In Regionalization and Labour Market Interdependence in East and Southeast Asia, edited by D. Campbell, A. Parisotto A. Verma and A. Lateef. New York: Macmillan Press Ltd.

Persson, T. and G. Tabellini. 1994. Is Inequality American Economic Review 84 (3).

Harmful

for Growth?

Reyes, C. M. and J. T. Yap. 1993. Money and Prices in the Philippines, 1981-1992: A Cointegration Analysis. Journal of Philippine Development 20 (1). Rodrik,

D. 1996. Understanding Economic Literature 34.

Rodrik,

Economic

Policy Reform.

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Capital Account

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Essays in inter-

national Finance No. 207. New Jersey: Princeton University. Romer, P. M. 1986. Increasing Returns and Long-Run Growth. Journal of Political Economy 94 (5): 1002-37. Schmidt-Hebbel, K., L. Serven, A. Solimano. 1996. Saving and Investment: Paradigms, Observer 11 (1). Solimano,

Puzzles,

Policies.

A. 1996. The Chilean

Economy

The World Bank in the

Age andBeyond. Manuscript. Washington Solow, R. M. 1956. A Contribution to the Theory Quarterly Journal of Economics 70 (2). Stiglitz,

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J. E. 1996. Some Lessons from the East Asian World Bank Research Observer 11 (2).

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address

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Stiglitz, J. E. and M. Uy. 1996. Financial Markets, Public Policy, and the East Asian Miracle. The World Bank Research Observer 11 (2). Swan, T. W. 1956. Economic Growth nomic Record No. 32.

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Eco-

Chapter 1: Yap

Wade, R. 1990. Governing the Market: Economic Theory and the Role of Government in East Asian Industrialization. New Jersey: Princeton University Press. World Bank. 1989. World Development Report 1989: Financial Systems and Development. New York: Oxford University Press. World Bank. 1993. The East Asian Miracle: Economic Growth and Public Policy. New York: Oxford University Press. Yap, J. T. 1997. Structural Adjustment, Stabilization Policies and income Distribution in the Philippines: 1986-1996. Final report submitted to the Microeconomic Impact of Macroeconomic Adjustment Policies Project Phase III. Policy and Development Foundation, Inc. Young, A. 1994. Lessons from the East Asian Countries: A Contrarian View. European Economic Review No. 38.

The Philippines

beyond 2000: An economic

assessment

Box 1: Defining and Measuring Total Factor Productivity, Total Factor Productivity (TFP) is a concept of efficiency the economy's in production. of production. approach, is further

where

productive inputs like labor and capital are jointly used TFP is roughly equivalent to the quality of the factors It Can be measured in two ways: 1) the deterministic

and 2).thes_ochastic approach. The deterministic divided into two categories: (a) index number

approach approach,

and (b) growth accounting approach.. Both.methodologies are simple and. TFP estimates can be easily computed. However, a weakness of these approaches is the residual der biased estimates. In the growth the part of output

accounting growth

cumulation, i.e., growth terms, the equation is:

treatment

of TFP which .

could

ren-'

approach,

total factor productivity

not explained in capital

by the changes

and th.e labor force.

in factor

ac-

In algebraic

_o '-_ y. - atl'- (.i ,.a.._)k , where

q_is the growth

rate of TFP and

y, l, k are the growth

rates

Output, labor and capital, respectively. The parameter a is the share of labor and (.l-a) is the share of capital. In practice a is taken to be constant

over time Usually. measured

using data from

tive year. Collins and Bosworth (1996) applied ing methodology in their study 0f East Asia. The direct estimation ofthe stochastic approach. tion is:

of the production The standardform

log Y_ -_c + czlog L + fl log Kt Here,

_, the coefficient

a representa-

the growth

account-

function is one example of.the estimating equa-

+ ¢T +u t

of the trend variable

T, measures

rate of TFP growth over the sample period. Austria (Chapter 6) applied the econometric an aggregate .production function modified effects of inflation on output. Her estimates

the average

approach

using

to capture, the dynamic showed that the average

TFP growth for.the Philippines for the period 1960-1996 is -0.4 percent. The anmml TFP growth for this same period is shown in Figure B1 and'it axis.

can.be' observed

that the values

fall mostly

in the negative

Chapter 1."Yap

Figure B1. Philippine

Savings Rates (1970-1996).

o_o6

0,040,02

.o.02 _,Q4 -0,06

-0.0_[

_0,1':I -0,12 Source:

Estimates

Austria

(1998).

Meanwhile, another stochastic approach assumes the existence of an unobservable production frontier function and from this, the actual production frontier is compared. In doing so, the residual treatment is eliminated and all factors contributing to production are accounted for. This approach can be used in time series and cross sectional data .... Two other concepts are introduced in this stochastic approach of TFP. The first is the technical efficiency (TE) estimate which is simply the ratio of actual output to potential output. A ratio equal to 1 suggests that the sector is operating along the best-practice frontier. A ratio below 1 signifies the sector's technical inefficiency; the more the ratio falls below 1, the higher is the level of technical inefficiency. Depicted graphically, a technically inefficient sector is one that lies below the production possibility frontier. The other concept is the technical progress (TP) estimate. This is interpreted as the natural measure for innovation and can be graphically depicted as the shifts in the production frontier. The sum of TP and TE is TFP. Cororaton and Abdula (Chapter 7) employed the stochastic approach and obtained estimates of TP and TE for the major manufacturing sectors. Results showed that TFP growth for the aggregate manufacturing sector experienced wide swings over the period from 1958 to 1991,with sharp drops during the balance-of-payments crises

The Philippines beyond 2000: An economic assessm.enl

,'i

in 1984-1985 ,ar_ffealty I_N,, _ _on rm_ ,sh_x_ed.TFP growth to be _sithtely_velated'_o exports,_t'red_, cti_a in.tariffs, and R&D iavestmentl, ',On,the other.hand. T_ g_wth iis negatively afle_i_ta,t_ and by!macroeco_omic fected 'by _ higher " ,.. ..... .mm_mum _s irtsta_flity c__ised'hy_ inflation, ,, : ' The entire _at_'oaeh to _ _stimafion has been criticized by the so-called nJ_St view (Fet_:._..t997; FeliPe andMeCombie 1997). _hey cited 'the serio_ts.metht_ol_ical .:problems in using an 'aggregate,production,_Ur_etian m,,re_etat_the ' econo_; And even if an aggregate func_Ola, were .a _atid"___, 'tke residmd .tin the eeon_tric al_oach) _ mer_(;t_ _tedaverage of the growth rate of_the .retaml to capital and.!.t_e .,mmm ' to labor.! The whole pro.eess, aecordt_'_t_: the. nihilist Vie_, is n_g .more than.an exercise !in.validating. aeeou_nting identiti_;_ ' ' .'"' , Deciding _¢h side of'thd",:_gumen,t is, correct is not part of

Philippines as laggingbehind i ts_:.:EastASian neighbors in terms of techno!.ogic_l' development. Tlils important insight_wtaich i:,holds wl_ether the TFP estimates, are _or not_--is whatshoutd,,c_lacern

, Despite the sharp appreemtmn of the peso in real terms (Fig,tare 4'),and its adverse, i_act on_._e, performance of the agricttlmre and,raant_facturing, sectors,(_tio_5,2), there is still a d_ate whether, The

peso as overvalued revolves

,prices, of the tra_bteaad, nontred_ble scot;ors in favor of the ,tatter. ` h the Philippine ease, the in investor confidence following ,the resolution0f,the energy cnsi_,: 1992and the liberalization Of the capital, account in that same,_ar, caused a rise in the price of nontradables. This was, brough_',::_bout by _cxeased activity i a this sector particularly in ,eonstructi_and reMestate, The real apprecia-

Chapter 1: Yap

tion could not have been brought about by a surge in portfolio capital flows as net portfolio investment was quite small even during the aeriod after the capital account was liberalized (Table 16). The only other major inflow of foreign exchange was remittances of overseas workers but this was used to cover the trade deficit. The current account deficit was generally manageable, ranging from 3 to 4.5 percent of GDP. Hence, the appreciation in real terms was an equilibrium response to improved economic conditions. On the other hand, movements in the nominal exchange rate show that the appreciation of the peso in real terms was directly related to its sharp appreciation in nominal terms from P29.2 in October 1993to P24.1 in December 1994. Other Southeast Asian countries were able to prevent large changes in their nominal exchange rate. Real interest rates have always been on the high side during this period indicating that monetary policy was extremely tight. Lamberte (1993) cited the IMF-imposed ceilings on monetary variables as the culprit. Empirical evidence also shows that the Bangko Sentral ng Pilipinas was targeting the exchange rate (Gochoco 1992, Reyes and Yap 1993). The notion that there was increased investor confidence in the Philitapine economy because of major structural reforms hmngs by a thin thread. As Krugman (1995) convincingly argued, the spectacular economic performance of some developing countries was based not on solid achievements, but on excessively optimistic expectations on the part of international and domestic investors or, using the terminology of Federal Reserve chairman Alan Greenspan, on their irrational exuberance. While Krugman was specifically referring to Mexico, his analysis can apply to Indonesia and the Phflil:r.pines. The initial successes that followed the implemen_lion of economic reforms (note that the term "followed" and not "caused" was used deliberately) led to a speculative bubble. Krugman aesedbed this process as follows: "Markets poured money into _countries, encouraged both by the capital gains they had ah,e_y seen and by:the belief that a wave of reform was unstoppable. Governments engaged in unprecedented liberalization, encouraged by the self-reinforcing conventional wisdom and the undeniable fact that reformers ..received instant gratification from enthusiastic investors? The bubble did burst for many developing countries, the major lesson being that the real currency appreciations that resulted from the ap-

The Philippines beyond 2000,"An economic assessment

Figure B2. Equilibrium

Real Exchange

Rate.

120

................ _Actual 40

1 RER

'I '

I/ iEquilibrJum,

RER

2O 1

Source:

Author's

esti'mates_

Figure B3. Degree of Overvaluation librium, 1980-1997).

(Ratio of Actual to Equi,i

1,2

,(15

0,9

0,_ ,75 *L7

Source:

Author's

estinlates.

Chapter 1: Yap

parent increase in investor confidence did not reflect changes in real exchange rate equilibria. Rather, the currency appreciations should have been interpreted as transitory in nature given the fact that they resulted from excessively optimistic expectations of international investors that were not warranted by structural economic change. To give an empirical sense to the debate, an equilibrium real exchange rate was calculated with monthly data from 1980-1997 using the Hodrick-Prescott filter as applied by Goldfajn and Valdes (1997). The real. effective exchange rate, based only on trade with major partners, was used to approximate a real exchange rate. The results are shown in Figure B2. The degree of overvaluation (undervaluation) is derived by taking the ratio of the actual value of the real exchange rate and its corresponding equilibrium value. Based on the definition of the real exchange rate index used, a ratio above 1 (below 1) indicates that the currency is overvalued (undervalued). As shown in Figure B3, the ratio is above one for most of the sample period. The only times the ratio would dip below unity was when there was a sharp peso depreciation (October 1983, November 1990, and the second half of 1993). Thereafter, the ratio would climb back above 1 implying that the tendency is for an overvalued currency. The degree of overvaluation, however, is generally mild (in the order of 10percent). Given the weight of the theoretical arguments and the empirical evidence, the answer to the question posed in the title of this box _is definitely YES..

Box 3: The Options Approach to Investment Conventional investment theories focus on the cost of capital and the replacement cost, as compared to market value of new capital goods. They fail to consider, first, that most investment decisions face inherent uncertainty about future benefits and costs; second, that investors can control the timing of investment, waiting for relevant information that may reduce investment uncertainty; and third, that most investment decisions are partly or completely irreversible--once the capital stock is installed, it cannot be put to new uses without incurring a substantial economic cost? Dixitand Pindyck(1994)as citedby Schmidt-Hebbel,et al. (1996).

The Philippines beyond 2000: An economic assessment

' These crucial features have led to a new ol_ion aPl_ro_._1:_at sees an investment opportunity as an option m buy an asset at_fferent points in time, balancing the value of waiting with the ot_u, nity of cost of postponing investment decisions. The option.apt_r_ach shows that the standard net-present-value rule of investment (knvestment when. NPV>O) must be modified. The correct rule is that the anticipated return on the new investment project must exceed the purchase and installation cost by an amount, equal to the value of keeping the investment option alive (NPV > value o_option to _ait). The "options" approach tOinvesm-Jent enhances., the,role !ofuncertainty in investment ,decisions. Ar_.hknl_of instalailit_in k_ll!a¢roeeonomic parameters will lead, to tlo_la_nement of inves_t projects. An impor_am'ilolicy implication is that uncertainty tet_dlt_0_! make-investment less responsive to incentives such as subsidies,,ai_d,J tax co.rme_sions and ttutt huge incentives would therefore be ,neces.::: sary to counteract the impact of, high uncertainty on private investmerit. '. )

Chapter 7: Yap

Annex

1: Development Paradigms and Strategies 1 The most prevalent paradigm in economic literature is the neoclassical model and its variants which include endogenous growth models. The appeal of this model lies in its theoretical underpinnings which lead to a consistent and robust framework from which policy prescriptions are readily drawn. The standard model emphasizes tlhat economic growth depends on capital accumulation. The versions of the neoclassical model associated with economists like Krueger, Balassa, Bagwh---M, and T. N. Srinivasan considered that the opening up of the East Asian economies and, possibly, their expor_ promotion schemes played key roles in promoting model is sometimes refen°ed to as the classical theory growth (Asian Development Bank ciple of comparative advantage.

growth. This of economic

1997) and its cornerstone The proponents argued

is the printhat by re-

moving price distortions through trade liberalization and deregulation, resources in East Asian economies were allocated to the sectors where they 'were used optimally.

This brought

about the most efficient

production factors and fastest possible economic growth. The main outcome of this strategy is the rise in exports toward

manufactured

and the

structural

transformation

economy penetrate

forces firms to be more competitive, hence, they are able to the international market. Also because of a larger market,

firms are able to take advantage down unit costs.

exports.

use of

of scale economies

A more open.

thereby

bringing

The "governing the market/developmental state" approach seriously questioned the claim of the classical school that the policies carried out in East Asian economies did not distort prices and allocation of resources. This approach emphasizes two aspects in its analysis: 1) the importance

of industrial

policies

and strategic

trade policies

in shap-

ing the economic structure and ultimately the growth path of a country; and 2) the role played by the "synergetic connections" (Wade 1990) between the state and the private Asian economies. Critics

of this framework

sector assert

"governing the market/developmental a consistent theoretical framework tween

selective

policies

in t'he growth that

the main

process

of East

weakness

of the

state" approach is the absence of that depicts the interrelations be-

and economic

growth.

'This section is derived largely from Bertoldi (1997).

Therefore,

the 'usual

The Philippines

analysis

of ex-post

and ex-ante

beyond

2000: An economic

assessment

cannot

determine

a particular

whether

measure is appropriate or not. In. other words, the scope and extent state intervention is indeterminate.

Parallel to the debate about the appropriate paradigm to explain the East Asian miracle is the debate on the strategy that was adopted by the East Asian governmen:ts following import-substitution policies. There are three general positions which, in simpliffed form, can be id.entiffed as 1) the outward oriented-export led strategy position; 2) the investment-led strategy position; and. 3) export-investment led strategy position. Depending on the strategy pursued, 'the implications for economic policy will be different. It would be interesting to note that in some cases, the division on this issue is not between the neoclassical and nonneoclassical approaches the different theories.

since the particular

The outward oriented-export the classical theory. This position sider

that the high East Asian

strategy

cuts across

led strategy is a direct outgrowth of is criticized by economists who con-

economic

growth

was investment-led.

The criticism stems not only from the "governing the market/developmental state" school of thought but also within the ranks of the neoclassical school. One variant of the latter is the so-called minimalist view of Young (1994, 1996) and Klqagman

(1994) who clafined

that there

is nothing miraculous in. the economic growth of East Asian countries because it can be fully explained by the conventional neoclassical growth model. The arguments estimates

of Young and Krugmman

for the region which

fore, concluded

are not particularly

that the economic

growth

are base

on the TFP

high and. 'they, the?e-

was due primarily

to mobili-

zation and accumulation of productive factors similar to the experience of socialist economies in the 1950s and 1960s. In particular, the post-war growth could be traced to increased labor participation rates, a rise in the investment to GDP ratio and an improvement in educational stand.at'&_ All 'these factors are contained in the neoclassical growth

model. Similarly,

argues

the "governing

that investments

the market/developmental

and not exports

state" school

are the real engine

of East Asian countries.

Because

of the rapid increase

tion, •there was a strong

increase

ir,demand

of growth

in capital

and productivity.

formaA virtu-

ous circle of investment -_ productivity -) exports + domestic demand •_ profits "_ new investments was established. This virtuous circle was further

strengthened

by the ability of East Asian govermnents

to pick

Chapter

1: _p

winners (i.e., select sectors in rapid, expansion, with potential economies of scale, increasing returns and strong technological, spillovers). In doing so, they pushed the private sector to move its specialization toward the modern sector of the economy and, in this way, increased the potential

ga-owth rate of the economy.

In this process,

outward

ori_

ented policies played a minor, albeit important, role. On the one hand they guaranteed new markets for th.e newly created productive capacity; on the other hand, they put domestic producers under strong sure because of the need to stay competitive in the international ronment. Meanwhile,

the "export-investment

ers that the transmission put forward by "outward a significant

led strategy"

position

pres_ envi-

consid-

mechanisms of exports on economic growth. oriented-export led" strategy exist and played

role in the growth process

of East Asian economies.

How-

ever, the productive specialization of the countries was inadequate to acquire all the advantages that outward oriented-export led policies could provide.

Therefore,

their export-push up the production benefit

policies frontier

the East Asian governments

complemented

with active selective policies, which moved of the countries in. sectors that could better

from the advantages of international trade. Lall (1995) placed this strategy in the context of the development

of technological

capability.

He arg_ed

that

the more

important

and

pervasive source of market failure is likely to be the learning processes in production rather than. scale economies or externalities. This fact is particularly important for developing countries, which, are latecomers to industrialization and must face already established competitors which have already undergone the learning process. Depending

on the extent

of the learning

costs and the efficiency

of the relevant factor markets and supporting institutions, it may be necessary to have selective and variable fiffant industry protection and gradually expose existing activities tection itself reduces the incentive has to be carefully

designed,

to import competition. to invest in capability

sparingly

granted,

Since probuilding, it

strictly monitored,

and

offset by measures to force firms to aim for world standards of efficiency. The most effective counter measure to the disincentives that arise from protection seems to be strong pressure to enter export markets, since a commitment to export disciplines not only firms but also those who design

and administer

policy.

In Lall's view, the true contri-

bution of export orientation to industrialization framework for selective interventions.

is to provide

the right

The Philippines

In sum, the neoclassical due to neutrM

incentives

beyond 2000: An economic

assessment

view is that the East Asian success

between

domestic

was

and foreign, markets

and

limited government interventions, permitting the realization of static comparative advantage. The "revisionist" view, akin to the "goverr_ing the market/developmental state" approach, is that interventions central to East Asian success because of the presence of pervasive ket failures. Government this context

interventions

since their objective

are taken to be industrial

were mar-

policies

was to spur industrialization.

Indus-

trial policies refer to those measures capable of attracting additional resources to the industry sector, to modify the allocation of resource within

the industry

ticular zontal

sector. They generally fall into two categories, and vertical interventions. Horizontal

sector or to intervene

interventions

in the organization

include government

fers to the industry sector; fiscal pol.icies favoring industry sector; financial and technical assistance

of a par-

namely,

subsidies

hori-

and trans-

investments to the to small.- and me-

dium- size enterprises; provision of infrastructure for the development of the industry sector; and the creation of special, zones wi:th special privileges. Vertical licly owned vention sectors;

filterventions

include

investments

carried

out by pub-

firms to promote

specific

sectors; public-priwtte

joint inter-

or cooperation to develop new products and/or to enter new measures to limit competition; trade policies like tariffs and

quotas in favor of infant industries aimed to support the sectors picked as winners; and R&D subsidies to promote high technology sectors. The aim of horizontal industrial interventions is to increase the level of investment, to improve productivi_ and to encourage innova_ tion in industry as a whole and not just in specific sectors. On the other hand, the aim of vertical specific industrial sectors sectors. The resolution,

industrial policies is to promote and possibly to create vertically

of the debate

on the appropriate

or protect integrated

paradigm

and

strategy of the East Asian miracle was the primary reason why the World Bank conducted its 1993 study. The study developed the marketfriendly

approach

which, advocates

for getting

the fundamentals

instead of proposing to get prices right. The market-friendly drops some of the assumptions of 'the neoclassical model. that [actor

markets

kets in particular

may not operate

perfectly,

may need interventions

approach It accepts

and that education

to create

right

the human

marcapital

Chapter

1: Yap

base for industrialization.

This type of intervention

of the horizontal type. The market-friendly

approach

is nonselective

also differs from the neoclassical

development approach in accepting that there may be market failures in coordinating investment decisions within industry for several reasons: missing information markets, capital mies of scale, interdependent investments ties, and externalities

in skill creation

for government intervention. study, however--that export

market deficiencies, in vertically related

and learning.

econoactivi-

These are reasons

The main conclusion of the World Bank push strategies, supported by strong for-

mation of human capital, a stable economic framework and strong fundamentals would explain the miracle--is nearly equivalent to that of the neoclassical paradigm, times worked but only under based mechanisms, avoided.

it concedes that selective policies somevery stringent conditions (e.g. contest-

insulated

bureaucracy)

and

hence,

should

The World Bank presented empirical ticularly the case against selective policies

evidence for its findings parbut the results and method-

ology have been heavily criticized

1994; Lall 1994). Moreover,

(Amsden

the report did not have a strong theoretical framework analysis. Critics argued that the conclusion favoring

for its empirical the effectiveness

of export-led

to the early neo-

strategies

was an ideological

concession

classical theory, because such strategies do not require selective intervention by the government. After an exhaustive survey of the literature on the East Asian miracle, Bertoldi (1997) important for economic

concluded that economic policies were very growth. Fundamental policies (i.e. high sav-

ing, outward orientation, macroeconomic stability arid income distribution policies) created the foundations for the miracle but they do not tell the entire story. Government interventions did have an impact but in the absence of realistic counter-factual analysis and more robust evidence about the direction of causality, it cannot be determined what type of inter'¢entions (horizontal or vertical) and strategies (outwardoriented

export-led,

significantly

investment-led,

to the high growth

A parallel

view is offered

export-investment rates

led) contributed

of East Asian economies.

by Hattori

and Sato (1997) in their study

of the development mechanisms of Korea and Taiwan. The differences-where they find Korea's to be government-led and Taiwan's to be market-led--are attributable ences in the relationship

to social between

and political differences government and society.

and differ-

The Philippines beyond 2000: An economic assessment

These conclusions are hardly inspiring given that it is difficult to judge the expertise of economists in terms of their understanding of the social and political dynamics of countries like the Philippines. Thus, if used as a basis for justifying an economic program in a particular country, the interpretation of the East Asian story will largely depend on the ideological biases of policymakers. Since the evidence for the various types of strategies and government intervention is generally inconclusive, the null hypothesis of economic managers--to use a statistical phrase--will ultimately determine the policy recommendations and, most likely, the.actual economic programs pursued in the country. Annex 2: The Financial

Crisis in East Asia

From Miracle to Debacle The current financial turmoil in East Asia has sent shock waves across the global economy even eliciting dire predictions of another "Great Depression." A World Bank (1989) study lists three possible sources of a financial crisis: macroeconomic conditions, industrial and financial policy, and debtor and creditor behavior. The predominant view is that the present crisis .was brought about by weaknesses in the financial system of the economies, bringing into focus specific financial policies and debtor and creditor behavior. Many of the East Asian economies implemented twin liberalizations: a) opening up of the capital account which allowed foreign investment to flow in and out of an economy with very minimal regulation; and b) liberalization of the domestic financial system. The first measure allowed domestic firms to gain access to foreign capital while the second increased competition among financial institutions operating locally. One view of the crisis is that existing regulatory framework could not cope with the new demands brought about by these structural changes. Prudential regulations and bank supervision were inadequate to cope with the more liberalized economic climate. The riskiness of loans was not evaluated thoroughly, financial institutions did not disclose enough information, and even if they did, the data were not timely. The stance of the government, particularly the monetary authorities, also encouraged the expansion of the financial system and dollar borrowing: There are at least two elements to this aspect: 1) By standing behind the viability of 'the domestic financial system, the government always gives an implicit guarantee.to pli-

Chapter

1: Yap

vate debt. This guarantee

encouraged

bankers

to take on riskier

loans knowing that even if these fail, they will be bailed out eventuaUy. Deposit insurance forms part of this guarantee, but in this case, it discouraged depositors to monitor the performance of the banks. 2)

Economic

managers

were not able to respond

properly

to the

rapid inflow of foreign capital. 1 Exchange rates appreciated in real terms and/or interest rates rose. The interest rate differential encouraged dollar denominated borrowings. In the Philippines, instead of working to keep the exchange rate at a competitive level, the BSP gave a strong signal that the level of the exchange rate was not only appropriate but would remain stable for an extended period of time. This stance further encouraged foreign

borrowing.

The increased

access

to funds

and greater

competition

led to a

rapid expansion in the assets of the domestic financial system, mainly in the form of loans to the private sector (Tables 17 and 19 for the Philippine case). and currency

An unhealthy mismatch of funds in terms of maturity base developed. Banks would lend long-term based on

deposits and borrowings that were short-term would lend dollars to firms that earned revenue Data show that 40-50 percent

of foreign

in nature; and balxks in domestic currency.

currency

deposit

loans in the

Philippines went to nonexporters (Table A1 ). Thailand, Indonesia and Korea, meanwhile, had a rapid build-up of short-term foreign debt. It was inevitable that there would be some bad loans because of the overinvestment

in some sectors

sult of the intense

competition,

and loans

were

not repaid.

financial

sector

was relatively

vestors

to start pulling

particularly

profits

in real estate.

were squeezed,

In the case of Thailand, widespread.

projects

failed

the crisis

in the

This prompted

out of the stock market.

Because

As a re-

foreign

in-

Thailand

had a

huge current account deficit at that time, the pullout of foreign put tremendous pressure on the baht. There was no recourse allow the baht to depreciate sharply.

money but to

Neighboring countries were then drawn into the crisis, the socalled contagion effect. One reason was that the structure of the export sectors

of Malaysia,

lar, hence, to remain

Thailand, competitive

Indonesia

and the Philippines

are simi-

with each other, their currencies

tSee Section 5 for a discussion on macroeconomic stability.

mus

The Philippines

Table A1. Foreign

Currency

beyond 2000: An economic

Deposit

Unit Loans

assessment

(In US$ million).

1.993

1994

1995

I996

1997

Comrnodi_ Exporter Service Exporter Producers/.Manufacturer

1108.9 44, I 18.5

1715.8 56.3 14_6

2985,8 N7.5 56.6

5868.0 285.6 89_3

5171.2 351, 150.5

Oil Companies Public Utilities

492.4 335.0

538.7 448,6

400.3 869.6

448.7 1484.5

402. 1614.6

LEVELS

Others

16_1

TOTAL

320.5

2015.0

3094.5

Colnrnodity Exporter Service ExporLer Producers/Manufacture."

55.0 2,2 0.9

55.4 1,8 0.5

Oil Companies Public ULilities Others TO'IAL

24.4 16.6 0.8 100.0

17.4 14.5 10.4 100.0

Source:

2400.8

2713.5

10576.9

10403.0

59.3 2.1 I. 1

55.5 2.7 0.8

49.7 3,4 1.4

8.0 17.3 12.2 100.0

4.2 14.0 22.7 100.0

3.9 15.5 26. 100.0

TO TOTAL

Bangko

depreciate

614.0 5033.8

Sentral

in tandem.

_g Pflipinas.

It should be noted that China experienced

a sharp

depreciation in 1994 and this put competitive pressure on the Southeast Asian countries. This explanation, however, lost some of its strengfla when

the crisis spread to Hong Kong and Korea. The second reason for the contagion effect was that foreign

in-

vestors acted like a herd in withdrawing their funds from the region. This is attributed to incomplete information on the part of the investors; they could ous economies. ture

not or did not bother to differentiate among the variThis type of behavior is the central theme of the litera-

on self-fulfilling crises. Since many of the debts

were

dollar

denominated

and did not

carry a natural hedge against sharp depreciations, the fall in the value of domestic currencies weakened the financial viability of many projects. The situation

was exacerbated

cost of money

and the larger

magnified

by the rise in interest debt overhang

the crisis and caused

a downward

rates.

The higher

in terms

of local currency

spiral

in the East Asian

economies, especially Indonesia. Some pundits contend that it was less a case of overinvestment than a case of unwise investment. This is another view of the cause of the weaknesses in the financial sector. They cite as examples the national car program of Tommy S uharto in Indonesia, the Petronas tower

Chapter .1: Yap

in Malaysia and the steel industry in Thailand.. A Newsweek issue January 1998) even revived the phenomenon of crony capitalism.

(26

The analysis above gives the distinct impression that some of the factors responsible for the rapid growth of East Asia as discussed in Section 3 are now absent or were themselves the cause of the problem. For example,

promoting

competition,

especially

through

export-oriented

policies, was hailed as one of the key ingredients of their rapid growth, yet lack of competition in the business conglomerates is seen as one of the critical failings; and what were previously viewed as strong financial markets, which were able to mobilize huge flows of savings and allocate

them

kets which

efficiently,

sparked

have transformed

the economic

debacle

into weak financial (Stiglitz

1998).

mar-

And as a

swipe against government intervention, some quarters contend that the close relationship forged between the bureaucracy and private sector in several of these economies to address information problems brought about political cronyism and a general allocation leading to the bad loans. This sweeping crises have occurred

lack of transparency

in credit

analysis tends to gloss over the fact that similar in countries with sophisticated financial regula-

tion (e.g., the US savings levels of transparency two-thirds of external

and loan debacle)

and in places

with high

such as Scandinavia (Stiglitz 1998). Moreover, bank lending in Indonesia was to the nonbank

private sector indicating that foreign lenders were willing to extend credit to indonesian firms. The latter did not have to resort solely on behest loans

from friendly domestic banks. A third line of argument lays the blame

squarely

on the liberal-

ization of the capital account and the liberalization of the banking sector as the cause of the weaknesses in the financial sector (Montes 1997). Ready

access

leading

to the profligacy

to international

credit

and excesses

amplified

existing

market

failures

of the private

sector.

Both Stiglitz

.and Uy (1996) and Rodrik (1998) note that market

failures

arising

from

asymmetric information, incompleteness of contingent markets, and bounded rationality are endemic to financial markets. Despite the seemingly consistent analysis, the framework rooted on financial sector weaknesses is still incomplete. The macroeconomic parameters of many of these economies (except perhaps for Thailand) did not warrant the excessive deterioration in their conditions, particularly the exchange

rate.

policy

mistakes,

leading

policy prescriptions.

Thus,

particularly

to put the enth°e blame

in the financial

sector,

on domestic

can lead to mis-

The Philippines

beyond 2000: An economic

Krugman (1998) echoed this semiment clearly wrong to blame all of overinvestment

assessment'

when he stated that "it is and overvaluation of as-

sets in Asia on domestic financial intermediaries. After all, private individuals-and foreign institutional investors--did buy stocks and even re_ estate in all the economies now in crisis. This suggests that other kinds of market failure, notably "herding' by investors, still have some role to play." It is evident that contagion through the panic of fund managers had a.n impact on the economic performance of the East Asian economies. The discussion

on this subject

be learned about the present crisis miracle, particularly the idiosyncratic

reveals

that

there

before dismissing financial practices

is still much

the East Asian associated with

some of the economies. What is clear is that the lessons from the experience of the HPAEs, as discussed in Section 3, are still valid. The crisis was caused by an aberration in the financial with supply side fundamentals. Policy

implications

of the Crisis

Several

however,

experience

lessons,

during

the past

sector

could be drawn

six months.

and had little to do

from

the tumultuous

First, prudential

regulations

and supervision of financial institutions must be strengthened in order to prevent moral hazard problems. Intal and Llanto (1998) list some specific recommendations: 1.

Strengthen

prudential

regulation

and supervision

by implement-

ing comprehensive risk-based assessment and supervision instead of focusing primarily on credit risk. In addition, there is a need for more stringent information disclosure requirements, accounting and auditing standards, as well as clearer 2.

adequate rules and

greater 'transparency in asset classification and provisioning. Review the policy on capital accounts and foreign borrowing. It would be useful to look into the Chilean case which entailed stricter rules on domestic firms bolxowing minimum credit rating rule), the imposition term foreign term

portfolio

currency

deposits

directly abroad (e.g., of reserves on short-

by nonresidents

flows, and a one-year

and other short-

residency

requirement

foreign direct investment. Furthermore, dollar lending FCDs to unhedged borrowers must not be allowed. Second, including

trade

the timing,

extent,

liberalization

on from

and pace of tile twin liberalizations,

should

be reviewed.

It is not surprising

Chapter 1: Yap

that since 1980when financial liberalization was began in earnest around the world, the number of BOP crises associated with banking crises increased (Kaminsky and Reinhart, 1996). Public authorities would do well not to let the ideology of liberalization obstruct the specific objectives of monetary policy--the sound development of the financial system and the increase in the productivity of investment (Montes 1997). In this regard, measures should be implemented to regulate the flow of short-term capital although this is closely related to recommendation (2) above. Finally, the behavior of the international private sector should be examined. First, international lenders must be more prudent and not be swayed by herds nor be afflicted with disaster myopia. Second, foreign investors should be encouraged to hedge at least the currency risk of their investments to prevent sudden withdrawals from domestic capital markets (Montes 1997). But beyond this, the current situation where there is simply too much liquidity in the global system should be corrected. This situation encourages very short-term investment and fuels speculative activity which generates volatility that makes globalization a threat instead of a challenge and an opportunity.

TheInternational

Chapter

Economic Environment andthePhilippine Economy

l'onciano

S. Intal Jr. and Leilanie

O. Basil]o

his paper focuses on the two most important developments in the international economic em4ronment facing the Philippines now and in the furore, namely: (1) opeimess, integration and globalization including the sharp resurgence of capital movements; and (2) the rise of Asia-Pacific and China. Openness, integration and Globalization Openness and Integration in th'storical Perspec_ve The international economy has become increasingly open and integrated during the last two decades of the 20th century. Sachs and Warner (1995) estimate that, whereas only about 20 percent of the world's population lived in open economies in 1960, more than 60 percent of the world's GDP and more than 50 percent of the world's population were in open economies by 1993. If the ongoing reforms, liberalization and economic opening in China and Russia continue, it is not too long when about 87 percent of the world's population and 83 percent of the world's output is located in open economies. The openness and integration of the international economy in the 1990s is not the norm during this century. Trade protectionism lorded heavily during the 1930s until the 1950s; hence, the world economy was essentially closed then. The process of opening up of the developing world has been slow and, in many cases, "stop and go" during the 1960s until the 1980s. The experience of much of the century therefore is not sufficient to provide information on the range and degree of both the benefits and risks, arising from the deepening integration of the world economy. This is a challenge for policymakers and analysts especially in the developing world in their effort to manage the integration of domestic economies into the international economy. current

The only period in world economic history that is similar to the emerging international economic environment is the period

The Philippines

beyond

2000: An economic

assessment

from the 1870s until 1913 right before the first world war. Technological developments (e.g., shipping, refrigeration, communications), low rate of protection in much of the world (except to some extent in the US and Russia),

and currency

convertibility

under

the gold and silver standards

during the period gave rise to the first truly international economy in world history. Studies show that some economic convergence occurred during

the period

advanced

as the economic

countries

periphery

grew faster than the more

at that time, i.e., UK, France

and Germany

(Sachs

and Warner 1995). Lewis' estimates of the growth of world trade during 1883-1913 indicate that Japan, the temperate settlements and Asia other than India and China

experienced

export

growth

rates higher

average for the whole world as well as the average Northwest Europe (Lewis 1978). The Philippines

also participated

econonay

during the late 19th century

tropical

exporters,

increasingly

for the developed in the international

and early 20th century.

it faced deteriorating

terms

than the

Like other

of trade during

the 1880s

and early 1890s such that the volume export growth was largely offset by the decline in export prices in gold terms. What encouraged the growth

of Philippine

exports

despite the decline

in export prices in gold

bullion terms was the depreciation of the peso (i.e., silver Mexican peso) vis-_t-vis gold by about 50 percent during the period. The country experienced mainly trade surpluses during period. When the external terms of trade improved for tropical products during 1895-1913, the Philippines registered export growth rates higher than the averages for all developing countries, all tropical countries and developed countries (Intal 1983). Thus, on the whole, the Philippines increasingly participated in the international economy during the period. This process of growing economic integration accelerated during the American colonial regime. The share of exports to national output of the Philippines rose from about 7.7 percent in 1913 to about a quarter in 1938 (Intal 1983). Toward

Greater

Openness

and

Competition

Major international policy developments during the past decade point to greater international economic openness and competition especially in the Asia-Pacific region. The GATT Uruguay Round, the most ambitious round of muhilateral trade negotiations during the post World War II, expanded the multilateral trade disciplines to the hitherto excluded sectors of agriculture, textiles and garments, and services as well as to new areas

of interest

to international

trading,

specifically

Chapter 2: Intal and Basilio

TRIPS and TRIMS. The Round also deepened tariff reductions and reduction in nontariff barriers and widened tariff bindings. Thus, overall, the GATT Uruguay

Round pushed

significantly

further

the continu-

ing process of trade liberalization in the world. But some analysts consider that the most important achievement of the Round is the strengthening of the institutional structure of international trading, especially the improvement of the dispute settlement system, the establishment of the World Trade Organization (WTO) which has stronger powers than the GATT Secretariat, and the clearer rules on antidumping and countervailing

duties.

Under the WTO, multilateral

negotiations

have been continuing

to address uncompleted negotiations under the Uruguay Round and other initiatives. The most recent trade liberalization agreement is the information

Technology

Agreement

during

the first WTO Ministerial

Meeting in Singapore in 1996 wherein countries agreed zero tariff on ilfformation technology products. The ASEAN Free Trade Area (AFTA) agreement Pacific

Economic

Cooperation

(APEC) Bogor

to an eventual and the Asia-

declaration

aim toward

virtually free trade in the ASEAN and Asia-Pacific regions. Under the Common Effective Preferential Tariff (CEPT) scheme, intra ASEAN trade for nonsensitive manufactures and agricultural products would have tariffs of zero to five percent by year 2003. As a result, the average CEPT rate for the whole ASEAN will decline from 7.1 percent in 1996 to 2.7 percent Similarly, and investment

in 2003 (ASEAN undated). the APEC Bogor declaration aims toward free trade in the whole APEC region by the year 2020, primarily

through the "concerted" unilateral liberalization efforts of the member economies. Because APEC is nondiscriminatory in principle, the Bogor declaration means that the APEC member economies which currently account

for more

than

one half

virtually open economies investment liberalization,

of total world

production

by the year 2020. In tandem the APEC member economies

would

with trade and are also in the

process of coming up with "collective action plans" that tend to address trade and investment facilitation issues like customers procedures, standards and conformance Drawing

from

and transparency

the initial submission

in government

of Canada

procurement.

in response

to the Ma-

nila declaration to strengthen economic cooperation in the region, economic infrastructure and facilitation institutions like ports would aim for commonly tive of reducing

agreed

upon

efficiency

the transactions

targets,

with the ultimate

cost of doing business

objec-

in the region.

100

The Philippines

The experience of the European deepening economic integration

beyond

2000: An economic

assessment

Community countries also shows that among the member economies neces-

sitates the harmonization of trade, investment and competition related domestic policies. Thus, the Philippines is facing not only a more open and integrated regional economy but also where the standards of trading and facilitation cumscribed.

heading gration.

as well as domestic

policies

are increasingly

cir-

In summary, the Philippines is in the midst of a region that is toward greater economic openness and deeper economic inteThe more open export markets offer opportunities for the Phil-

ippines. Similarly, the greater openness of the Philippines sents challenges to domestic producers. In short, managing

itself prethe deeper

integration of the Philippines into the international economy, which offers both opportunities and challenges, will be a continuing task for the country's policymakers now and in the future. Integration Despite

and

Globalizat_bn

its similarly

World War, the current

to that of the late 19th century

international

economic

regime

until the First is qualitatively

different from the "first world economy" in many respects. For example, the remarkable improvements in air transport and telecommunications in recent

decades

has led to the development

of global production

net-

works of major multinational corporations, indeed, by 1992, the sales of foreign affiliates of multinational corporations already exceeded total world

exports

of goods

and services

(World

Bank

1996). Interna-

tional trade is increasingly intraindustry trade and intercompany The rapid technical change, growing importance of after-sales

trade. service

and competitive pressure have contributed to the growing globalization of production networks in order to meet the varied demands of various

exports

and to reduce

production

costs.

The electronics and computer industries are good examples of the globalization of production networks where parts are sourced from, produced

and

assembled

in, various

affiliates).

As can be expected

from

parts

of the world

the product

(many

cycle theory,

from

the pro-

duction of products with more mature technologies and facing steeper price competitive pressure is shifted to developing countries (e.g., in electronics and computers, mainly ASEAN and lately China for computer peripheral like floppy disk, low-end printers, vides an illustration of an international production

etc.). Figure network.

1 pro-

102

The Philippines beyond 2000: An economic assessment

to be important. The two most important investor countries, Great Britain and France, invested not only within Europe but also in Canada, South Africa, Latin America, Australia and Asia. The investments were primarily in infrastructure (e.g., railways, electricity, etc.), mines and a few industries including tropical plantation (Lewis 1978). _qevertheless, the magnitude of capital flows in recent years is a quantum leap from the levels of the early years of the century. Net medium-term and long-term capital flows to developing countries, which averaged about $20 billion per year (amounting to 0.7 percent of GDP) during 1982-1989 rose to $104.8 billion (representing 2.3 of GDP) in 1993 (Khan and Reinhart 1995). Equally important is the sharp rise of portfolio flows in recent years. For example, for the APEC developing countries which account for the bulk of capital flows to the developing countries, portfolio investment which averaged about $0.9 billion per year during 1982-1989, increased dramatically to $37.1 billion in 1993 thereby nearly equaling the level of foreign direct investment (at $39.5 billion) during the year (Khan and Reinhart 1995). Like in the early 20th century, capital flows were facilitated by minimal government interventions in capital outflows. However, unlike in the early years, current flows occur through a sophisticated and increasingly and internationally integrated financial system. Also, unlike in the early years under the silver and gold standards, the magnitude of international capital flows at present has significant potential impact on the macroeconomic variables in net receiving countries. As the current currency turmoil in Southeast Asia suggests, capital flows bring potential macroeconomic risks apart from potential economic growth benefits. The macroeconomic risks arise because capital flows exacerbate inappropriate policy mixes, inadequacies in the domestic financial systems and institutions, and weak monitoring by inadequately staffed regulatory authorities. The cun-ent currency turmoil in Southeast Asia, to some extent, points to the next stage of policy reforms in the region, These reforms would include: (1) improving macroeconomic management; (2) addressing structural inadequacies in the domestic financial systems including the need for greater transparency and. more effective monitoring and oversight" (e.g., regulators and monitors not co-opted by the regulated financial institutions); (3) encouraging greater competition in the financial system; and (4) improving the institutional capacities of the regulatory authorities. The current currency and economic turmoil in the region should be viewed as part of the process of the deepening

Chapter 2: Intal and Basilio

103

economic integration of the Southeast Asian economies with the world economy, not only in trade and production but also in finance. It may be noted that while the late 19th century is characterized by large international movements of people (immigrants) and less of capital, the late 20th century can be characterized by large flows of capital and less of people (given stricter immigration rules). Of course, to some extent, the large capital flows and the growing globalization of production networks make international mobility of people in terms of permanent migration less pressing while making international mobility of people in terms of temporary migration more important. The Rise of Asia and the Pacific Another differing characteristic of the current international economic environment from the "first world economy" is the rise of Asia and the Pacific now compared to the centrality of Northwest Europe during the late 19th century. East Asia, comprising China (including Hong Kong), Japan, Korea and Taiwan, accounted for 8.8 percent of world total trade in 1970, which increased to 14.9 percent in 1990 and 18.2percent by 1995. The share of Southeast Asia (ASEAN) to total world trade increased from 2.2 percent in 1970 to 5.0 percent in 1990 and 7.0 percent in 1995. The share of APEC member economies (excluding Brunei) to total world trade has increased for 33.3 percent in 1970 to 39.6 percent in 1990 and 45.1 percent in 1995. The share of the East Asian and APEC member economies to world output, increased from 47.2 percent in 1980 to 53.6 percent in 1993 (Table 1). It may be noted that the rise in the region's share to total world trade is higher than in the region's share to total world output. This reflects the comparatively greater trade orientation as well as the increasing economic integration of the economies in the region. Underpilming the rise in the share to total world trade and output is the significantly higher rate of growth of output, exports and imports of many of the East Asian economies during the past two decades. Popularly described as "tigerhood" or "dragonhood", it is the markedly higher rate of growth in the region which has attracted the attention of the world and which has spawned controversies with respect to the factors that contributed to such high rate of growth. Despite the current currency turmoil in the region which has somehow dimmed the public perception of the "East Asian Miracle", one keydetermining characteristic of the Asian "tigers" or "dragons" is their high investment rate, funded largely by the high domestic saving rates

Table 1. Share to World Total Trade (In percent). 1966

1970

1975

1980

1985

199'0

1991

1992

1993

1994

1995

1996

1997I-III

WORLD

i00.00

100,00

100.00

100,00

100.00

100,00

i00.00

100,00

Brunei Indonesia

0,03 0,30

0.03 0,34

0,08 0.69

0,13 0,54

0,09 0,76

0,05 0,70

0,0S 0,75

0,84

............... 0,87 0,84

0,84

0,87

0,85

Mahysia PhlEpplnes Sin gapor_ Thailand

0,60 0,45 0,61 0.40

0,51 0,37 0,66

0.41 0.35 0.79

0.61 0.36 t ,[ 1

1,23 •0,27 1,30

1.45 " 0.31 1.67

1,64 0,31 1,77

1.10 0.34 1.85

1,24 0,40 2,12

1,39 0,42 2,34

1.49 0.45 2.38

1,47 0,51 2,41

1,49 0.58 2.40

0,33

0,32

0,40

0,43

0,53

0.93

1,00

!, 10

1,17

1,25

1,22

1,i5

2,26 0,24 1,30 0,78 4.86

2,30 0,46 0,75 0,89 6,24

2,79 0,71 0.91 0.75 6,65

3,60 1,02 0,97 1.08 6,93

3.49 i.13 1,84 1,58 8,13

4,36 1,33 1,69 2,41 L66

4.g0 1,54 1,92 2,82 7,81

5,14 2,17 2,26 3.32 7.53

5.73 2.2[ 2,59 3,65 g,05

6,16 2,__2 2,77 3,67 7,88

6,4i 2,55 2,72 3,59 7.63

6.49 2,63 2,73 3,57 7,15

6,50 2,59 2,81 3,60 7,05

_. _'

Taiwan EAST ASIA

0,29 9,67

0,48 ll.lg

0,72 12,43

1,0l 14,25

1,34 17,81

1.79 19,85

1,97 21.40

2,10 22,65

2,16 24,24

2,09 24.72

2.11 24,91

2.04 24,50

2,14 21,5l

Aust_lia Canad_ Chile M_=ico

1,71 5.06 0.43 0,71

1,6[ 5,08 0,38 0.63

1.32 4,10 0, t8 0,55

1,13 3,32 0.2"1 0,89

1,28 4,53 0,18 0,95

1,20 3,65 0.24 0.54

1,18 3,57 0,24 0.93

1,1g 3.60 0.25 1,05

1.18 3,79 0,27 1,07

1,18 5,75 0,27 1,12

1,12 3,53 0,31 0.93

1,19 5,54 0,31 1,13

1,19 3,82 0,33 1,29"

New Zealand

0,88

0.40

0,31

0,28

0.31

0,25

0.25

0,26

0,27

0.25

0,27

0.27

0,21

Peru USA PACIFIC & LA

0,40 14.41 23,27

0,27 13,90 22,27

0.22 12.58 19,25

0,16 12,31 lg.37

0.t3 15,10 22,49

0,10 13,34 !9,66

0,11 13,i7 19,45

0,11 13.70 20.15

0.11 14,23 0,92

0,i3 14,08 20,$3

0,15 13,2g t?.60

0,14 13,61 20,21

0, i6 14,50 21,5S

ASIA-PACIF II3_

35,20

35,75

34,47

36,22

43,58

43,57

45.65

47,98

50,gg

51.70

50,92

51,20

52,56

SOUTHEAST Korea China I-Ion g kon 8 Japan

" except

_.SIA*

BruneJ

P preliminary ' estimate Basic

data

source."

IMF

International

Financial

Statistics,

various

issues

O O _ _"

Chapter 2: intal and Basilio

of the countries.

Recent

105

studies

(e.g., Mason

1997) indicate

that the

high saving rates are, to a large extent, a "demographic bonus", an aspect that was not highlighted in the World Bank East Asian Mfi'acle book.

Specifically,

the high saving rates are a result

of the happy

hap-

penstance of declining fertility rates and dependency ratios and of good economic policy regimes that resulted in good returns to the growing investible funds from the rising domestic saving rate (i.e., high economic growth). This symbiosis was perhaps more tightly "managed" by the Northeast Asian NIEs (i.e., Korea and Taiwan) by their credit bias toward their tradable

sector (exports

than the ASEAN countries port to their nontradable

and import substituting

thereby weakening their financial institutions rent account deficits). Nevertheless, precisely saving

rates

in most

industries)

rather

(which have allowed an excessive credit supsector, especially the property sector, and

countries

and bloating their curbecause the rise in the

in the East Asian

region

stem largely

from the sigmficant demographic change that occurred during the past two decades, it is likely that the domestic saving rates in these countries would

not drop precipitously

during

the current

economic

diffi-

culties, in contrast to the experience of the Philippines during the 1980s. With their comparatively better economic fundamentals in terms of saving rate, export

orientation

and fiscal surpluses,

mies currently battered by the currency turmoil recover well in the near future from the present

the ASEAN econo-

would likely be able to economic difficulties.

The World Bank projections of the world economy's growth rate until the year 2005 show that East Asia will remain to be the economic growth

leader

in the world

(at a per annum

rate of 7.9 percent

during

1996-2005), followed by the non-OECD developed countries (at 5.5 percent per annum) and the South Asian economies (at 5.4 percent per annum) jections

(World Bank 1996). The cmTently available World Bank proare as of 1996, which do not take into consideration the current

currency

turmoil

in the area.

While

it is possible

that there

may be

some reduction in the projected average growth for the region through 2005 as a result of the current economic problems, it is likely that the region

remains

China continues more important comparatively

the growth

leader

in the world.

to grow at a fast pace and as the country to the regional and international economies. higher

economic

growth

projected

tries, it is likely that by year 2005, the three world

This is especially

are all situated

in the Asia Pacific

becomes With the

for East Asian coun-

largest

region,

so as

economies

in the

i.e., the US, Japan

and

106

The Philippines beyond 2000: An economic assessment

China. In addition, large countries like indonesia, India and Russia are also expected 'to move up in the future in terms of world ranking in level of national output and trade. In the process, the locus of international economy veers inexorably to the Pacific and away from the Atlantic (between Europe and the US). The Philippines, which is situated in the geographic heart of East Asia, will be heavily influenced by the developments in the Asia-Pacific region. Indeed, the Philippine trade pattern has moved over the past two decades toward greater integration with the rest of the region (Table 2). As shown in Table 2, the ranking of the top 15 trading partners of the Philippines has changed significantly during 1975-1995. Specifically, countries in Western Europand the Middle East slid down in ranking, making way for the sharp rise in importance of the Asian NIEs (Korea, Singapore, Hong Kong) and the other ASEAN economies (Thailand, Malaysia). The Asia-Pacific region now accounts for about three-fourths of total foreign trade of the Philippines. The Philippine trade in the Asia Pacific is largely a three-way flow, that is: the Philippines as net exporter across the Pacific to the United States and a net importer from the rest of East Asia. At the same time, the sourcing of imports from East Asia has been shifting toward the Asian NIEs in part as a result of currency shifts in the region (Intal and Aldaba 1994). In short, Philippine international trade is intimately linked with the fortunes of the Asia-Pacific region. "Flying Geese" and Sh$£ts in Comparative Advantage The intimate link between the fortunes of the Philippines and the Asia-Pacific is exemplified by the economic restructuring in East Asia since the latter 1980s. Popularly described by Japanese analysts in terms of a "flying geese", the ongoing economic restrncturing in the region reflects shifts in comparative advantage arising from the changing relative factor prices (accelerated by exchange rate changes) and greater vertical and horizontal integration of production systems in part along the lines of endogenous product cycles in the region. Investment flows and technology transfer, primarily to ASEAN and China in the late 1980s and early 1990s, provided the important mechanisms for the acceleration in the shifts in comparative advantage in the region. The differing factor endowments and levels of development arn.ong the countries in the Asia-Pacific, in tandem with the comparatively high economic growth, have contributed to the increased eco-

Table 2. Major Trading Rank

Partners

of the Philippines

1975

1980

to Total

Trade (In percent).

1985

1990

1995

_* g_

1 2

Japan USA

31,39 25.01

USA Japan

Saudi

6.56

Saudi

4 5

Netherlands Germany

3.79 3,47

6 7 8

United Kingdom Australia Kuwait

France

Arabia

Canada

25.21 22,66

USA Japan

30.14 16.47

uSA Japan

26.61 18,94

USA Japan

25.43 i9.79

6,05

Malaysia

5,47

Netherlands

17.67

Singapore.

5.66

Germany Netherlands

4.26 3.44

Germany Hongkong

4.56 3,90

Germany Hongkong

4.48 4,27

Hongkong Korea

4.83 4,10

3.28

Kuwait

3.06

Singapore

3,88

Singapore

3.52

Saudi

3,72

2.92 2.53

Hongkong Korea

2.80 2.47

China United

3,65 3.31

Korea Saudi

3.44 3.02

Germany United

3.54 3,07

1.54

Australia

2,43

Kingdom Saudi Arabia

3.15

United

2, 91

Kingdom Thailand

2.68

2.38

Netherlands

2.5t

Arabia

1.53

United

2.39

Korea

2.85

Kingdom Australia

Arabia

Indonesia

1.42

Kingdom Indonesia

2.09

Austra|ia

2, 65

Malaysia

1.96

Australia

2.12

It-an

1,28

China

1.89

Kuwait

2.32

Canada

1.49

Malaysia

2,05

China

I. 18

Malaysia

1.83

_donesia

2.11

Thailand

1.44

China

1.91

Hongkong

1.03

Iraq

1.80

Netherlands

1,69

France

1.43

Indonesia

1.64

Malaysia

1,00

Singapore

1.74

France

1.6I

Indonesia

1.24

France

i. I5

Sol_rce:

UNCTAD

International

Trade Statistics,

various

1_ _.

years.

"-,1

108

The Philippines beyond 2000: An economic assessment

nomic linkages and shifts in comparative advantage in the region. Resource endowment proxies are shown in Table 3. The Asia-Pacific can be grouped into the natural resource-abundant countries (Canada, US, Australia, New Zealand, Chile), the natural resource-poor countries (Japan, Asian NIEs) and at the middle, the ASEAN countries and China. Human capital proxies and, GNP per capita for physical capital, point to the developed countries to be well-endowed while the developing countries ASEAN and China bring up the rear; the Asian NIEs are in the middle but with South Korea nearing the levels of the developed countries. The revealed comparative advantage (RCS) estimates by Yamazawa and Okuda (1994) bring out the enduring comparative advantage of the natural resource-abundant countries in resource-based products as well as the shifts in comparative advantage in a number of manufactures consistent with the evolving differences in human capital and teclmological capability (Table 4). Japan, US and Canada have lost comparative advantage in low-skilled labor-intensive manufactures in favor of China, the ASEAN-4, and South Asia. In turn, Japan, US, Canada and the European Community have moved to machineries, which are highly skilled labor and technology intensive. Consistent with the shifts in comparative advantage, the ASEAN4 and China experienced major changes in the structure of their exports. Specifically, the share of exports of manufactures has risen dramatically while that of primary products exports declined substantially. Indonesia's comparative advantage in labor-intensive manufactures has been primarily in low-skilled labor intensive industries like footwear, garments and textiles while Malaysia's export niche has been in the electronics and electrical machinery sector, which is comparatively more skilled-labor intensive (Table 5). RP's Revealed Comparative Advantage and the Challenge of Economic Restructuring Table 5 also shows the shifts in comparative advantage of the Philippines during the period 1975-1990. The table indicates that the country's revealed comparative advantage in agriculture-resource intensive exports declined substantially during the late 1970s and the 1980s. Meanwhile, it gained comparative advantage in low-skilled labor-intensive manufactures (primarily garments) and in human resource-intensive industries (especially electronics and electrical machinery). The RCA estimates in Table 5 have not been updated to the mid-1990s. Nev-

Table 3 . Resource

Endowment

Proxies.

Population

Ag, Pop"

<;NP per

density" (PersonMsq.m)

Ag,La nd (Person._/ha)

ca pila (USS)

t-k Mean

"t_a rs

of Schooling (25+ years old)

Secondary

Tertiary

Enrollmen_ (_A--) Fenta [e _'

Education

(% of poptfla tion of gradtmting age)

]atyma

329

1.70

26840

10.8

23.7

USA Canada

27 3

0.03 0.02

22340 20510

12.4 12.2

N.A 101

29.6 33.3

.MlStralia

0.02

17120

12.0

3¢.4

4.50

13580 6350

7.2 9.3

75 86

6.7 3 7. 7 .r

,._

14140

4.0

5.8

tz Hong Kong South Korea

5800 445

Singapore

2800

Indonesia

100

3.70

610

4,1

0,6

MaLaysia Philippines Thaikmd Vietnam

57 217 109 209

1.10 3.60 1.50 6.10

2520 740 1650 150

5.6 7.6 3.9 4.9

58 75 32 40

1.4 6.7 5.0 NA

China

124

8.00

370

5.0

0.5

Bangladesh India

830 268

8.70 3.20

220 330

2.0 2.4

11 33

0.6 NA

l:Xalos tan Sri Lanka

162 268

3.10 4.70

400 500

1.9 7.2

13 77

N.A 1.4

Fiji Papua New Guinea Solomon Islands

39 9 10

1.20 6.60 5.60

1920 930 700

5.1 1.0 1.0

57 10 NA

1.1 0.6 NA

arable

land and permanent

Agricultural Population hAs percent of cohort Male and female dEnrollment rate Source: Intal (1996).

as a ratio of agricultural

land

(defined

to include

crop

land) _'_

110

The Philippines beyond 2000: An economic assessment

Table 4. Revealed Comparative mies, by Group. _Agricultural Products Japan 1970 1.990 NIEs 1970 1990 USA 1970 1990 Aust-NZ 1970

Minerals

Advantage

Labor-lntexlsive Manufactures

of Asia-Pacific

Machinery

Econo-

Capital-Intensive Manufactures

0.31 0.10

0.1 1 0.09

1.01 0.58

1.61 1.97

1,,44 0.67

0.70 0.41

0.18 0.12

2.61 2.45

0,50 0.97

0.62 0.65

1.1 l 1.16

0.60 0.43

0.43 0.71

1.63 1.34

1,02 0,94

3.57

1.46

0.05

0_25

0.53

1990 ASEAN 1970 1990 China

3.32

2.06

1,05

0.18

0,45

3.51 1.56

1.94 1.57

0.26 1.18

0,13 0.82

0.22 0.42

1970 1990 South Asia 197 0

3.14 1.44

0,29 0.71

1-18 2.23

0.13 0.51

0.76 0.73

2.54

0,59

1.44

0.t8

0.61

1990

1.86

0.41

2.62

0.15

:1.06

Source:

Intal

et. al. (1996).

ertheless, it is likely that the country's rise in revealed comparative advantage in human resource intensive industries consolidated further during the 1990s. In contrast, the country's revealed comparative advantage in low-skilled labor-intensive manufactures may have likely deteriorated in the light of the problems faced by the Philippine garment industry in the face of stiffer competition from lower-cost exporting countries in the region as well as from Mexico and the Caribbean countries (for the US market). The changes in the commodity composition of Philippine exports during the late 1970s and the 1980s, as indicated in Table 5, seem to suggest that the Philippines followed the ASEAN pattern which is consistent with the dynamic changes that transpired in the region during the late 1980s and the early 1990s. However, the changes during the 1980s reflect weaknesses of the Philippine economy in sharp contrast to the dynamism of the other ASEAN countries. The comparison with Malaysia may be in order. While both Malaysia and the Philippines registered declines in revealed comparative advantage in primary prod-

Chapter 2: Intal and Basilio

Table 5. Revealed

111

Comparative

Advantage

Indices:

ASEAN- 4.

1.975

RCA Indices 1980 1985

1990

1. Indonesia ARI MRI ULI HRI TI

1.29 3_36 0.01 0_03 0.01

1.47 2_59 0.07 0.02 0.01

1.66 3.53 0.41 0.06 0.03

2.19 3.11 1.14 0.05 0.06

2. Malaysia ARI MRI ULI HRI TI

3.76 1.07 0.46 0.21 0.24

3,16 1.19 0.37 0.05 0.16

2.89 1.80 0.34 0.67 0.13

2.09 1.36 0.27 1.07 0.34

3. Philippines ARI MRI ULI HRI T1

2_03 0.39 0.62 0.36 0.06

1.63 0.42 0.86 0.64 0.16

1_48 0.34 1_11 1.01 0.11

1.18 0.46 1.42 1.02 0.21

4. Thailand ARI MRI UL[ HRI TI

4.82 0.47 1.10 0.46 0_05

3_93 0.49 1.18 0.13 0_27

4.46 0.46 1.79 0.28 0,20

2.74 0.38 1.85 0.64 0.13

Notes:

ARI = Agricultural Resource-Intensive MR.t= Mineral Resource-Intensive ULI = Unskilled Labor-Intensive HRI = Human Resource-Intensive TI = Technology-intensive Source: Intal et al. (1996) ucts, the decline in the Philippines occurred because of the absolute decline in exports earnings from US$3.1 billion in 1980 to US$1.6 billion in 1990: decline

for RCA occurred

despite

the increase

lute level of primary

product

earnings

(from US$9.9 billion

exports

1980 to US$11.7 billion in 1990) because

in the absoin

the level of exports from manu-

factures rose dramatically during the period (from US$2.7 billion in 1980 to US$17.4 billion in 1990) (Intal 1995). Poor world market funda-

112

The Philippines beyond 2000: An economic assessment

mentals for the country's traditional agricultural exports, the worsening natural resource constraints and the deteriorating international competitiveness led to the sharp fall in export revenues from agricultural products. More fundamentally, the poor performance of the Philippine trade sector during the period reflect the effects of stagnant labor productivity in the Philippines in contrast to the sharp rise in labor productivity in the other competitor countries in the region (e.g., ASEAN countries, China) and combined with the real appreciation of the peso vis-fi-vis the currencies of the competitor countries, esp. China and Indonesia (Tables 6 and 7). it is clear that the Philippines faces formidable challenges in its efforts to reverse the dismal performance of the Philippine economy during the 1980s into sustained winning performances in both the agri- • cultural and industrial sectors in the future. As the next section of the paper indicates, the country needs to address a large number of concerns before the current economic resurgence is sustained. Meeting the Challenges of Globalizationand Sustainining the Philippine Economic Resurgence Gearing up for greater integration in the global arena calls for a holistic improvement of the economy. To be able to benefit from deeper economic integration with the rest of the world, the Philippines would need a facilitative macroeconomic policy environment (i.e., higher saving rate, outward orientation and "investment friendly" measures), sustained productivity improvements and stronger institutional and human resource capacity. Sustained productivity growth, in turn, necessitates more efficient resource allocation, more effective infrastructure and bureaucratic support services, and higher rate of technological absorption and adaptation (Intal 1996). Savings Mobilization and investment Facilitation Raising the Savings Rate Mobilization of domestic savings plays a significant role in the quest for a sustained high economic growth. High domestic savings provide for greater domestic investments and facilitate foreign direct investments through joint ventures and improved macroeconomic expectations. Between 1970 and 1997, saving rates rose sharply for most of the Southeast Asian countries (Table 8). Positive real interest rate, availability and accessibility of financial institutions, higher returns on in-

Chapter 2: Intal and Basilio

113

Table 6. Indices of Average Labor Productivity, ture and Manufacturing (1975= 100). Country

Overall,

Agricul-

1975

1980

1985

1990

1996

China

overall

100

122

131

140

.,.

Indonesia

overall

100 _

126

131

148

204 b b

(1993 prices)

a_Ti m[_tg

100 _ 100_

104 155

121 194

114 242

160 b 310

Malaysia (1978 prices)

overall agri mftg

100 100 1.00

125 133 104

13.8 158 118

161 201 143

216 281 181

Philippines (1985 prices)

overall agri mftg

1.00 100 100

119 117 1.19

92 100 96

102 109 108

99 108 100

Singapore (1985 prices)

overall agri mftg

100 100 100

116 114 115

137 194 128

171 177 171

233 288 272

Thailand

overall

100

116

132

181

297

(1988 prices)

agri. mftg

100 100 '

101 121

1.1.3 133

118 178

234 210

_• 1976 b 1995 Data sources: Intal (1996); ADBKey Indicators (1988and 1997).

vestment

ventures

promoted

domestic

savings

(Eggleston

1997), higher

economic growth rate and a rapid demographic transition (Mason all contributed to the sharp rise in the domestic saving rates In contrast, was comparable

the Philippines' to the other

gross

Southeast

domestic

saving

Asian countries

1997)

rate, which in the 1970s,

ch-opped substantially in the 1980s and early 1990s and is currently the lowest in the region despite some slight increases in recent years (Table 8). As a result, the investment rate in the country is lower and the country now would have to rely more on foreign financing (i.e., foreign direct investment, foreign portfolio capital and foreign loans), thereby making

the investment

climate

vulnerable

to the foreign

investor's

per-

Table 7. Real Effective

Exchange

Rates of Selected

Countries,*

1975-1997.p

Co_n Iry

|975

1976

- 1977

l _t'/8

1979

[980

198l

19_82

[983

1984

19'85

1986

[987

[988

I989

1990

199[

1997.

I993

1994

I9"95

1996

_997 r

PhiI[pptne_

91.83

91.oI

90_68

98,31

89.O7

86.98

34,O8

80.17

97.24

97.87

33.25

100.13

104.75

105.11

98.19

100.O0

97.86

8ff.98

85.04

79.51

76.23

7O,50

72.29

_in_g_porc Tl'_il_nd

99.55 90.9O

1[2.]0 91.55

117,47 93.91

113_35 98.7O

122,34 99.12

123.45 92.92

113.89 [g5.68

[O9.98 85.]5

109.00 85.42

109.37 86.75

[O9.83 97.52

109.57 98_80

112,45 103.58

ill.06 104.19

]07,18 101.63

]OO.O0 IO0.O0

95,34 97.21

92.59 95.50

91.87 95.74

35.88 94.4,4

84.24 94.5l

52.32 87.91

79.22 98.7O

lndon_ia

48.O5

4_.t)6

41.49

47.91

62.75

61.23

57.92

52.15

84.71

56.2O

67.41

82_42

106.H

109.70

]06,98

100.00

1ol. 12

K)l.13

99.74

99.95

t_2.22

9O.37

97.45

P,lalaysia

72.75

78.4_

?8.85

80.70

82_0_

8_,82

89.85

82.12

78.05

75.88

78.O4

83_0

39.49

95.34

93.05

100.00

99.68

9O.0O

87.05

89.O5

85.1]

81.47

84.57

K_ea Ito_gkor_

125_7] 129.34

l[5.7_ 128.33

114.84 125.42

11_.56 1_0.35

IO4.96 [47.9O

114.83 [49.[2

][1.33 149.12

]09.82 140.53

[15.93 223.70

llL08 201.52

[86.76 187.77

130.57 145.55

126.13 [34.4O

114.08 ]27.95

]00.08 []7.2(>

[O0.O0 [00.00

98.08 86.10

1OL17 77.52

105.68 57.93

]08.74 34.47

190.93 58.89

98.10 5].18

J08.83 47.82

Taipei

I35.44

189.87

141.59

138.30

145_38

133.]5

[21.05

127.21

132,07

182.46

]34.44

[29,36

113.88

100.87

97.73

1O0.00

99.95

98.83

98.[6

98.[1

99.78

9Y.99

_b2.31

PI_OC Inc$ir_ P_ k i_La_

35.03 59.58 58. ]6

38.12 7] .99 37. 01

37.55 72.13 6 O.O4

38.56 75.6O 52

33.32 77.87 5O.64

30.63 75,52 6 2. 72

30.46 75.51 56. 62

31,72 74.22 5[. 9 4

32.63 72,26 6 6. 77

38.55 75.27

5O.23 79.85

6[_08 80.21

71.27 82.4O

75.24 85.80

77.17 94_46

1O0.00 1O0.00

1[5.61 [17.52

123.02 124.34

128.06 138.62

193.48 132.22

191.15 1M_48

182.62 _31.75

175.7_J 124.8]

5 4 •64

72.40

80.55

89.07

89•85

94.82

[00.00

10[.49

[01.94

_04_3q

P04.39

]88.63

l08•0 q

107.03

Bangladesh S,r[ l[_nk_

60.27 39.83

75•92 43.83

8_.8_ 55.58

90_23 ]OO.30

87.50 [01.58

83.O2 95.61

89.75 95.58

95.53 92.47

102.73 95.`45

95.99 83.55

96.58 95•44

101.SJ 93_5[

1Ol,81 99.O7

99.04 99.38

92.9O 1oZ.2ff

100.00 1O0.00

[00•03 93.38

105.03 9l•25

[O3.68 89.23

104.38 85.85

105,37 38.38

107•43 5[.70

99.07 77.38

1980,

1985,

1990,

1995

* Export shares: p Preliminary

F_2

Basic data sources." IMF International the Republic of China, 1993, Monthly Trade, 1995 Yearbook

Financial Statistics, Bulletin of Statistics

ADB Key Indicators for Developing Asian and Pacific Countries, Statistical Yearbook - China, March 1997, Financial Statistics in the Taiwan Area of China, IMF Direction

of of

('_

_v'_' v._E

_._

Chapter 2: Intal and Basilio

115

Table 8. Gross Domestic Saving (Percent of GDP). Country

1,971-80

1990

1996

1997

lj_donesia

21.6

32_3

30,2

31.0

Korea

22.3

36.2

35.2

34.5

Malaysia

30.4

33.4

42.6

43.8

Philippi.nes

23.4

18,7

18.8

19-2

Thailand

22.2

34.2

33.7

31.0

Sources:

ADB Key Indicators

(1985)

and ADO (1998)

ception of the Philippines. This means that, during its deliberations of policy reforms, Philippine policymakers would have to consider highly the possible impact of these reforms on foreign investors and lenders who have become a key player in Philippine economy. The drop in the country's saving rate in the 1980s and early 1990s arose primarily from the decline in per capita incomes during the economic crises and recessions during 1983-1985 and 1991-1993(Figure 2). Household and unincorporated business saving, which dominated national saving until the late 1980s, was particularly hard hit by the decline in per capita incomes and has continually become low since then. it has been corporate saving, and to some extent government saving, which has been rising in recent years. Nevertheless, Philippine government saving has been generally low and variable, in sharp contrast to the higher government saving and better fiscal positions of the other Southeast Asian countries, at least until 1996. The government saving rate of 3.8 percent during 1992-1995 is much lower than Indonesia's (9.7%), Malaysia's (6.2%), Singapore's (D.7%) and Thailand's (7.4%) during 1990-1993 (Intal, 1997c). In view of the importance of a high saving rate for a sustained high economic growth rate, it is critical that the country creates and sustains the environment that encourages high domestic saving rate. Fundamentally, this means robust economic growth rate, positive real interest rate, more attractive and accessible financial saving instruments and lower fertility rate. Drawing from the experience of the 1980s and early 1990s, it is important that declines in per capita incomes are avoided so that the household savings rate does not drop and would increase instead. Robust economic growth could translate to higher overall propensity to

116

The Philippines

Figure

2. Philippine

Saving

beyond

Rates

2000: An economic

assessment

(1970-1996).

0 1970

1972

I974

7,976 1978

1980

t982

1984

1986

1,988 1990

1992

1994

1996

Year Gross Saving NationalofCorporation Saving Gross

save as it raises employment with higher saving rates. Explicit

incentives

.......

Net NationaJ and Saving t-lou,sehokls Unincorporated Enterprises

and increases designed

the incomes

to encourage

small

of the age groups savers

also fa-

cilitate more efficient mobilization of household saving. For so long, small saving deposit rate has been negative, thereby acting as a deterrent to financial saving of households. Policy measures designed to encourage small savers include the elimination of the final tax on interest incomes from small savings stamp tax on smaller_denominated Robust

economic

growth,

and other taxes like the documentary government securities. a competitive

environment

and an ef-

ficient pension system, on the other side, may raise corporate saving rate. There may be a need to restructure and reform the country's major social security systems (especially the GSIS) in order to maximize investment returns as well as reduce the administrative comparatively higher than in other Southeast Asian Singapore. The country pension reform whereby

cost, which is countries like

may well explore the Chilean experience in a number of private firms that met selection

Chapter 2: lnral and Basilio

117

criteria compete aggressively for the management of pension including the government, thereby ensuring the maximization vestment returns. The government

can contribute

to higher

national

raising the government saving rate. This means fiscal discipline. In turn, this means improved through through

funds of in-

savingrate

greater emphasis on tax effort preferably

improved tax administration to mitigate tax evasion and minimization of the erosion of the tax base (through very lib-

eral and wide areas of tax exemptions). Fiscal discipline also demands better programming of government expenditures to reduce government

wastes

(especially

the societal cracy.

returns

Lastly,

in the infrastructure

from

government

the East Asian experience

in dependency

ratio and fertility

rates

sector)

expenditures indicates

and to increase and the

bureau-

that steady

declines

over time in an environment

high economic growth facilitates a rising trend in saving rates (Mason 1997). The average increase in Asia's saving rate due to demographic factors has been estimated to be about 5-percentage Thus, the demographic transition in the country rate and dependency rate should

catch

ratio) has to be accelerated

if the country's

up with the rest of the economies

Aggressive Investment PromoO'on In view of its comparatively low domestic pines can only raise the country's

investment

points (ADB 1997). (i.e., lower fertility saving

in the region.

saving rate, the Philiprate significantly

higher

than the domestic saving rate through foreign capital inflows, instead of foreign loans and foreign portfolio inflows, it is best that the capital inflows are direct investments. Foreign direct cant source of private resources, employment,

investment is a signififoreign exchange and

technological improvement. Much of the increase in the global trade share of the region has been associated with a rise in foreign direct investment.

However,

although

its share of FDI inflows

has grown, the

Philippines has not been a major recipient of foreign direct investment in the region. Only one-third of investment inflows in the Philippines during

the early 1990s is accounted

half for other

economies

for by FDI as compared

in the region.

with about

The bulk of the investments

the Philippines remain to be portfolio flows and external borrowing (World Bank 1997). While the improvement of the country's economic performance and prospects

as well as political

stability

remain

to be the ultimate

118

The Philippines

beyond

2000: An economic

assessment

encouragement for foreign investors, it is worthwhile for 'the government •to invest more resources in a more aggressive investment promotion. In addition, the government bm'eaucracy would have to be more "investor- friendly." This could be achieved if there is greater coordination among concerned agencies to streamline systems and procedures to reduce the transactions costs of setting up businesses and implementing investment programs. The government's fiscal incentive system would have to be restructured to be more focused to fewer industries in support of exports and industrial restructuring in. order to reduce the fiscal burden of the fiscal incentives. At 'the same time, however, it may be useful

to provide

greater

flexibility

in the granting

the incentives consistent with the needs of the targeted industries and interested firms, given, the overall notional fiscal budget for fiscal incentives. Productivity-Wage Rate-Exchange Rate Meeting the demands of global integration maintaining tiveness.

and widening

the country's

This brings out the importance

ity and the relationship rate. From

the late

among

wages,

Nexus essentially

requires

area of international

competi-

of improvement productivity,

1970s to the early

in productiv-

and the exchange

1990s, the Philippines

lagged

behind its Asian neighbors in labor productivity growth, especially in mannfacturing. China and Indonesia were the leaders and both countries also experienced the largest real depreciation compared to the other Southeast Asian countries (Intal 1997c). As a result, the international competitiveness of the two countries improved and has been rewarded by the significant rise in exiiorts, especially for China. For the Philippines,

the loss in international

competitiveness

in the 1980s and

early 1990s is reflected in its poor export performance during the period. Labor productivity has improved in selected industries in the manufacturing sector in recent years (World Bank 1997; Chapter 8 of this book), which the country's

may have contributed

export

performance,

to the recent

although

largely

improvement limited

commodities primarily in electronics and electrical machinery. A comparison of the value added per worker (as a measure labor productivity), to labor prodnctivity

'to a few of

wage and salary per worker and the ratio of wages relative to the United States (i.e., US = 100) for the

whole manufactm:ing sector in a number of countries during the 1980s and early 1990s is given in Table 9. The estimates are based on value

Chapter 2: Intal and Basilio

119

added and wages in US dollars at current prices; thus, the estimates are comparable only on the assumption that the exchange rates are not seriously distorted. Because the exchange rates in the selected countries were not seriously distorted during the period, the comparisons in Table 9, although based on current prices, remain robust. In addition, it is shown in the table that Japan and the Asian NIEs (here, Korea, I-Iong Kong and Singapore) experienced secular rise in unit labor costs (i.e., ratio of wages to labor productivity) relative to the United States despite rising labor productivity. This reflects the increasingly tight labor markets in the countries during a period of high economic growth rates. The experience of the ASEAN-4 countries was varied. Malaysia followed to some extent the experience of the Asian NIEs, except that labor productivity did not increase relative to the US but wages and salaries did. This reflects the tightness of the Malaysian labor market in the face of one of the fastest growth rates in the world during the late 1980s and early 1990s. In sharp contrast to the Malaysian experience, Indonesia's unit labor costs declined relative to the US. The decline arose from rising labor productivity relative to the United States.

with no secular rise in wage rates

The Philippines offers the middle ground between Malaysia and Indonesia. Specifically, the country's unit labor cost fluctuated relative to the United States during the period and without any clear secular trend. The unit labor cost relative to the U.S. was highest in 1989, resulting from a sharp rise in wage rates (the year the minimum wage rate rose significantly) at the same time that labor productivity fell. Since 1989, unit labor costs have declined relative to the U.S. as labor productivity improved more than the rise in wage and salary per worker. The overall picture at the whole manufacturing sector masks, however, significant differences in cost and productivity performances at the subsector, industry levels (Table 10). For the Philippines, based on the 1982 and 1993estimates, the country's unit labor costs relative to the U.S. increased in food products, textiles, leather products, wood products, industrial chemicals, other chemicals, i_lbber products, fabricated metals and electrical machinery although, with the exception of leather products, unit labor costs in these industries remain lower than in the United States. Philippine industries with lower unit labor costs during the early 1990s compared to the early 1980s include footwear, paper products, printing and publishing, plastic products, transport equipment and other remaining manufactures.

120

The Philippines

beyond

2000: An economic

Table 9. Wages and Value Added per Worker Labor Productivity. Wage & Salad, per worker

and Ratio

assessment

of Wages

(US_ I00) 1979 1982

1986

1989

1990

1991

1992

1993

._apan Korea

69.2 18.9

59.6 31.8

82.3 15.1

101.3 31.8

98.0 34.8

106.9 39,2

111.8 40,5

126.6 43.0

lqm_gkong Sh:gapore Indonesia

22.7 23.6 3.9

22,9 28.9 2.8

25.1 29,7 3.7

29.7 35.0 3.3

32,3 40.0 2.5

35.7 44,4 2.6

38.2 49.2 3.0

41.8 52.5 3.1

Malaysia Philippines Thailand

12.2 6.6 ,..

12.9 6, I 11,6

12,5 5,4 7,5

11,0 7,3 8,8

10.9 6.7 9.5

12,3 6.9 .........

12.8 8,7

1,3,1 8.3

Bangladesh India Sri Lanka Austra[ia Ca,'_ada

3,5 5.6 2.0 77,7 91,4

2,6 5.3 4.9 78.3 93.5

2.5 5.2 2.3 61,1 82,2

2.3 4.9 2.2 73.5 99,4

2.5 5.0 2.2 77.0 102,1

2.2 4.0 2.6 83.5 104.5

2.0 3.9 0,0 0,0 98-3

... 3.5 4.9 69.4 93,1

Italy Netherlands New Zealand

60.4 111.8 51,.9

49.7 78.8 56.6

50.4 73.6 45.5

108.0 110.4 60.7

/30.4 127,0 65.5

131,3 106,9 0.0

132,8 113,5 57-6

104.9 108.9 65,2

United Kingdom United Slates

61,7 100.0

60,0 100.0

49,8 100.0

70,8 100.0

83,0 100.0

86.0 100,0

86,5 100,0

73.5 100,0

(US_ I00) 1979

1982

1986

1989

1990

1991

1992

1993

Japan Korea

77,0 30.6

68,3 47.9

87,1 22.4

108,1 36.7

i05,7 44,8

114.4 52,7

112.0 53.5

119.3 54.9

Fiongkong S:io.gapore i_nd0ne_ia

17.9 29.2 6,3

18,9 34,2 4.6

14.2 36,4 6,3 '

19.1 40.2 5.8

20,9 44.9 6.8

24,2 48,3 6.6

26,1 50,7 7.3

27.4 56.0 7.3

Malaysia Philippines Thailand

19.5 i1.0 ...

16.4 11,0 24.7

16,2 10.1 13.9

I5,0 9,7 22.0

14.2 10,6 22.2

1.6.2 10,5 .........

15,9 13.1

i6,0 13,9

Bangladesh India Sti Lanka Australia Canada ]_tal.y Net her'la.nds New Zealand United Kingdom United States

4,3 4.5 4.4 57.5 78.0 63.7 98.7 31,4 53.9 100.0

3,3 4.5 11.4 60,2 84.0 53.6 57.2 37.7 53.6 100.0

3,2 4.2 5.8 49,1 70.5 47./ 60.3 30,5 50.5 100.0

2,6 4.3 4.5 66.8 79,3 59.6 65.8 40.5 61.9 100.0

2,3 4.6 4,9 70.4 79,3 69,5 74.5 43.6 70.3 100.0

2.1 3-6 4,8 0.0 77.2 67,8 72.5 0.0 68.9 100.0

1.9 3.4 0.0 0.0 73.0 68.0 73.5, 41.4 69.1 100,0

.., 3,6 8.1 57.5 71.7 54,3 69.5 43.1 59.5 100,0

Value Added per worker

mance,

In sharp contrast to the Philippine experience of mixed perforvirtually all of Indonesia's manufacturing industries registered

significant declines in unit labor costs relative ing the 1980s and early 1990s.

to the United

States dur-

As a result, Indonesia improved its international competitiveness vis-h-vis the Philippines during the 1980s and early 1990s. Behind this was the much to the Philippine

larger peso.

depreciation Indeed,

of the Indonesian

the rupiah

depreciated

rupiah

compared

vis-_t-vis the peso

Chapter 2: lntal and Basilio

121

Table 9. continued... Ra&, of Wages ro &_bor Prod.czfli 1979 Japan Korea ICIongkong Siugapore Indonesia Ma]aysia PhilippJrtes Thailand 13ang[adesh India Sri Lanka Australia Canada [taIy Netherlands New Zealand United ](iugd om United S_aEes Basic

data

89.9 o1,7 126.9 81.0 61,2 62.6 60.3 ... 80.0 124.1 46.3 135.1 117,2 94,8 113.3 165,1 114.4 100,0

source:

UNIDO

U (US= 100) 1.982 1986 87.3 66.3 121,1 84.6 60.8 78.5 5_3.4 47.0 78.3 118.3 42,6 130.0 111.2 92.8 137,8 150.1 1.11.8 100,0

Intenlational

94.5 67,4 175.9 81,6 58.3 76.9 53.4 54.0 77.4 124.9 40.6 ]24.116.7 t07.0 122,0 1.49.1 98-6 100.0

1989

1990

1991

1992

1993

93.7 86.8 155.2 87,0 57.5 73.3 73,4 39.9 90.0 ]15.5 49.6 110,0 125.4 181.1 167.8 149.9 114,4 100,0

92.7 77.5 154.0 89.0 36.7 76.4 63.4 42.6 1,1,0,0 108,9 4.'5,5 [09.3 128.6 187.7 170.4 150.4 118.0 100.0

93,4 74.5 147.8 92.0 40.2 76.0 6.5.4 ......... ]03.3 111,1 54.8 ...... 135.3 193,6 147.5

99.8 75.7 146.3 90.9 40.9 80.6 66.3

106.2 78.3 152.7 93.7 42,7 82.2 59,4

102.1 112.9 .58.0

.., 98.4 61.4 120,6 129.9 193.3 156.8 151.1 123.6 100.0

Yearbook

of Industrial

1NI7 100.0

134.5 195,4 154.4 139,3 125,3 100,0

Statistics,

various

years.

by 46 percent during 1984-1994. This depreciation almost equals decrease in unit labor cost in indonesian manufacturing as against Philippines during the same period. ASEAN currencies tive terms

since

have significantly

1990, halted

only by the

the the

appreciated

in real effec-

1997 currency

devaluations,

with the Philippine peso appreciating the most (Figure 3 and Table 7). Currency appreciation and/or increases in wage costs, on the other hand, could be countervailed

by productivity

to maintain

com-

petitive niches. For instance, the Korean won has substantially ciated during 1982-1993 and wages have significantly increased

apprevis-a-

vis Philippine wages. Nevertheless, five advantage over the Philippines higher tries.

increase

improvements

Korea has maintained its competi_ in many areas because of a much

in the labor productivity

of its manufacturing

In 1997, most of the East Asian countries

have witnessed

indusconsid-

erable speculative attacks on their currencies following the major depreciation of the Thai baht in the middle of the year. The peso immediately depreciated nominally, rising from the virtually-pegged P26/US$1 to P30 in August, before hitting a 42 percent depreciation at the close of the year. But unlike the past devahlations, the current depreciation has not been significantly inflationary. This can be attributed in part to the relatively tight monetary and fiscal policy adopted by the government, high protection rate in food crops, more realistic wage adjust_

b,o

Table 10. Ratio of Wages to Labor Productivity*,

Current

ISIC

KOREA

Industry

INDONESIA

Prices in US $ (US=f00) ( In percent). MALAYSIA

PHILIPPINES

THAILAND

1982

1986

1990

1993

1982 1986

I990

1993

1982

1986

1990

1993

1982

1986

1990

1993

1982

1986

1990

1993

3ll/2 321

Food Products Textiles

102 67

114 49

48 38

56 54

90 79

89 67

94 93

92 82

85 93

10J 78

[02 78

103 80

66 68

66 115

73 85

83 79

60 92

i17 59

62 25

_.. ,.,

_ __.

322 323 3N 331 332 341 342 351

Wem-ing apparel, except footwear Leather and fur products Footwear, except rubber or ptastic Wood ploducts, except furniture Furniture and fixtures, excl. metal Paper m_d products Printing andpublish[ng IndustriaJ chemicals

81 51 U1 53 121 112 99 49

73 21 59 47 86 77 104 89

66 38 58 34 72 28 78 60

43 45 44 40 69 36 58 51

103 89 134 67 121 92 90 57

102 67 85 93 84 68 84 58

104 74 78 81 74 86 84 84

93 75 lti 89 75 73 92 84

112 68 134 84 ll0 83 98 75

125 104 112 93 110 84 123 34

119 I21 It-/ 83 92 92 97 45

134 135 127 79 97 95 97 40

108 116 i"00 56 97 68 88 45

176 128 162 109 146 26 129 31

122 1[9 125 85 106 60 106 68

105 i40 49 77 84 58 84 64

97 .. 91 56 241 86 183 84

111 40 71 76 98 65 259 102

134 f80 115 5l 72 49 88 84

... ... ... ... ... .. ... ,,.

352 355

Other chemicals Rubber Products

143 73

150 76

105 47

102 61

86 113

86 91

85 108

94 71

118 68

131 65

129 73

138 85

77 57

136 108

108 98

93 89

80 51

104 54

94 53

... ,.,

356 381

Plastic products Fabl5 cared metals

118 55

93 55

47 36

75 38

90 76

75 72

77 7l

70 77

87 87

90 87

77 74

85 67

83 67

I04 76

71 74

65 74

53 88

31 57

30 43

.. _.

383

Electrica[

machinery

,.,

384 390

Transport equipment Other manufacturingindustrJes

52 99

59 86

20 66

18 57

67 105

68 94

74 100

85 98

84 100

109 95

43 80

67 95

52 H3

84 143

44 96

38 98

54 59

96 67

41 36

,. ,.,

_" Wages and labor productivity are in US dollars Basic data source: UNIDO, International Yearbook

at current prices. of Industrial Statistics,

various

%_ (3 _., t_

)'ears.

Chapter 2: Intal and Basilio

Figure

3. Real Effective

123

Exchange

Rate,

1975-1996

(1990=100).

250

200

150

/ 100

,,....,_ ._,,._

n. n ,.. x .,b s'j

***w

Year PhJlippi_es

ment during

....

i[nd_)nesia .......

the period,

MalaxsJa

and by the reduction

and Medalla 1998). Despite the brought about by the high interest

Thailand

in world

.....

PROC [

oil prices

(Intal

current macroeconomic problems rates and slowdown in the economy,

the currency realignment, which is in fact a market-based adjustment, is seen to help improve the economic prospects of the country in the long run because it increases the competitiveness of the export industry and corrects the long-standing price distortions in the country's economic structure. Agricultural A robust

Development

agricultural

of the East Asian countries,

sector facilitates high economic

creases in per capita food and agricultural rising agricultural trade surplus. In contrast, ippines

per capita output

industrial

growth.

For most

growth

coincided

with in-

output

(Table 11) as well as a

in food and agriculture

in the Phil-

in early 1990s was lower than in the early 1980s. Equally

impor-

124

Table 11. Indices Cotmtry

The Philippines

beyond

2000: An economic

of Per Capita

Output

(1989-91=100).

Agricultural

Production

1970

1980

1990

Irldonesia

M_tlysla

Phi]ippines Thailand

89 St

108 96

104 95

Viet Nam

Ch'ina

Source:

FAOSTAT

Database

Food

1996

1997

101

11,3

100

.103

assessment

Production

1970

1980

1.990

1996

1997

1].1

]01

113

lll

104

100

110

111

106 1.08

104 108

90 81

109 97

104 105

107 105

105 104

100

121

120

100

119

118

101

144

148

102

149

152

Collections,

online

edition

(May

1998).

rant, the country has turned from being an agricultural country in the 1970s until the 1980s into an. agricultural

trade surplus trade deficit

economy by the early 1990s. Although the Philippine

grew faster

early

1990s, this was largely

protection,

agricultural caused

production

by the sharp

Given the high agricultural

rise in agricLiltural

tariffs in the country,

and in the

light of the ASEAN Free Trade Agreement, domestic agriculture-based industries face a formidable task of competing when manufactures tariffs within

the region

the year 2004. High agricultural Philippines para'tively

are reduced protection,

to a :range of zero to five percent implies

higher

food prices

in the

vis-a-vis food exporting countries like Thailand. With comhigher food prices come workers' clamor for high wages,

which with currency appreciation up until August 1997 and marginal productivity increases, leads to eroded competitiveness. Such poor performance of the Philippine agriculture thus calls for improvements There is an urgent

in agricultural strategies, policies and institutions. need for sustained real improvement in agricultural

productivity

through

greater

investment

in and improved

framework

of, the country's

agricultural

research

tem, improvement the agricultural cies.

in infrastructure bureaucracy

Better Infrastructure Sustained profitability kets rest crucially tion operations.

institutional

and extension

support

system,

restructuring

and redesigning

market

intervention

Support and the ability to compete

on the costs arm availability Given the comparatively

of inputs

sysin poli-

in global marin the produc-

high and rising labor

costs in

Chapter 2: Intal and Basilio

125

manufacturing in the country, firms would have to rely more on improving productivity and greater efficiency in the interplay of production inputs.

This includes

greater

reliance

on adequate

infrastructure

support both in processing (e.g., reliability of power and water supply) and transporting of goods and services to the production sites (e.g., dependability of roads and telecommunications). Sustaining economic addressing infrastructure Analysis

performance bottlenecks

in the World Development

a strong relation GDP. Increasing

in the East Asian region makes an important consideration.

Report

1994 confirmed

between the availability of infrastructure GDP per capita by 1% requires raising

that there

and per capita the infrastruc-

ture stock by 1%. creased

Infrastructure investment in the region has dramatically induring 1970-1980. In the 1980s, investment in infrastructure

averaged

about

4.6% of GDP compared

1990, there have been further

to 3.6% during

major increases.

the 1970s. Since

It should be noted,

how-

ever, that the Philippines has been investing far lower than any of the countries in the region, devoting only 2.5% of its GDP compared to the region's

average

of 4.7% (Table 12) (World Bank,

1995).

The 1995 World Competitiveness Indicators of the World Bank shows that the Philippines ranks close to the tail end of the list of countries with respect lower than

the other competitor

1995, only about asphalt),

to the level and quality of infrastructure; countries

17% of the country's

in the region

(Table 13). In

total roads is paved (concrete

the lowest in the region with an average

Table 12. Investment

it also ranks

in Infrastructure,

and

of 67%. The country's

1992 (In US $ million).

Country

Total

GDP (US$B)

Invest.

as a % of GDP

China

24637

484

5. I

Indonesia

4800

126

3.8

Korea

13844

296

4.7

Malaysia

3473

6.0

Philippines Thai.la n.d

1287 4780

52 110

2.5 4.3

Others*

2268

4.0

East Asia

55089

1183

4.7

* Others include: Cambodia, Fiji, Kiribati, Lao PDR, Maldives, Mongolia, PNG, Solomon Islands, Tonga, Vanatu, Viemam and western Samoa Source: World Bank (1995)

Myanmar,

126

The Philippines

Table

13. Infrastructure % of Roads Paved

Country

beyond 2000: An economic

Competitiveness Normalized

Phone

Road

per

1995

Index

assessment

Indicators. Lines

Waiting

1000 pop

Time

Average

Price

for a Line (yrs)

per 3 rain. call 1995

1995

1,995

1994

China

89.7

0,3

Indonesia

45.5

0.3

6.07 4.88

Korea

6.3

118

415

0.0

Malaysia

Rep.

75.0

166

0.3

5.99

Philippines Singal?ore Thailand

16.7 97.3

47 .. NO

21 478 59

5.5 0,0 4.0

6,22 4,02 7,30

Viet Nam

25.9

1,5

Source:

World

normalized

Bank

Competitiveness

Indicators,

interact

road index is 47 as compared

118. (The road

index

represents

edition.

to Thailand's

the total length

140 and Korea's

of road

in a country

compared with the expected length of roads where the expectation is conditioned on population, population density, per capita income, urbanization and region specific dummy variables drawing from data from all countries in the world.) The index value of 47 means the Philippine road system is only about 47 percent of the average ratio for all countries. Historically, waiting time for a phone line in the country took almost six years in distinct

contrast

to the average

of four months

in Malaysia, Indonesia and China and virtually no waiting time in Singapore and Korea. it is likely that the long waiting time in the Philippines has drastically dropped as a result of deregulation in the telecommunications industry. Nevertheless, it is likely that the four-month waiting

time in Malaysia

remains

a challenge.

importance of good telecommunications ization and the rise of information-based waiting

Given

the increasing

facilities in the face of globalindustries, the shorter the

tinae for a line, especially in the provinces the better. Despite the substantial improvements in infrastructure,

unmei:

demand remains quite high in East Asia, and more so, in the Philippines. During the next decade, the World Bank estimates the infrastructure

investment

to be between Bank

estimates

requirement

$1.2 and 1.5 trillion

of the region's or about

that the Philippines

developing

7 percent

particularly

will need

percent of GDP in 1995-2004, more than four percentage than its 1992 investment level. With the great infrastructure ing capability maximize

of the government,

public-private

challenges there

partnerships.

to invest

points

way beyond

is the continuing Despite

countries

of GDP. The World 6

higher

the financchallenge

some successful

invest-

Chapter 2: lntal and Basilio

127

ment projects e.g., those in Malaysia (BOT arrangements for major toll highways), Indonesia (toll roads) and parts of the Philippines (power distribution), significant challenges remain. Facilitating private investment requires improvement of the policy environment for private participation including greater transparency and regulatory reforms to encourage more appropriate pricing of infrastructure services. With greater private involvement in infrastructure primarily in areas where market demand allows for private participation, the government can redirect to some extent public infrastructure expenditures towards lagging regions and areas where private investment would not likely be interested. In so doing, the government addresses equity in spatial development as well. Skills, Technology and SME Facilitation Raising productivity does not only require improved allocation of resources and improved organization of firms but also enhanced human capital resources and technological development. Enhancing Skills As discussed earlier, rising labor costs and appreciating currency should be compensated with substantial growth in labor productivity in order to maintain and improve the country's international competitiveness. This would include the overall advancement of the country's human resource pool. Although such would not translate into immediate economic improvement, it should help ensure the sustainability of growth in the future. Between 1970 and 1994, East Asian enrollment ratios for almost all levels have dramatically increased (Table 14). Adult literacy rates have also markedly improved. In both indicators, the Philippine figures are comparable to those of other countries. However, in terms of primary level completion, the country registers the highest dropout rate. In 1990, only 70 percent of enrollees in the primary finished as against 100 percent for Singapore, 96 percent for Malaysia, 87 percent for Thailand, and 77 percent for Indonesia. In 1988, only 93 percent of those who completed the primary grades proceeded to the secondary level. At the tertiary level, the enrollment data disguise the problem of quality and relevance. There exists a 40 percent dropout rate at universities and colleges. The shorter school cycle means that higher edncation institutions have to compensate by spending more time on bring-

128

The Philippines

Table

14.

Gross

beyond 2000: An economic

Enrolment

Primary Countries.

Ratios

Level,

Country

Completion

Gross Enrohnent Ratio 1970 1994

China 1st Level 2nd Level 3rd Level

85 23 0.1

118 a 55" 3,8 _'

1st Level 2rid Level 3rd Level

77 15 2.8

115 a 44 a 8.5 c

1st Level 2ud Level 3rd Level

103 42 7.9

95 b 99 I, 54.8 b

1st Level 2rid Level 3rd Level ,

87 34 t.6

93 61 7.2 c

l st Level 2nd Level 3rd Level

108 46 19,8

III 79 26.8 a

Ist Level 211d Level 3rd Level

106 46 6.8

i07 69 35,2 c

1st Level 2nd Level 3rd Level

83 17 2.7

87 49 20.6

h_donesia

Korea

by Level,

Rep.

Malaysia

Philippines

Singapore

Thailand

Adult

Rates,

assessment

Literacy

Selected

Adult Literacy Rate 1970 1995

and Asian

Primary Level Completion Rate (1990l

...

....

100

" 1993 t_ 1995 1990 Sources:Enrolment Colunm

Ratio:

'UNESCO

UNDP

Human

Statistical

Yearbook,

1983

Development

Report,

various

and

1996

years.

ing entrants up to basic levels. Thus, the curriculum is hardly geared to modern technological needs and has little inputs from industry, unlike the developed countries where there is more direct and comin.uous interaction 1997).

between

providers

While the private education,

and users of higher

sector has taken greater

the government

remains

education

(World Bank

part in the provision

to be the most important

provider

of such service particularly at the early levels. During 1970-1994, most of the Asian countries have devoted greater share of public expenditures on education

as percentage

the Philippines,

public investment

at 2.4 percent

was two-percentage

of their GNP (Table 15). However, in education

as share to GNP in 1994

point lower than in 1970. As percent

Chapter 2: Intal and Basilio

129

Table 15. Public Expenditure

on Education. As % of Total

As % of GNP Country

Gov't

Expenditure

1970

1994

1970

1994

China Korea,

___ 3.6

2.6 4.5

.... 21.4

12.2 16,6

Malaysia .Philil_pirles

4.4 2.6

5.3 2.4

17.7 N.4

1,5,5 10,5

Singapore Thailand

3.1 3.5

3.3 3_8

1.1.7 17.3

24_2 18.9

Sources:

UNESCO Statistical Yearbook, various years; UNDP Human Development Report, various years_

of total government expenditure, it has drastically dropped from 24.4 percent in 1970 to 10.5 percent in 1994. The substantial drop in government expenditures in education had a particularly adverse effect on the quality of primary and secondary education as the tight budget had to be geared primarily to meet the needs of the growing number of students arising from the continued high growth of popnlation. The Philippfiaes needs to invest more in developing technical skills for improve_d labor competitiveness. While the general skills are comparable with those of other countries, the skill base has to be reoriented and improved in quality if it is to support a significant upgrading of the technological base of the country. Developing Technology Technology is crucial for global market competition_ In an increasingly integrated market, innovation and product development may significantly affect the value and trade position of a country. The technological system in the Philippines is at the early stage as against those of other Asian countries. This is manifested by the low levels of R&D expenditures, poor quality of R&D effort and management, and a science and technology sector that is ineffectively integrated with productive activity (World Bank 1997). Gross expenditure on R&D in 1991 for the Philippines accounts for only 0.2% of GDP (Table 16), which is far inadequate to make the country an NIE that spends an average of almost 2% of their GDP. Although R&D and technology do not always have to be locally produced, improving R&D capability is needed for the effective use of foreign technologies. Strong local R&D base is required for accelerated

130

Table

The Philippines

16. Gross

Expenditure

beyond 2000: An economic

on R&D (In percent

assessment

of GDP).

Country/Area

1981

1991

Japan

2.13

3.02 _L

USA

2.43

2.75

Korea

0_62

1.86

Taipei

Rep.

0.93

1.69 a

Singapore

0.28

1_27 b

China

0.80

0.72

Malaysia

...

0.80

Indonesia

...

0.20

Philippines

...

0.20

Thailand

0.02 c

0.16

1990 b1992 c 1986 Source: UNESCO World Science Report, 1996.

and appropriate technological tional developments.

acquisition

and adaptation

to interna-

Developing technology is not an exclusive domain of the government. Indeed, the private sector is central to technology development. Hence, private participation should be encouraged in the country so that technological industry.

research

The whole structure in the Philippines customer-driven

would have a direct and effective of the public science

has to be reformed and proactive

and technology

to make it more

(World Bank

linkage

1997). Proper

system

autonomous, institutional

and organizational arrangement has to be developed in encouraging firm-level technological capability (Patalinghug 1998) consistent with the general goal of industrial restructuring through, for example, determination of high priority industries for technological support the implementation

of environmental

most accessible and cheapest ment can encourage greater

standards.

Since adoption

the and is the

way of acquiring technology, the governtechnology transfer from multinational

companies to local enterprises through programs like Singapore's Local Upgrading Program. In addition, it is important that there is bigger budget allocation for public R&D at the same time that the institu-

Chapter 2: Intal and Basilio

131

tional structure of public and private R & D system is improved. Finally, the government may also need to institute R & D enhancements such as development of h_dustry-linked Polytechnics and HRD pro_ grams, and provision of better incentives for technical and research personnel. $ME FaciBtatlon The importance of small and medium enterprises (SMEs) is recognized in their capacity to provide a strong base for an export-oriented industrialization and international competitiveness. Such has been demonstrated by the Hongkong and Taiwan experiences where a dynamic SME sector has been a crucial factor in their export success. SMEs have exhibited flexibility of supply to respond to a rapidly changing demand of global consumers. They also encourage labor4ntensiveness in manufactures through subcontracting mode and become a testing place for new industries (Intal i997b). The study of Medalla et al. (1995) showed that the number of SMEs in the Philippines has increased during the period 1983-1988, which can be attributed primarily to trade liberalization and the recovery of the general economy. More open trade facilitated growth of the SMEs as it allowed for an easier access to more cost competitive inputs. Furthermore, freer exchange encouraged greater exports of manufactures and motivated the use of subcontracting. Recognizing the role played by SMEs in the economic performance of the country, institutional support must be intensified. Such could be done through an. "industrial extension" system, which the Northeast Asian countries followed greatly. The program ranges from technical assistance, investment and equipment-lending schemes, provision of common service facilities, expansion of SME promotion activities and restructuring of regulatory framework. Greater private participation and joint public-private ventures would need to be pursued in order to improve the effectiveness of the provision of support services, in this light, linkages between SMEs and large enterprises (LEs) may also be encouraged, as in the case of Singapore wherein the government reimburses a large percentage of the cost borne by the LEs participating in technology transfer programs. Greening the Domestic Economy Growing concern over the integration of environment into the world trading system calls for reshaping of the countries' domestic poll-

132

The Philippines beyond 2000: An economic assessment

cies. Faced with environment-related muhflateral trade provisions and rising "green" consumer expectations, the government would need to encourage domestic industries to be efficient in the context of a more open economy and greater global competition and integration and, at the same time, more environment-friendly operations. This means that the country's policy regime needs to encourage the incorporation of social or externality costs of pollution or environmental damage in domestic market prices. There have been apprehensions on the possible adverse effect of the internalization of the environmental costs on the international competitiveness of Philippine indnstries. Initial analyses drawing from the estimates of pollution abatement costs from the Environment and Natural Resource Accounting Project for the Philippines indicate, however, that with the exception of industries with particularly high ratio of abatemerit costs to the value of output (e.g., logging, metallic mining and agricultural products), indnstries, on the average, could internalize to a large extent environment costs and still remain competitive. However, in so doing, the overall incentive structure becomes more skewed against the export industries (Intal 1997a); thus, it is best that the internalization of environment costs is complemented with further rationalization of the tariff and nontariff trade regime. The pattern of Philippine trade shows dramatic changes in the pollution intensity of both exports and imports (Table 17). Export and import shares of nonpollutive and nonhazardous products sharply increased, while the share of h.ighiy pollutive exports decreased. In addition, the share of pollutive imports is relatively high. This means that,

Table 17. Philippine

Exports and Imports

Type of Product Flighly Pollutive/Exu'emely

Hazardous

by Pollution Intensity.

% of Total Exports

% of Total Imports

1.975

1990

1,975

1990

2,3

5.0

32.5

24.4

Highly Poilutive/Hazardous

31,3

10.4

14.8

19.4

I-li.ghly Pollutive/.Non_Hazm-dous

17.4

6.5

4.5

4.6

Pollutive/Extremely

0.3

2. I

1.7

5.3

17,7

18,9

34.5

N.7

Hazardous

Poliutive/Itlazard0us Pollufive/Non-Jilaz_wdous

0.3

1.3

0.9

1.3

Non- Poll ut i.ve/Hi_.zardous

21.9

11.2

8.1

9.2

Nol_-Pollutive/Non-Hazm'dous

8.9

44.6

3.2

16.2

Source:

Intal

(1994).

Chapter 2: Intal and Basilio

the Philippines

133

is importing

products

locally would have aggravated This is salutary. Nevertheless,

which,

had they been

produced

the pollution situation in the country. as the economy undergoes structural

transformation towards more capital and materials intensive intermediate products as the economy grows and industrializes, it is likely that the structure of exports and imports would change in the future with a growing domestic production of potentially Thus, as the economy grows, it is important

more pollutive industries. to improve the domestic

pricing system and the country's institutional capability to cope with the likely increased pressure of industrial pollution in the future. This would mean,

for example,

tion of the polluter-pays

more widespread principle.

adoption

Revenues

and implementa-

from taxes following

the

polluter pays principle can in turn be invested in environment-regenerative programs and facilities, such as facilities for hazardous wastes from SMEs. As the country nonetheless

important

improves

its environmental

for the govenament

management,

and the private

it is

sector to be

constantly aware of the developments in foreign environmental procedures and standards in order for the export industry to respond effectively. At the same time, the government would need to exert efforts to ensure that multilateral or bilateral or regional agreements do not become vehicles lated trade kets.

for possible

restrictions

discriminatory

for protectionist

use of environmentally measures

in the export

remar-

134

The Philippines

beyond

2000: An economic

assessment

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the Asian

George

Economic

J. Power, E. Tan, R. Aldaba,

Trade and Industrial

ing Up with Asia's Tigers Volume L Makati tute for Development Studies.

Policies: Catch-

City: Philippine

Insti-

Patalinghug, E. 1998. An Institutional Analysis of R&D Expenditures in the Public and Private Sectors. Revised version of a paper presented

during

the Consultative

in the Public and Private and the Pacific. Sachs,

J. and A. Warner.

Workshop

on R&D Expenditures

Sectors,

24 March,

University

of Asia

1995. Economic

Reform

and the Process

Global Integration. Brooking.7 Papers on Economic Activity Takayasu, K. and Y. Ishizaki. 1995. The Changing international sion of Labor

of Japanese

Impact on the Japanese dustries Vol. I, No. 27. World

Bank.

Electronics Economy.

1995. Infrastructure

Development

cific: Towm'ds a New Public-Private The World Bank. World Bank. 1996. Global Economic

Industry

RIM Pacific

1:95. Divi-

in Asia and Its Business

and In-

in East Asia and Pa-

Partnership.

Prospects

Washington

D.C.:

and the Developing

Coun-

tries. Washington D.C.: American Writing Corporation. World Bank. 1997. Philippines Managing Global Integration, Volume Background Papers. Draft Report prepared duction and Economic Management Sector East Asia and Pacific Regional Office. Yamazawa, i. and S. Okuda. 1994. Basic Trade Project

Intraregional

Changing

Comparative

Trade Expansicn

by the Poverty ReUnit, 19 September,

Statistics

Advantage

for the APDC Patterns

in Asian and the Pacific.

and

Mimeo.

TradeandIndustrialPolicy Beyond2000:AnAssessment ofthePhilippineEconomy Erlinda

Chapter J

Medalla

industrial reforms started to be implemented. The reforms ore than atodecade has passed sincewith substantial tradegrowand appeared have begun to pay off, the economy ing at more than 6 percent. However, some recent developments have cast a shadow over the optimism in recent years. In particular, indicators from the Survey of Key Establishments in Manufacturing (SKEM) exhibited downward trends in production for certain sectors during the first two quarters of the year. Then came the regional currency adjustments, which saw the peso falling by as much as 25 percent in the last three months. in light of these developments, it has become more imperative to know the real impact of these reforms on the manufacturing sector. In particular the important questions are: • How has the manufactming sector performed since the reforms? • What is the real state of the manufacturing sector? • Have changes in the manufacturing sector arising from trade reforms taken root, enabling it to perform better in the future? • How can the trends indicated by the SKEM be explained? • What has the government failed to do and what more should be done to finally push the sector to its full potential? • What is the role of the exchange rate, and how will the manufacturing sector be affected by the recent peso devaluation? To shed light on these questions, this paper starts out first with a brief review of what the reforms have been. This is followed by a discussion of the impact of these refoims on the economy as a whole and the mamlfacmring sector in particular usind the results of the more recent Philippine Institute for Development Studies (PIDS) studies on trade and industrial policy. The analysis on the economy-wide impact of trade reforms consists of a simulation of results isolating the effects of trade reforms. The study on the manufacturing sector is empirical

138

The Philippines

beyond 2000: An economic

assessment

in nature focusing on the competitiveness of firms and industries. These are taken as indicators of the manufacturing sector's potential and how it is likely

to perform

in the new, more

still early to tell, there

is a need

export and industrial any) in the production

performance, and export

the past industrial performance, then, in the :first two quarters role of the exchange

created

regime.

Although

closely

at actual

in terms of growth, and shifts (if structure. The paper thus examines

first during the years prior to 1997 and of 1997. Then, recognizing the crucial

rate, an analysis

presented. The continuing toward, becoming

open trade

to now look more

trade reforms

by the General

outward

of the role of the exchange have started

oriented,

Agreement

rate is

to shift the economy

just in time for the changes

on Tariff

and Trade-World

Trade

Organization (GATT-WTO). A brief discussion is then given on what the more open global setting implies. A discussion of other important and relevant issues and concerns (e.g., the pace of liberalization and the continued protection on agriculture) follows. recommendations are suggested in the conclusion Brief

Review

Finally, some policy of the paper.

of Past ]?oliey Reforms

Trade and investment policies have been the major policy tools for industrialization in the Philippines. In the area of trade policy, especially before major reforms eral use of tariffs and import

started in the 1980s, this meant the liblicensing requirements to protect local

indnstries. This is largely embodied in the investment.incentive system, the Omnibus Investment Code (OIC), mainly through the granting of fiscal incentives to selected activities in its Investment Priorities Plan (IPP). From the post-war dergone

major changes

period

to the present,

in its trade policy regime.

the Philippines In general,

has un-

five stages/

periods could be traced, in its trade policy reform experience. The first is the pre-reform era of highly trade-restrictive and protectionist policy regime (the post-war period up to the 1970s), which supported the inward-looldng import-substitution strategy at that time. This is followed by the first major trade reforms during the first half of the 1980s--the 1981-1985 Tariff Refoml Program, which brought down all tariff range to within

50 percent

from

highs

of 100 percent

tariff

rates. The third

period saw the major import liberalization episodes in 1986-1988, soon after the EDSA revolution and during the Aquino administration. During

this period,

imports

for more than 1,400 items were liberalized,

Chapter 3: Medalla

139

bringing

down the percentage

percent. Program, percent.

The fourth period is the second phase of the Tariff Reform which narrowed down the tariff range to mostly within 30 This was implemented by the Aqnino administration under

of import

restricted

items to less than 10

Executive Order (EO) 470 from 1991 to 1995. Finally, the fifth major period is the third phase of the Tariff Reform Program under EO 264 which is being implemented to 2000. This would further

by the Ramos administration from 1996 narrow down the range to within 3 percent

and 10 percent (excluding some agricultural products) by year 2000. On the other hand, investment incentives have been available even as early as 1946. The earliest version offered exemption from all internal revenue taxes for four years for "new and necessary" industries, the same set of industries the ensuing trols would protect. In the fifties, incentives

trade and exchange conin the form of liberal im-

portation

inputs

of raw materials

and intermediate

sixties, exemption from duties on imported able to "basic" industries. The system the enactment

of investment

incentives

of the Investment

were selected and "measured centives were geared mainly market.

They were

import import

control protection ban). Since then,

were added.

equipment

was made avail-

was formalized

Incentives

In the

in 1967 with

Act of 1967. Priority

areas

capacity" established for these areas. Intoward the production for the domestic

given further

incentives

(import licensing several amendments

in the form of tariff requirement have been

and/or

or outright introduced,

most notably with the passing of the Export Incentives Act in 1970, followed by Batas Pambansa 301 (BP 391) in 1983, and finally, Executive Order 226 (EO 226) in 1987. Trade

Reforms

Since

Before

trade refolxns

the

1980s

started

to be implemented

in the 1980s, the

Philippines has had more than three decades of highly protectionist and restrictive trade regime, characterized by escalating tariffs and import created

restrictions, generally on finished products. biases and unintended results which became

system. resulted

To summarize, in three major

•

The protection

the past-protracted biases: structure

Such a regime embedded in the

protectionist

(of high tariffs

and tariff

trade

policy

escalation)

resulted in an import-dependent low tariffs on imported inputs

import-substituting policy. The made them artificially cheaper,

thereby

linkages,

discouraging

backward

inherently

penalizing

140

•

The Philippines beyond 2000: An economic assessment

downstream industries and encouraging the use of imported inputs. The high tariff on imported finished products, on the other hand, promoted finishing stage, assembly type of industries. Thus, industries such as those in textile, paper and cosmetic that were heavily dependent on imported inputs grew until they were constrained by the limited domestic market; Exports, on the whole, were penalized by the highly protectionist trade policy. The protectionist trade regime inevitably defends a lower exchange rate, which acts as a general penalty to exports; and The protection structure artificially cheapened capital, encouraging greater capital intensity.

Recognizing more fully the adverse effects of past policies, the government started to undertake the first major trade reforms in 1981 with the passing of the 1981-1985 Tariff Reform Program (TRP). Such series of reforms, followed through, in the succeeding periods, are among the most basic ones aimed at attaining global competitiveness, improving resource allocation and sustaining economic growth. By ridding the market of distortions, trade liberalization would espouse greater reliance on the market, foster competition,, and provide an even playing field which would encourage the development of industries with real comparative advantage. The 1981-1985 TRP brought down all the tariff rates to within the zero-to-50 percent range, reducing substantially both the average tariff and the variation in tariff protection across industries. The Aquino administration implemented more trade reforms that reduced import restrictions (mainly in the form of import licensing requirements or outright import ban) from 1986 to 1989, and narrowed the tariff range with the implementation of EO 470. From 1986 to 1989, import restrictions on some 1,471Philippine Standard Commodity Classification (PSCC) lines were lifted. This reduced the number of regulated items as a percentage of the total number of PSCC lines from around 32 percent in 1985 'to only 8.0 percent by the end of 1989. From 1989 to 1990, there was practically a lull in trade reforms when the country experienced severe difficulties caused by the December 1989 coup attempt, tile oil price hike resulting from the Gulf war, and a series of natural disasters. A few more items have been liberalized since then, bringing down the percentage of regulated items to less than 5 percent (Table 1).

Chapter 3: Medalla

Table

1. Annual

141

Remaining

Regulated

Commodities.

Year

No. of PSCC Lines Subject to Restrictions

% Regulated Items (as to Total PSCC Lines)

Total PSCC Lines

5,632

100.00

1970 1980 1985 1986 1987 1988 1,989 1990 1991 1992 1993 1994 D95 1996

1,307 1,820 1,802 827 653 598 470 463 439 160 253 246 222 161

23_21 32.32 32,00 14,68 11,59 10.62 8.35 8.22 7,79 2,84 4.49 4.37 3.94 2.86

Source: de Dios (1997). There were some tariff adjustments brought

by the removal

of these import

however, were generally temporary slight increase in the average tariff.

meant restrictions.

and minimal,

to cushion

the effects

The tariff changes, resulting

only in a

Then, the second phase of the tariff reform program started to be implemented with the passing of EO 470 in 1991. This further narrowed

down the taliff

range, with the majority

of the tariff

lines failing

within the 3 to 30 percent range by the year 1995 (Table 2). Outside this range there were 43 lines coming in at zero rate and 208 lines with 50 percent tariff. The duty-free items were mainly capital goods that included cement. Those with 50 percent tariff were mainly agricultural and industrial products covered by the Board of Investment (BOI) local content

programs.

The Ramos administration kept the trade liberalization program in its policy agenda, deeming it in line with its policy thrust toward global competitiveness. This is consistently enunciated in the MediumTerm Development Plan. Some of the earlier EOs and Central Bank Memos passed by the Ramos administration have been meant to liberalize trade further. These induded EO 1, EO 2, EO 5, EO 8, and EO 61 among

the executive

1365. There

orders

and Central

have been some wavering

Bank Circulars

1347, 1356 and

in the implementation

further trade reforms, with the suspension, executive orders and CB Circulars issued.

followed

of these

by revisions,

142

The Philippines

Table

2. Frequency Rate Level (%)

Specific 0 3 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 90 100 "lbtal

Distribution

PreRefol:m"'

of Tariff

Pre Post 1981 -1.985 TRP':""

2 1 0 2 319 0 204 0 218 0 5 0 203 0 0 0 119 0 0 0 .228 1,301

* P.D. 1464 Before

beyond 2000: An economic

1981 Number

1985

2 3 0 14 380 0 282 0 194 0 87 0 151 0 59 0 139 2 58 29 2 1,402

2 3 0 14 ' 334 0 335 0 284 0 100 0 331 0 0 0 0 0 0 0 0 1,403

TRP as amended

the intent

Rates.

Post E.O. 470

Pre

1990 1995 H.S. lines

1995

2000

0 33 0 42 1,635 0 1,273 0 1,226 7 544 2 1,431 0 0 0 0 0 0 0 0 6,193

0 0 1,938 14 892 0 996 0 1,561 8 37 2 90 0 0 0 0 0 0 0 0 5,538

0 0 2,933 0 1,789 0 787 1 73 7 13 43 18 1 50 7 0 0 0 0 0 5,722

0 43 285 16 1,957 26 1,036 19 1,971 0 0 0 208 0 0 0 0 0 0 0 0 5,561

.Post E.O. 264

by E.O. 521, P.D. 1500 and P.D. 1620

*_ Up to emd including E.O. 609,632-A in EOs 288,313, & 328 Source: Tariff Commission.

Nonetheless,

Pre

assessment

and 706, E.O. 624, inclusive

to continue

of the changes

with the trade

reforms

re-

mained. As early as a year before the completion of EO 470, the then Tariff Task Force started discussions about implementing reforms toward a lower and more uniform 'tariff structure by the year 2003. Indeed, the first major

step toward

this intent

has been undertaken

with

the passing of EO 264. EO 264 constitutes the third phase of the Tariff Reform Program, which would further narrow down the tariff range for industrial products to within 3 percent and 10 percent by the year 2000. The EO also virtually removed all zero duties, raising the floor tariff

rate to 3 percent.

quantitative

restrictions

For agricultural

products,

the tariffication

(QRs) and the setting of minimum

access vol-

ume of imports were implemented with the passing of EO 288, EO 313 and EO 328. Out-quota tariff rates for some of the affected products were raised to as high as 100 percent.

By the year 2000, the ceiling tariff

Chapter 3: Medalla

143

rate will still be as high as 65 percent. Majority of tariff lines will cluster around 3 and 10percent. Other Developments The above discussion shows substantial

unilateral trade reforms

beginning in the !980s. This is especially true for industrial products in the 1990s. On top of these unilateral trends are multilateral movements toward greater global and regional liberalization especially in the 1990s. These include, most importantly, the ratification of the GATT-WTO new initiatives under the ASEAN Free Trade Area (AFTA) and wider regional efforts to accelerate liberalization further under the Asia-Pacific Economic Cooperation (APEC). In view of the unilateral trade reforms, not much further liberalization is effected by the new WTO. Instead, above anything else, the new WTO represents, for the Philippines, efforts to strengthen the disciplinary rules in the global trade and restore global trading order. It thus reinforces the cmTent trend in trade policy. The AFTA and APEC, on the other hand, intend to achieve more within their narrower regional context in terms of lesser trade barriers and lower tariffs. More than anything, the commitment to APEC's goals set forth in the Declaration of Common Resolve signed in Bogor, Indonesia serves as a confirmation and reaffirmation by member economies to stay faithful to GATT-WTO principles and objectives of global liberalization. The APEC open regionalism is probably one of the best ways to ensure that countries uphold their WTO commitments. This intent is further enhanced and strengthened by APEC's efforts to accelerate and deepen liberalization agreed upon under the WTO and by commitments to achieve a free and open trade and investment regime by year 2020. These developments complement the current policy thrust. The GATT-WTO would ensure that trading nations, especially the major industrialized ones, do not become more protective. This, together with the impact of AFTA and APEC, could open market access and greatly benefit the export-push strategy. The investment incentive system reinforced the trade pohcy, especially before export incentives started to be granted in the 1970s. The attention on exports mitigated somewhat the bias of trade policy but because of its limited coverage, the compensation for the bias remained inadequate. Exports that concentrated on a few products (garments in the 1970s, and electronics starting in the late 1980s) resulted.

144

The Philippines

beyond 2000: An economic

assessment

There was some improvement in the incentive system with the enactment of Batas Pambansa (BP) 391 during the period 1983-1987, manifested in the higher share of exports in 'terms of both project costs and number of firms approved, lower capital-labor ratio, and smaller average firm size during that period. However, these versed with the termination of BP 391 and the passing capital-intensity and size biases were incentives to exports ware effected. Thus, except for its export cen'tive system

restored..

trends were reof EO 226. The

Furthermore,

promotion

aspect,

and trade policy has been

generally

fewer

the investment mutually

in-

reinforc-

ing. The Development Incentives Assessment (DIA) study undertaken by the PIDS showed that the activities within the Investment Priorities: Plan (IPP) have, on average, higher effective protection rate (EPR). The foreign

investment

ment incentive

system.

the 1992 Foreign

Investment

policy runs parallel

This was especially

to the overall

true before

invest-

the passing

Act. The BOI, at that time, had an implicit

positive list for foreign investment, which closely coincided with its IPP. There were some areas closed or restricted to foreign investments, generally usually uity.

those

exploiting

open to foreign The new Foreign The Negative

.natural

resources,

but the IPP areas

direct investments (FDIs). Investment Act liberalized

List where

FDI is restricted

catering

to the domestic

market

capital. Regional dispersal of industries vestment have been among the stated

of foreign

has been

those exploiting natural resources, those dealing of firearms and other national security-related enterprises

entry

were

limited

eqto

with the production activities, and small

with less than US$100,000

paid-in

ment.

The first concrete

processing industrial Metro

program

and promotion of regional ingoals of the Philippine govern-

involved

the creation

of the export

zones starting in the 1970s and 'the establishment ofthe first estate, Phividec in 1976. The incentives for locating outside

Manila

have been a long-time

ment Code (OIC). Indeed,

provision,

in the Omnibus

by the 1980s, investment

incentives

Investwere no

longer available for firms located within Metro Manila. Then starting in 1991-1992, the BOI, in its implementation of the OIC, has explicitly included various programs that more actively promoted regional investments. For example, it provides pioneer status to firms locating in the identified Less Developed Areas (LDAs). The promotion of industrial estates became accelerated. Indeed, a central agency, the Philippine Special

Economic

Zone Authority

(PEZA) was established

in 1992

Chapter 3: Medalla

145

to coordinate efforts in this area. Also, it has started the promotion of Regional Agri-industr/al Growth Centers (RAIGC) which were implemented by the Department of Trade and Industry. At least one RAIGC was identified in each of the 13 regions. On the whole, the reforms starting in the 1980s brought about substantial changes, greatly altering the price and incentive structure across industries. Impact

of Policy

Reforms

Studies under the DIA noted improvements in the tariff and protection structure brought about by the series of trade policy reforms. The average level of Effective Protection (EPR) 1 and the variation across industries 3 presents

has gone down significantly since the prereform period. Table the average EPR across major sectors for the years 1983,

1985, 1990 and 1995 to illustrate more clearly the changes tion structure arising from major trade reforms. As Table 3 indicates,

the average

to 29.4 in 1990, to 24.1 in 1995.

EPR declined

in the protec-

from

44.2 in 1983

The gap in EPRs specially

between

agriculture and industry, and between the exporting sector, and the import-substituting sector has been significantly reduced. Furthermore, although exports remain penalized gree of penalty has declined. Table 3. Effective Protection duty drawback).

03-96 An sectors Imporlables Exportables

28-96

Source:

Agriculture, Fishing and Importables Exportables Agriculture Importables Exportables

Forestry

Manufactm'ing [mportables Exportables Institute

of Developing

structure,

Rate (Using book rates assuming

Description

03-21

by the protection

Economies

the de-

with

1983

1985

1989-1990

1995

44.2 87.4 -4.0

38.0 76,0 -4.5

29.4 57.0 -1.4

24,1 47,0 -1.4

11.3 90.9 -8.7 24.2 88.4 -4.4

9.2 76.5 -7.8 19.5 76.4 -5.9

3.2 35.3 -4.9 9.8 31.7 0.0

2.4 31.2 -4.9 9.4 30.4 0.0

64.7 88.1 3.1

55.9 77.0 0.1

45.5 61_2 3.8

37.3 50.0 3.8

(IDE).

The EPR is a measure of net protection considering the tariffs on both output and inputs. It is the percentage difference between "protected" domestic value added (value added given the tariff on both output and inputs) and free-trade value added (value added without tariffs),

146

The Philippines

A more

recent

study

beyond 2000: An economic

by Tan (1997) shows further

assessment

decline

up to

year 2000 in the average EPR, for the economy as a whole and for almost all sectors, with full implementation of EO 264 (Table 4). By year 2000, the average EPR for the whole economy will be down to 14.6 percent. However, despite the EPRs' continuing trends, a switch occurred in the relative protection between agriculture and manufacturing starting in 1996. That is, the average EPR for agriculture has become higher than that for manufacturing--21.8 percent for agriculture and 18.2 percent for manufacturing come the relatively more protected

in 1996. Thus, agriculture has besector. This is primarily due to the

tariffication

products

Table

of QRs in agricultural

4. Weighted

Effective

Rate

(EPR).

1988

1992

PRE95

POST95

2000

21.9 36.2 -4,7

25.1 41,.0 -4.5

17.7 29.1 -3-5

17.4 28.5 -3.2

14.6 23.4 -1.6

19.4 31.1 -1.9 22.3 35.9 -0.9

19.6 31.8 -2.6 22.4 36.1 -0.7

18.7 29.6 -1.3 22.1 35.5 -0.6

18.4 29.1 -1.2 21..8 35.0 -0.5

14.7 23.1 -0.8 20.4 32.7 -0.4

24.3 38.4 -6.3

28.9 44.9 -5.7

18.5 29.2 4.7

18.2 28.6 -4.3

1.5.7 23.9 -2.1

and 146 (semiconductors) of E.O. 264. of E.O. 264.

enjoy

All sectors importables Exportables

1-27

38-169

Notes:

Source:

Agriculture, Fishing & Forestry lmpo)_bles Exportables 1-23 Agriculture Importables Exportables Manufacturing importables Exportables Sectors 71-81 (garments) PRE95 before effectivity POST95 after effectivity Tan (1997).

More importantly,

EO 313.

Protection

Description 0-169

under

the studies

under

duty drawbacks.

the PIDS-DIA

project

also

provide empirical evidence on the positive impact of these trade reforms on competitiveness. The results show that for the whole manufacturing sector, the DRC/SER (domestic resource cost as a ratio to the shadow

exchange

zThe measure

rate) 2 went down from

of efficiency

used

in this project

around

1.7 in 1983 to around

is the ratio of the domestic

resource

cost

(DRC) to the shadow exchange rate (SER). The former indicates the value of domestic resources used to produce a unit of net foreign exchange while the latter indicates how society truly values foreign, exchange. Thus, a ratio of one, or less than one, indicates efficiency since the activity is using domestic resources, whose cost is lower than the value of the net foreign exchange it earned or saved. The lower the DRC/SER ratio, the higher the allocative efficiency.

Chapter 3: Medalla

147

1.5 in 1988. This is a clear of competitiveness

indication

of an increase

of the manufacturing

sector.

in the overall To illustrate

level

further,

the share of establishments whose DRC/SER ratio falls within the range of zero and one ( i. e., those with allocative efficiency) rose substantially between 1983 and 1988, in terms of both value of output and number of firms. In terms of the value of output, the share of efficient firms increased significantly in 1988 (Table 5).

Table 5. Resource

from

Allocation

18.8 percent

in 1983 to 39.5 percent

and Efficiency.

1992

Share in Number of Establ_shrrlcat (%) 1983 1988 1992

0< DRC/S?_;R < l

Highly

efficient

18.84

39.51

43.95

19,60

30.25

33.22

t.O< DRC/SILR< 1,5

Ef f:icient-MiIdly t,mf:[:icicnt

28.75

22.76

29,48

17.16

27.73

31,17

DRC/SER

Effic_enc_v Classification

Range

Sh_re 1983

in Production Yhlue (%) 1988

1.5_DRC/SER<2.0

ineffic[eut,

12.30

14.68

8.36

14,20

13.00

12.69

DRC/SER>2,0

Highly

39.,58

21.77

18.07

46.01

26.61

21.87

1.72

1.54

1.21

Average

lnefficient

DItC/SER

Sources."Medalla et. al. (1996) and Pineda (1997).

Another important finding of the DIA Project is the significant correlation between DRC and EPR in 1983 but none in 1988 (Table 6). This implies that the protection structure, which has been entrenched prior to the trade reforms,

encouraged

resource

allocation

toward

the

more inefficient (higher-cost) sectors (in terms of allocative efficiency measured byDRC). The absence of a correlation in 1988 indicates some

restructuring,

incentives brought DRC was positively

with the economy

responding

to the new set

about by trade reforms. For both years, however, correlated with capital intensity and negatively cor-

related with labor productivity. The former implies that the more capital-intensive sectors were also usually associated with higher DRCs while the latter indicates of comparative

that labor productivity

advantage.

These results,

really surprising, it merely confirms domparative advantag e lies. cant

that

is an important especially labor

determinant

the latter,

is where

are not

the country's

The more interesting result is that there was also a very significorrelation between the change in EPR and the change in DRC/

SER between the two years (Table 6). While this regression result should not be taken as an absolute indicator of the impact of trade reforms, it

148

The Philippines beyond 2000: An economic assessment

Table 6. Regression

Results.

(Dependent Variable - DRC) Independent C o e f f i c i e n t s Variables 1983 1988 1992

T - v a 1u e s 1983 1988 1992

EPR Capital Intensity Labor Productivity

-0,32 0,0065" -0,51"*

124" 0.00747 -0.0003"*

8,85 3.24 -2.89

19;3 and 1988 • :0.0,1%to0,90% • * :5.1%to 10%

1992 * :1% ** :5%

R " 0.43

0,09

0,31

4.15

4.13

Changes in DRCtSER vs. Changes in I+EPR EPR Coefficient

T-value

Level of Significance

1983-1988 1988-1992

5.8 2.4

0.1% 2.5%

Level of:Significance

1.2• 0.073* -0.52 "_

1.36 0.68

31.68

-0.84 2.63 3.45 2.1J -1.91' -2.11

Sources:Medallaet. al. (1996)and Pineda(1997).

strongly suggests that indeed, trade reforms have been a major factor in the improvement of competitiveness of manufacturing industries. The findings from the DIA Project also reveal a significant deconcentration of manufacturing industries taking place between 1983 and 1988 (Table 7). This is reflected in the sharp decline in the fourplant value added-concentration ratio at the three-digit Philippine Standard Industrial Classification (PSIC) level. Also there were no significant signs of shut downs of plants or massive unemployment. On the contrary, there was a substantial increase in the number of firms. Furthermore, the large majority of new entrants into industries were relatively small-scale plants. While the number of manufacturing plants increased by 63 percent from 1983 to 1988, employment grew by only 21 percent. This led to a significant decline in the average employment size of manufacturing plants from 122 to 75 workers per plant during the period (Table 8). The compositional shift toward smaller plants served to reduce the large-scale bias of Philippine manufacturing industries, which presumably would have had positive employment and income distribution effects. A more recent study has been undertaken by Pineda (1997) using the 1992 Annual Survey of Manufacturing (ASM). Except for some aspects, especially with respect to small and medium enterprises (SMEs), the trends continued. On the overall, competitiveness has improved, indicated by a further lowering of the estimated DRC for manufacturing to just slightly more than 1.2. Furthermore, the share in value added of industries with estimated DRC lower than one increased. There was

Chapter 3: Medalla

149

Table 7. 4-Plant Concentration

Ratios of Manufacturing

Industries.

m,,,

PSIC Code

Industry

Descr.iptio_

(In Percent) 1983 1988

31,1 312 313 314 321 322 323 324 331.

Food Processing Food Manufacturing Beverages Tobacco Textiles WearLng Apparel except Footwear Leather _md Leather Products Leather FootwemWood and Cork Products

82 48 04 96 37 26 73 66 35

59 53 72 96 29 18 52 34 38

332 341 342 351 352 353 354 355 356

Ftuxdture except Metal Paper and Paper Producl_ Printing and Publishing Industa_al Chemicals -Other Chemicals Petrolemll Refineli_s Petroleum arid Coal Producl_ Rubber Products Plastic Products

30 74 52 65 61. 100 96 82 32

18 57 43 72 55 100 76 69 24

361 362 363 369 371 372 381

. Pottery, China, arxd Earthenware Glass and Glass Products Cement Other Mon-metallic Products Iron and Steel Nonf:errous Metal Productzs Fablqcated Metal Products

97 73 43 65 75 84 59

75 80 39 56 65 100 58

382 383 384 385 386 390

Machjrlery except Elecn-ic_ ElectlScal Machinery Transport Euipment Professional and Scientific Equipment Metal Ftmliture .MisceUaneous Manufactures

50 65 79 98 58 72

66 57 80 100 57 54

Average

Concentration ratios for 3-digit PSIC sectors are weighted ( by total receipts) averof ratio of total receipts by four largest firms to total receipts in each 4 digit PSIC sector. Source:

Tecson

(1996).

a significant correlation between the change in DRC (this time between 1992 and 1988) and the change in EPR. Further trade reforms continued to bring about increased competitiveness in manufacturing industries. There were, however, some disturbing signs with respect to SMEs (Table 9). They appear to have lost some comparative advantage. It _hould be noted, however, that the 1992 estimates are based on ASM whiIe the earlier estimates are based on a Census of Establishments. While the above could partly explain the trend, the more likely explanais the power crisis experienced during the period. The larger es-

150

The Philippines

Table

8. Manufacturing

beyond 2000." An economic

Sector

assessment

Indicators. i

Change

, j Manufacturing

Average

DRC/SER

Number

of Manufacturing

Indicators

1983

Workers per Plar_r Toted Fixed Assets (Million C_uTe_a_ Prices ConsLmxt: (1985)

Pesos)

Prices

1.21

5.733

I1,488

11,764

10,726

700,895

856,951

968,628

895,252

Constmat

Note:

SITC

(Mi]li

1994/

1988

1992

0.90

0.79

0.00

2,00

1.02

0.91

1.22

1.13

0.92

0.61

1.10

,1.ffl

2,12 1.01

2.34 1.51

1,76 1.46

6,194

1.06

2.29

1.93

2.749

0,50

1.47

1-60

0.039 0.021

0.074 0.033

' 1.73 0.82

2.07 1,33

1.91 1,58

] 22

7,604 13,30l

16,104 1,3,380

37,698 20,163

1.326

1.402

3.205

2.320

[-165

1.714

0.011 0.019

0-019 0,016

83 66,442 29,488

(Chemicals,

9.677

11.649

22.875

30.308

1.20

1.96

:1.32

18.794

9,631

1,2.594

14.651

0.51

.l.31

].:16

0-079

0,156

0.278

0,363

1.97

1-78

1.31

0.154

0.129

0.153

0.176

0,84

1.18

1.15

on Pesos)

(1985),Prices _'

5-8

1992/

1983

Pesos)

Ce_lsus Value Added per Plan_ (Million ]Pesos) Currem Prices Constant (198g).Prices b Census _,_tlue Added per Worker CuiTent .Prices

1.988/

Fixed Assets per Plant (Million Pesos) Current Prices Fixed

1994

1.54,

Constant (1985) prices _ Assets per Worker (Mil]ion Cmxent prices Cortstant (1985) Prices _'

1992

1.72 Plmats"

T0talEmp[o?nn_ertt"

1988

Basic,Manufactures,

Machines

& Transport

Equipment,

and Miscellaneous. Manufactm'ed Goods " Only includes large manufacturing establishments (with 10or more workers) uIPI for Mmmfacturing at 1985=100was used as deflator IPI for Capital Formation at 1985;100 was used as deflator Sources: Medalla et al. (1996),Pineda (1997) and1996 Philippine Statistical Yem'book

tablishments

dealt better with the power crisis because

they can better

afford the cost of alternative sources of energy (e. g., generator sets). This is in sharp contrast with what happened in the earlier period examined, 1983 to 1988, wherein SMEs seemed to generally cope with the economic crisis better than the larger establishments, as indicated by the large increase in the number of SMEs and the decline in their estimated

average

DRC.

More insights could be gleaned by looking at the results three-digit PSIC sectors (Table 10). In 1983, before substantial

for the trade

reforms were implemented, there was a very wide variation across sectors, which already hides wide variations between

in DRCs sub-sec-

tors and between

produc-

firms

tion had the lowest This would

within

average

sectors.

have been surprising

ments,

footwear

and furniture

sectors

were among

goods

Kigh at around

if it were not for the fact that sectors

the strongest

Such a wide variation

The consumer

DRC, but still quite

clearly

1.43.

the gar-

belong to this group. These three

exporters indicates

during the period, an inefficient

allocation

Chapter 3: MedaUa

151

Table 9. Size Structure tries at 3-Digit Dc_c_ptiota

and Efficiency of Manufacturing PSIC Classification. A L 1.

1983 DRC/SER S M M E A D L I L U M

PSIC Code

Industry

311 312 313 314 321

Food Processing Food Ma,nul:actu_ing 8q'vcrak-'es Tobacco Textiles

1.60 1.28 1.89 1.73 4.86

2.36 1.79 1,73 1,01 3.31

322 323 324

Wearing Apparel excp Ftwr. Leather and Leather Prodtmt_ f,c_tthcrFoo[wcur

0.92 1.26 031

331 332 341 342 351

Wood and Cork Products Ftu-nlture except Metal Paper and Paper Products I'r,hating and Pubilshinu 'lnduxtrial Chemicals

352 353 354 355 356

1988 DRC/SER S M M E A D L I L (5 M

L A R G E

A L L

2,14 2,19 1.73 1.09 3.72

1,40 1.20 1.90 1.74 5.23

1,07 1,02 1.21 1.22 3-55

1.25 1.25 0.79 1.20 2.011

0.95 1.1I 1.12

1/.96 1.85 1.17

0,90 1.24 0.82

1,04 1-58 1.13

1.12 - 0,92 2.75 2.68 2.16

1,02 1.14 3.80 3.09 1.98

11,89 0.71 2.72 1.86 3.14

1,20 0.87 2.611 3,20 t.93

()l.h,ar Chcmicala Pclyo|cum Refineries Petrolem and Coal Products Rubber Products Plas/ic Producl._

1,66 1.51 2.00 2.10 2.61

2,25

1,60

1,60 1.51

2.3I 2.56 2,84

1.50 2.03 3,14

36l

Pottery, Chinaand Earthenwme

6.56

4,35

2.10

362 363 369 371 372 381 382 383 384 385

Glwss and Gl:cs.s Products Cement OIhc,' NCm-:uq:l:tll.ic Pvoduv:ls Iron and Steel Ni)rifet'l'ou.,/Mct:tJ Prodttt;t.s lYabvic:thxl Mel_d Pvoducl.s Maehiucry except E[e.ctrical 1"21cortical Machinery "15anspon Euipment Professionaland Scientific

2.63 3,38 6,61 1.75 1,28 2,57 2,76 2,88 2.40 1.06

4.90 21,54 4.66 2.36 1,11 133 2,30 2.29 2.15 1.05

1,78

386 390

Equipment MetalFmniture Miscellaneous Manufactures ALL MAuMUFACTURI_NG

4.10 1.32 1.72

3.34 1.33 2.02

5,45 2.06 1,42 3,17 4.07 1,45 2.27 1.04

Indus-

1992 DRC/SER S M M E A D L [ L tY M

L A R G E

A L k

038 1,20 0.98 1-04 7.40

1,03 0,96 1.24 1-23 3-53

1.20 1,26 1.14 1.32 1.64

1,43 0,85 2.06 1-64 1,31

1,04 1,06 2.97 0.96 1,44

1.25 1.39 1.12 1,33 1,76

0,91 2,53 1.08

0,92 2,61 1.31

1,18 033 0,87

0,99 1.44 1.02

0.91 1,52 1.11

0.85 1,77 0.78

1.02 1,38 1.03

1.35 11.94 1.86 1,91 3,08

1,15 1.11 1.90 1,81 1,36

1.18 11.81 2,87 1,37 1,14

1.49 0.89 1-76 2,45 4.10

1.41 1.24 1,34 1.04 1,14

1.48 1.12 220 1,87 1,40

h64 1-41 1,52 1.13 1.55

1.27 1,25 1,18 0,76 0,93

1.07 0,57 0,78 0.99

1.13

1.20 1.76

0.98

0.91 1.22

1,43 2.61

0,89 0.89

0.95 1.22 0,_ 0,94 1.62

1.42

2,06 2,36

1.16 1.76 0,59 0,91 1.23

0.52 2,01 1.78

1,01 1,19 1.68

0.85 1.52

7,i8

1,29

1.40

1.39

1.28

1.59

2.53

2,31

1.50

2.51 3,31 I0,79 1.69 1.29 2.88 2.79 3.03 2.43 1.08

1,61 3.09 1,77 2,27 1.75 t.78 1.40 3.94 1.40 2.72

2.16 4,28 -7,28 2.08 1.09 lag 1,96 1.08 1,00 1,67 1.81 1.37 2.28 1.16 1.97 I.N 1,25 1.12 - 8,37

1.55 2.96 1.81 3,08 1.76 1,83 1.30 4.40 1,44 1,11

1.78 1.68 1.55 1,19 1.09 1.79 1.23 1.16 1.55 1.48

1.77

0.73

1.87 1,65 1.69 2.36 1.74 I.II4 1,33 1,26

I.eG 1,48 0.56 1.56 2.12 1.41 1.73 0.97

1.84 1.68 1.42 1.00 1.10 1.66 1.00 1.16 1.55 1,54

7-16 1,34 1.68

2,68 1.17 1.54

4.14 1.53 1.29

1,02 1.64

3.91 1,34 1.21

1,68 1,65 1.38

5,10 1.24 1.24

127.0 1.18

1.28 1.86

1.25 1.17 1.29

L A R. G E

Notes:

Employment size of plants defined as follows: Small : 10-99workers Medium : 100-199workers Large : 200 or more workers Sources: Medalla et al. (1996) and Pineda (1997). of resources. Resources would have been put into better use if more of these were used in activities with low DRC/SER ratio and lesser for those with high DRC/SER ratio. The more widely divergent the ratios, the more inefficient the allocation of resources. This is more or less the resource allocation situation bred by the over-all protectionist policies in the three decades prior to the reforms. cation

trade

We see a leveling of DRCs across sectors, indicating a better alloof resources. But what is more telling is the trend in the per-

centage share in value added. In almost all cases, the share of the sectors whose DRCs went down increased while the share of the sectors that

exhibited

that, indeed,

a rise in DRCs declined resource

allocation

(Table 10.1). This is an indicator

was improving.

152

The Philippines

Table

10. DRC/SER Ratios and EPRs by End-Use Classification.

PSIC Classification

TotalManufacturing Consumer Goods 311 Food 312 Other food 313 Beverages 314 Tobacco 322 Apparel 324 Footwear 332 F'urn. and Fixture except. Metal 386 Fu.nliturcand Fixtures, Metal Intermediate Goods . 3211.Textiles 323 Leather Poducts 331 Wood ProducLs 341 Paper Products 342 PlJJating, Publishing 351 IndusuriM Chemicals 352 Other Chemicals 353 Petroleum Refilaing 354 Coal Products 355 Rubber Products 356 Plastic ProducLs 361. Pottery amd China 362 Glass Products 363 Cement 369 Other Nonmetal Mineral Products Capital Goods 371 Iron and Steel 372 Nonfelrous Metal basic Products 381 Fabricated MetN Products 382 Machinery except Electrical 383 Electrical Machinery 384 Transport Equi.pmert'l, 385 Prokessional Equipment 390 Other M.aaufactufing Sources:

beyond

2000: An economic

assessment

of Manufacturing

Industries

D R 1983

C/S 1988

E R 1992

E 1983

1,72 1,43 1.60 1.28 1.89 1.73 0.92 0.91 0.92 4.10 1,,81. 4.86 1..26 1.12 2.75 2.68 2.16 1.66 1.51 2.00 2.10 2.61 6.56 2.63 3.38 6.61 2.24 1.75 1.28 2.57 2.76 2.88 2.40, 1.06

1.54 1,06 1.06 1.04 1.21 1.22 0.95 1.13 0.94 2.68 1.87 3.55 1.58 1.35 1.86 1.91 3.08 1.1.6 1.76 0.59 0.91 1.23 1.29 1.61 3.09 1.77 1.48 2,27 1.75 1.78 1,40 1.10 1,40 2.72

1.21 42.80 1,18 28.97 1.20 32.95 1.26 10.98 1.14 83.74 1.32 147.03 0.99 3.10 1.02 -6.50 1.24 -2.57 3.91 182.68 1.23 54.68 1,64 92.77 1.44 -1.3.90 1.41 2.11 1.34 64.99 1.04 68.27 1.14 53.21 0.95 37.70 1.22 56.64 0.57 74.47 0.94 129.32 !..62 1.19,68 1.59 224,14 1.78 6734 1.68 79.16 1.55 280.34 1.23 38.73 1.19 38.25 1.09 9.74 1.79 82.32 1.23 28.12 1.,16 42.51 1.55 50.60 1..48 13.19

1.32

1.17

1.34

8.09

P 1988

R 1992

28.30 20.66 26.52 30.46 22.30 14.20 21_30' 62.81 52.00 48.84 60.60 54.33 3.90 3.40 -5.30 3.64 1.90 7,47 75,90 52.74 31.67 17.53 30.60 15.48 1.70 32.40 4.50 8_29 29.20 27.97 72,40 10.41 8.50 9.95 44.80 25.11 59.60 17.76 -5.50 1.35 18.90 21.73 20.90 30.46 4.70 20.38 37.40 35.66 42,40 7.02 17.40 27.26 1,2.31 12,83 80.50 7.97 -11_30 3.28 66_30 50.75 I1.70 5.17 30_90 9,18 48,80 37.85 21,00 23.78 4_65

8,10

Medalla et al. (1996) and Pineda (1997),

Clearly, it will benefit the economy if resources from inefficient activities are transferred to the efficient ones. To do this, the first step is to level the EPR. While trade liberalization may increase imports and restrict the market for locally produced goods, it also increases Competition and induces greater efficiency among domestic producers. Wide variations in DRCs across firms within an industry were also found. Trade liberalization could induce the inefficient firms to

Chapter 3: MedaUa

Table

10.1.

153

Change in Value SER Ratio.

Added

PSIC De,scription

and

1983-1988 "vhlue DRC/SER Added

Change

in DRC/

1988-1992 Value DRC/SER Added

Consumer Goods 311 Food 312 Other Food

27.09 31.29 15.33

_25.82 -33.59 - 18.64

-9.64 -27.12 -46.86

11.32 12.93 20.98

313 Beverages 314 Tobacco 322 Apparel 324 Footwear

-30.58 60_51 119.96 -66.79

-35.89 -29_64 3.23 23.84

152.45 - 19.88 -2.34 105.71

-5.91 8.44 4.24 0.49

332 Fm_aimre and Fixvares except Metal 386 Fm'niture and Fixtures, metal Intermediate Goods 321 Textiles 323 Leather Products 331 Wood Products 341 Paper Products 342 Printing. Publishing 351 Industrial Chemicals 352 Other Chemicals 353 Petro]eum Refining 354 Coal Pcoducts 355 Rubber Products 356 Plastic Products 361 Potter}, and China 362 Glass Products 363 Cement 369 Other Non-metal Mineral Products

72.30

2.23

-56.52

3[.85

-23,26 -3.38 7.02 4.23 -37.59 31.22 5.99 63,13 33.62 -49.73 237.12 36.15 11.33 42.71 140 _47 25.15 1.74

-34,61 3.09 -27.01 25.46 20.70 -32.44 -28.87 42_74 -29.92 16.32 -70,70 -56.84 -52,78 -80.30 -38_60 4.55 -73.20

51.52 -7.61 -35.13 75.6 8 -49.08 2-2.30 81.82 _5.40 26.61 -37.88 -26.05 19.08 - 17.11 -27.01 -65.97 61.62 57.89

45_84 -34.22 -53.77 -8.91 4.30 -27.87 -45.45 -63_03 -18.34 -30,54 -2.72 3.70 31.44 23.04 10,22 -45.65 -12,49

Capital Goods 371 Iron and Steel 372 Nonfen-ous Metal basic Products 381 Fabricated Metal Products

-36.42 -82.65 173.23 - 17,35

-33.93 29.87 36.50 -30,92

53.88 163.63 30.86 39.64

-16.89 -47.64 -37.61 0,82

382 Machinery, except Electrical 383 Electrical Machhaery 384 Transport Equipment 385 Professional Equipment

10.41 6.19 -51.55 419.23

-49.20 -61.92 -41.54 156.29

4.13 48.85 47,59 -48.15

-12.27 5.77 D.48 -45.52

390 Other

66.84

- 11.47

2.69

14.66

Manufacturing

Sources:

Medalla

et al_ (1996) and Pineda

become

efficient

(19971.

or shut down.

Either

way, the effect

is for the

industry's DRC to go down. At the same time, trade liberalization lead to export expansion or the expansion of the more efficient tries. tries,

would indus-

In the long run, the DRCs will level across and within the indusand thus create a more efficient allocation of resources and a

higher

level of efficiency.

there

This is, indeed what appeared to have happened. Not only has been a reduction in the average DRS/SER ratio for manufactur-

154

The Philippines

beyond

2000: An economic

assessment

ing; there was also a clear levelling off in the ratio across sectors. Large reduction in the ratio could be noted for the capital goods from 2.24 in 1983, down to 1.48 in 1988 and even further down to 1.23 in 1992. The most improved sectors were industrial chemicals, coal, and rubber products, completely transforming from highly inefficient to efficient sectors. There

was a slight increase

in DRC for intermediate

1.81 in 1983 to 1.87 in 1988, but this improved 1992. There was also a decline in the average

goods from.

substantially to 1.23 in DRC/SER ratio for con-

sumer goods in 1988. However, the ratio increased in 1992, due largely to the deterioration in food sectors which were probably most affected by the power more uniform

crisis during DRC, which

that time. More important indicates a better allocation

to note is the of resources.

Hence, not only was there an improvement in the competitiveness industries, there was improved allocation of resources as well. Since the study by Pineda Establishments

has become

(1997),

available.

the

"partial "3 1994 Census of

This project

has accordingly

updated some of the estimates to see if the trends still continue using a more recent and larger database. The results remain very encouraging (Table 11.1). The overall DRC/SER ratio declined, further to around 1.18 (down from around 1.2 in 1992). Furthermore, the share in value added of inefficient

and highly inefficient

activities

( i. e., activities

with DRC/

SER ratio between 1.5 and 2, and those with DRC/SER greater than 2, respectively) decreased from around 26.4 percent in 1992 to around 20.5 percent Table

in 1994. There was a slight decline

11.1. 1994 Resource

Allocation

in the share

of efficient

and Efficiency.

DRC/SER Rauge

Efficiency Classification

0<DRC/SE.P,< 1

Highly Efficient

41.63

22.38

1.0<D P,C/SER< 1,5

Efficicnt-Mi.ldly ]il_eEficieul,

37.86

40.45

1.5<DRC/SER<2.0

Inefficient

7.56

16.30

DRC/SER>2.0

Highly Inefficient

12,94

20,76

Average D.RC/SE R Source

Share in Production V_due (%)

Share in Ntanber of Establishment (%)

1.18

of basic data: NSO.

3,Although it was supposed to be a Census of Establishments, cover all establishments with 10 or more employment.

the NSO was

unable

Chapter 3: Medalla

firms

from

155

1992 to 1994 but the share

is still higher

than that in 1988

which is probably the better basis for comparison as 1992 estimates are based on the survey's smaller database. In any case, the decline in the share

of inefficient and highly inefficient activities is unambiguous. Using the 1994 set of estimates, at three-digit PSIC level,

the

DRC/SER as the dependent variable was again regressed against EPR, capital-labor ratio and labor productivity (Table 11.2). As in the case in 1988, the correlation The capital-labor

between ratio

EPR and DRC has become

and labor

very significant, showing the change in DRC with the change again showing competitiveness

Table

productivity

insignificant.

coefficients

trade reforms to be having some positive of manufacturing industries.

11.2. Regression

(Dependent Variable - DRC) tndeperldent Variables

impact

on the

Results. C o e f f _c i e n t s

EPR Capital Intensity Labor Productivity

0.7784°'°* 0.0151" -0_001"

Level o17Significance

* 0.01% •'_•15%

t - v a 1u e s 1.47 6.75 -6.80 R2 F

Changes in DRC/SER vs. Changes ir_ I+EPR EPR Coefficient • 1988-1994 1992-1994

are again

same expected signs. Regressing the in EPR still show positive correlation,

T-value

1.11 0.75

0.6492 12.029

Level of sigr_cmace

1.92 1-09

6.47% 28.48%

The new estimates for 1994 confirmed the loss in comparative advantage for SMEs (Table 11.3). Possibly, similar qualificatiofis could be made for 1994 as in the case of 1992 (i. e., SMEs are still not adequately covered and the effects of the power shortage are still being felt). However, it is now more likely that the formerly efficient SMEs have grown, leaving behind less efficient (that is still small) SMEs. This could also explain the increased Looking sification,

efficiency

now at the 1994 estimates

an improvement

was found

of medium-scale of DRC/SER

for consumer

industries.

by end-use products

clas-

at 1.08,

156

Table

PSIC Code 311 312 313 31.4 321 322 323 324 331 332 341 342 351 352 353 354 355 356 36.1 362 363 369 371 372 381 382 383 384 385 386 390

Note:

The Philippines

11.3.

beyond

Size Structure and Industries at 3-Digit

h_dustry

2000:

An economic

assessment

Efficiency of Manufacturing PSIC Classification.

Description

Food Processing Food Manufactulfing Beverages 2bbacco Textiles Wearing apparel except Footwear Leather and Leather Products Leather Footwear Wood and Cork Products F_u_iture except Metal Paper and Paper Products Printil_g and Publishing Industrial Chemicals Other Chemicals Petroleum Refineries Petroleum and Coal Prod uct,s Rubber Products Plastic Products Pottery, China, and Earthenware Glass a_ad Glass Products Cement Other Non-metallic Products lrou and Steel Nonfela-ous Metal Products Fabricated Metal Products Machinery except ElectlJ.cal 'Electrical Machinery Trausport Eq/.6pment Professional and Scientific Equipment Metal FmTai'mre Miscellaneous Manufactures All. Ma uufactucing

1994 DRC/SER ALL SMALL MEDIUM

1.18 1.23 1.00 0_47 1.51 1.04 1.41 0_98 1.27 1.02 1.40 1.18 0.96 1.00 1.23 1.48 1.07 1.24 1_40 3.25 2.35 1.94 1.15 0.90 1..59 2.19 1.01 1.88 1.46 1.17 1_21 1.18

1.32 1.40 1_88 1.55 1.41 0_83 2.36 1.68 1.14 1.05 2.13 1.86 1.24 1.75

0.90 0.81 1.26 1.03 1_16 1.02 1.07 1.66 1.40 1.05 1.94 1..43 0.88 1.23

1.67 1.88 1.50 2.21 1.12

1.39 1.63 1.09 2.38 0.98

3.22 1.21 1.86 1.54 2.04 1.49 4.71 1.41 2.16 1.44 1.47

1.55 1.46 1.29 1.93 1.56 1.10 0.73 0.79 0.94 1.09 1._05

LARGE

1.31 1.32 0.93 0.45 1.62 1.10 1.27 0.86 1.29 1_01 1.20 0.96 0.95 0.91 1.23 0.87 1_17 1.27 4.98 2.35 1.27 1.05 0.89 1.56 2.29 0.98 1.96 1.69 1.00 1.1.8 1.17

Employment size of plants defined as follows: Small: 10-99 workers; Medium: 100-199 workers; Large: 200 or more workers Source of basic data: NSO

Chapter 3: Medalla

157

a slight increase for intermediate products at 1.29, and a further improvement for capital goods at 1.2. Furthermore, better resource reallocation is also evident with the share in value-added increasing for those sectors with declining DRC and vice versa for the majority of cases between 1988 and 19944 (Table 11.4). Table 11.4. 1994 DRC/SER Ratios, EPRs and Share of Value Added of Manufacturing Industries by End-Use Classification. PSIC CLASSIFICATION

DRC/SE.R

EPR

Share of Value Added

1.18

19.17

100.00

CONSUMER GOODS 311 Food 312 Other Food 313 Beverages 314 Tobacco 322 Apparel 324 Footwe0x 332 Furn.iturc and Fixtures except Meta'l 386 Furaiture and Fixtures, Metal Intermediate Goods 321 Textiles 323 Leather Poducts 331 Wood Poclucts 34I Paper Poducts 342 Printing, Pblislting 351 Industrial Ccmicals 352 Other Chemicals 353 Pctrolemn Rfining 354 Coal Poducts 355 Rubber Products 356 Plastic Products 361, Pottery and CIlina 362 Glass Products 363 Cement 369 Othci- Non-metal Mineral Products Capital Goods 371 Iron and Stccl 372 Nonferrous Metal Bm_ic Products 38.1 FabJScatcd Mct_l Products 382 Machinery except ElcctlScal 383 ElcctiScal Machinery 384 Transport Equipment 385 Professloaal Equipment

1,08 1.18 1,23 1.00 0.47 1.04 0,98 1.02 1,17 1.29 1,51 1.4,1 1.27 1.40 1,18 0.96 1.00 1,23 1,48 1,07 1,24 1.40 3.25 2.35 1.94 1.20 1.15 0,90 /-59 2.19 1.0 1 1.88 1,46

29.00 14,45 5026 43.96 53,39 4.69 0.22 -0,07 - 4_51 I%15 1.93 7-95 7_53 19,86 13.64 3.04 29.14 20.07 -10.06 17.31 17.88 3.56 20.21 19,49 18.40 10.66 9.12 - 1-15 28,74 0.36 4.72 57.32 1.0u

38,8t 9,06 8,42 9.11 5.61 5.59 0.28 0.68 0.06 37.25 3.14 0.15 0,82 2.06 1.43 2.83 10.48 8.75 0.04 1,22 1,94 0.47 1.08 2.12 0.72 22.96 4,62 1.25 .I-81 1,07 10,43 3A8 0,30

1.79 11.05 18,10 - 17.47 -61.39 9.51 -13.04 8.46 -56-36 -30,92 -57.43 - 10-81 -6-05 -24.64 -38-10 _8,86 -14.04 -29,97 152.59 18,05 0.61 8.33 101.25 -23,97 9,52 -18.64 -49.40 - 48.49 -10,44 56.20 - 7.91 34.00 -46.26

-7.56 15.34 -24,29 117,37 -26.08 -16,02 60,00 -55.20 81.82 -14.07 - 41,64 1.35 -71,00 -33.31 75,68 -37.53 -0.53 13.71 -67.13 -41.65 15,68 14.36 -35.52 28.33 2.42 67.92 196.34 -12,53 56.98 5.1 1 58,41 109,64 11.11

390 Other Mantffacttwing

1.21

-0.83

1,00

3.54

3.52

TOTAL MANUFACTURING

Change (1988 -1994 DRC/SER Share of Value Acldod

The earlier year of 1988was chosen as the basis of comparison instead of 1992to allow more time for changes to occur. Also, 1992has a smaller data set, being a survey year. Nonetheless, similar results were noted using 1992 as the basis of comparison albeit with more (although still a minority) number of sectors exhibiting the opposite (unfavorable) trends.

158

The .Philippines beyond 2000: An economic assessment

Turning now to the economy-wide impact of trade reforms, Tan (1997) analyzed the effects of the reforms (particularly EO 264) on the economy using an I/O-based trade model (patterned after Chung Lee). Her results show positive output effects with or without exchange rate adjustment (Tables 12.1 and 12.2). Growth in output would increase by around 0.4 percent to 0.75 percent (for low and high elasticity assumptions respectively) due to trade reforms under EO 264. Most benefited is the exportable sector, which could grow by around 4 percent to 8 percent. This is mainly due to the improved relative prices facing the sector with trade reforms. However, under fixed real exchange rate, there is a very slight decline (around 0.03 percent to 0.06 percent) in income growth, attributed mainly to a decline in the growth in manufacturing value-added. This implies a reallocation of resources to sectors with relatively lower value_added ratio. The effects on the growth in both output and value-added for agriculture are positive. This is mainly because EO 264 maintains protection in agriculture while lowering industrial tariffs substantially to 10percent and below. With the exchange rate adjustment, and attempts to constrain the trade deficit to within 2 percent of GDP, growth in both output and income rises with trade reforms under EO 264, and for both sectors. This highlights the complementary role of the exchange rate in trade reforms. Tan (1997) also simulated the effects of moving toward a uniform 5 percent tariff (Scenarios B and D of Table 12.1, and Scenarios F and H of Table 12.2). Output growth for the economy increases by around 0.6 percent to 1.04 percent under fixed exchange rate and around 1to 1.5 percent under flexible exchange rate. This underscores the benefits of having a uniform tariff structure vis-fi-vis maintaining protection in agriculture. Or put in another way, this indicates one of the costs of maintaining some protection in agriculture amidst trade reforms. However, the growth in agriculture is reduced (for all cases) with reforms toward a uniform 5 percent. Clearly, there are trade-offs which must be recognized. Note also that in the case of a uniform 5 percent reform, income growth increases by even more than the increase in output growth at around 1.36 percent to 2.44 percent. This implies a reallocation of resources, on average, toward sectors with higher value-added ratios. In all cases, growth in both output and income increases. Positive effects of the trade reforms were also noted at the more micro level in the industry studies undertaken by PIDS under the Policy Training and Technical Assistance Facility (PTTAF) project_ Tecson (1997)

Chapter 3: MedaUa

159

Table 12.1. Effects of Trade Reform Assuming Fixed Real Exchange Rate (In Percent). A

Output Importables Exportables AgricLdture Importables Exportables Manufacturing lmpor tables Expormbles

0.40 -1,16 4,27 0.5 1 0.46 1-27 1.03 -1.11 5.51

0.60 -2.99 8.71 -0.75 -5,03 4.94 0.78 3.64 10.06

0,75 -2.09 7,85 0.82 0.74 2_03 1.92 -2.08 10.33

1_04 -5.55 15,80 -1.20 -8.05 7.9 1.47 -6.83 18.87

Income Importables Exportables Agricuflture Importables Expot_ables Manufacttu'i:ag Importables Exportables

-0.30 -2,21 3_40 0.58 0.48 1.26 -0.06 -2.65 4,53

1.36 -0,76 8.22 -0.67 -5.06 4.94 3.06 -0.68 9.74

-0,06 -4.02 6.20 0.92 0,77 2.01 -0.1,2 -4.97 8,49

2.44 1,34 14.78 -1.08 -8.10 7,90 5.75 -1.28 18.26

Total Change in Imports in Billion Pesos "lbtal Change in Exports in Billion Pesos Change in Trade Balance in Billion Pesos (dX-Dm) TD/GDP

7_38

17.35

13.11

32.63

I0.10

17.48

18,67

31.90

2.92

0.13

5,6

-0.73

2. i

2.5

1.8

2.6

Notes:

A: Effects of E_O. 264 using low supply elasticities B: Effects of the 5% uniform tmiff using low supply elasticities C: Effects of E.O. 264 using high supply elasticities D: Effects of the 5% uniform tariff using high supply elasticities. The level of trade deficit in 1988 is estimated to be P18.4 B supply elasticities, prices while the GDP is estimated Source: Tan (1997)_

in border

at P 740 B.

cited that almost all the responding firms claim to "adopt or intensify cost-cutting measures and productivity improvements" as a result of the ongoing trade reforms. "Continuous quality upgrading" was also the answer to many in terms of, for example, more new products and line extensions for existing products. Another response was "improvement in production technology." This meant, for most respondents, increased investments in fixed assets, as in the case of a paper company (Tipco) which increased capacity, and Concepcion Industries which diversified to two-way radios. Other responses included: "greater investment in training, intensification of and finetuning of marketing strategy, and exportation." On the whole, the firms were optimistic that they could cope in the new, more open trading environment.

160

The Philippines

Table

12.2.

Effects change

beyond

2000:

of Trade Reform Rate (In Percent).

An economic

assessment

Assuming

Flexible

Real

Ex-

Change in Real Exchange Rate (rl/ro) ' dTD (Billion pesos)

0.2

1.0

0.0

0.6

3.80

5.56

3.80

Output lmporrables Exportables Agliculture Importables Exportables Manufacturing Importables Exportables

0.49 -0.99 4.44 0.58 0.58 1.37 I. 21 -0.92 5.71

0.98 -2.30 9.48 -0.45 -4.59 5.42 1.57 -2.89 10.95

0.75 -2.09 7.85 0.82 0.74 2.03 1.92 -2_08 10.33

1.50 -4.73 16_72 -0.89 -7.58 8.4 2.44 -5.9 19.96

Incolne Imp o1_ables Exportables Agricuhure lmpo_:ables Exportables Manufacturing ImpmXables Exportables

0.05 -2.05 3.57 0.66 0.60 1.36 0.13 _2.47 4.73

1.71 0.08 8.97 _0.35 -4.62 5.41 3.88 0. i0 10.62

-0.06 -4.02 6.20 0_92 0.77 2.01 -0.12 -4.97 8.49

2.87 -0.53 15.66 -0_73 -7.64 8.40 6.75 -0.31 19.35

Change in Trade Balance

3.8

5.6

3.8

TD/GDP Notes:

E: Effects of E.O, 264 using low supply elasticities. F: Effects of the 5% uniform tariff using low supply elasticities G: Effects of E.O. 264 using high supply elasticities. H: Effects of the 5% uniform '(rl/ro)-1: If rl>ro, the peso depreciates tariff using high supply elasticities. : If rl<ro, the peso appreciates. Source: Tan (1997).

There

were,

of course,

Among

the

visible

reforms

is the

closing

and Phihread--which

also some and

of two major

claim

to have buckled

However,

the

maining

two

companies.

This

indeed,

industrial

giving

way

cited

down

liberalization.

are

often

negative

restructuring to the more

two

firms

could

negative tire

very ones.

costs noted.

effect

of the

companies--Sime under

were

is happening. efficient

adjustment

later

well

trade Darby

the pressure

of trade

bought

the

re-

be an indication

that,

The less

firms

efficient

Chapter 3: Medalla

Export

161

and Industrial Performance While studies show positive effects

of trade reforms,

especially

with respect to the increasing competitiveness of industries, the performance of the industrial sector in terms of growth during the recovery period

starting

in 1993 has been very modest.

This is not entirely

sur-

prising, considering the adjustment form. It has even been encouraging

period required for any kind of reto note that the adjustment period

exhibited

adjustment

little of the anticipated

massive plant shut downs. Nonetheless, one's mind is when the industrial sector efits of the reforms. The continuing

trade reforms

positively on industrial trends in the production

costs

associated

with

the question that remains in will finally reap the full ben-

are expected

to eventually

impact

growth. This section thus next examines the structure and economic growth to see if such

effects could already be discerned.

There are two major limitations when

looking at such trends. First is the timing of the observation. Gains from trade reforms are more long-run in nature and may not already be apparent. Second, one cannot solely attribute actual changes in industrial activities and economic growth to adopted industrial policies arising from a host of other factors (monetary, litical,

etc) which

are equally important.

fiscal, agriculture,

However,

the resulting

po_ pro-

duction structure and growth of the economy should still provide some indication of the trade reforms' impact on industrial performance. Tables 13.1 and 13.2 show the changes in the production structure of the Philippine economy over the past 20 years. The tables indicate a very stagnant industrial sector reflected by manufacturing growth rates consistently lower than the overall economic growth. This is also reflected by the almos t constant share of manufacturing. Hence, past industrial policies did not seem to have induced rapid industrial growth.

Neither

did the reforms

appear to have made much

of an im-

pression as yet. The share of manufacturing even went down during the reforms. This could be due to a number of factors. The main possible reason is that the industrial

sector

structuring.

of the new investments

Much

three

to four years.

failure

of the government

mentary measures, is further discussed

is still in the process

Also for the delayed to implement

of adjustment

happened response

outright

and re-

only in the last

may be due to the

the necessary

comple-

particularly with respect to the exchange in the succeeding section of this paper.

rate. This

162

The Philippines beyond 2000: An economic assessment

Table 13.1. Production Structure of the Economy Average Growth Rates, In Real Terms. Indus_'y

75-80

80-85

85-90

90-95

90-96

Agri.Fisher y,Forestr y

4.50

0.38

1.96

1.30

1.55

k_duslry Sector Manufactm'ing

7.45 5.07

-2.27 4.77

1_54 2,91

2.29 2.17

2,86 2.65

Service

5.48

1,97

4.40

2.96

3.40

5.99 5.88

_0.09 -0.61

2.74 3.36

2.34 3.07

2.79 3.61

Sector'

GROSS DOMESTIC PRODUCT GROSS NATIONAL PRODUCT Source:

National

Income

Accounts,

Table 13.2. Production Distribution, l_d_stry

NSCB.

Structure of the Ecomomy In Real Terms.

Percent

1975

1980

1983

1985

1988

1990

1993

1996

Agri. Fishery, Forestry

24.74

23,55

22.04

25.28

.23,80

22.19

22.37

20.2

industry SecLor Marmfactming

38.48 28.39

40.59 27.65

41.01 26,49

36.06 25.87

35.56 25.95

35.28 25.39

33.67 24.27

34.30 24.34

Service Sector

37.04

36,05

38.44

41.50

41.56

42.02

42.26

41,56

100.26

100.19

1.01.49

102.84

1,00.92

99.49

98.29

96.06

100.00

100_00 100.00

100.00

Accounts,

NSCB.

GROSS DOMESTIC PRODUCT GROSS NATIONAL PRODUCT Source:

National

Income

Some concerns were raised by certain sectors about the negative trends in the production index indicated by the Survey of Key Establishments in Manufacturing (SKEM) during the first half of 1997 (Table 14). The figures seem to indicate some slowdown in indnstrial growth on a year-on-year basis between the first quarter of 1996 to the first quarter of 1997. The economy earlier appeared to be picking up, bringing along the industrial sector as well. How disturbing are these recent trends indicated by the SKEM? The Department of Trade and Industry (DTI), for one, questions the accuracy of the trends as an indicator for the whole manufacturing sector. The SKEM data set has limitations in that they capture only trends in key establishments in Metro Manila. As would be shown in the latter part of the paper, a lot of the industrial activity is moving out of Metro Manila and toward growth areas such as the industrial zones

Chapter 3: Medalla

Table

163

14. Index of Enterprises

Value of Production of by Industry 1985= 100.

1.995 Manufactm'ing

TOTAL

Manufacturing

1996

1997

380.4

397.5

411.4

414.4

455.1

428.6

445.3

433.1

445.1

303.2

Food

251.5

214.1

213.3

264.1

298.6

255.3

243.4

278.5

3D.0

269.8

Beverage

259.5

291.8

255.7

279.9

304.5

347.5

315.0

351.5

326.8

3863

"lbbacco

157.4

149_2

148.5

170.5

163.1

163.8

165-9

190.0

155.2

200.1

Tcxtile

170.0

178.4

204.6

203.1

193,3

169,8

192,5

160.5

127.4

140_8

Apparel

266.3

302.4

342.6

330.0

208.2

209.4

210.9

218.4

158.2

196.7

Wood and Wood

127.0

129.0

142.8

129.8

113.0

127.9

139.6

122,0

126.7

129.2

and

215.8

223.1

227.4

223.6

440.3

424.0

486.8

509.2

489.4

477.8

and Paper

257.1

259.5

266.4

-940.4

275.8

230.5

261.7

271.3

219.3

198.0

263.4

288.5

299,3

281.8

287.9

286.1

303.4

301.2

301.9

294,2

Wearing

Products Furniture Fixtul-e_ Paper Prods, Chemicals

aad

Chemical

Products

RnbberProducts

145.3

147.6

165.1

147.6

126.8

116.1

114,0

117.1

109,5

110.5

Petrolettm

192.1

212.7

198.5

214.1

253.0

228.6

240.4

231.8

240,4

233.1

Mineral

334.6

340.3

371.7

343.7

343.0

400.2

396_7

391.2

417.4

504,1

396.8

431.5

441.6

432.4

513.3

360,2

450.0

492.4

394.2

387.6

Transport

Equipment

2,679.6

2.782,0

2,934.9

2,674.8

2,966.0

2,875.2

3,094.2

2,586.2

2.513,7

2,371,6

Electrlcal.

Machinery

536_7

603,4

633.9

690.4,

828.9

' 827.0

796,5

818.4

993.8

1.031.8

239.4

253.1

260.0

257.3

265.4

281.8

285-1

263.7

310.0

341.4

ProducEs

Nonq_aetallic Products ,Basic Metals

Miscellaneous Sources:

1996

Philippine

Statistical

Yearbook

Economic

Indicators,

NSCB.

in Cavite, Laguna, Batangas and even some parts of Mindanao. Hence, the SKEM data is most possibly not representative of the whole manufacturing

sector.

An expected

outcome

of reforms

is some restructur-

ing which entails contraction in some and expansion in other sectors/ industries/firms. Hence, the SKEM data could be capturing more of the contraction,

since the SKEM covers only the established

firms. It is thus important to look at other indicators. A principal objective of the Philippine trade reforms if not eliminate,

the bias against

exports

inherently

sample

is to reduce,

arising

from

past protectionist policy. While studies show that the manufacturing sector has been responding well to trade reforms, a logical question how this has been translated in terms of actual export performance.

the is

164

The Philippines

ing

sector

a growth

rate

averaging

1993-1996.

The

performance

the

with

period

is even better:

the

same

period.

the

highest

followed

the

export

15 indicates,

well,

sector

erage

2000: An economic

As Table formed

it grew The

growth

rate

by electrical

by around

1990s,

the

beyond

and

at around

47 percent

Table

15. Average

good

transport

during

Annual

has

sector, the period.

Rate

exhibited period,

grew

slowed

during

durduring

the same

is the textile

21 percent

Growth

sector

per-

export

equipment which

garments

performer

of around

has

20 percent 24 percent

equipment/semi-conductors,

but another an average

of almost

machinery

The

whole

than

of manufactured

by an average

38 percent.

growing

on the

at more

assessment

with

on avdown

exports

of Exports.

Commodity

1986-1988

ha Percent 1989-1992

1993-1996

Coconut Products Sugar and Produck_ Fruits _-mdVegetables Odaer Agro-based Products Forest Products • Mineral Products Petroleum Products Manufactures Electrical Equipment Garments Textiles Footwear Tl-avel Goods and Handbags •Wood Man tffactm-es Furnitures and Fixt m'es Chemicals Non_n'letallic Mineral Manufacturer Machinery and Transport Equipment Processed Foods and Beverages Miscellaneous Manufactured Articles Others Special Transac t_ons Re-Exports TOTAL

8.0 -23.7 6.2 21,8 9.8 15.2 22.2 20.0 13.6 28,9 23.9 17.3 30.3 22.6 31_2 22.4 15.7 30.9 21.4 17.7 23,9 80.0 55.6 15.5

4.7 13.4 5.3 _2.0 -30.3 -4.0 .5_1 13.9 16,9 13.0 14.5 17.4 28.4 10.2 - 0_1 1.8 25,2 55.8 4.9 12.6 1,2.8 38.0 6.5 8.6

7.9 15.2 7,2 4.5 -1.6 5.8 19.2 23.8 38.2 3.3 21.5 5.7 24.3 8.1 1.2.9 7,4 4.9 47.0 11_4 7.9 17.1 45.3 38.5 20.3

Source: Selected Philippine Economic Indicators,

These exports

during

trends

resulted

the past

primary products

decade

in a dramatic (Table

CB-DER.

shift

in the

16). The share

composition

of agricultur

of e and

declined. On the other hand, the share of manufac-

tured exports (starting out in 1970 at less than 7 percent) grew from around 55 percent in 1985to around 70 percent in 1990 to more than 83 percent in 1996.

Chapter

3: Medalla

Table

16. Exports

165

by Major

Commodity

Group.

Commodity

1986-1988

Coconut Products Sugar and Products Fruits and Vegetables Other Agro-based Products ForestProducts Miner_d Products Petroleum Products Manufactures Electrical Equipment Garments Textiles Footwear Travel Goods and Handbags Wood Manufactures Furnitures and Fixtures Chemicals Non-metallic Mineral manufactm-er Machinery and Transport Equipment Processed Foods and Beverages Misc. Manufactured articles Othm5 Special Transactions Re-Exports TOTAL

9.30 1.47 4.98 6.96 4_03 10.00 2.19 58.82 19.80 17.77 1.03 1.03 0.28 1.07 2.24 4.31 0.41 1.02 2.40 1.42 6_05 0.22 2_02 100.00

Source: Selected Philippine

Thus,

on the

by a creditable (Table

from

17).

Indeed,

the

trade

during

the

third

should

quarter,

already

by around

6 percent.

to be faring

better

than

most

covery

should

far

at hand,

changes

in the manufacturing

sector

of course,

is premised

Indicators,

in general,

was

reinforced

by a satisfactory

ever,

there

remains

•

There The

were

responding some

was some declining

which, except lower DRC.

been

well

accompanied

cause

sectors

trend

the

effects

of the

economy

grew

All around,

that

good,

the

Philippines

neighbors.

Thus,

considering

has

already

the

re-

basic

happened.

This,

stability.

showing

to trade

that

the manufactur-

reforms.

These

results

were

performance

until

1995.

How-

for concern: in industrial

included:

for subsectors

an upward

the

of its Asian

political

industrial

slowdown

when be felt,

especially

on continued

ing sector

•

have

GNP still exhibit

appears

not

4.66 0.70 3.01 3.47 0.25 5,17 1_12 79.56 39.83 16.03 1.19 1,26 0_56 0.85 1.64 2.06 0.64 4,31 1.98 1.33 7_88 0.57 1.49 100.00

CB-DER.

reforms

on quarterly

turmoil

expected

Indicators,

6.16 1.43 4.07 5.29 1,27 8.19 1_65 70.69 25,08 21.16 1_15 1.40 0.52 1,26 2.19 3.23 0.73 2.07 2.51 1.63 7.75 0.24 0_99 100.00

performance.

NSCB

currency than

whole,

export

Data

regional

Economic

Percent Distribution 1989-1992 1,993-1996

growth

garments,

in iron

and steel,

tires,

beyond iron

exhibited

1995; and

steel,

relatively

166

The Philippines

Table

beyond

2000: An economic

17. Gross National Product and Gross Domestic Industrial Origin Growth Rates (%). 1995

INDUSTRY

1996

assessment

Product

1997

1.79

-0.68

1.22

0.85

1.85

5.93

3.56

1.55

3,73

2.93

1,12

Industry Sector Marmfacturi_.g

6,91 6,63

7,94 8,26

7,24 6.36

5,92 6,04

6.07 4.90

6,41 6,23

6.81 6,34

5,99 4.90

4.02 2,33

6,91' 5,33

5.76 4,47

Scrvicc

4.62

4.96

5,19

5,11

6.07

5,87

6.65

7.14

6.39

6.23

5.69

4.72 4.99

4.75 4.03

5.17 5.96

4.35 4.80

5.10 6.87

6.07 8.10

6.14 6.85

5.44 6.07

4.96 5.75

5.79 6.42

4.88 5.69

AgLi.._shery,

fores'try

Sector GDP GNP

Source: Economic and Social Statistics Office, National Statistical Coordination Board. What changed?

What happened

in the last few years, which

seems

to have put some brake on the manufacturing sector's performance? Or, if one were to take a more optimistic view, what factors helped the economy manage the recent regional currency onslaught? Some explanation could be directly related to the next critical issue--the exchange

role of the exchange rate. Table 18 shows the real effective rate index (REER, 1990=100). Since 1990, the REER index

has been falling. previous

By 1996, the index was down to 70.36, lower than the

peak of 105.11 in 1988.

The role of the exchange amining more closely the impact sectors. The Role of the Exchange

rate could be further analyzed of an exchange rate appreciation

by exacross

Rate

The most basic and general

impact

of a real appreciation

peso (the domestic currency) is to raise the price of nontradables relative to that of tradables (T), exportables (X) and importables

of the (NT) (M)

alike. This makes the NT sectors, in general, more attractive relative to the T sectors, inducing a corresponding flow of resources. This results from a strong

domestic

disequilibrium

supported

parative

advantage

currency,

whether

by overborrowing,

in a particular

sector

arising from an implicit

BOP

or an overwhelming

com-

(e. g., export

of labor). 5

5In other words, the overabundant foreign bmTowing (or other capital inflow such as portfolio investments) or earnings from labor exports make other foreign exchange earning and saving activities unattractive.

Chapter

3: Medalla

Table

18. Nominal

167

and

Real

Effective

Exchange

Rate,

1990=100.

Year

Nominal Effective Exchange Rate

Real Effective Exchange Rate

1975 1976 1977 1978 1979 1980 198I 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1.996

29.81 30_61 30.45 30.30 30.35 30.90 32.50 35.13 45.7 1 68.69 76.54 83.86 84.60 86.77 89.41 100.00 113.03 104.94 111.56 108.67 105.77 107.84

91.83 91.01 90.68 93_31 89.07 86.96 84.08 80.17 97.24 97.87 88.25 100.1.3 104.75 105_11 98.19 100.00 97_86 85.98 86.04 79_51 76.23 70.36

Source: Bangko Sentral ng Pflipinas, Intal (1997).

The

impact

varying

with

added

coefficient.

within

respect

appreciation

of the

these

to several peso

would

tend

with

competitive distribution

Only

13.4 percent

down

10 percent,

reduced

to only

DRCs remaining

the tute,

With

respect

peso

lowers

the

cheaper

have

value-

out industries

with

DRC)2

earnings,

a real mar-

This induces

industries

with

advantage.

7 This

is better

illustrated

by the

"market"

DRC

in Table

If the

exchange

rate

goes

to compete

will

a ratio

less than

percentage

12 percent, 20 lists

to the

one.

of industries

able

with

only those

with

some

examples

of industries).

second

the relative price

and

of industries the

(Table

nonuniform,

for example,

by "market"

to export

are

profitability

factor,

to wipe

(measured

respect

sectors

mainly

to the first

greater

ing at the

factors,

respect

advantage

considerable

general

With

ginal competitive reliance,

two

price

of foreign

factor, of the exchange

although export

very

a real or the

subsequently

by look19.

low "market"

appreciation import lowers

substithe

Competitive advantage is estimated as comparative advantage in market prices, excluof tariffs on outputs and intermediate inputs. with respect to foreign exchatxge saving, on import substituting industries with considerable competitive advantage and/or high protection.

168

The Philippines

Table

19. Percent Ranges

beyond

Value Added with and Corresponding

DRCM raage (DMtO)

Specific

EPR % 0.6 19.9 0,2

0.0 <_ DM]O <= 1.0

]3,4

1.4

1,0 < DM/O <= 1.2 1.2 < DM/O <= 1,5 DM/O > 1.5

14.5 16-9 55,0

6-5 27.5 40.5

1.8

SECTORS

38324 32133 371.90 38256 38294 35400 35602 38249 38461 33290 38311 331,30 35293 38339

of Manufacturing

Sectors

and

Establishments,

<= 0.9

Description

DRCM/OER

EPR

Radio and TV Transmitting, Signalling etc. Equipment Canvass Products iron and Steel Basiclndustries, n,e.c. Computing arid Accounting Machine Sm_lAnns and Accessories Miscelhmeous Products of Petroleum and Co,'d Plastic Footwear Special Industri_d Machinery and Equipment, nec Mmxffactm'er and Assembly of Motorcycles Repair of Furniture m'ld Fixtures except Metal Elec/rical Motors and Generators Hardboard and Pal_ideboard Ma_cches Electrical Appliances and Housewares

0.345

36.32

0,417 0.706 0.710 0.745 0,746 0.762 0.815

33.35 34.96 -0.38 -2.55 -5.47 21.42 2.65

0.819 0,820 0.832 0.839 0.852 0_873

84.41 22.15 14.81 13,11 6.85 25.01

SECTORS

WITH 0.9 < DRCM/OER

PSI(;,

<= 1.0

Descri.ption

32222 31141 38340 35115 38223 31231,

1988 (NSO).

DRCM/OER.

WITH 0.0 <= DRCM/OER

PSIC

Source

within

0.3 1.1 12.0

Table 20. 5-Digit

5-DIGIT

assessment

0.0 <= DM/O <= 0.8 0.8 < DM/O <= 0,9 0.9 <DM/O <= 1.0

of Basic Data: Census

5-DIGIT

DRCM/OER EPRo

% "V_dueAdded to Ib_al Mfg. VA

Average DRCM/OER (All Manufacttu'ing) Source

2000: An economic

DRCM/OER

Women's and Girls' Garments Cmming and Preserved o[ Fruits and Juices Primary Cells andBattelies Orgamic Acids and Acid Compounds Animal Husbm_dry Machinery and Eqjai,pment Milled Sugarcane

o/Basic

Data: Census

of Manufacturing

Establishments,

0,948 0.953 0,991 0.991 0.999 1.000 1988 (NSO).

EPR

-4.91 -0.78 30.05 4.42 4,26 2.36

Chapter 3: MedaUa

169

cost of imported inputs, Amitigating somewhat the loss in profitability. Hence, in general, with everything else being equal, the lower the valueadded ratio of the activity, the less negatively appreciation and the more it could adjust. As a corollary to this, a nontradable nontradable

with natural

prohibitive

tariff

protection

or import

control

or a virtual

most from a real peso appreciation. In sum, if one were to arrange sectors

fected

to most

affected,

sector

protection)

benefits

adversely

affected

it is by the peso (whether

a "true"

nontradable

due to

with low value added from

most favorably

_he nontradable

sectors

af-

(including

•"virtual" nontradables) with low domestic value added would rank highest (i.e.,benefiting most from the peso appreciation), while exporting sectors with high domestic value added would rank lowest (hurt most by a real peso appreciation). In between would be the nontradables with high domestic value added, nonetheless, and exporting and import-competing sectors added--both

of which

tion. This explains

are less adversely

still positively affected, with low domestic value

affected

by the peso apprecia-

to some extent why semi-conductors

have been con-

sistently doing well despite the real appreciation of the peso. In contrast, the garments sector has not done very well. The key factor

appears

A real appreciation

to be the value-added

of the peso favors

Likewise, a real peso appreciation with relatively higher value-added. declining generally

index of production, have relatively higher

ratio of the sector.

sectors-with

low value-added.

creates some biases against sectors Looking back at the sectors with

except for iron and steel, these sectors value added. Indeed, the garments sec-

tor has a low DRC. However, for an exporting sector (with low EPR), its DRC is at the borderline (with the more recent estimate for 1994 becoming

even slightly higher

than

1). Furthermore,

its local content

relatively higher at around 50 percent than other exports tors). The past exchange rate policy has thus contributed to its disappointing To some Its estimated the continued

performance.

extent,

the same

could

DRC for 1988 and

complemented

as earlier

be said about

1992 were relatively

by an outstanding peso appreciation

tage. Furthermore,

(semiconducsubstantially

performance eroded

noted,

much

until

the tire industry. low.

This was

1995. However,

of its competitive

advan-

this could very well be the result

The same conclusion is arrived at for any traded input, whether actually imported, a domestic import substitute, or an expol_able.

170

The Philippines

industrial applied

restructuring

beyond

that became

by the prolonged Finally, the results

2000: An economic

more imperative

assessment

with the squeeze

peso appreciation at that time. of the Tan study show that under

a fixed ex-

change rate, the reforms under EO 264 (and EO 313) could have some negative impact on the growth in the value-added of the manufacturing sector, in contrast with the positive (although slight) impact of the trade reform when accompanied by some devaluation. This reinforces. 'the conclusion tection

about

the impact

of a peso appreciation.

The negative impact is also due to the switch ill the relative probetween manufacturing and agriculture brought about by EOs

264 and 313. Hence, it may not be entirely slowdown in the manufacturing growth. In the discussion

surprising

to find some

above, two main factors stand out as most likely

contributing to the less than stellar performance of the manufacturing sector. One, the trade reforms effected a switch in the relative protection between relatively

agriculture

and manufacturing,

less protected.

preciation which outward-oriented

And two, there

inhibited much economy.

The GATT-WTO: The continuing

reforms

the latter

was a prolonged

of the potential

Challenges trade

making

and

growth

real peso apfrom a more

Opportunities

appear

sector

to have removed

much

the distortions of past protectionist policies, it has started to gear up the economy toward becoming more outward oriented and globally competitive,

just in time for the changes

created

While the past trade liberalization eral basis, the trade liberalization under multilateral would markets

basis. This means

be rewarded

was undertaken on a unilatthe GATT-WTO would be on a

that the opening

by the opening

to the country's

exports.

by the GATT-WTO.

of the domestic

up of all other member

market

countries'

In effect, this may be expected

to trade expansion and hence, to stimulate ness of the international economy would

to lead

economic growth. The openease the possible constraints

to export orientation. Equally important, the WTO provisions on global trading rules and disciphne (e.g. the agreement on technical barriers to trade, safeguard

measures)

facilitation, both of which global market.

bring about

greater

are important

transparency

factors

and trade

in the increasingly

The discussion applies as well with respect to the developments

in APEC_

Chapter 3: Medalla

Therefore, rather

171

the GATT-WTO must not be perceived

as a Source

of economic

opportunities

as a threat

but

as well as challenges

which in the long term will be beneficial to all countries. The challenge for the Philippines is to take full advantage of the opportunities opened the new GATT-WTO. hance

In gearing up to these new opportunities, the country has to enits productivity and hone further its comparative advantage--

labor.

This implies,

velopment ing better

in general,

investing

more in human

(HRD), improving the provision of support infrastructure, and increasing technological

resource

de-

services, includabsorption and

adaptation. The investment in human resources is perhaps the key element that will allow the nation to compete and take advantage of new opportunities. wrong.

This is probably one area where increased focus could not go Nonetheless, perhaps more specific studies could be under-

taken, whether wants in human for important industry

on a general level such as assessing the needs and resource development, or on an industry level such as

export

studies

prospects. The different ries of proposals

sectors

should,

like semiconductors

of course,

government

agencies

for GATT-related

of these programs

are still

and garments.

also include

involved

programs

difficult

market

to assess.

have lined

and projects. However,

attempts will focus national attention on supporting ward-orientedness of the Philippine industrial policy.

These

widening

and

up a se-

The merits at least

these

the greater

out-

The DTI, for example, plans measures generally geared toward productivity enhancement and market penetration. This is an appropriate emphasis to take. There is the question, however, about the effects of focusing on specified export winners. Further studies should be made

about

the advantages

of such targeting

approach

as opposed

more generic ket widening

measures for productivity enhancement and export marand penetration. Further efforts, for example, toward

streamlining

export

ogy

(both process

procedures

and acquiring

and equipment)

the provision of information, also be considered.

the necessary

could be given priority.

both on technology

technolImproving

and markets,

could

The DOST has a set of plans for technology transfer, and research and development for the export sector. Prior questions about the best way to do this should first be answered. private

sector

in this area should

further

Also, the role of the public be clarified.

and

172

The Philippines

beyond 2000: An economic

assessment

Policies, in general, have been set in the right direction (exportorientation, global competitiveness). What needs further attention are the supportive measures needed by the economy.

which would further spur the export drive A serious inadeqnacy seems to be in the area

of institution and capability building. The GATT-WTO provisions on strengthening the global trading rules and 'discipline would necessarily have a greater implication on institutional reforms. regard. •

This study suggests some important The more important ones identified

recommendations include:

in this

Capability- building in the Bureau of Customs (BOC) to cope with the new demands of the GATT Customs Valuation System. This is a very important aspect necessary preparations

of trade facilitation. Failure to make the for the transition could be costly.

•

Coping with International Standards. If rapid export growth is to be achieved and sustained, it is necessary to eliminate the bottle_ necks in this area.

•

Coping

with sanitary

equally

important

and phytosanitary as the technical

evance to the agricultural potential for exports. •

•

Improving

sector

(SPS) measures.

standard. which

This is

It has special

has as much

rel-

untapped

the administration

of the International

Property Rights.

Research

and Development

activities

need

to be encouraged

stimulate potential

further productivity from the improved

enhancement global wading

vital to realizing regime.

the

Implementing a rational antidumping system. The potential use of the anti-dumping duty as a protectionist measure should be curbed. This could only be ensured with both a rational legislation and an enlightened and Capable administration. Dealing with the new demands of the environment. This would become even more important in the future. Of particular importance is the ISO 14000, an even more complicated issue than the ISO 9000 series. The ISO 14000 is the international standard on environmental

management

which would potentially

export products in the long run. have greater impact in the future.

under

It could

cover most

thus be expected

Finally, the new, tighter, and generally more transparent rules the GATT-WTO would tend to curb the use of measures such as

anti-dumping, tive instruments

countervailing of protection,

and safeguard a result

mechanisms

that would in general

as alternabe benefi-

Chapter 3: Medalla

173

cial to exporters. This could be further enhanced by a more effective Dispute Settlement (DS), the procedures for which has been strengthened during the Uruguay Round. At the same time, however, this means that the Round's DS has become more legalistic. There would therefore be an. implied need for more trained personnel and resources so as to successfully litigate cases put forward to the DS panel. These two factors are however, currently scarce in a developing country such as the Philippines. Capabflity-building in such area is clearly needed. This is one area where an institution such as the United Nations Development Program could possibly provide technical assistance. Other Issues Role of Investment As earlier noted, the trade reforms have not been accompanied by very significant adjustment costs when the economy began to pick up beginning 1993. During that period, the rise in economic activities could be attributed to growing investments, especially the direct foreign type. There was a boom in BOI-approved and PEZA investments (Tables 21.1 and 21.2). All these are more a function of the overall local macroeconomic environment and political stability. Therefore, such increase in the level of investments appear to have helped mitigate the adjustment costs. Like the level of investments, its composition also has a significant impact on future growth. It is thus also important to look into this area. Where investments go would depend on the over-all incentive structure, of which the trade regime is a major factor. Trade reforms improve relative prices for the exports. Accordingly, resource allocation should become more favorable to the exportable sector. Another important factor is the exchange rate. Before the devaluation that started in July 1998, the peso has had a prolonged period of appreciation. As such, the real appreciation of the domestic currency could translate into a corresponding resource flow wherein more investments were going into nontradable sectors vis-_i-vis exportable sectors. This, indeed, seems to be the case if one were to look at the data on BOI-approved projects (new and expansion)_ There has been a decline in the share of export-oriented firms in these projects. Between 1983 to 1986 (the Batasan Pambansa or BP 391 era), export producers accounted for more than 70 percent of the project cost. This went down

174

The Philippines

Table

21.1. Project Cost of BOI-Approved and Expansion Projects, with

Domestic M_ltffactuj_Sng Agriculture, Forestry Fishery

and

beyond

1985

ZI986 1988

693 25 487

2000: An economic

1990

Projects Incentives

199J

1992

1994

1995

].996

622 12,346 73,963 63,292 31,088 52,308

387,730

279,335

368,156

184 423

148,879 2,353

131,580 1,255

24,52 4,59

8,381 18,828 35,661 13,547 1,647 768 537 988

21,348 1,496

200

7,193

1.843

Ex_ergy_related Projects

137

1,192 23,420

20,140

'lburism-OlZtan_edProjects

86 12,852

3,004

481

PublicUrilities

840

3,477

966

685

Others

7,425

1,141

635

2,049

1,569

16,366 25,932

10,887

2,023

1.483 13,520 22,939

9,694

Export

Agricttkure. Fisher)'

Forestry

and

•Mining

by Sector New (In P n_illlon).

1993

Mining

Manufacturing

assessment

1,9361

805

5.895

14.341 27,011

411

118,037

13.164

13.855

492

8,580

3,428

13,707

1,319

85,81i 122,522

36.163

549

22,134

6,580

269,424

8,537

17,462

63,625

19,945

14,308

5,885

34,866

58,837

17,941

11,175

1,555

386

924

2,536

681

1,206

1,078

292

347

.2,607

269

100

1.915

3,582

926

2,842

871

Public utilities

Oehers

74,179 39,625

69,769

EnerKv-related

Projects

Totud sm-oriented

Projects

TOTAL

2,742

2,192 28,712 99,895

451,355 299,280

0 382,464

Note: Others include service, Agricultural farm services, irffrastructure/industriual service facilities, export traders, commerce and research and development activities Source: Board of Investments.

to 25 percent in 1993 and further slumped to 15 percent 21.3 and 21.4). The figures are not as bad when viewed number

of firms

(where

exporters

still account

in 1994 (Tables in terms of the

for more

than

50 per-

cent) since exporting firms are much smaller in terms of project cost. These figures could, for the large part, be an effect of the removal of the preference superseded

for exports

when

the incentives

not help. Has the same bias been seen ment?

This again

foreign equity tion of project the period vestments

system

of BP 391 was

by that of EO 226. Still, the trend in the exchange

appears

in the case of foreign

to be so. The trend

rate does

direct

invest-

in the distribution

in BOi-approved projects replicates that of the distribucost of BOi-approved new and expansion projects over

considered. In 1985, around 97 percent of foreign-equity inof BOI-approved projects were export-oriented. The share

declined to around 1994 (Table 21.5).

40 percent

in 1993 and further

slid to 21 percent

Chapter 3: MedaUa

Table 21.2. Status of Economic

InvestmentS (ha Million Pesos) Approved Projects During the Year ,New Export Enterprises/ Expansi.ons/additional Projects of Existing Export Erttet_rises/ Service Enterprises Development Costs of New Ecozones Facilities/Utilities

175

Zones, 1995-1997.* 1995

1996

1997"

52,242.980

65,342.266

104,121.079

49,337.680 2,462.1130 443.200

20,512.688 42,631.365 2,198.213

44,294.918 59,492.78 333.380

Number of F.in31s Approved Bataan EPZ Baguio EPZ Mactan EPZ Cavite EPZ o Regular Zones o Special Zones

577 83 15 106 2N 428 149

692 89 15 111 256 471 221

745 92 15 118 268 493 252

Operating Bat,'um EPZ Baguio EPZ Mactan EPZ Cavlte EPZ o Regular Zones o Special Zones

424 71 14 84 162 3N 93

553 69 12 100 206 387 166

643 66 13 97 299 475 168

Employment Bataan EPZ Bagttio EPZ Mactan EPZ Cavite EPZ o Reguhu- Zones t) Special Zones

121,823 20,405 3,498 28,259 40,442 92,604 29,219

152,250 22,118 3,718 32,111 47,148 105,095 47,155

170,797 24,075 3,839 33,458 48,42 109,793 61,004

•.

* Jan-Aug. 18, 1997 except for employment January-June Source: Philippine Economic Zone Authority

1997.

This trend could pose serious problems in the long run, especiaUy if one were to consider the growing trade deficit. The low investment in foreign exchange-earning activities would make it even more difficult to close this gap in the future. This would not be the case had investments in domestic activities been in the area of infrastructure and other related activities that could ultimately serve the export sector. The 1994 data on approved BOI new and expansion projects indicate that less than half of such investments for the domestic market could be considered as belonging in these areas (e.g., energy-related and public utilities). While not entirely disappointing, neither is it a very encouraging sign. Whether the share is substantial enough or beneficial enough for the export sector still remains to be seen.

176

Table

The Philippines

21.3.

Percentage

beyond

2000: An economic

Distribution

of Project

Approved Projects by Sector, Projects, with incentives.

assessment

Cost

New

and

of BOI-

Expansion

1985

1986

1988

1990

1991

1992

1993

1994

1995

1996

Domestic Mantffacrm5 ng Agriculture, Fores_-y and Fishery Mining Energy-relamd Proiects To_u_ism-orienmd Projects PuNic Utilities Od_ers

25.3 0.9 17.8

28.4 8.4 19,3

43.0 29,2 5_7

74.0 18.8 0.8

85,3 48.1 0,7

78.5 34.2 2.5

75.0 30.6 2,1

85.9 33.0 0.5

93.3 44.0 0.4

96.3 6,4 1.2

1.6 5.0 0.0 0.0 0.0

0.0 0.7 0.0 0.0 0.0

0.7 4.2 0.3 2.9 0.0

7.2 23.4 12_9 3.5 7.4

2.5 27,2 4.1 1.3 1.5

L0 36.2 1.2 1.7 1.6

0.1 38.7 0.7 1.9 0.8

0.4 26.2 1.9 19.0 4.9

0.3 4.4 1.1 40.9 2.2

1.5 3.6 3.6 9.5 70.4

Expol_ Manufacrming Agricult_u'e, Fores'a-y and Fishery Mining Energy-related Projects To_arlsm -oriented Projecrs Public Utiliti es Others TOTAL

74,7 73.8 0.6

71.6 67.6 0.9

57.0 47.1 5.4

26.0 23.0 0.4

14.7 13.1 1,2

21.5 14.9 6.4

25.0 21.3 1.0

14.1 13.0 0.3

6.7 6-0 0.4

3_7 2.9 0.1

0.0 0,0 0_4 3. i 0.0 0.0 0.0 0.0 0.0 0.0 100.0 100.0

1.2 3,0 0.2 0.0 0.0 100,0

2.6 0.0 0.0 0.0 0.0 100.0

0,4 0.3 0.0 0.0 0.0 0.0 0.0 0,0 0.0 0,0 100.0 100.0

2,7 0.0 0,0 0.0 0.0 100.0

0.8 0.0 0.0 0.0 0.0 100.0

0.3 0.0 0,0 0.0 0.0 100.0

0.7 0.0 0,0 0.0 0.0 100.0

farm services, infrastructure/industrial and research and development activities.

ser-

Note: Others include service, vice facilities, export traders, Source: Board of Investments.

Table

agricultural commerce

21.4. Number of BOI-Approved and Expansion Projects.

Projects

Under E.O. 226, New

1990

199,I

1992

1993

1994

1995

1996

Domestic ManufactmS.ng Agriculture, Forestry and Fishery Mining Energy-related Projects Tourism -oriented Projects Public U_ilities Others

231 73 14

136 51 17

93 24 17

116 43 14

302 76 26

157 39 14

191 36 20

14 5 44 66 15

10 8 11 26 13

10 9 6 16 11

3 14 9 21 12

7 24 31 119 19

5 8 25 55 11

8 8 79 24 16

Expo_q: Manu factur_ng Agriculture, Forestl'y aud Fishery Mining Energy-related Projects _lburism -oriented Projects Public Utilities Others TOTAL

524 488 31

354 328 21

296 273 21

270 249 15

426 403 I9

226 210 11

187 173 8

5 0 0 0 0 755

5 0 0 0 0 490

1 0 0 0 1 389

6 0 0 0 0 386

4 0 0 0 0 728

5 0 0 0 0 383

6 0 0 0 0 378

Note: Others

service,

agricultural

vice facilities, export traders, Source: Board of Investments.

include

commerce

farm

services,

and research

infrastructure/industrial

and development

activities_

ser-

Chapter 3: Medalla

177

Table 21.5. Percentage Distribution of Foreign Equity Investments of BOI-Approved Projects by Sector, New and Expansion Projects, with Incentives. 1985

1986

1988

1990

1991

1992

1993

1994

1995

1996

Domestic Manufacturing Agriculture, Forestry and .Fishery Mining Energy-related Projects Tourism -oriented Prqjecta Public Utilities Others

2_9 1,2 1.7

19.0 1,0 15.5

43.0 31,8 7.8

52.8 10.3 0.0

84,1 503 0.0

64.4 25.9 0.1

60_4 23.5 0,2

78.7 32.2 0.0

91.9 76.3 0.0

84_7 14.8 0.3

0.0 0.0 0.0 0.0 0-0

0.0 2.5 0.0 0.0 0-0

0,2 3.1 0.0 0.0 0.0

4.5 23.4 10.8 0.2 3.5

2.0 24.5 3.8 0.2 3,3

1.2 35_8 0.0 1.0 0.4

0.2 34.0 0.9 0.4 1.3

0.7 35.1 3.6 5.6 1.4

1.4 2.3 0.7 9.0 2,3

0.5 3.2 7.6 21_3 36,9

Export Mtmufacturing Agri.cultttre, Forestry and Fishery Mining Energy-related Projects Tourism -oriented Projects Public Utilities Ofhel_ TOTAL

97-1 96,2 0.0

81-0 74,8 5_8

57,0 54.6 1.4

472 46,2 0.9

15,9 12.2 3.5

35.6 31,5 2.3

39,6 38,2 0_0

21-3 21,2 0.1

8.1 8,1 0.0

15.3 13.4 0-0

0.0 0.9 0.0 0,0 0,0 100,0

0.0 0.4 0.0 0,0 0.0 100,0

0.3 0.7 0.0 0.0 0.0 I00,0

0,0 0,0 0.0 0,0 0.0 100,0

0.1 0,0 0,0 0,0 0.0 100.0

1.8 0,0 0,0 0,0 0.0 100,0

1.3 0.0 0.0 0,0 0,0 100.0

0,0 0,0 0.0 0,0 0.0 100,0

0,0 0.0 0,0 0.0 0.0 100,0

1.8 0,0 0.0 0,0 0.0 100,0

Note: Others include service, agricultural farm services, infrastructure/industrial service facilities, export traders, commerce and research and development activities. Source: Board of Investments.

The picture, however, is not as bleak as indicated by BOI figures since more and more investments in exports are now going directly to PEZA industrial

zones.

To a large

extent,

the reduced

BOI-preference

for exports has been replaced by the growing attractiveness of PEZA. As Table 22 shows, investments in PEZA has grown substantially from P9.6 billion in 1994 to P65 billion in 1996. Faster Pace

of Trade Reforms

vis-&-vis

Other ASEAN

Countries thrust

The AFTA-CEPT is not a long-run goal in itself. The overall policy is toward a more open trade regime. The AFTA-CEPT should be

considered

more as a stepping

stone or a training

ground

for the even-

tual more liberal trade regime. In a way, it could help mitigate the adjustment costs of unilateral trade reforms. it is usually Singapore)

the countries

that would

AFTA. The more on the whole,

open trade

regime

and the AFTA-CEPT

cess. The problem

with low tariffs

gain most

and adjustment

from

(as in the case of

an arrangement

encourages would

provide

costs arising

some of

such as the

an export

orientation

greater

market

from

unilateral

actrade

178

The Philippines beyond 2000: An economic assessment

Table 22. BOI and PEZA investments 1985

1986

1988

TotalBOIlnvestments Export Produccr_ (% Share zo _btal)

2,742 2,049 74,72

2,192 28,712 1,569 16,366 71,60 57,00

Manufactmdi_g (% Share to Total) (% Share ro Export)

2,023 73.78 98.74

1,483 ' 67.64 94.47

13,520 47,09 82.dl

1990

1994

1995

99,895 74,179 39,625 69,769 25,932 10,887 8,537 17,462 25.96 14.68 21.55 25.03

451,355 63,625 I4.10

299.280 382,464 19,945 14,308 6,66 3.74

i2,939 22.96 88,46

9,694 I3.07 89.04

58,837 13.04 92.48

755

490

NO. of Approved Projects Employment

a (in Pmi!llon). 1991

113,290 63,068

1992

1993

5,885 I4,866 14.85 21.31 68.93 85. I3 389

17,941 5.99 89.95

1996

11,175 2.92 78.]0

386

728

383

378

46,51,2 55,]66

145,513

79,776

76,619

TotalPEZAlnvcst_e_xts ExlYoi_Producers (% Share _o To_al)

2,155 2,155 I00.00

70 70 I00.00

321, 321 I00.00

2,900 2,900 I00,00

2,303 2,365 2,303 2,365 100.00 DO.O0

2,686 2,686 100.00

9,559 9,559 I00.00

52,243 52,243 t00.00

65,342 65,342 i00.00

M.maufacturlng (% Share to Export)

2,155 70 100.00 100.00

321 100.00

2,900 100.00

2,303 2,365 I00.00 100,00

2,686 100.00

9,559 100.00

44,998 86.12

20,457 31.31

No. of Approved Fh'ms E'mployi_e_t New Source:

and

Expansion

Board

151

188

243

298

388

577

692

24,540

23,750

24,342

35,258

43,233

54,787

69,383

91,860

121,823

152,250

projects

of Investments

and

Philippine

Economic

reforms will be there, with or without some of these costs could be reduced.

Zone

Authority.

AFTA. However, with AFTA,

In the case of the Philippines, there is also some concern about its faster pace of trade reforms vis-a-vis that of other ASEAN countries, especially within the context of AFTA-CEPT. This has two aspects. First, the Philippine unilateral trade reforms appear to be faster compared to those of the other ASEAN countries. Second, the Philippine AFTA-CEPT tariff reduction had been scheduled earlier that those of other ASEAN countries. The debates are basically the same as those surrounding trade liberalization in general. While it would probably be better for all the Association of Southeast Asian Nations (ASEAN) members to schedule their reduction at a similar pace, the Philippines should not base its schedule solely on what the others are doing. There are merits to a gradual reduction even if this means an earlier schedule. One, this smoothens the adjustments. Two, it could make the Philippines better prepared later on. The nation has undertaken unilateral trade reforms in the past without expected reciprocity from other countries. Now, it is simply liberalizing ahead of other ASEAN countries that would do the same, but only at a later date.

Chapter 3: Medal&

179

Distortions in the Tariff Structure AFTA-CEPT

for Some Sectors with

The more serious problem with AFTA-CEPTwhen combined with other unilateral trade reforms are the resulting tariff distortions. This is most notably the case for the food manufacturing sector, particularly meat processing. Livestock imports, a major input to the meat processing sector, come from outside the ASEAN. Tariffication of QRs result in.higher tariffs for affected inputs. These inputs are imposed (outquota) tariffs of as high as 60 percent. On the other hand, there is effectively tariff reduction on the output of the food processing sector, especially with its inclusion in the AFTA-CEPT. Tariffs on the meat processing sector are not as high as that for the inputs. These are even very low considering their inclusion in the AFTA. Perhaps other nontrade measures such as technical assistance in various forms could be sought. For example, phytosanitary regulations of other countries to which the Philippines export to pose some constraints to local exporters. These technical assistance and information should help exporters cope more easily with these regulations. Employment and Wage Policies Labor is another key factor in economic growth as a whole and industrial development in particular. Some of the issues include: • low employment absorption in manufacturing; • increasing Philippine labor costs (eroding Philippine comparative advantage); and • declining labor productivity. (vestiges of past protectionist policy which discouraged reinvestment in new technology--e, g., textile-resulting in outdate technology for many industries and hence, low productivity). These issues analysis.

are very important

and require

more indepth

Continued Agricultural Protection As earlier raised, one key national issue is the continued agricultural protection. The simulation by Tan highlights the trade-offs in maintaining agricultural protection vis-a-vis a hypothetical uniform tariff structure. In particular, Tan's simulation shows higher over-all output growth but net negative impact on the agricultural sector under

180

The Philippines beyond 2000: An economic assessment

uniform tariffs compared to a lower over-all growth but a positive impact on the agriculture sector. Clearly, this may well become more of a political decision. Policy makers, in any case, should be aware of the trade-offs in the choice to be made. Conclusion

and Reconunendations

Basic changes have occurred in the manufacturing sector after the trade reforms. The sector has become more competitive. On the whole, there is better resource allocation as indicated by the DRC estimates over the years. The economic performance, especially before 1997, has been encouraging, exhibiting little of the anticipated adjustment costs. The industrial performance in particular, although not stellar, has also been well within comfortable levels. What proved worrisome are the more recent trends in industrial production. The above analysis here points to the crucial role of the exchange rate policy. It appears that the lack of a timely exchange rate adjustment that could have accompanied the reforms has been a limiting factor. Would the last peso devaluation have a positive impact on industrial performance? The problem with the 1998 recent peso devaluation is that it was not a deliberate policy action but rather, a forced response to external factors prevailing in the region. It only partially put the peso back at the initial competitive level in the region. As long as wages did not rise by as much as the devaluation, there was some real peso depreciation against currencies of the Philippines' major trading partners that would benefit the tradable sectors, although not by as much as the magnitude of the devaluation. This, of course, is an oversimplification of the problem facing the industrial sector. The new, more open trading environment, especially beyond 2000, requires a dynamic export sector in particular and tradable sectors in general. This implies a need for continuous productivity enhancement measures. Human resource development (HRD) will be very crucial. The more global orientation and investments in newer technology would require a highly trained/skilled manpower. Having put in place trade policy reforms, the government cannot still just sit back and watch. For example, there are further areas of reforms to examine in the wider arena of "competition" policies, especially in shipping and telecommunications, which have very strong linkages with the industrial sector. The suggested HRD program should include investments in technical institutions. Technology upgrading and innovations will also be

Chapter 3: Medalla

181

key factors. In this regard, the government should seek measures would induce private R&D activities. The new challenges would

that also

require institution-building in keeping with the WTO and Asia Pacific Economic Cooperation (APEC). This pertains most especially to measures that will allow the nation

to cope

with the technical

trade provision, sanitary and phytosanitary erty rights (IPR), home consumption value rules.

The first two, for example,

certification

and testing

There

require

barriers

(SPS), intellectual prop(HCV) and anti-dumping

some institution

building

procedures.

is also an implication

on the investment

incentive

system.

The Philippines should reduce its reliance on the use of trade measures, if there is a need to resort to these, the measures should be timebound.

The focus should

most criteria

still remain

for selection

on export

in its IPP should

promotion.

remain

The fore-

to be the potential

to exports. Outside this priority area, the BOI should be very selective, focusing at a very few industries at a time. In particular, this could include

those

where

inter-dependent

investment

decisions

jor role and for which selective promotion would result efits such as by acting as a catalyst in the development lated sectors. Finally,

the remaining

question

is: Should

play a ma-

in external benof the interre-

the government

con-

tinue its policy toward a uniform 5 percent by the year 2003? To answer this, there are a number of things to consider. First, much would depend on how much the government would rely on external duties as a source of revenues. Yap(1997) argues that the negative revenue impact of moving

toward

a uniform

5 percent

tariff

rate could have a dampen-

ing effect on investments. This then means having to implement the necessary fiscal measures. An alternative is to aim for a more uniform tariff level at a higher rate. This options leads to the second consideration: What is politically

feasible?

A near uniform

tariff,

for all sectors

would approximate the expected benefits from trade reforms. This would also be more politically feasible to implement. What policymakers have to guard

against

is the possible

call

for

any policy

reversal.

uniform rate may be the very long-run goal. Finally, this brings one to the third consideration: timing and scheduling. Past studies have shown that given enough time and proper phasing and scheduling, of short-run adjustment costs can be evaded.

a number

182

The Philippines beyond 2000:An economic assessment References

Azarcon, C. J. 1997. Comparative Study of ASEAN Tariff Profiles. PIDS Discussion Paper No. 97-20. Makati: Philippine Institute for De_ velopment Stxtdies. De Dios, L. C. 1994: A Review of the Remaining import Restrictions. PIDS Research Paper No. 94-08, Makati: Philippine Institute for Development Studies. De Dios, L. C. 1997. Impediments to Trade in the Philippines. Unpublished Paper. Malcati: Philippine Institute for Development Studies. Lamberte, M. B., G. Llanto, R. Manasan and Associates. 1993. Decentralization and Prospects for Regional Growth. Makati: Philippine Institute for Development Studies. Manasan, R, G. and R. Querubin. 1997. Assessment of Tariff Reform in the 1990s. PIDS Discussion Paper No. 97-10. Makati: Philippine Institute for Development Studies. Medalla, E. M., G. Tecson, R. Bautista, J. Power and Associates. 1995. Catching Up With Asia's Tigers. Volume I. Makati: Philippine Institute for Development Studies. Medalla, E. M., G. Tecson, R. Bautista, J. Power and Associates. 1996. Catching Up With Asia'_ Tigers. Volume H. Makati: Philippine Institute for Development Studies. Mercado-Aldaba, R. A. 1994. Foreign Direct Investments in the Philippines: A Reassessment. PIDS Research Paper No. 94-10. Makati: Philippine Institute for Development Studies. Pineda, V. S. 1997. Effects of the Uniform Five Percent Tariff on Manufacturing. PIDS Discussion Paper No. 97-16. Makati: Philippine Institute for Development Studies. Pineda, V. S, 1997. Study on the Effects of AFTA-CEPT Scheme on Manufacturing Industries. PIDS Discussion Paper No. 97-23. Makati: Philippine Institute for Development Studies. Tan, E. S. 1994. Trade Policy Reforms in the 1990s: Effects of E.O. 470 and the Import Liberalization Program. PIDS Research Paper No. 94-11. Makati: Philippine Institute for Development Studies. Tan, E. S. 1997. Effects of the Uniform Five Percent Uniform Tariff. PIDS Discussion Paper No. 97-17. Makati: Philippine Institute for Development Studies. Yap, J. T. 1997. Macroeconomic Impact of a Tariff Reduction: A ThreeGap Analysis with Model Simulations. PIDS Discussion Paper No. 97-18. Makati: Philippine Institute for Development Studies.

TowardanEfficient Path

Chapter

to FoodSecurity: ThePhilippine Case*

Cristlna

David**

ervasive

market

failures

in Philippine

agriculture

arose

from

various factors: instability in domestic and world markets, pub lic good nature and strong economies of scale of ceI_tain inputs and technologies and their generation, imperfect information, high transaction ket failures

costs and externalities in production. Because of such marin agriculture, government interventions are required in

achieving long-term efficiency ernment policy and institutional

in resource allocation. However, interventions have been motivated

govnot

only by long-term efficiency objectives, but also by food security and income distributional considerations within the sector, and between producers

and consumers

of food and raw material

products.

More-

over, the policy and institutional framework adopted by the government has been conditioned over time by the changing political economy factors (David 1996). This paper

aims is to analyze

how the government

price, prop-

erty fights and public expenditure policies have affected food security goals, which continue to be largely dependent on the growth performance of the agricultural sector. The first section describes the growth performance of agriculture over the past four decades. The next three sections

examine

the changing

patterns

of price

and market

policy in-

terventions, policies on property fights and public expenditure allocations to infer how government policy and institutional interventions have affected agriculture's performance. Growth

Performance

The Philippine agricultural sector, which accounts for more than 20 percent of gross domestic product and over 40 percent of employment has performed

poorly since the 1980s (Table 1). Whereas

its growth

Paper presented at the Taipei International Conference on East Asian Food Security Issues in 21st Century on April 16-17,1998,Taipei, Taiwan. "*The author is grateful for the excellent research assistance of Ms. Brenda B. Solis.

184

The Philippines beyond 2000: An economic assessment

performance compares well relative to other developing countries in South and Southeast Asia in the 1970s, the country had the lowest growth rate in gross value added in agriculture (GVA)and agricultural exports in the 1980s. Growth performances in GVAand agricultural exports have improved in the 1990s, but these are still comparatively lower than those achieved by neighboring countries.

Table 1. Average Growth Rates of Agricultural Gross Value Added and Agricultural Exports in Selected South and Southeast Asia Countries (In percent). 1970-1980 A,ariculturg_ Agriculture gross value export added

1980-1990 Agrict, ltural Agriculture gross value export added

1990-1994 AgriculturalAgricultm'e gross value export 'r added

Philippines

4.9

14.6

-1.0

4,6

1,&

3.2

Indonesia

2,0

20.0

4.9

4.7

4.3

6.8

Mala_vs_a

6,5

19,3

,3,8

3,1

2.4

Thailm_d

4.20

21.2

3.9

4.9

2.4

3.6

India

1.8

4.6

3.2

0.8

2.4

2.8

• Pakistan

3.0

13.8

4.3"

3.2

3.5

-5.4

Nepal

0.8

-2.9

2.7

0.7

0.4

8.4

Bangladesh

1.4

2.6

1.9

1.5

2.6

-2,9

Sri Lanka

1.8

9.7

2,1"

0.03

2.1"

-8.1

" Refers to 1972-1980. b Refers to 1990-1995. CRefers to 1981-1990. aRefers to 1990-1993. "Refers to 1990-1993. Sources: ADB Key Indicators,

various

issues;

FAO SOFA (1995).

The poor agricultural performance since the 1980s has been caused in part by depressed .world commodity prices. The fact that the decline in the agricultural growth rates was most severe in the Philippines, however, suggests that the country has been losing its competitive advantage in the sector. Indeed, the ratio of agricultural imports to exports increased from 30 percent in 1960 to 100 percent by the mid-

Chapter 4: David

185

1990s (Table 2) as the measures agricultural 3). 1

Table

and all major

2. Agriculture's port-Export

of revealed

agricultural

comparative

exports

declined

Share in Total Imports, Ratio (In percent).

advantage sharply

Exports,

Table

(Table

and Im-

Imports

Expoi_s

(1)

(2)

Expol_s

1960

1965

1970

1975

1980

1985

1990

1993

101

3. Trends in Revealed Comparative Advantage in Agriculture and Selected Major Agricultural Exports. Agriculture

Coconut

Sugar

15.3

Banana

Pineapple (canned)

1960

3.0

1965

2.7

131.8

1970

2.6

145.0

21.4

1975

3.8

211,2

22,0

29.3

1980

2.9

224.1

12.1

30.4

1985

2.4

212.3

7,6

31.2

91.6

1990

1.5

21(.I.8

3.8

23.3

69.7

1995

1.2

181.2

1.5

13.8

40.5

Note that sugar import competing

is exported crop.

only to the US premium

market,

as sugar

82.2

is actually

186

The Philippines beyond 2000: An economic assessment

Labor and Land Productivity The apparent loss in competitive advantage is consistent with the trends in productivity indicators. Table 4 shows the growth rates in gross value added in crops and livestock, labor employment in agriculture, and cultivated and crop area; and their trends are depicted in Figure 1. It should be emphasized that the slow growth in agriculture since the 1980s has also been due largely to the poor performance of the crops subsector, as growth rates in livestock and poultry were relatively high. The rapid growth of livestock and poultry hldustries over the past two decades reflects the effects of increasing demand as well as improved management and new technologies used in imported breed, veterinary medicines and feed ingredients. The growth rate in the number of workers employed in agriculture between 1980-1995 was about equal to the population growth rate. Somewhat surprising is the higher growth rate of cultivated area than of crop area since the 1980s suggesting that opportunities for double cropping becanae less and a shift from shorter- to longer-deviation crops were occurring. Table 4. Gross Value Added in Agriculture by Crops and Livestock, Agricultural Employment, Cultivated Land and Crop Area (In percent). Gross Total

Value Added Crop

i.r_,Agt:[culturc Livestock

Labor

Land Cultivated

Crop

I960-1965

5,0

5.0

2,4

0.9

1.4

1965-1970

3.2

3.5

2.1

2.4

0.9

2.1

197 0-1975

6.4

7.6

1.5

2.,$

3,0

4,0

1975-1980

5,9

5.0

5,4

3,8

3.0

2,4

1980-1985

0.3

-0.6

2.0

3,9

1.4

0,7

1985 -1990

3.4

1,8

8.5

0.2

1.4

0,2

1990 1995

2.4

1.6

4.8

2.1

1,4

0.5

The growth rates in partial prodnctivity measures reported in Table 5 and portrayed in Figure 2 indicate a declining trend in labor prodnctivity for the crop subsector, and imply a positive growth for the livestock and poultry subsector. Although positive, the growth rate in land productivity for crops is small particularly in terms of cultivated areas. It was not possible to derive a measure of total factor productiv-

Chapter 4: David

Figure

187

1. Trends in Real Gross Value Added in Agriculture by Crops and Livestock (Including Poultry Agricultural), Cultivated Land and Crop Area, 1960-1996.

19eo.loo

lO6O-1oo

500

400

/ /

30O

400

100

tlv_sto_.k

. J

zoo

3O0

,_*1

lt7|

,oo

tlv_sto_.k

1_0o

1M_

'_ •

100 _

1||o

1DtG

lt_O

1|1_

1_70

Crop areo 1¢1

lt76

ltJs

117o

Table

Labor and Land Productivity of Crops and Agricultural (i.e., Crops and Livestock including Poultry) Sectors. Agr.ic,odt.,;a-e fa.tbor

II|S

1leo

Ine

Crops

Land CMO.vated

Labor Crop

Lind Cultivated

Crop

1960 -1965

2.5

4.1

3.5

2.5

4.1

3.5

i965 -1970

0.8

2.3

1.1

2.6

1.4

1970 -1975

3.9

3.4

2.3

5.1

4.6

3.4

1975 -1980

2.1

2.9

3.4

1,3

2.0

2.6

1980 -1985

-3,5

-1,1

-0.4

-4.4

-2.0

1.3

1985 -1990

3,2

2,0

3.2

1.6

0,4

1.7

1990 -1995

0.3

1,0

2.9

-0.5

0.2

2.0

ity. But since the use of nonfarm inputs--chemical fertilizers and pesticides-have been observed to increase at a higher rate than traditional

inputs

of labor

most likely reflect the crop subsector.

and land,

the same pattern

the total factor

productivity

would

as labor and land productivity

for

188

Figure

The Philippines

beyond

2. Trends in Labor and Area (c)] Productivity (Crops and Livestock

2000: An economic

Land [Cultivated Area (p); Crop for the Crop and Agriculture Incl. Poultry) Sector, 1990-1996.

Agriculture

Crops

300 19e0= 1O0

_00 1960 _ 100

ZgO

2EO Lsnd {El ptoductlvity

200

assessment

Land (p, produetlvlty f_

Lmld (c) productivity

f_.._. .a_L.-_ Land (p) productlvRy /

200

/_ /--"

L¢ 100

100

3960

1965

1970

197_

Growth Crops

1600

1965

1990

1996

1_40

1_45

11?n

I_S

11410 1115

1|In

IIil

and livestock

and

by Commodity currently

account

for about

75 percent

poultry, 25 percent of gross value added. most important, accounting for 26 percent

Among all crops, rice is the of gross value added and 30

percent of total crop area. It is followed by coconut in economic importance, but is the leading agricultural export. Corn, which is also a staple crop in upland areas of Visayas and Mindanao as well as the main feed crop, is next, followed by sugar. All these four major crops contribute about half of crop value added and occupy 80 percent of all crop area. Consistent

with the figures in Table 6, livestock

(particularly

poul-

try) showed the highest growth rate in value added. Average growth rates fluctuated widely, but the low performance of the crop subsector since the 1980s appear

to be generally

true across

crops,

It should

emphasized that the average growth rates of rice in the 1980s and 1990s while lower than the earlier years, compare well relative to other crops. However, above

because

population

the growth growth

while

higher income and substitution increased in the 1990s. The declining

corn

duced crop area applies

rat e in rice production the demand

was only slightly

for rice increased

of rice for corn, imports

production

more to planted

in the

due to

of rice steadily

1990s mainly

due to re-

the white corn used mostly

Table

6. Gross

Value

Added

(at Constant

Prices)

of Select

Products

1960-1996

(In percent).

Palay

Cor n

Coconut

Sugar

Banana

Other Crops

Livestock

Poultr y

1960-1965

5.0

1965-1970

4.3

5.8

0.8

6.6

7.1

2.7

1.8

3.1

i970-1975

3.6

6.5

6.6

7.3

10.3

11.3

0.4

4.9

1975-1980

4.9

4.2

3.2

-1.6

15.4

6.4

1.6

13.4

1980-1985

2.7

-0.8

-3.7

-0.5

-2.9

2.5

1.3

1985-1990

2.8

3.5

-9,4

-1.5

-5.2

5.1

7.2

10.4

1990-1995

2.6

-1.1

0.6

2.9

0.3

1,7

3.6

6.5

1995-1996

7.0

0.6

-1.5

20.8

-0.4

1.9

6.6

11.3

1996-1997

-0.1

4.3

5,9

-10.0

2.6

5.1

5.2

8.0

"_' g_

g_ _"

190

The Philippines beyond 2000: An economic assessment

subsistence crop, rather than to yellow corn used for feeds. This is mainly because the rising price protection for corn as shown in the next section, made corn relatively more expensive than rice as a staple food. Also compared to that for white corn, the technology development in corn hybrids and government subsidy programs were focused on yel: low corn. Sugar's performance was also low and erratic despite the high price protection because of lack of technological change. Given the bias of government policies against exports, the stagnation of the coconut and banana industries was not surprising. What is discouraging is the generally poor performance of other minor crops, many of which are high valued per hectare, that contribute a total of 45 percent to gross value added in crops (Figure 3).

Figure 3. Trends in Cultivated Land, Crop Area, Cropping Intensity and Land [Cultivated (p); Crop Area (c)] Productivity of the Crop Sector, 1990-1996. POOOIha (lS85

ptlcu,)

1600

1000

1_0

200

Culllvat*d so

Area

The next three Sections examine whether government policy and institutional interventions have contributed to the erosion of the country's competitive advantage and, hence, to the poor performance of the agricultural sector since the 1980s. These policy interventions include those pertaining to prices and market, on property rights and the public expenditure allocations.

Chapter 4: David

Price

Intervention

191

Policies

Past studies have already amply demonstrated 1980s, both economy-wide and commodity-specific

that up to the early price intervention

policies both economy-wide and commodity-specific have created an incentive structure that is significantly biased against agriculture (David 1983; Bautista 1987; Intal and Power 1991). Moreover, that bias has been primarily through the overvaluation of the peso due to the industrial protection system and other economy-wide policies meant to defend a deficit in the balance of payments. Economy-Wide

Policies

Over the past decade, the government

has adopted

various

struc-

tural adjustment and stabilization measures to correct fundamental distortions in the economic incentives and imbalances in the external and public move

sector accounts,

quantitative

trade

including restrictions

trade policy refoims and reduce

that will re-

the level and disper-

sion of tariffs, and the liberalization of th e foreign exchange market. As a result, the overvaluation of the exchange rate, which was about 20 to 30 percent from 1960 up to the mid-1980s, dropped to 20 percent by 1992 (Table 7). This rate of peso overvaluation posing

a substantial

larly of exportable

penalty agricultural

against

agricultural

significant,

profitability

By Intal and Power

Rate Overvaluation,

particu-

Philippines

By Medalla and Associates

24 19 23 20 27

im-

commodities.

Table 7. Degree of Real Exchange (In percent).

1960-1961 1962-1966 1967-1969 1962-1969 1970-1974 1975-1979 1975-1980 1980-1982 1989 1992

remains

45 12 30

28 26 21

192

The Philippines beyond 2000: An economic assessment

Furthermore, the real effective exchange rates appreciated significantly in 1988 and 1989 and even more sharply between 1991 and 1996, which tended to lower relative prices oftradable agricultural products (Figure 4). This unfavorable trend has been caused by several factors. First, trade liberalization, which should reduce distortions in the exchange rate, was not accompanied by appropriate nominal exchange rate adjustments and other macroeconomic policies (Medalla et al. 1995). Second, short-term foreign capital inflows attracted by high interest rates due to the tight monetary regime accommodated an increase in the current account deficit, causing the real exchange rate to appreciate (de Dios and Associates 1993; Lamberte 1995). And finally, domestic inflation rates were higher than those of the country's trading partners, particularly in 1995 when .sharp increases in food prices led to double-digit inflation.

Figure 4. Trends in the Real Exchange

Rate, 1960-1997.

200

1BOO

IN¢

1_70

1_Tg

lalo

lSBG

19_0

In7

With the substantial devaluation of the peso in late 1997 and controlled inflation, the real exchange, rate began to increase. By early 1998, the real exchange rate has risen by 40 .percent. The .devaluation was caused not so much by balance of payment difficulties but by the flight of short-term foreign capital and the contagion effect of currency devaluation in neighboring countries. Commodity.Specific Policies A wide variety of policy instruments directly affect agricultural output and input prices. Although import tariffs are generally levied on

Chapter 4: David

193

all agricultural products and inputs, their protective effect is limited as tariff protection is essentially redundant on exportable and nontradable commodities. Up until early 1996, nontariff barriers--quantitative trade restrictions, import prohibitions, price controls, and government monopoly control in international trade have been the dominant commodity-specific policy interventions in agricultural output markets. Tariffs are more commonly applied on inputs and agricultural products which are not locaUy produced in any significant quantity. Except after the devaluation in 1970 and the sharp increases in world commodity prices in the mid-1970s, there have been few attempts to intervene in the production and trade of exportable agricultural products. Table 8 shows the trends in the nominal protection rates (NPRs) of major agricultural commodities. These rates measure the impact of commodity-specific policies on agricultural prices. As expected, exportable commodities received no price protection and in the 1970s and the early 1980s were in fact penalized by NPRs ranging from -4 to -28 percent. The changing rates of nominal protection over time partly reflect the government's attempts to stabilize domestic prices, as evidenced by the low and negative NPRs for exportable commodities in response to the devaluation and the subsequent boom in world prices during the 1970s. But this low or negative rates of protection continued into the early 1980s, despite the sharp drop in world prices since the late 1970s, indicating that there are difficukies not only of protecting producers of exportable commodities from low world prices but also of doing away with policies that had outlived their original purpose as vested interests are created. On the other hands, there has been an upward trend in the NPRs of import competing commodities in agriculture in recent years. Sugar is historically the most highly protected initially because of the country's access to the United States (U.S.) premium market. Since the late 1980s, domestic prices of sugar have been about equal and often higher than export prices to the U.S., at about double the cost insurance freight (CIF) world prices. Corn and chicken also have had one of the highest nominal protection rates. NPR for rice has likewise risen. It reached about 65 percent in 1995 and 1996, reflecting a drastic reversal of rice price policy from the historically pro-urban to pro-farm bias. The 1997devaluation reversed the rising trend. The nominal protection rates for rice, corn and sugar declined only slightly in 1997. However, the estimates shown in parenthesis in Table 8,which refer to December prices and using P37 to $1 exchange rate computed for 1998,

194

The Philippines

Table

Nominal modifies,

Protection 1970-1995

beyond 2000: An economic

Rates of Major (In percent).

assessment

Agricultural

Corn-

1970 1979

1980 1984

1985 1989

1990 1994

1995

1996

1997

Rice

-4

-13

Corn

127

Sugar

154

104

65 (17) 69 (62) 113 (20)

-28 -4

-6 7

0 18

0 10

0 5

-4 -4

0 0

-9 46

43 39

31 74

44 84

na na

CoconutProducts Copra -17 Coconut Oil -4 Desiccated Coconut and Copra Cake and Meal -4 Bananas, Pineapple, -4 Tobacco, Abaca Pork 6 Chicken 34

indicate

sharp

reductions.

sured adequate imports basic commodities. Trends increases declining

in Terms

Being an election to prevent

105 60

year, the government

any increase

in nominal

en-

prices

of Trade

in the NPRs have been sufficiently

trend in the relative

price of agriculture

high to counter

the

to nonagriculture

the world market and the appreciations in the real effective exchange rates in the 1990s. This is evidenced by the more gradual decline in 'the domestic terms of trade of agriculture since the 1980s (Figure 5). Indeed, many major import-competing agricultural products have been characterized by positive net price protection after considering the indirect disprotective effects of the overvalued exchange rate. In the case of corn, sugar and chicken, the net price protection exceeded 50 percent, even higher than most manufacturing industries. Similarly, the rice sector has become highly protected by 1995. On the other hand, exportable

agricultural

commodities

continue

to be penalized by the steep appreciation of the exchange rate particularly in the 1990s. Although the recent devaluation raised the real effective exchange

rate, the domestic

slightly in 1997 as the government

terms

of trade in agriculture

reduced

trade barriers

declined

(as evidenced

Chapter 4: David

Figure

195

5. Trends in the Real World (Tw) and Domestic (Td) Agriculture/Nonagriculture Terms of Trade, 1960-1997.

1511

100

ill

1_)80

Ige5

ill

111

'1S70

1976

ll,,,

ill

10(r0

ID81_ teao

by the reduction ing commodities).

of nominal

Effective

Protection

Rates

Resource

allocation

is affected

tion which effects

considers

I_ILI_

import

compet-

by the effective

rates

of protec-

on output

prices but its

For agricultural

crops, the

inputs to value of output

is still rela-

input prices

of cost of intermediate

lu_7

rates in major

not only the pohcy effects

on intermediate

proportion

protection

as well.

tively low; hence, trends in the nominal and effective rates of protection will not differ significantly. Given the declining trend in nominal protection rates of inputs to agricul_u'al crops shown in Table 9, however, effective rates of protection would have risen even faster than nominal protection rates. The favorable impact of trade liberalization in agricultural inputs can-be observed in the falling real prices of farm machineries, agricultural chemical and fertilizers, which contrast the rising real wages (Figure

6). In the case of livestock

and poultry,

effec-

tive rates of protection may not have increased as much as the NPRs because the implicit tariff on corn, the most important ingredient in animal

feeds, rose at a higher

sector

While the dispersion of protection rates within the agricultural has widened, the difference in the estimated average rates of

effective

rates

has narrowed

of protection

rate.

between

(Table 10). During

fective rates of protection

agriculture

and manufacturing

the 1970s and 1980s, estimates

of the manufacturing

sector ranged

of ef-

from

196

The Philippines beyond 2000: An economic assessment

Table 9. Implicit Tariffs on Agricultural 1995 (In percent). Fertilizer

Pesticicle

Inputs, Philippines,

Tl_ctors Threshers

Water ptmaps

3(10)

'10

Urea

Amn_ophos

2- wheel

4- wheel

1970 -1974

-,13

-9

1975 -1979

1980 -1984

1,985-1989

1990 -1994 1995

Figure

1970-

6. Trends in Index of Real Wage, and Retail Prices of Urea, Ammonium Sulphate, Machineries, and Chemicals, 1960-1996.

1980-100

19110-100

ZOO [

Chernioals

1l$o

Ammonium

L 0

IHO

SulphatR

igeri i'll'

1115

'''

1170

1171

'Ill

L_["

IIII

]

J '

11_

1111

I01_

.....

111S

'1170

J '

1171

....

III0

J '

' I

IBI15

L d ....

tlO,b

fin

to 79 percent, much higher than those for agriculture, which ranged from 5 to 9 percent (Tan 1979; Medalla et al. 1995). By the mid-1990s, the average effective rates of protection between agriculture and manufacturing were about equal (Manasan 1996). This has been mainly because of decliningprotection rates of manufacturing, including agricultural inputs; increasing rates of protection among the major import competing agricultural products; and decreasing share of exportable agricultural commodities. Projected effective rates of protection, in fact, indicate that the agricultural sector would

Chapter 4: David

197

Table 10. Estimated Effective (In percent).

Protection

Rates

by Major

Sectors

Agriculture, Fishery, and Forestry

Manufacturing

All Sectors

1974

9_0

44.0

36.0

Medalla et al. 1983 1985 1986 1988

10.3 9.2 5.0 5.2

79.2 74.1 61.2 55.5

52.8 49.3 39.8 36.3

Manasan (preliminary) 1993-1995

24.4

29.1

26.7

Tan

(28.1) have higher

rates relative

tions in tariff rates

to manufacturing

WTO Agreement The country's membership (WTO) could

given the scheduled

up to the year 2000 (Manasan.

in the World

have set the path toward

reduc-

1996).

Trade

an efficient

Organization

price intervention

framework and' world

for Philippine agriculture as well as improve market access prices for the country's agricultural exports. Unfortunately,

the specific

agreement

itself and the manner

of implementation

so far

suggest that virtually none of these potential benefits will be forthcoming unless government policies are drastically redirected. First of all, the rice sector, one of the most heavily regulated cornmodifies, has been exempted from tariffication for the next 10 years, a scenario similar to that of Japan and South Korea. as a staple food is a politically-sensitive issue. Second,

while the quantitative

April 1996, these were replaced high-binding tariffs (Executive mitted

under

mostly

100 percent,

rates, received definitely

the WTO. under

higher

trade

This is because

restrictions

were lifted

rice on

by applied tariffs that are equal to the Order 313)_e maximum tariffs com-

As Table

11 indicates,

are typically

higher

the regime

of quantitative

these

binding

than the nominal

than book tariff rates under

trade

tariffs,

protection

restrictions

the earlier

Executive

and Or-

198

The Philippines

beyond

2000: An economic

Table 11. Loans Granted to Agriculture and as Percentages of Gross and Total Loans.

in Real Terms (1985 prices) Value Added in Agriculture

Agricultural Loans (P million) 1970 1975 1980 1985 1990 1993

Agricultural loans as % of GVA Total loans

24,196 30,882 53,480 28,050 25,774 27,054

der (EO) 470, which wide range

33 29 47 26 21 21

programmed

of agricultural

assessment

the unilateral

and industrial

goods.

12 6 9 8 6 2

tariff

reductions

Moreover,

of a

tariffs

on a

number of imported agricultural products considered close substitutes for commodities where quantitative restrictions (QRs) are to be lifted (e.g., feed wheat though

and barley

the applied

tariffs

as substitutes are scheduled

for corn)

were raised.

to decrease

years for these commodities, they will be 0nly about than tariffs rates in 1995 under EO 470 and definitely

equal to or higher much higher than

the 5 percent target average tariff at the end of that period. Third, the administration of the minimum access volume provision of the WTO agreement ing, inequities, high bureaucratic government

revenues

from

has inevitably, resulted costs and inefficiencies

importations.

tariff quota system has been some agricultural commodities

Al-

over the next 10

(MAV)

in rent-seekin allocating

With the MAV provision,

established where a certain quantity of may be imported at a relatively low (in-

quota) tariff rate, and others will have to pay the higher-applied (outquota) tariff rate. Because most of the MAV is lower than import demand at the in-quota tariff, large quota rents are created unless the right to import

the MAV is auctioned

and granted

based on the highest

bid. The few exceptions are the high MAV figure for live animals, the Department of Agriculture (DA) claims are merely clerical and 'are now being negotiated Overall, the Philippine tection

has not been prevented

for technical

correction.

agriculture's

drift toward

under

the current

which errors

increasing

pro-

WTO agreement

be-

cause of the high binding tariffs and the exemption of the all-important rice from coverage. In fact, the increases in the tariff protection of hogs, poultry

and meat products

to compensate

for the high nominal

protec-

Chapter 4: David

199

tion of corn have been facilitated. Of course, tariff ceilings, albeit high, have now been set to limit increases in price protection. The implementation guidelines of the MAVensure that quantitative trade restrictions continue to be in effect despite tariffication. They extend the role of government parastatals, promote rent-seeking, fragment the budgetary process and cause inefficiencies in public expenditure allocation. In any case, the General Agreement on Tariffs and TradeUruguay Round's (GATT-UR) failure to provide some control over government parastatal involvement in agricultural trade, often as a monopolist, also allows WTO member-countries to counter the spirit of the agricultural agreement on market access. Recent analyses of the Agriculture Agreement now indicate that any expansion of market access in other countries and improvement in world prices will be very limited because of widespread "dirty" tarrification, concentration of tariff reductions on commodities where tariffs were already low, unusually high tariff equivalent due to low world prices in base year, exemption of rice from coverage in a few countries, and continued monopolistic power of government parastatals (Hathaway and Ingco 1995; Winters 1995). The current rules on the reduction in aggregate measures of support and export subsidies will also have a limited impact on world prices for at least two reasons: rules apply to the aggregate and not to individual commodities, allowing some major traded products to maintain high domestic support and export subsidies; and unilateral reductions adopted after the base year of 1986-1988 already form the major part, if not all, of the obligations under the greement. Property Rights As the population growth continues to be high, the supply of land, a major factor input in agriculture, has increasingly become scarce. Cultivation frontier has moved progressively into the marginal upland areas, while widespread deforestation, soil erosion and intensive cultivation have degraded land quality. To maintain agricultural competitiveness, long-term investments in land improvements and flexibility in land market transactions (sales and rental) to facilitate changes in land use/cropping patterns as well as land management patterns (small vis-a-vis large farm vis-a-vis contract farming, etc.) are necessary. However, government policy of retaining ownership of land with slopes beyond 18degrees (with some exceptions) and agrarian reform programs have tended to stifle and efficient operation of land markets and low-

200

ered

incentives

tree crops. tural loans reported Table

The Philippines

beyond

2000: An economic

for long-term

investments

assessment

in land improvements

and

These effects are reflected in the declining share of agriculto gross value added in agriculture (GVA) and total loans

in Table 12. 12.

Distribution of Public Expenditures for Agriculture and Natural Resources by Policy Instruments, 1987-1994 (In P million).

Agrarian Reform Land Acquisition Distribution Support Services Natural Resources and Environment Fishery Forestry/others Agriculture Irrigation

(NIA)

Price stabilization

(NFA)

5,179 (24) 3,272 1,907 4,805 (23) 697 4,108 11,575 (53) 1,704 (8) 2,765

(13) 985 (5) 2,014 (9) 368 (2) 467 (2) 3,272 (15) 21,559

are still classified

as public

lands,

even in slightly sloping

areas

Coconut development Livestock Others Total

Because

32,775 (26) 16,204 16,571 28,602 (23) 4,240 24,362 67,675 (51) 15,600 (12), 1,1,746

(9) Extension

full property

1994

5,074 (4) 9,497 (7) 2,082 (2) 1,826 (1) 21,850 (17) 129,052

Research

Upland

1987-1994

Policies most of 'the uplands rights

cannot

be conferred,

suitable for crop production, agroforestry or livestock ety of user rights arrangements have been instituted cates of Stewardship

Contracts

(CSC), Community

pasture. A varisuch as Certifi-

Forest Management,

Chapter 4: David

201

(CFM), Industrial Forestry Management Arrangements (IFMA) and pasture leases. CSCs are granted to small upland dwellers but area coverage of these as well as of CFMs and IFMAs are still relatively small. Moreover, these property rights instruments do not have collateral value because of the limited terms of tenure and nontransferability. A 25year tenure (renewable once) would still be short in relation to the growth period of forest products. On the other hand, the very low rental fee for pasture leases have led to excess demand and, consequently, to allocation of these rights in large parcels to politically powerful families and to inefficient management of these lands. Agrarian Reform Toaddress the highly unequal distribution of rural incomes caused mainly by the inequitable land distribution, a series of land reform programs have been instituted, starting with the 1963 law (Republic Act 3844) which fixed the sharing ratio between tenants and landlords. Land transfer was effected for rice and corn by Presidential Decree 27 in 1972 in three steps: first, by converting tenancy arrangements from share tenancy to leasehold; second, by issuing a Certificate of Land Transfer (CLT) where payments to landlords or the LandBank are corn sidered as amortizations; and finally, by granting emancipation patents or title of ownership. In 1987, RA 6675--better known as the Comprehensive Agrarian Reform Program (CARP)--was passed, which aimed to redistribute all agricultural land to tillers but with fair compensation to landowners. The program was designed not only to include land redistribution but the provision of support services to beneficiaries as well. Because of inherent political difficukies and the high cost of implementing the land transfer program, the target hectarage was not expected to be met by the end of 1998, the ending date of the program. Certain provisions of the agrarian reform programs as well as their slow implementation have increased distortions in land markets with unintended negative effects: • Share tenancy was made illegal, even if such labor-land market arrangements may be efficient and a means for landless households to rise up the agricultural ladder. ° Under PD 27, when the land reform was confined to rice and corn, land owners were discouraged from growing these crops in areas where intercropping of rice or corn with coconut or other crops have been traditionally practiced.

202

•

The Philippines

beyond 2000: An economic

Weak controls and lack of national land-use or zoning policy have allowed the of agricultural land to be prematurely converted for nonagricultural The prohibition has eroded the

purposes as induced by CARP. of land sales, even after the start of land reform collateral value of land in the formal credit mar-

ket. This in turned

investments,

particularly

ment and tree crop farming, and. cukivation crops requiring more cash inputs. •

assessment

for land

develop-

of nontraditional

The linking of the CARP implementation to the provision of support services lowers efficiency in the delivery of such services, as short-term subsidy productivity-enhancing funded.

Public

Expenditure

sources

Because cause

productivity,

types of instruments rather than long-term public investment, tend to be the ones

Policy

some unique features market failures, public improve

market

of agriculture and expenditures meant

efficiency

and protect

natural reto increase

the environment

are required to maintain and enhance the country's competitive, advantage. Public expenditures, however, have also been aimed at improving the unequal distribution of income, land ownership, and access to forest, fishery, and other natural resources. Oftentimes, public expenditures for price subsidies, concessional credit programs and other types of subsidies .are justified because they mitigate the penalties imposed oll agriculture by other economic policies, particularly that on price intervention Morerecently, been spent to rehabilitate natural groves, etc. Trends terms

significant resources

Over Time

'.Public expenditures

for agriculture

qnickly

in the late

contractionary peak around

public resources have also forests, coral reefs, man-

recovered

and natural

resources

1980s, after bearing

in real

the brunt

policies in the early 1980s (Figure 7). After reaching a 1990, public spending figures began to decline and recovh

ered again in 1995. As a proportion tures net of debt service,

public

to GVA and total public

expenditures

expendi-

for the sector was already

moderately high at 6 to 7 percent in 1987 and about 10 percent, in 1995. However, Figure 8 shows that much of public expenditures were allocated to natural resources and environmental management and rehabilitation

of forest

and fishery

resources.

They also went to rice price

Chapter 4: David

Figure

203

7. Trends in Real Government Expenditures ture (Ga), its Ratio to Gross Value Added tuLre (GVA), Total Government Expenditures Less Debt Service (G').

Bn P_lol

lal 198_ prl©Qs)

I%1

Ral

in Agriculin Agricul(G), and G

I%) 16

GBIGVA

Figure

8. Trends in Real Government ture by Policy Instrument.

Expenditures

Bn pglcg *_ 1D85 price*

B. pale* al lasg

in Agricul-

prie**

Lrdgatlon

Othur

Natural r_soutcw mld anvironct_mnt

0 _1_5

ltTO

1,75

1N0

Agr_rl_

Refarm

l_eS

..i !1_

A_lculturo

l_*S

1_¢s

117o

stabilization and redistributive purposes, namely program but less went to productivity enhancing tion, the single largest

item of public

1984 (close to half of agricultural

expenditures

public

spending

total infrastructure budget), dropped sharply timled to decline gradually into the 1990s.

ls?s

1_0

Isas

lS_O

11B_,

the agrarian investments.

reform Irriga_

between

1974 and

and 20 percent

in the mid- 1980s and con-

204

The Philippines

Allocation

beyond

2000: An economic

assessment

by Purpose

A disaggregation of public expenditure for agricultural and natural resources between 1987 and 1994 is reported in Table 13. Close to one-fourth of public expenditure has been allocated for natural resource and environment, eries accounted

mostly for forest rehabilitation and protection. Fishfor only about 15 percent of that allocation. Beyond

that, public expenditures

for agriculture

mostly for redistributive purposes, tivity impact. The agrarian reform fourth' of total expenditures.

(crops and livestock)

have been

with little regard for their producprogram accounted for about one-

Although

about

half of that was spent on

support services, most of the so-called support services are also redistributive in nature, that is, subsidies for credit programs and inputs, cooperative

development,

Food Authority

etc. The budgetary

(NFA) which is responsible

allocation

for the National

for rice price stabilization,

constitutes nearly 10 percent, and this can easily increase to 12 percent if the cost of market regulations in other agencies is included.

Table

13. Trends in Agriculture and Natural and Development by Expenditures Tterms, (1985=100).

Resources Research by Agency in Real

1988

1990

1991

1992

1993

1994

1995

DA DENR DOST PCARRD PCAMRD FPRD SCUs UPLB

70.5 31.9 62.6 40.1 3.1 19.4 94.3 78.4

205.0 37.7 68.9 42.2 6.3 20.3 133.2 91.6

183.4 29,3 59.0 33,7 5.6 19.7 121.8 86.4

183.1 34.8 50.6 29.2 5.2 16.3 120.2 83.1

192.1 32.0 50,2 28.0 5.5 16.7 133,8 93.7

205,6 34,5 51,2 30,7 5,0 15,5 137,8 99.5

241.4 39.2 86.3 49.7 5.7 31.0 139.4 98.7

Others Total

(49.7) 36.6 284.1

(53.4) 41.6 444.8

(46.6) (43.6) 35.3 37_0 393,45 388.7

(40.8) 40.1 408.1

(36.2) 38.4 445.7

(34.6) 40.7 486.1

Only about

30 to 40 percent

of public expenditures

for the sector

(representing about 3 percent of gross value added stock) have been allocated for productivity-enhancing

of crops and liveactivities which

the market

or technology

will fail to provide.

Agricultural

research

gen-

Chapter 4: David

205

eration, in particular, is severely underfunded, with public expenditures representing only 0.3 percent of gross value added in contrast to an average of one percent among developing countries and two to three percent among developed countries (Pardey et al. 1991). Indeed, the total public expenditure for technology generation of the DA, the Department of Environment and Natural Resources (DENR) as well as the Department of Science and Technology (DOST) and of state colleges and universities is only about half the budgetary allocation for the NFA. Public expenditures for agricuhure continue to be disproportionately in favor of the rice sector (about half), which presently accounts for less than 15 percent of gross value added of the sector. Aside from the budgetary allocation for irrigation and price stabilization, rice dominates expenditures for extension, land redistribution, credit programs, subsidies for seeds, fertilizers, farm machineries, and post-harvest facilities. Yet, the transition problems encountered with the introduction of modern rice technology in the late 1960s and the implementation of land reform in rice in the mid-1970s that would have justified subsidies for credit and modern inputs are long over. Rice traders, millers and input dealers have successfully replaced land owners and rural banks as the major sources of production credit. In fact, interest rates from these informal sources of production credit are about the same as those charged by cooperatives, the conduit for government-supported credit programs (Institute of Agrarian Studies (IAS) 1995). Budgetary allocations for the exportable agricultural subsector have been quite meager compared to the 20 percent implicit tax indirectly imposed by the overvalued exchange rate. An exception is the major effort to address the falling productivity of the coconut industry by financing fertilization and replanting activities through a foreignfunded program. However, whereas the distribution of subsidized fertilizer was on schedule, very little progress has been made on the replanting program where public support is most needed. Because of uncertainties about land reform, land owners hesitate to make longterm investments; they prefer to convert land use for non-agricuhural purposes, thereby avoiding the land reform program. There has also been very little effort, thus far, to address the problem of declining competitive advantage of major import-competing commodities, particularly corn and sugar, through productivityenhancing public expenditure programs. While irrigation investment

206

The Philippines

beyond 2000: An economic

assessment

may not be socially profitable for these commodities, technology generation in sugar and corn is clearly underfunded. Budgetary allocation for sugar research has been only about 0.5 percent of its contribution to gross value added; Summary

and

and for corn, about

0.1 percent.

Conclusions

Overall, the policy and institutional framework continue to hinder the sustainable growth of the agricultural sector and, thus, food security. While

policies

have become

more favorable

the sector, these have been achieved major import-competing commodities

by increasing and reducing

the protection implicit tariffs

ofon

inputs

price intervention

rather

than reducing

disincentives

on exportable

commodities

caused by distortions ill exchange rates. Thus, improvements in agricultural incentives occurred at the cost of greater inefficiencies in resource

allocation

ture, and between

arising

from

agriculture

wider price

distortions

and agroprocessing.

within

Higher

agricul-

food prices

have also adversely affected equity because majority of the rural and urban poor are net buyers of the highly-protected food commodities. Finally,

the high and wide dispersion

promote rent-seeking. ample, will intensify

of tariffs

among close substitutes

Technical smuggling of cattle and wheat, for exgiven the large differential tariff between breed-

ers and ordinary live cattle and between feed wheat and wheat for food, The wide distortions of prices within agriculture are particularly detrimental to the growth and employment objective not only of the whole economy but of agl5culture itself. Because the supply of land is essentially

fixed, the artificial

rise in the profitability

of rice, corn, and

sugar has increased the cost of land for other crops. Consequently, the competitive advantage of exportable agricultural commodities in the world

market

is reduced

indirectly.

Corn is the single most important

input to the hog and poultry industriesindustries whose potentials for growth are high and whose contributions to gross value added in agriculture, and labor and land productivities corn. The high corn price policy has hindered

are even higher the international

petitiveness

mostly

of the hog industry

yard producers),

as studies

(still consisting

have showed

The very high protection

(Gonzales

than com-

of small, back-

and Perez 1991).

rate Of sugar hurts both consumers

and

the food processing industry, which accounts manufacturing value added and employment,

for 40 and 20 percent of respectively. In contrast

to sugar

and for which

(which

is clearly

import-competing

domestic

Chapter 4: David

207

consumers have to pay about twice as much as the world price), the • food processing industries heavily using sugar as an input have greater export potential. At least 25 percent of domestic production of processed vegetables, fruits, chocolate and sugar confectioneries are exported. The excessively high protection of a number of food commodities have had adverse effects on equity because a great majority of the rural and urban poor are net buyers of these. High food prices also put pressure on wages as evidenced by the numerous clamor for minimum wage hikes following the food price-induced inflation in recent years. High wages for labor-intensive manufacturing industries, however, are less competitive in relation to those of low wage-cheap food economies such as Vietnam and China. These inefficiencies are not only due to distortions in incentives but due to the choice of policy instruments as well. Continued use of quantitative trade restrictions rather than tariffs promotes rent-seeking, reduces government revenues, incurs significant bureaucratic cost and introduces price uncertainties. Recent policy changes in response to the WTO agreement seem to have exacerbated rather than mitigated such problems. While the property rights policies both for punic and private lands have well-intended environmental and equity objectives, the slow implementation as well as certain provisions that limit these property rights, tenure and transferability have inadvertently created negative effects. Land market transactions have been greatly hindered, incentives for long-term investments lowered, collateral value of land eroded, and land conversions from agricultural to nonagricultural uses accelerated. Although public expenditures for agriculture have recovered in the late 1980s, much of that recovery was allocated for redistributive purposes (e.g., agrarian reform and market subsidies) and natural resource and environmental management programs, rather than for longterm productivity-enhancing investments that can reverse the sector's declining competitive advantage. The continued use of quantitative trade restrictions has not only limited tax revenues, but dissipated scarce government resources because of the high cost of administering market regulations, particularly NFA operations. Agricultural research in particular has been severely underfunded, with public expenditures representing only 0.3 percent of gross value added in agriculture in contrast to one percent among developing countries and 2 to 3 percent among developed countries. Budgetary allocations have also contin-

208

The Philippines beyond 2000: An economic assessment

ued to be disproportionately in favor of the rice sector, with very meager allocations to other major commodities such as corn. On the other hand, public investments for market infrastructure continue to favor large urban centers particularly those close to Metro Manila. The issue is not only the level of public expenditure and its allocation. Equally important are the inefficiencies caused by weaknesses in the bureaucracy in terms of organizational structure, incentive problems, transitional difficulties with devolution, and instability in leadership. In particular, the fragmentation of the R & D system as well as the weak linkage between research and extension have failed to promote technological development in many key commodities especially corn, coconut, sugar and other traditional crops. Moreover, weak planning, political factor, and excessive graft and corruption have lessened the effectiveness of public investments in market infrastructure. Although agriculture's performance and the government's management of agriculture indicate a bleak picture, recent economic and political developments may induce and/or ease the adoption of policy and institutional reforms. First, the substantial devaluation of the ex_ change rate presents an opportunity to reduce the major distortions in market incentives. Since the border price (in pesos) of import-competing commodities will increase by 30 to 40 percent, the high import tariffs of major agricuhural commodities may be reduced significantly without lowering nominal prices. In 'this way, the relative output prices within the sector will be less distorted, benefiting the exportable commodities where the country has a comparative advantage as well as the hog and poultry industries hurt by the high rates of protection on corn and its substitutes. Furthermore, as the out-quota and in-quota tariffs on major import competing commodities equalize, the use of quantitative trade barriers (except for rice) would have been truly abolished, minimizing bureaucratic cost and rent-seeking. Also, as trade liberalization continues and the macroeconomic management of short-term fluctuations in foreign capital and borrowing inflows improves in response to the current economic crisis, the overvalued of the exchange rate that generally hurt agricultural incentives will be reduced. The weaknesses in the property rights smxcture in land are much more politically difficult to resolve. However, the Congressional Commission on Agricultural Modernization has recently passed a law that substantially increase the budgetary allocation for agriculture. This increase was specifically allocated for productivity-enhancing investments, particularly irrigation and R & D. Dining the deliberations of

Chapter 4: David

this commission,

209

the organizational

of the government bureaucracy second bill has been submitted

and other institutional

weaknesses

in agricultural were also recognized. A to Congress, recommending to stream-

line the bureaucracy in a way that will improve the efficiency provision of necessary support services to agriculture.

in the

210

The Philippines

beyond 2000: An economic

assessment

References Anderson, K., Hayami, Y. et al. 1986. The Political cultural Protection: East Asia in International and Unwin.

Economy of AgriPerspective. Allan

Anderson, K. 1994. Food Price Policy in East Asia. Asian-Pacific nomic Literature 8(2):15-30. Bale, M. and E. Lutz. 1981. Distortions An International Comparison. Economies 63(1):8-22.

in Agriculture American

Eco-

and their Effects:

Journal

of Agricultural

Bautista, R. 1987. Production Incentives in Philippine Agriculture: fects of Trade and Exchange Rate Policies. Research Report

EfNo

59. Washington: international Food Policy Research Institute. Bautista, R. and A. Valdes (eds.). 1993. The Bias Against Agriculture: Trade and Macroeconomic Francisco: ICS Press. Clarete,

Policies in Developing

Countries.

1983. An Analysis

of the Economic

R. and J. A. Roumasset.

Policies Affecting the Philippine per No. 83-08. Makati: Philippine ies. David, C. 1983. Economic Policies pine Economic Journal 11.

Coconut Institute

San

Industry. Working Pafor Development Stud-

and Agricultural

Incentives.

David, C. 1996. Food Policy: Its Role in Price Stability

Philip-

and Food Secu-

rity. Paper presented at the Annual Conference of the Philippine Economic Society, Makati City. David, C. 1996. Agricultural Policy and the WTO Agreement: The Philippine Case. Paper presented at the Conference on Food and Agricultural Policy Challenges for the Asia- Pacific, Manila. De Dios, E. S. and Associates. 1993. Poverty, Growth and the Fiscal Crisis. Makati_City: Philippine International Development

Institute for Development Research Center.

Studies

and

Gonzales, L. and N. D. Perez. 1991. The Economics of Hog and Poultry Production. in M. W. Rosegrant and L. A. Gonzales (eds.) The Corn-Livestock Sector: Performance and Policy Implications. nila: IFPRI and Philippine Department of Agriculture.

Ma-

Hathaway, D. and M. Ingco. 1995. Agricultural Liberalization and the Uruguay Round. In W. Martin and L. Alan Winter (eds.) The Uruguay Round

and the Developing

per Number

307. Washington.

Economics.

WB Discussion

D.C.: World Bank.

Pa-

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of Agrarian Studies. 1995. Agrarian Reform Beneficiaries Performance Monitoring and Evaluation System. Los Bafios: IASt. P., M. Lamberte, C. David, M. Austria, C. Cororaton, E. MedaUa and V. Pineda. 1996. The Emerging World Trading Environment and Developing Asia: The Case of the Philippines. Manila: Asian Development Bank.

Intal,

P. and J.N. Power.

1991. The Philippines.

In A.O. Krueger

et al.

(eds.) The Political Economy of Agricultural Pricing Policy. Baltimore and London: The John Hopkins University Press. lohson,

D. G. 1991. World Agriculture St. Martins Press.

in Disarray

(2nd ed.). New York:

Lamberte, M. 1995. Managing Surges in Capital Inflows: The Philippine Case. Journal of Philippine Development 22(1). Makati: Philippine Lindert,

Institute

for Development

P. H. 1991. Historical Timrner (ed.) Agriculture Poverty in Developing versity Press.

Medalla,

Studies.

Patterns of Agricultural Policy. In C. P. and the State: Growth, Employment, and

Countries.

E., G. Tecson, R. Bautista,

Ithaca

and London:

Cornell

J. Power, E. Tan, R. Aldaba,

Uniand L.

de Dios. 1995. Philippine Trade and Industrial Policies: Catching Up with_Asia's Tigers Volume I. Makati City: Philippine Institute Pardey,

for Development Studies. P.G., J. Roseboom, and J.R. Anderson

(eds.).

1991. Regional

Perspectives on National Agricultural Research. Agricultural Research Policy: International Quantitative Perspective. Cambridge University Press. Tan, N. 1979. The Structure of Resource Flows in the Philippine. In R. H. Bautista and J. H. Power (eds.) Industrial Promotion Policies in the Philippines. Studies. Tyers, R. and K. Anderson. titative Assessment.

Makati:

Philippine

Institute

for Development

1992. Disarray in World Food Markets: A QuanCambridge

University

Press.

Winters, L. A. 1995. implications of the Uruguay Round Agreements: Critical Issues and Adjustment Requirements. In Implications of the Uruguay Round Agreements New York: United Nations.

for the Asian and Pacific Region.

Philippine Employment andIndustrialRelations Policies

Gonza]o M. Jurado and Ma. Teresa C. Sanchez

been the government's emphasis on employment creation and key to the reforms on growth, poverty alleviation equity promotion of harmony in industrial relations. and These are has the means for giving poor people access to the fruits of production and allowing growth to proceed faster. The policy thrusts toward faster employment generation and improved industrial relations are laid down and elaborated in three important government documents: The National Employment Plan (NEP) 1993-1998, the Medium-Term Philippine Development Plan (MTPDP) 1993-1998, and the Comprehensive Employment Strategy Program (CESP) 1995. To what extent these objectives have been realized is an extremely interesting question. The purpose of this paper is to assess the government's accomplishments in the area of employment and industrial relations and then evaluate the impact of these accomplishments on growth, poverty and equity. Accordingly, this study tries to find answers to the following: (1) What has been the rate of employment creation in the economy? Has it been sufficient to solve the unemployment problem? (2) What has been the trend of real wages? (3) Is Philippine labor becoming more (or less) internationally competitive? (4) What is happening to income distribution? In whose favor is it changing? (5) Are the economy's industrial relations improving? and (6) What is the state of overseas employment for Filipinos? Targets, Policies and Strategies of MTPDP and NEP The MTPDP subsumed the government's plans on employment and industrial relations under the broad rubric of human development. it is however in the NEP, and later in the updated CESP, where these plans are laid out and elaborated upon. Human development is, for the majority of Filipinos, synonymous with the attainment of the most basic needs, including adequate hour-

Chapter 5: Jurado and Sanchez

2.15

tors. Toachieve these objectives, the NEP lays down a strategy covering three processes: employment generation, labor market facilitation, and manpower development. Specific targets, policies and strategies Both the MTPDP and the NEP propose to generate an average of 1.1 million jobs annually over the 1994-1998 period and consequently reduce the unemployment rate over the same period from 9.1 percent to 6.6 percent. These jobs will be generated over the years as follows: Total

Annual

Total

•Employment Increase (in million workers) 1993 1994 1995

24.467 25.519 26.623

1.052 1.104

Annual

EmploymentIncrease (in million workers) •1996 1997 1998

27.786 29.003 30.334

1.163 1.217 1.331

For these targets to be achieved, both plans' strategy of accelerated employment generation require (1) pushing for sustained growth in incomes and employment among the poor people; (2) setting up safety nets for those who will be adversely affected by structural adjustments; and (3) directing public resources and efforts'toward basic social services, disadvantaged regions, and specific groups among the poor. Toattain the human development aims, the Plans are (a) to focus education and manpower development on meeting the changing demand for basic, middle-level, and higher-level knowledge and skills; (b) to create new/upgrade existing capabilities in the government for manpower planning, training and research; (c) to encourage the private sector to take a greater role in skills development; and (d) to improve the capabilities of local government units (LGUs) and nongovernmental organizations (NGOs) in delivering training programs to the informal sector, disabled/handicapped persons, women, indigenous cultural communities, urban poor families and parent couples. AnAnalytical Framework The government's performance in employment generationand industrial relations will be assessed by using the following analytical framework and taking into consideration the realities of the Philippine economy.

216

The Philippines beyond 2000: An economic assessment

Consider the nominal gross domestic product (GDP) and divide it into factor shares: (1)

pY = wL+

where: p is the average price level, Ythe real domestic product, w the average nominal wage rate, L the level of employment, r the average rental cost of capital, and K the capital stock, all in annual terms. Dividing both sides by pYyields: (2)

1 =wL/pY+

rK/pY

where: wL/pY is the share of labor and rK/pY the share of capital. The average productivity of labor h is: (3) h= Y/L

(3a)

Y=hL

where Y and L are as previously defined. Substituting (3a) into (2) and treating the share of capital as a residual yields: (4)

1 = w/ph + (1-w/ph)

Equation (4) constitutes the heart of the framework. The equation focuses attention to (i) each of w, p, and h, and, more importantly, to (ii) the real wage, w/p, (iii) the unit cost of labor, w/h, and (iv) the share of labor in the gross domestic product, w/ph. In addition the model, through equation (2), directs the spotlight to (v) employment L. Typical objectives of governments, as they are in the current instance, include the welfare objective of increasing the real wage, w/p, the competitiveness objective of reducing the unit cost of labor, w/h, the productivity objective of improving labor productivity h, and the distribution objective of raising the income share of labor, w/ph, in addition to the employment objective of increasing employment L. As it turns out, some of these objectives are mutually inconsistent and achieving all of them simultaneously is not possible, at least in the shortterm. Achieving the welfare objective satisfies the income distribution objective but violates the competitiveness objective. Satisfying the employment objective implies a violation of the productivity objective.

Chapter 5: Jurado and Sanchez

217

This is treading on the knife edge. One way to get out of the dilemma in the medium- and long-term is for output to grow at a "very high" rate. Then as long as employment grows no faster than output, both employment and productivity objectives are attained. Further, as long as nominal wages do not outpace productivity, the competitiveness objective is not undermined. In this context, the welfare objective is satisfied as well if inflation is reduced, or better yet, hauled down to zero. The distribution goal is not satisfied but it is not subverted. Given these considerations, it seems apparent that the chances of the government in attaining its employment and industrial relations goals in the medium- and long-term depend critically on its success in accelerating growth and taming inflation. Application of the Framework A numerical example can be used to demonstrate the application of the framework. Suppose one wants to know what happened to the real wage and the unit cost of labor between two years, say between a base year and another year. Reducing w, p, and h to indexes, with each equal to 1.0 at the base year, the values of these indexes at the other year can be computed. Suppose at the other year, w = (1 + a), p = (1 + b) and h = (1 + c). Then, holding h = 1, the real wage increased (decreased) or remained unchanged depending on whether a is greater (lesser) than or equal to b. Similarly, holding p = 1, the unit cost of labor increased (decreased) or remained unchanged depending on whether a is greater (lesser) than or equal to c. The framework can also be used to discover the resulting change in income distribution between the two years. Income distribution changed in favor of (against) the working people if (1 + a) / (1 + b) (1 + c) in the second year is greater (lesser) than the 1.0. in the base year. Of course, if the new ratio is equal to 1.0, income distribution did not change. The Data The study uses data on the GDP and the implicit GDP deflator for the nation as a whole and for each of the nine major sectors of the economy (i.e., defined at the one-digit level of the International Standard Industrial Classification of All Economic Activities [ISIC] for the period 1986-1996). These data come from the National Statistical Ofrice (NSO) and the National Statistical Coordination Board (NSCB).

Chapter 5: Jurado

and Sanchez

219

During the period 1993-1996, which are the years covered by the MTPDP, employment grew by a net 3.0 million during the period or an average of 1.0 million a year. This is somewhat short of the MTPDP/ NEP's net target

of 5.8 million new jobs or an average

year for the said three-year year period 1993-1998. A closer examination regularity.

The figures

period

but is within

of 1.1 million

the target

of Table 1, however,

shows

say that while the economy

per

for the five-

a statistical

generated

ir-

an aver-

age of 594,000 net new jobs a year, or a total of 1.78 million during the three-year period 1992-1995, it created 1.744 million net new jobs in the single year 1996. This is incredible, and reliability of the data.

raising

Table

I. Labor

1987-1996.

Year

Labor Fotxze

Employed

Unemployed

(thousand)

(per'cent)

(percent)

1987

22,880

20,795

2,085

90.9

9.1

1988

23, 451

21,497

1,954

91.7

8.3

1.989

23,858

21,849

2,009

91.3

8.4

1990

24,525

22,532

1,993

91.9

8.1

1991

25,246

22,979

2,267

91.0

9.0

1992

26,180

23,917

2,263

91.4

8.6

1993

26,822

24,443

2,379

91.1

8.9

1994

27,483

25,166

2,317

91.6

8.4

1995

28,040

25,698

2,342

91.6

8.4

1996

29,637

27,442

2,195

92.6

7.4

Source:

Current

Force

Labor

Philippine,

Statistics

the question

Employment

Rate*

of the accuracy

Unemployment

Rate

(DOLE-BLES)

October Round

Three possible the labor

sources

force participation

can be cited for this anomaly. rate (LFPR),

which

must

The first is

have suddenly

increased from 1995 to 1996. Second, there was the 1995 population, which must have been underestimated. And third, there was the 1996 population, which must have been overestimated. The LFPR can be In this paper the term "net increase in employment" refers to dN, the change in employment, and not to nNo, the "gross increase in employment." Unfortunately, there is no figures on attrition aNo. It is assumed that the target set down in the MTPDP/ NEP, an average of I.I million jobs a year over the five-year period 1994-1998, refers to dN and not to nNo, Furthermore, in standard practice

this paper does not distinguish refers to "tasks" and "change

"workers." Here the terms are used interchangeably.

between "number in employment"

of jobs" which which refers to

220

The Phil{ppines beyond 2000: An economic assessment

eliminated immediately because even if it increased between the two years, the increase is statistically insignificant. The 1995 population is more likely to be the culprit, considering the result of the actual census for that year, which showed a higher population than had earlier been projected. If this is the case, the employment estimate for 1995 will be bigger than reported and the employment estimate for 1996 will no longer appear to be incongruously large. This of course means that the total net increase of employment for 1993-1996 will be even larger than 3.0 million. Thus, if one proceeds to ignore the 1996 figure on the ground that it is highly improbable and concentrates only on the 1993-1995 data, the conclusion on the magnitude of the increase in employment would be a lot less rosy. Now, suppose one accepts the figures to be what they are. To reach the MTPDP/NEP target of 5.8 million net new jobs for the five-year period 1993-1998, the government would have to generate some 2.5 million net new jobs in the period 1996-1998. Can the government do it? If it can overcome the adverse impacts of the current currency turmoil and restore business confidence in the public policies soon, the government will have good chances of attaining its goals on employment generation. The average growth rate of employment in the four-year period 1992-1996 was 3.5 percent. This is clearly superior to the 2.7 percent average of the preceding four years of 1988-1992. In 1996, the biggest concentration of employment was in agriculture, which absorbed 41.7 percent of the total figure. The next biggest was in services which took in 41.6 percent. The residual 16.7 percent was in the industrial sector, The corresponding figures for 1992 were 45.4 percent, 38.6 percent, and 16.0 percent; and for 1988, 46.2 percent, 38.3 percent, and 15.5 percent. As a percentage of the total figure, employment in agriculture is clearly declining and that in services is picking up the slack. The employment share in industry is almost constant at about 16percent (Table 1.1). In terms of occupational grouping, the employment in 1996 consisted of 41.3 percent agricuhural, 22.8 percent production, transportation and related fields, 28.3 percent clerical, sales, service and unclassified, and 7.6 percent professional, technical, administrative, executive and managerial. Compare these with the respective figures for 1992: 44.9 percent, 21.2 percent, 26.9 percent, and 7.0 percent; or for 1988: 45.6 percent, 21.5 percent, 26.6 percent and 6.4 percent. The decline in

222

The Philippines

beyond

2000: An economic

assessment

the share of agricultural employment is also evident but the slack is taken up by the clerical and sales group and professional and managerial group. unchanged.

The production, transportation This change in the structure

and related group remained of occupational groupingS

somewhat parallels the change in the structure was earlier shown to be minimal (Table 1.2).

of the industry,

which

Employment can also be distributed by class. In 1996, the employed consisted of 47.7 percent wage and salary workers, 37.5 ownaccount workers, and 14.8 unpaid family workers, in 1992, the corresponding figures were 44.3 percent, 40.4 percent and 15.2 percent. These were, in 1988, 45.8 percent, 39.2 percent, and 16.7 percent. The share of the wage and salary workers ers remaining

about

is increasing,

the same,

that of own account

and that of unpaid

work-

family workers

de-

clining. There is an implied increase in the total monetary income of households here, where previously unpaid family workers are now receiving

monetary remuneration (Table 1.3). The three sets of data are mutually consistent.

relative relative

share share

the relative

The decline

in the

of agricultural employment is matched by the rise in the of service employment. This is confirmed by the fall in

of agricultural

tive share of professional,

occupations

managerial,

clerical,

ers. In parallel fashion, there is a decline workers (who predominate in agriculture)

and the rise in the relasales and service work-

in the share of unpaid family and an increase inthe share

of wage and salary workers (who predominate One question that has often been raised

in the service sector). regarding employment

in the Philippines is whether there are any employment-restricting barriers in the economic system, say, laws or regulations that discourage labor

intensity.

Do not the

provisions

of the Labor

guarding

the security

of workers

(i.e., preventing

Code safe-

dismissals

without

just cause, prohibiting pay cuts for union work, etc.) serve as impediments to exit and therefore exert a dampening impact on labor absorption? Do not the Regional Tripartite Wages and Productivity Boards (RTWPBs), in setting regional minimum wages, perform the same employment-discouraging function? If these Labor Code provisions and RTWPB activities exert such adverse impact on employment creation, they apparently

do so in a way that does not decisively

retard

the pace

of employment generation in the economy. On the other hand, there are clear incentives for labor-use in the government's arsenal of policies. The Board of Investments reward labor intensity with various tax exemptions

and credits.

b4 t',a 4a

Table

1.3.

Employment

by Class,

All Classes

I987-1996

Wage and Salary

(In Percent). Workers

Own-Account

Workers

Unpaid

FamiIy

Year

of Workers

Total

Private

Government

Total

Self-EmpIoyed

Employer

Worker

1987 1988

100.00 100.00

44,08 45,79

35,93 37,65

8.i5 8.i4

39,23 38.42

36,20 35,52

3,02 2,90

16.70 i5.79

1989

100,00

45,20

36,56

8,64

39.66

36,65

3,01

i5.14

1990 19 91

100 _00

45.70

37.19

8.51

38,28

35.07

3.21

16,01

f'tx

100.00 100.00

45.43 44 .34

37.40 36 .29

8.03 8.05

40,11

37.05

3.07

14.45

'_£

1992

40,44

37.36

3.08

15 _23

1993

100.00

46.32

38.54

7.79

39.94

36.70

3.24

16.14

1994

t00.00

45,57

37 _89

7.67

39.50

36.39

3.11

14,92

1995 1996

100.00 100.00

45,61 47.65

37,50 36.80

8.11 7_60

39,i6 37.52

35,39 33.98

3.77 3,55

15.23 14.75

Source

of basic data:

Labor

Force

Survey.

NSO

(various

years).

,_' 2, _"

bo -,

o ¢,, ga 0a

Chapter 5: Jurado and Sanchez

225

The presence of unions and their hardline stance can be cited as similar obstacles to rapid employment generation. However, historical data do not support this, particularly in reference to recent years. Notwithstanding these incongruities in the Labor Code provisions, ambiguities in the actions of some RTWPBs and some apparently ineffective government's programs on human resource development, employment generation seems to proceed according to the Plan. On the overall, the labor policies seem to be producing the desired result. Unemployment Figures in Table 1 show 'that the open unemployment rate declined from 8.6 percent of the labor force in 1992to 7.4 percent in 1996. If this pace persists or accelerates, this decline is likely to reach the target envisioned in the Plan: a fall in the open unemployment rate to 6.6 percent by 1998. Along with the fall in the open unemployment rate, the absolute number of the unemployed decreased, albeit only slightly, from 2.26 million in 1992 to 2.20 million in 1995. This is notwithstanding the fast population growth and slight rise in the labor force participation rate. Wages Wages are a reflection of the state of the labor market and labor productivity. Where productivity is low and unemployment widespread, real wages would tend to be "low." The opposite is true when the labor market situation is improving. Also, real wages would tend to increase as the labor market begins to get tighter. Nominal and real daily wages in agriculture and non-agriculture are shown in Table 2. Both wages have been steadily climbing since 1987, with nominal wages in agriculture increasing by approximately 200 percent and those in nonagriculture by 160percent until 1995, and real wages in agriculture and nonagriculture increasing by approximately 33 percent and 20 percent, respectively, until 1995. For both nominal and real wages, those in agriculture represent approximately one-half of those in nonagriculture, a rough measure of the relative productivities of the two sectors. In a broad sense this trend is a reflection of the steadily increasing pace of employment generation in the economy. Also, as will be indicated below, it is an index to what appears to be a tightening labor market.

ho ho

Table 2. Nominal

and Real Wages in AgricuIture Daily Nominal

Wage

Year

Agriculture

Nonagriculture

1987

31.62

63.88

1988

35.96

1989

and Nonagriculture, Daily Real Wage (1992 prices) Agricudture

1987-1995 (Pesos). Annual

Real

Wage (1992 prices)

Nonagricultttre

Agriculture

Nonagriculture

53.7I

108.52

13,427.50

27,130.00

_.-

71.42

55.7I

110.65

13,927.50

27,662.50

41.72

85.08

59.28

120.89

14,820.00

30,222.50

1990

50.53

100.15

63.55

125.96

15,887.50

31,490.00

1991

57.74

117.96

62.32

127.32

15,580.00

31,830.00

1992

65.16

134.38

65.16

134.38

16,290.00

31,095.00

1993

72.51

131.46

67.85

123.01

16,962.50

30,752.50

1994

80.38

151.73

68.55

129.41

17,137.50

32,352.50

1995

92.27

160.38

73.06

126.99

18,265.00

31,747.50

C) Sources:

Bureau

of Agricultural

Statistics,

Current

Labor

Statistics

(BLES-DOLE). g_

Chapter 5: ]urado and Sanchez

227

If one were now to define the real wage in terms

of the output

(earlier explained), the trend for both real and nominal wages can be seen in Table 3, which has reduced various indicators of the economy into indexes,

including

the trend

for average

labor productivity

(See

Appendix II for the computational procedure for the real wage in the output sense). The trend for real wages is increasing slightly but that for labor productivity is stagnant. There seems to be something amiss here: Were enterprises paying workers more than competitive markets dictated? As cited by Khan (1995, pp. 9-10), the World Bank tried to explain the phenomenon by alluding to a protected oligopohstic modem not dictated by competitive considerations

sector whose decisions were but by their ability to pay.

For his part, Khan, after raising

about the quality of the data,

attempted an explanation mal and informal sector, said:

"The rise in industrial

have spilled political parts

wages

over into the rural

environment

questions

by dividing the economy into an urban and a rural formal and informal sector.

while

in the urban

formal

sector

formal

sector

in a generally

real wages/incomes

forHe could

favorable

in the vast informal

of both urban and rural sectors stagnated." Khan seems closer to the truth, but the World Bank explanation

is a tribute

more to the imagination

ness of their analysis. porary

Another

labor migration.

of the analysts

explanation

The departure

than

to the sound-

is to take into account

of labor migrants

tem-

gives rise to a

tightening of the domestic labor market (i.e., a leftward shift of the labor supply curve), resulting in an increase in the real wage. The tightness becomes more severe when those who have returned raise their reservation

wages,

preferring

ployed rather than accepting they had received abroad. 2 Yet another explanation units?

If the efficiency

to be counted wages

among

that are not

is to consider

unit per worker

the openly

comparable

labor in terms

than is normally

assumed,

actually

than

that is, the supply

it appears;

of efficiency

is less than one, a reflection

a lower efficiency be tighter

unemto what

the labor market curve

would of labor

•expressed in full efficiency served in the labor market.

terms would be leftward of the curve obIn this case, the "high" real wage appear-

ing in the market is actually rather than to the inefficient

that one pertinent worker.

2We owe this point to Ruperto P. Alonzo. 3We owe this point to Emmanuel F. Esguerra.

to the

efficient

worker

t_ t_ co

Table 3. GDP, Employment Year

and Labor Productivity,

GDP

Current

Prices

(million

pesos)

Constant

1992 Prices

(million

Empioyment (thousand)

pesos)

1987-1996. GDP/Employment Constant

Growth

Rate

1992 Prices)

GDP

EMP

GDP/EMP

pesos)

(percent)

_;_

(thousand

1987 1988

682,764 799,182

1, i59,783 1,238,082

20,796 21,497

55.77 57.59

6.8

3.4

3.3

1989

925,444

1,314,925

21,849

60. I8

6.2

i .6

4.5

1990

1,077,237

1,354,845

22,532

60.13

3.0

3.1

-0.1

1991

1,248,011

1,347,017

22,979

58.62

-0.6

2.0

-2.5

i992

1,351,559

23,917

56.51

0.3

4.1

-3.6

1993

1,474,457

1,379,673

24,430

56.44

2. I

2.2

-0.1

1994 1995

1,692,932 I ,906,328

1,443,865

25,166

57.37

4.7

3.0

1.6

1,509,365

25,698

58.78

4.5

2. i

2.4

1996

2, i56,029

1,597,059

27,442

58.20

5.8

6.8

-0.9

Sources

of basic data:

NIA (NSCB),

;_, ¢3

NSO_ ga

Chapter 5: Jurado and Sanchez

This brings cause

up the question

of the economic

resurgence

229

of the state of the labor market. in the mid-nineties

Be-

and the persist-

ing attractiveness of foreign employment, the demand for labor has clearly increased more than it did in the previous years. The supply of labor has obviously increased too, given the rise in the population and the slight increase in the labor force participation rate. Employment at home is rising and open unemployment declining. Is the labor market then becoming

tighter?

Although

no precise

statistics

are available

to answer

this point

directly, there is a basis for concluding that the market is tightening. At the higher education and skills levels, less people relative to demand pass the prescribed standards. "Piracy" of well-qualified staff is now being observed among large enterprises. At the lower rungs of the skills ladder, such as domestic help, gardeners and drivers, less and less people seem to be available for employment at prevailing rates of remuneration. There

is pressure

on wages.

Apart from

with prices,

workers

at all levels

expect

any effort to "catch

higher

starting

wages

up" than

those paid a year or so earlier. Unit Costs

of Labor

The unit cost of labor measures shows the nominal

the competitiveness

wage paid not on a per-worker-basis

of labor.

but on per unit

of output. Thus, a worker paid ta200 per day producing 10 units of output per day costs less than a worker paid the same amount but producing only 5 units for the same period. A sector or country that has a lower unit cost of labor is more competitive than a sector or country that has a higher labor unit cost. It is therefore the unit cost of labor, not the nominal wage rate, that determines the competitiveness of a sector

or country. Labor

productivity

eight years. 4 Standing

in the Philippines

has stagnated

at ta55,770 per worker

in the last

in 1987, labor productiv-

ity was t256,510 in 1992 and ta58,200 in 1995 (all expressed in 1992 prices) as shown on Table 3. These figures are lower than those in 1989 and 1990, when productivity was ta60,180 and ta60,130, respectively. Because of the stagnation in productivity on the one hand,

and

the rise in the nominal

wage on the other,

country

from an index of 0.50 in 1987 to 1.00 in 1992 and

has increased

the unit cost of labor in the

4This finding is consistent with the conclusions of Cororaton (1997) and Ausuda (Chapter 9).

230

The Philippines beyond 2000: An economic assessment

1.29 in 1995 (Table 4). Unless the countries competing with the Philippines have suffered from a similar malaise, 5the Philippines will continue to lose its international competitiveness. Table 4. Philippine

Year

Indexes,

No(ninal W_'Lge Implicit GDP Deflator (w) (p)

1987-1995(1992= 1.00). Average Labor Productivity (h)

Real Wage (w/p)

Unit Labor Cost (w/h)

Share ofLabor ia GDP (w/.ph)

1987

0.50

0.59

0.99

0.85

0.50

0.86

1988

0.56

0,65

1.02

0.86

0.55

0.84

1989

0.67

0.70

1.06

I).96

0.63

0.91

1990

0.80

1.06

1.00

0.75

0.94

1991

0.93

1.04

1.00

0.89

0.96

1992

1.00

1,00

1.00

1993

1.07

1,00

1.00

1,07

1.00

1994

1.23

1.17

1.02

1.05

1.21

1.03

1995

1.34

1,26

],04

1.06

1.29

1.02

This point can be highlighted by referring to the tradable sectors of the economy, alone. Tables 4.1 (agriculture), 4.2 (mining and quarrying), 4.3 (manufacturing), 4.5 (construction) and 4.7 (transport, storage and communications) show the tradable sectors. These sectors contend with rising unit labor costs. Their products are losing ground to competitors in foreign markets unless, as has been said, these markets suffer from rising unit labor costs, too. At the macroeconomic level, raising labor productivity requires hiking the capital-labor ratio upon which labor-productivity depends, where capital is defined as equipment or mechanical tools for the worker--that is, investment in man-made capital. Such a requirement is not always necessary at the microeconomic level. At the enterprise level, raising labor productivity may well require no more than implementing cost-free innovations. Among these are: improving maintenance procedures so that the idle time of equipment is reduced; continuously updating the inventory of spare parts so that no time is wasted searching for these; and systematizing time and motion procedures. Only at the level of the worker may productivity s Ifthe Philippines is being compared directly will have been necessary to express its unit exchange rate. However, no direct comparison version has been necessary_

with its neighbors in competitiveness, it labour cost in terms of the appropriate is being made; therefore, no such con-

Chapter 5: Jurado and Sanchez

improvement demand tion in skills upgrading requires tuition (time not spent come, etc.).

231

investment in time and money, since participaor acquisition programs by workers inevitably

payments, in addition to the usual opportunity cost with the family, time not spent to earn additional in-

The Philippine

labor productivity's

can only mean that: (a) machines investment are not best practice,

inability

to rise in recent

years

and other equipment acquired from much less cutting •edge; (b) manage-

ments are not adopting efficient techniques for their business organizations; and/or (c)workers are making no effort to enhance or augment because

their human capital. it means international

because the country tive if it is to survive Income labor

This turn of events is alarming competitiveness is declining

not only but also

does not have another choice but to be competiand prosper in the global economy.

Distribution

The increase productivity

in real wages on the one hand and the stagnation in on the other hand have resulted in a steady im-

provement in the share of labor in GDP. As shown in Table 4, from an index of 0.846 in 1988, the share went up to 1.00 in 1992 and tol.015 in 1995.6 Such

a change

in income

distribution

in favor

of the working

people is a welcome development, suggesting that income distribution is becoming more equitable. The discordant note, however, is that it is apparently being achieved competitiveness.

at the expense

of the country's

international

This brings up once more the inconsistency between the equity and competitiveness goals. Rewriting the share of labor in GDP as (w/ p)/h--that is, the real wage divided by labor productivity--one can see the difficulty of getting off the knife's edge. Whereas an improvement in the real wage relative to productivity increases the share of labor in GDP, an enhancement of competitiveness relative to the real wage reduces

it. Another

way of looking

at it is to set p = 1.0 (i.e., constant

6The national income accounts break down the gross domestic product on the income side into compensation income and operating surplus, in addition to capital consumption allowance and taxes paid to the government. The share of labor shown in this paper is not directly comparable to the sum of compensation income and operating surplus in the national income accounts because the two items in the national income accounts include compensation and surplus accruing not just to workers' households but also to nonworkers' households, i.e., to households of capitalists, landlords and other members of the leisure class.

232

The Philippines beyond 2000: An economic assessment

prices), where the share of labor in GDP is exactly the same as the unit cost of labor'. Improving income distribution in favor of labor means undermining competitiveness while enhancing competitiveness means sabotaging income distribution. is there no way out of this dilemma? There is, if one thinks in terms of absolute shares rather than relative terms. If output is increasing rapidly and employment less rapidly, and prices remain unchanged, labor productivity will rise. if rea ! wages rise in pace with labor productivity, both the competitiveness as well as the distribution objectives, may be satisfied. However, in these circumstances where the values of "allpertinent variables have risen, labor's relative share in income may be unchanged or even smaller but its absolute share may be bigger. The indexes for w, p, h, w/p, w/h, and w/ph for the agricultural and other sectors are shown on Tables 4.1 to 4.9. If one reads the indices for three sectors only, one can see that the nominal and real wages rose steadily in agriculture from 1987 to 1995 while productivity stagnated, Result: The unit cost of labor increased, undermining the competitiveness of the sector. The share of agricultural labor in GDP improved slightly (Table 4.1). For manufacturing, nominal wages rose but real wages and productivity stagnated. The share of manufacturing labor in GDP improved from 1987 to 1992 but declined after said period (Table 4.3). The indices for community, social and personal services are about the same-as those for manufacturing (Table 4.9). Table 4.1. Agricultural NominalWage

Indexes, Philippines, Average Labor Prodttclivity lh)

Real Wage

1987-1995 (1992= 1.00).

Yezlr

(w)

implicit GDP Deflator' (p)

(w/p)

Uuil Labor Cost (w/h)

Share of Labor' in GDP (w/Iph

1987

0.49

0.59

1.03

0,82

0.48

0.80

1988

0.55

0.6_

1-06

0.85

0.52

0.80

1989

0-64

0.70

1.12

0.91

0.58

0-81

1990

0.78

0.80

1.07

0.98

0.73

0.92

199I

0,89

0.93

1 -O0

0.96

0.89

0.96

1992

1.00

1993

[.1I

1.07

0,98

1.04

1-13

1.06

1994

1.25

I. 17

] ,04

1.05

1-20

1.00

1995

] .42

1.26

1.06

1.I 2

1.34

1.06

Chapter 5: Yurado and Sanchez

233

Table 4.2. Mining and Quarrying (1992=1.00). Nominal

Wage

indexes, Philippines,

Year

(w)

Implicit GDP Deflazor (p)

1987

0.51

0.59

1,48

0,86

0.34

0.58

1988

0,57

0.68

1,33

0.88

0.43

0,66

.1989

0_68

0,70

[.26

0.97

0,54

0.77

1990

0_8I

8,00

l,-39

1.01

0,58

0.73

• 1991

0.95

0.93

1,12

1.02

0.85

0,91

1992

1,00

1-00

1.00

1-00

1,00

1.00

1993

/,06

1.07

1-06

0.99

1.06

093

1994

1,22

1.17

1.23

1-04

1.00

0.85

1995

1,29

1.26

1,27

1-02

1,01

0.80

Table 4.3. Manufacturing (1992=1.00). Norninal

Wage

Average Labor Productivity (h)

Real Wage

1987-1995

indexes,

(w/p)

(3nit Labor Cost (w/h)

Share of Labor in GDP (w/ph)

Philippines,

Average Labor Productivity (h)

Real Wage

1987-1995

Year

(w)

[mp/icit GDP Deflator (p)

(w/p)

Unit Labor Cost (w/h)

Share of Labor in GDP (w/ph)

1987

0.51

0.59

1,09

0.86

I)-47

1988

0.57

0.65

I. i0

0.88

0.52

0.79 0,80

1989

0.68

0.70

1.11

0.97

0.61

. 0.87

1990

0.81

0.80

1.20

1.01

0,68

0.84

1991

0,95

0,93

1.11

1-02

0.86

0.92

1992

1.00

1,00

/993

1.06

1.07

1,04

0.99

1_02

0.95

11994

1.22

1.17

1.01

1.04

1.21

[,03

'1995

1,29

i ,26

1-05

1.02

1,23

0.97

Table 4,4. Electricity, Gas and Water Indexes, 1995 (1992= 1.00). Nominal

Wage

Philippines,

1987-

Yeal"

(w)

implicit GDP Deflator (p)

Average Labor Productivity (]11

Real Wage . (w/p)

Urtit Labor Cost (w/h)

Share of Lalx_r in GDP (w/ph)

1987

0,51

0,59

0,83

0.86

0.61

1,04

1988

0,57

0_65

0.83

0,88

0.69

1.06

1989

0.68

0,70

0.97

0,97

0.72

1_00

1990

0.81

0.80

0,87

1,01

0.93

1.16

1991

0.95

0.93

0.89

1.02

1,07

1.15

1992

1.00

1-00

1993

1.06

I _07

0,90

0.99

1.18

1.10

.1994

1-22

1.17

1.07

1.04

0,97

1995

1.29

1.26

1.07

1,02

1.21

0,95

234

The Philippines

Table 4.5. Construction Nominal

Indexes,

Philippines,

assessment

198% 1995 (1992= 1.00).

"/Ear

(W)

Implicit GDP. Deflator (p)

1987

0,51

0.59

1..26

0.86

0.4

0,68

1988

0.57

0.65

1,i8

0.88

0.48

0,75

1989

• 0,68

0.70

1.36

0.97

0-50

0.73

1990

0.81

0.80

1.28

1.01

0.63

0.79

1991

0,95

0.93

0.97

1_02

0,98

1,05

1992

1,.00

1.00

1,00

1.00

1993

1.06

1,07

1.03

0.99

1.03

0.96

1994 1995

1.22 1.29

I- 17 1.26

1.04 1.04

1,04 1.02

1.17 it .24

.I.00 0.98

Table

Wage

beyond 2000: An economic

4.6. Wholesale (1992=1.00). Nominal

Wage

and

Average Labor Produc(jvity (h)

Real Wage

etail

(w/p)

Indexes,

Unit Labor Cost (w/h)

Share of Labor ha GDP (w/ph)

Philippines,

1987-1995 |

Year

(w)

Implicit GDP Deflator (p)

1987

0,51

0.59

0,97

0.86

0.53

I.t.89

1988

0,57

0.65

1.01

0.88

0.56

0.87

1989

0.68

0,70

1,04

0,97

0-65

0,93

1990

0,81

0.80

1,05

1,01

0.77

0.96

199_

0.95

0.93

1,04

1,02

0-91

(I.98

1992

1.00

1,00

1,(If,)

1,00

1.00

/993

1,06

1.07

0,96

0.99

1,10

1.03

1994

1.22

I, 17

0.94

] .04

'1.30

l. II

1995

1,29

1.26

(I.94

1.02

1,37

1,04

Average Labor Prozlucti_ty (h)

Real Wage (wlp)

Unit Labor Cost (w/h)

Share o[: Labor in GDP (w/ph)

Indexes,

Philip-

Table 4.7. Transport Storage and Communication pines, 1987-1995 (1992=1.00). Nominal

Wage

[

3%:at

(w)

Implicit G,DP Det:lator (p)

Average Labor J?t'ocltJctJvir5" (h)

(Zeal Wage (w/p)

Unit Labor Cost (w/h)

Share ol" Labor in GDP (wlph)

1987

0.51

0.59

[.06

0.86

0.48

0,81

1988

0.57

0,65

0.97

0.88

0.59

0.9(

t989

0.68

0.70

0.91

0-97

0.75

[.07

1990

0.81

0,80

0.95

J .01

0.85

I .(16

1991

0.95

0.93

1..11

/ ,02

0.86

0.92

1992

1,00

1.00

1,00

1.00

1993

1.06

1.07

0.87

0.99

1.22

1.14

1994

1.22

1.17

0,8.[

1.04

t .50

1,14

1995

1,29

1.26

(I.76

I .(12

[ .70

1.34

Chapter 5: Jurado and Sanchez

235

Table

Ser-

4.8. Financing, Insurance, Real Estate and Business vices Indexes, Philippines, 1987-1995 (1992= 1.00). Nominal

Wage

Year

(w)

Implicit GDP Deflator (p)

Average Labor Productivity (h)

Real Wage

1987

0.51

0.59

0.88

0,86

0.50

0.98

1988

0.57

0.65

0.95

0.88

0.60

0.93

1989

0.68

0.70

1,01

0.97

0,67

0.96

1990

0,81

0,80

0.96

1.01

0.84

1.05

1991

0.95

0.93

0.95

1,02

1-00

1-07

1992

1.00

1,00

1.00

t993

1-06

1.07

0.96

0,99

1-10

1-03

1994

1.22

1.17

1.02

1.04

1,20

1.02

1995

1.29

1,26

0.97

1.02

1.33

] .05

Table 4.9. Community, Social ippines, 198%1995 Nominal

Wage

(w/p)

Unit Labor Cost (w/h)

Share of Labor in GDP (w/ph)

and Personal (1992=1.00).

Services

Real Wage

Phil-

Year

(w)

h,aplicit GDP Deflator (p)

1987

0.51

0.59

0.87

0.86

0.59

0.99

1988

0.57

0,65

0,91

0.88

0.63

0,97

1989

0.68

0.70

0.96

0.97

0.71

0.99

1990

0.81

0.80

0.98

1-01

0.83

1.03

1991

0,95

0.93

1.02

1_02

0,93

1.00

1992

/ -00

1.00

1-00

1,00

1.00

1993

1.06

1,07

1.08

0.99

0-98

0.92

1994

1.22

1,17

1,09

1.04

1.12

0.95

1995

1.29

1.26

1.17

1.02

1.10

0-87

industrial

Aver-age Labor Productivity (h)

Indexes,

(w/p)

Unit .Labor Cost (w/h)

Share of Labor in GDP (w/pb)

Relations

As articulated

in the MTPDP/NEP,

the maintenance

of industrial

peace is a cornerstone of the government's development program 1993-1998. Unless harmony prevails in the workplace, production proceed

slowly, or worse,

for will

halt altogether.

The Constitution guarantees workers the right to form and join unions and bargain collectively with management, and workers continue to enjoy this right. The number and membership of unions covering both private in 1982, unions

and public sectors

increased

in number

are shown on Table 5. From

1,693

to 7,882 in 1995. These comprise

local and independent unions in all sectors same 1982-1995 period, union membership almost 3.6 million.

of the economy. jumped from

During the 467,000 to

236

The Philippines beyond 2000: An economic assessment

Table 5. Unions, Memberships and Collective Bargaining ments in the Philippines, 1982-1996.

Agree-

Year

No, of Unions

Membership

No. of CBAs

Workers Involved

1982 1983 :[984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996

1,693 1,538 1,680 1,868 2,2U 2,723 3,321 3,934 4,485 5,081 5,553 6,188 6,699 7,882 8,250

466,985 427,146 451.,086 477,687 517,038 594,157 648,672 733,327 813,693 864,733 900,709 954,385 998,160 3,586,875 3,627,000

809 93:1 818 1,086 1,128 1,459 1,434 1,874 2,481 1,457 950 1,081 762 990 818

105,483 108,637 94,856 110,897 144,002 146,165 i15,857 146,807 230,025 155,995 91.,395 83,755 56,942 _09,380 1.31.,446

Source:

Cun'ent

Labor

Statistics

(BLES-DOLE).

The number of strikes and lockouts with notices peaked in1987 and declined steadily until 1995. They totaled 1,715 in 1987, went down to 1,209 in 1992, then declined further to 904 in 1995. The same can be said of the number of strikes actually held: the number fell from 436 in 1987 to 136 fia 1992 and 94 in 1995. The number of workers involved in mass actions exhibited a similar long-term decline from 75,848 in 1988 to 54,412 in 1995 (Table 6). For many years in the past, management's noncompliance with labor standards had typically been the stimulus to strikes and other forms of mass action by labor unions. In recent years, a few more issues were added by labor unions. One is the issue of labor-only contracting. While the farming out by companies of tasks that reqnire the contractor to bring in capital as well as labor is perfectly acceptable to unions, contracting out tasks that call for labor only is seen by workers as a form of union-busting. Another issue is management's call for greater flexibility in hiring and firing. A third union issue is 'the thrust of the government for union-free trade zones. Although the causes of mass actions have increased in number and diversity, the number, scope and duration of mass actions carried out have actually declined. One notion that seems to have gained, acceptance in some quarters is that Philippine labor is heavily unionized and that labor unions are highly adversarial. The facts, as cited above, do not lend support to

Chapter 5: Jurado and Sanchez

237

Table 6. Trends in Strikes 1980-1996.

and Lockouts

in the Philippines,

Year

Strike/Lockout Notices Filed

Actual Strikes

Workers Involved

Man-days Lost (000)

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996

362 784 743 705 960 1,175 1,613 1,715 1,428 1,518 1,562 1,345 1,209 1,146 1,089 904 833

62 260 158 155 282 371 581 436 267 197 183 182 136 122 93 94 89

20 902 98 585 53 824 33 638 65 306 111265 169 479 89 574 75,848 56,541 68,412 55,390 47,797 35,119 48,849 54,412 32,000

105 796 1,670 395 1,908 2,458 3,638 1,908 1,525 955 1,345 1,140 724 710 568 584 519

as big as it seems

to appear,

Source: Current Labor Statistics (DOLE_BLES) this notion. actually

First,

constitutes

union

membership,

a Small portion

of total employment--typically

more than 4.0 percent in each of the years the ratio go up to 14.0 percent. Second, volved

in mass actions represents

not

1988-1994. Only in 1995 did the number of workers in-

a minuscule

and declining

propor-

tion of union membership--from 11.7 percent in 1988 to 1.5 percent 1995, Third, mass action involvement relative to total employment

in is

microscopic--typically 0.2 percent to 0.3 percent (that is, one-fifth of 1 percent to less than one-third of 1 percent). And fourth, the number of actual strikes and the number of man-days lost in actual strikes are declining. A number industrial

and its steady industrial frozen

of factors

relations.

growth

peace.

can be cited for this marked

First, the recovery

in the 1990s generated

For example,

causes

nominal

wages

were removed

way in granting

worker

demands.

Labor

and Employment

of the economy favorable

of worker through

(DOLE), the government

in the late 1980s conditions

discontent

and management

Second,

improvement

for

such

had more lee-

the Department

has been increasingly

238

The Philippines beyond 2000: An economic assessment

utilizing cooperative mechanisms for settling worker-management disputes. Labor Management Cooperation councils, established under the leadership of the DOLE, are one of the most widely-used mechanisms. Third, there has been a noticeable weakening of union fervor. As the country's economy goes global, more and more unions are being told that cooperation between union and management is indispensable in order to make the enterprise globally competitive. Armed with no argument to refute that thesis as weU as conscious of the limitation of their numbers, unions are obliged to accept management's version of the nature of the international economy. This decline in the number, size and duration of strikes and other forms of labor-management dispute is of course commendable but it can be overturned by the work implications of globalization if these are not understood at the outset, Globalization has required companies to increasingly rely on the information highway, the internet, to facilitate communication as well as to concentrate and integrate production in a few places. This would tend to impact on employment in the countries participating in the global market by reducing the number of workers engaged in specialized tasks and located in various places, and increasing the number of those who integrate these tasks at the center of the network to generate the finished product. In other words, there may not only be a decline in overall employment but a geographical redistribution of employment as well. 7 Perhaps it is time to prepare both the workforces and management for this likely scenario if labor-management disputes that can upset carefully laid out development plans are to be avoided. Temporary Labor Migration Temporary labor migrants (TLMs), better known in the Philippines as overseas contract workers or OCWs, are mentioned in Philippine discourse almost exclusively for their foreign exchange remittances and their contribution to the balance of payments. While this is an important achievement, it is not the only contribution they make. By working abroad they relieve the pressure of unemployment at home and thus provide an escape valve to that simmering social volcano. The TLMs have been deployed to many parts of the world since the middle of 1970s. Their numbers and location are shown on Table 7. er the last 12 years, TLMs increased from 389,200 in 1985 to 667,669 1996, reaching as much as 760,091 in 1994. •. owe this point to CayetanoW. Paderanga.

Chapter 5: Jurado and Sanchez

Table 7. Deployed

239

Overseas

Contract

Workers,

1985-1996.

Year

Total

Land-Based

Sea-Based

1985 1986 1987 1988 1989 1990 1,991 1992 1993 1994 1995 1.996

389,200 414,461 496,854 477,764 522,984 598,769 701,762 723,594 738,958 .760,091 662,294 667,669

337,754 357,687 425,881 381,892 407,974 468,591 554,476 564,947 572,096 587,871 481,349 475,337

51,446 56,774 70,973 95,872 115 010 130 178 147286 158 647 166 862 172 220 180 945 192 332

Source: Philippine Overseas Employment Administration_

The figures discourses expanding

seem to be on the low side, given that other popular

place the number at 4 million to 5 million. However, even the figures by 50 percent to account for deficiencies in offi-

cial recording

cannot

possibly

push up the figures

to the total favored

by media. If a single round number is to describe the totality of TLMs, one million is more likely the realistic figure. The vast majority, or about 80 percent of the total number of TLMs, are land-based. The remaining 20 percent, are sea-based. The land-based TLMs are concentrated heavily in the Middle East, then in Asia, America and Europe, and Oceania (Table 8). The precise

and lastly in the Trust Territories,

way TLMs are related

to Philippine

Africa

employment

has

been ambiguously described because of the way the statistics are organized. TLMs are not included in the labor force and employment statistics. This is a serious

deficiency

members of the society. Thus, after reorganizing

because

TLMs are indeed

the data to factor

employed

in TLMs into the la-

bor force and the employed (computations not shown in this paper), the rates for employment expectediy come out uniformly higher than in the unrevised percentage

version,

points.

although

for unemployment,

by 0.2

conversely,

emerge

uniformly lower than the unrevised figure. The contribution of TLMs, including

both land-based

and sea-

based,

their remittances

is shown

to the balance

The rates

by a small fraction--typically

of payments

through

N3 4_

Table 8. Deployed

Land-Based

Contract

Workers,

1985-1996.

Year

Total

Africa

Asia

Europe

Middle East

Oceania

America

Trust

Elsewhere

1985

337 754

1,977

52,838

4,067

253,867

953

3,744

3,048

13,260

1986

357 687

1,847

72,536

3,693

236,434

1,080

4,035

3,892

34,170

_-,.

1987

425 881

1,856

90,434

5,643

272,038

1,271

5,6t4

5,373

43,652

1988

385 117

1,958

92,648

7,614

267,035

1,397

7,902

6,563

1989

407 974

1,741

86,196

7,830

241,081

1,247

9,962

7,289

52,628

1990 1991

468 591 54t 909

1,273 1,964

90,768 132,592

6,853 13,156

218 110 302 825

942 t,374

9,557 13,373

7,380 11,409

133,708 65,216

1992

532 928

2,510

134,776

14,590

340 604

1,669

12,319

11,164

15,296

1993

530 877

2,425

168,205

13,423

302 975

1,507

12,228

8,890

21,224

1994 1995

540,307 481,349

3,255 3,615

194,120 166,774

1t,513 10,279

286 387 234.310

1,295 1,398

12,603 13,469

8,489 7,039

22,645 ,44,465

1996

475,337

2,494

174,308

11,409

221 224

1,577

8,378

4,869

51,078

Employment

Administration.

Source." Philippine

Overseas

Chapter 5: Jurado and Sanchez

241

on Table 9. Looking only at the last 10years, one finds that from US$792 million in 1987, TLM remittances reached a peak of US$4.877 billion in 1995, then declined to US$4.244 billion in 1996. These figures will have to be on the low side since vast numbers of TLMs make use not of the banking system but of informal channels like friends and other door-to-door couriers in remitting earnings to their families. When brought to banks in exchange for pesos, these remittances cannot be distinguished from foreign exchange coming in from other sources. The average per worker remittances are US$1,793 in 1988, US$3,044 in 1992 and US$6,356 in 1996. The corresponding amounts are, for land-based workers, US$1,789, US$3,111 and US$8,400; and for sea-based workers, US$1,809, US$2,806 and US$1,306. The figure for land-based workers in the last year seems to be unduly large relafive to figures of earlier years, considering that labor officials have observed a decline in recent weeks of workers in foreign countries, particularly the Middle East. In contrast, the average remittances of seabased workers in the last two years seem to be unduly small even during a period of falling wages. One can only ascribe these apparent anomalies in figures to deficiencies in the monitoring and record-keeping procedures. Assuming these remittances go to the families or households of TLMs, how significant is the contribution of these amounts to family or household income? On an average of US$3,000 remittance per year, every TLM family or household would be receiving the equivalent of some P80,000 per annum from a relative working abroad. This is equal to a salary or wage of some P6,500 a month if worked in the Philippines. It is also the equivalent of the minimum wage increased by 50 percent on a monthly basis. Small wonder that a year or two after TLM's departure, their local household begin to accumulate household appliances like television sets, cooking stoves and stereo sets. TLMs of course produce more than just income effects. They have an impact on the domestic labor market when those temporarily migrating reduce the number of workers available for local employment. They have social impacts as well: disoriented families, neglected neighborhoods, among others. If the reorganization of the employment data mentioned earlier is expanded to cover wages earned by TLMs, there is little doubt that average wages will increase, almost certainly by more than 0.2 percentage points.

ha 4_ ha

Table

emittances

of Overseas

Contract

Workers,

1987-1996.

Year

Total Remittances (in million US$) Total Land-Based Sea-Based

Average Remittances (in US$) Total Land-Based Sea-Based

1987

791,902

671,422

120,480

1,594

1,576

1,699

1988 1989

856, 803 967,026

683,301 755,211

173,502 211,815

1,793 1,849

1,789 1,851

1,809 1,842

'_ 3"

1990

1,181,075

893,402

287,673

!,972

1,906

2,209

199i

1,628,274

1,253,048

375,226

2,320

2,302

2,547

1992

2,202,382

1,757,363

445,019

3,044

3,11I

2,806

1993

2,229,582

1,840,296

389,286

3,017

3,217

2,332

._.

1994

2,940,272

2,560,925

379,347

3,864

4, 34I

2,205

1995

4,877,513

4,666,999

210,514

2,365

5,697

1,163

1996

4,243,641

3,992,397

251,244

6,356

8,400

1,306

Overseas

Administration.

¢5

Source:

Philippine

Employment

Chapter 5: Jurado and Sanchez

On some occasions

243

in the past, some groups

have expressed

out-

rage at the deployment of Fiipino workers abroad and held the government responsible for it. This is cheap postm6ng, if not a clever device for the execution of a hidden ideological agenda. The government is no more responsible for temporary labor migration than it is for the country's underdevelopment. It can do something about temporary labor migration, like discouraging cannot do everything--like preventing of higher wages abroad, and human rights.

which

people from traveling, but it people from taking advantage

is a violation

of both the Constitution

The only way to deal with temporary labor migration sively improve the economy (by substantially increasing

is to decithe GDP

growth, accelerating employment creation and raising wages, other measures) so that TLMs can be encouraged to return What to do to bring this about ment

is precisely

the whole point

among home.

of develop-

policy.

A Review of ParticuIar Elements of Strategy Although the pace of employment generation

has been satisfac-

tory,

and competitive-

the inability

to totally achieve

the productivity

ness objectives calls attention to some aspects of the government's policies and strategies on human resource development. Particularly relevant are those policies and strategies that call for, among others: (1) education and manpower training programs for providing and upgrading the marketable skills of the labor force; (2) stronger linkages between education/training institutions and industry to minimize mismatches; (3) more incentives that will encourage the private sector to assume

a greater

of capabilities

role in skills development;

of LGUs to initiate

and (4) the enhancement

and deliver appropriate

training

ser-

vices to various sectors. The thoroughness and speed at which these programs are being implemented will obviously impact on productivity growth,

competitiveness

and employment

generation.

In 1993, a two-track human resource development program was established to enable the country to respond to the rapidly changing needs

of the economy

for various

types of manpower.

It consisted

a formal sector headed by the Department of Education, Culture and Sports (DECS) and an informal sector headed by the Technical Education and

Skills Development

Authority

(TESDA).

The formal

system

was to focus on ideas and theories, generating scientists, managers and other high-level professionals while the informal system was to

244

The Philippines

beyond 2000: An economic

assessment

focus on the application of these ideas and theories in the workplace, emphasizing the training of highly-skilled and skilled workers. The two systems are currently being carried How to reinforce linkages between

out. educatiol_]training

institutions

and industry has been a discussion point in the last two to three years all around the country. In a few cases, plans for cooperation have actually been considered. TESDA is currently grams with the private sector to produce

developing collaborative protrained manpower for some

segments of the industry. In some cases training programs to the private sector.

it has transferred

its entire

and devolution

of the Local

Under the program Government government.

of decentralization

Act, LGUs enjoy considerable autonomy from the national At present, LGUs are administering various programs de-

volved to them by national

departments

or agencies.

To the extent per-

mitted by their resources as well as by their management capability, they are implementing social programs, including some on skills training, for various more

members

of their constituency.

it seems clear that inspite of what can be accomplished. The challenge

el_hancing

productivity

performance

is below

these programs have done, is strongest in the areas of

and competitiveness--precisely the target.

The efforts

the areas where strengthen

linkages

between education/training institutions and the indnstry, to induce the private sector 'to shoulder a larger share of the burden, of training, and to extend to LGUs some assistance in maximizing their contribution to employment planning and employment ried out with greater vigor.

generation

need

to be car-

Conclusions The government generation,

creating

has not done badly in the area some 3.0 million

of employment

net new jobs in the period

1993-

1996 (or an average of about 1.0 million per year). While this is below the target of 3.3 million jobs for the period (or an average of 1.1 million jobs a year) stipulated goal of 5.8 million government

in the MTPDP/NEP,

it is close to it. To attain

net new jobs for the five-year

has to generate

an additional

period

2.8 million

its

1993-1998, the net new jobs in

the remaining two years of 1996-1998, or an average of 1.40 million new jobs per year. If it succeeds in overcoming the regional currency crisis before too much time has elapsed and keeps up the pace, or better yet, accelerated its efforts, there is little reason why it could not have met its target.

Chapter 5: Jurado and Sanchez

245

The average growth rate of employment in the four-year period 1992-1996 was 3.5 percent. This is clearly superior to the 2.7 percent of 1988-1992. Meanwhile, the unemployment rate fell from 8.6 percent in 1992 to 7.4 percent in 1996. With redoubled efforts, the government should be able to bring down the unemployment rate to the targeted rate of 6.6 percent in 1998. The real incomes of the working people rose slightly. However, the 6.0 percent increase in the real wage from 1992 to 1995 represents only a recovery from the 6.0 percent fall for the period 1989 to 1992. Performance was most dismal in the area of competitiveness. The unit cost of labor rose from an index of 1.0 in 1992 to 1.29 in 1995, clearly indicating a deterioration in competitiveness. This weakening of competitiveness began as far back as the data went, in 1987, when the index stood at 0.50. It increased steadily therefrom, reaching 1.0 in 1992 and 1.29 in 1995. This deterioration came about because labor productivity stagnated while nominal wages increased during the perio& The share of labor in GDP increased from an index of 1.0 in 1992 to 1.02 hi 1995. As with the unit cost of labor, the improvement in the share began in 1987 at an index of 0.86. Although a reason for rejoicing, this change in income distribution in favor of the working people seems to have been attained at the expense of competitiveness. Industrial relations had a marked improvement. The nnmber of mass actions in the form of strikes and lockouts, the number of workers involved, and the number of man-days lost due to industrial disputes all declined in the 1992-1995 peliod, and continued to fall starting the early 1980s. This contributed to an investor-friendly environment. Temporary labor migration decelerated after 1994when it reached 760,000. By 1996, TLMs were down to 668,000. Whether this is the result of the improvement in domestic economic conditions or of the worsening conditions abroad is hard to tell. What is certain, however, is that it is not the outcome of any conscious effort of the government. TLMs contributed an average of some P80,000 per year to their families or households. This is about 50 percent more than the annual earning of a minimnm wage worker in the Philippines and provides a substantial improvement in the levels of living of TLM households.

Chapter 5: Jurado and Sanchez

247

•

promotion of conciliation, mediation, voluntary other consensual modes of conflict resolution;

•

provision of compulsory nonunionized workers;

•

strengthening

•

provision

•

promotion of tripartite arrangements such as Labor-Management Councils as complements to collective bargaining; and

•

promotion instruments

arbitration

of responsible

of support

services

trade union

to workers'

arbitration

and

as a safety net to

organizations;

cooperatives;

of industrial peace accords and social contracts for inculcating social responsibility. Harmony

as be-

tween workers and managements is particularly important with respect to the wage and labor productivity nexus. Wages and prodnctivity are vitally linked in the estimation of the unit cost of labor. A balance between these two factors should therefore be achieved. global

If labor and management

competitiveness

The government

do not appreciate

will be difficult

should

carry

this,

to attain.

out relentlessly

its employment

planning and facilitation program. To this end, it should continue the following: * strengthening of labor market information systems connecting the demand

for and the supply of labor in all sectors;

revitalization of the networks of public ready set in place in various places;

employment

offices

al-

strengthening counseling;

employment

testing

and

, ,

provision of self-employment information; establishment of special programs for the disadvantaged;

improvement The government

its human

resource

of vocational

of labor market should

guidance,

monitoring

and analysis

and systems.

go full speed in the implementation

development

program.

It should

allocate

to this

program all the human, material and financial resources necessary to produce the desired results. This may be the only way to give the worker the education and skills he needs to generate higher productivity and a higher

wage rate but a lower labor unit cost. This may not achieve

income

distribution

long term.

objective

the

in the short term but it may do so in the

248

The Philippines

beyond 2000: An economic

assessment

References Bureau

of Labor

and Employment

Statistics.

Current

Labor

Statistics.

Various years. Manila: Department of Labor and Employment. Bureau of Labor and Employment Statistics. Yearbook of Labor Statistics. Various

years.

Cororaton, C. B. 1997. Productivity AnMysis in Garments and Textile industries. PIDS Discussion Paper 97-09. Makati City: Philippine Institute for Development Studies. Institute of Labor Studies. Manila: Department Intal, P. Jr. 1997. Developing Khan,

1994. National Employment of Labor and Employment. the Technology

Plan.: 1993-1998.

for Global Market

Compe-

tition. Development Research News Vol. XV, No. 2, March-April. A. R. 1995. The Philippines: Employment Policies in the Context of Globalization and Liberalization. Manila: International La•bor Office, SEAPAT.

National

Economic

and Development

Authority.

Medium-Term

Philip-

pine Development Plan 1993-1998. Manila, Philippines. National Statistics Office. Philippine Statistical Yearbook. Various years. National National

Statistics Statistics

years. National Statistical counts. Philippine Overseas ippines.

Office. Office.

Census of Establishment. Various years. Annual Census of Establishment. Various

Coordination

Board.

1997.

National

Income

Ac-

Employment

Administration.

Republic

of the Phil-

Chapter

5: ]urado

and

Sanchez

Appendix

Year

251

Nominal

Daily

Wage

Index

Computation.

Annual non]Jnal

Index

wage 1987

47.80

31.62

50.20

63.80

47.18

11,795

0.48

1988

46.1.3

35_96

53.17

71.42

54.56

13,640

0_56

1989

45.05

41.72

54.95

85,08

65.55

16,386

0.67

1990

45,20

50.53

54.80

100.15

77.72

1.9,430

0.80

1991

45.27

57.74

54.13

117.96

90.70

22,675

0.93

1992

45.45

65.16

54.55

24,38

97.46

24,366

1.00

1993

45.79

72.51

54.25

131.46

104.52

26,130

1.07

1994

44.70

80.38

55.31

51.73

119.85

2,996

t_23

1995

44.07

92.27

55.93

160.38

130.36

32,590

1.34

Where: '. Note:

Aa - proportion of employed in agriculture An - proportion of employed in nonagriculture Wa - nominal wage rate in agriculture Wn - nominal wage rate in nonagriculture Wd - nominal daily wage rate Aa = Ea/Et An = EnfEt Wd = AaWa + AnWn W = Wd (250)

Productivity Growth

hapter

inthe Philippines Afterthe Industri01Reforms

Myrna

S. Austria *

ast studies have shown that productivity growth in the Philip pines has been low compared to that of the other members of the Association of Southeast Asian Nations (ASEAN). The country experienced positive productivity growth in the early 1950s but this has been declining and even registered negative growth in some periods. The poor productivity performance was attributed to the inward looking industrial policies of the country that prevented the efficient allocation of resources. The experience of developing Asian and Latin American countries who opted for outward-oriented policies shows high productivity growth and hence, high and sustained economic growth. Among the many policy insmunents, trade and investment liberalization policies are considered to be the most important ones conducive to long-term growth. However, whether the effects of trade and investment liberalization policies on economic growth are large and sustained depends on whether increases in trade and investments are •accompanied by improvements in productivity. An economy will grow even without an increase in factor inputs if there is an increase in productivity. The negative and declining productivity growth of the country is a major policy concern, especially in the light of the issue of whether or not its favorable economic growth in the last three years could be sustained. The recent experience of the exports sector in the recent past has also shown that higher productivity, and not the peso depreciation, is the key to the country's international competitiveness. The country has embarked on major trade reforms since the 1980s by lowering tariff rates and removing import restrictions. The reforms were made, both as a unilateral effort of the government and as part of the country's commitment to the World Trade Organization (WTO), Asia Pacific Economic Cooperation (APEC) and ASEAN Free *Theresearch assistanceofEuben Paracuellesis gratefullyacknowledged.

256

The Philippines beyond 2000: An economic assessment

the more recent past. Specifically, TFP contributed 30 percent to the 1987-1994 output growth of Singapore, slightly higher than the 28 percent contribution of labor. While their finding is clearly a big departure from those of earlier studies, Rao and Lee (1995) had expected the results to be such considering the period covered by their study. They argued that the increased TFP contribution during the period was the result of the economic restructuring in the 1980s (notwithstanding the 1985-1986 recession) and of the high calibre of the manpower in recent years. They concluded that the Singapore growth experience showed that capital accumulation should be given priority during the initial stages of a country's development. Once the capital formation reaches a respectable rate and growth appears to be slackening, higher education and skills expansion should characterize the next phase. This sets the stage for a high TFP growth and the process leading to a developed economy begins. The study of Kawai (1994) showed that the Asian countries which experienced the highest GDP growth rates (Korea, Taiwan, Thailand and China) also registered the highest TFP growth rates (Table 2). Of the ASEAN countries, only Indonesia and the Philippines registered negative TFP growth rates for the period 1980-1990. The findings of Collins and Bosworth (1997) also showed negative TFP only for the Philippines among the ASEAN-Four (Table 3). These recent studies on the Philippines reinforced the common findings of earlier studies that the average productivity growth of the country has been declining and even negative in various periods (Lampman 1967; Williamson 1969; Sanchez 1983; Patalinghug 1984; Austria and Martin 1995). Considerable debates on the measurement of TFP arose since differences in methodology, especially in.the methods of handling data and in 'the perception of where adjustments are needed, generate different results (Nadiri 1970; Felipe 1997). Nevertheless, the studies of Kawai (1994) and Collins and Bosworth (1997), which applied the same methodology for the countries covered and hence yield comparable results, are consistent in their findings that the TFP in the Philippines has been declining and is lower than that of other ASEAN members. Since sustainable growth requires continued improvements in productivity, the low and declining productivity in the Philippines has drawn considerable concern among policymakers in the country. Worse, the country has the lowest GDP growth rate in the region (Table 4).

Chapter 6: Austria

257

Table 2. Growth of GDP and TFP for Selected Developing in Asia and Latin America (In percent).

Countries

GDP

TFP

19701980

19801990

19701980

19801990

Korea

8.3

8.9

0.8

2.8

Taiwan

9.3

7.4

5.1

3.9

Singapore

8.6

6-8

0.7

1.6

Th_dlmad

6.5

7_5

1..2

2.6

Malaysia

7.6

5.8

2.5

0.7

Indonesia

7.0

5.5

3.1

-0.1

Asia

Philippines

5.7

1.6

0,8

-2,2

India

3,0

5.4

-0-9

2.1

China

6.0

8.3

1,1

2,8

Latin America Chile

2,5

2.8

0,5

-0.1

Argentina

2.6

-1..2

0.1

-1.6

Mexico

6.4

1.6

1.1

-2.1

Brazil

8.2

1.5

0.4

-1-9

Colombia

5.3

3.4

0.8

0,4

Peru

3.7

-1.1

0-3

-3,0

Venezuela

3.1

0.7

-2.4

-0.6

Source:

Kawai

(1994), Table 1,

Table

3. Annual

Growth

Rate

of TFP, ASEAN

(in percent):

Period

Philippines

Malaysia

Indonesia

Thailand

1960 -1973

0.7

1.0

1.1

1.4

1973 -1994

- 1.1

0.9

0_7

2.1

1973 -1984

-1_3

0.4

0.5

1.1

1984 -1994

-0.9

1.4

0.9

3.3

•1960-1994

-0.4

0.9

0.8

1.8

Source:

Collins

and Bosworth

(1997) as quoted

in Felipe

(1997).

258

The Philippines

Table

4. Average

Annual

Countries,

beyond 2000: An economic

Growth

1965-1995

Rate

of Real

assessment

GDP,

Selected

(In percent).

Counu'y

19651970

19701975

19751980

19801985

19851990

19901995

Indonesia

5.9

8.0

7.4

5.6

7.1

7.5

7.3

5.6

5,6

8.9

•Malaysia Philippines

5.1

5-8

6.3

0_2

2.7

2.8

Singapore

12.9

10.3

7.8

6_8

6,9

9.0

Thailand

9.4

7.4

5.5

10.1

9.9

9.5

11.5

China India

4.9

3_5

4,6

5.6

6,2

5.4

Korea

10.4

8,9

7.5

6.7

9.5

7.8

Source:

International

Financial

Statistics,

April 1997.

Trade and investment Policies and Productlvl Past studies showed that the expansion of ex2 and the increased

inflow of foreign

direct investment

w and imports,

(FDI) due to trade

and investment liberalization have contributed to the increase in productivity growth of the developing Asian and Latin American countries. On the other hand, import substitution tivity growth in most of these countries.

resulted

in lower produc-

Trade and investment liberalization policies influence productivity through various channels. The common argument stems from competitive

pressure

arising

from

the increase

in imports

and in the

number of foreign companies that accompanies liberalization. To cope with such exposure to foreign competition and survive, domestic industries are forced to improve their productivity by developing new production techniques or making efficient use Of factors of production. This is in contrast

to a protectionist

regime,

where

the absence

foreign competition results in inefficient production of domestic industries. Likewise, the expansion of market across international borders permits average industries

industries

to achieve

costs, leading to higher to refrain

tionist policies, lower ductive activities.

from

economies

productivity.

rent-seeking

productivity

of scale and hence, lower Liberalization

activities

as resources

which,

also forces under

protec-

shift away from

pro-

Chapter 6: Austria

Trade imported ductivity.

259

liberalization

also offers

a wider

choice

of high quality

intermediate inputs at lower prices resulting in improved proOn the other hand, the entry of foreign companies brings in

technology

and management

know-how

that contributes

to increasing

productivity. FDI also increases the productive capacities of domestic industries if foreign companies are complementary to local companies. The ASEAN, which

is now

regarded

as consisting

of newly

in-

dustrializing countries (except the Philippines) by the World Bank because of their astonishingly high GDP growth rates in the late 1980s, have introdnced (if not accelerated) trade liberalization policies and eased

restrictions

with respect

to entry

and capital

ownership

of for-

eign companies. To what extent have liberalization policies of the ASEAN contributed to their TFP growth? Although there was no clear-cut effect of import

liberalization

policy on TFP, the increased

inflow

of FDI

into Malaysia contributed to the increase in its TFP (Okamoto 1994). The level of TFP was also higher for foreign companies compared to domestic companies, but the gap has narrowed over time because of the transfer of efficient technologies from foreign to domestic companies. Trade liberalization

in Thailand,

on the other hand,

generated

positive impact on TFP growth (Urata and Yokota 1994). As the country's trade liberalization efforts advanced in the 1980s, TFP improved as domestic

and international

competitive

pressure

intensified,

the choice

of intermediate goods widened and output and R&D expenditures expanded. For Indonesia, although TFP growth went up as a result of trade and investment liberalization, the TFP growth came more from trade liberalization than from FDI liberalization (Osada 1994). The study by Kajiwara (1994) on the Philippines covering the period 1974-1988, on the other hand, showed that trade and investment liberalization policies have not significantly improved the TFP. His finding is consistent with the fact that most of the significant reforms in the Philippines were only made in the late 1980s up to the present. Modelling A Dynamic

Growth and Technological Approach

Progress:

The empirical research on the sources of growth in the country have used the factor shares approach of decomposing growth into components due to factor accumulation approach assumes that production employment

so that shares

and productivity. The factor shares takes place in equilibrium at full

of GDP accruing

to each factor

can be im-

260

The Philippines beyond 2000: An economic assessment

puted. However, the macroeconomic crisis in the 1980s and the energy crisis in the early 1990s present particular difficulties in using this approach. The different crises the economy experienced have consistently put the economy out of equilibrium. The labor force, for example, does not appear to have been utilized at anything near full employment. This paper uses cointegration techniques to allow for inferences about the long-run structural relationships between output and its determinants while taking into account the dynamic influences that lead to short-run deviations from equilibrium. The approach is intended to lead to a model which is both consistent with the theory and with the properties of the data. The following discussion draws heavily from an earlier work by Austria and Martin (1995). Initial Model Specification The fundamental framework in specifying the long run output relationship in the Philippine economy is the neoclassical production function, which explains output as a function of capital, labor and technology as shown by,. log Y_= ao + a logK + g logL + alT

(1)

where K, L and T are capital, labor and a trend variable designed to represent technology, respectively. However, this basic long-run model is augmented to capture the dynamic effects of inflation on output. The supply hypothesis is that the deviation of actual enaployment from its natural level depends on the difference between actual prices and expected prices, or between actual and expected inflation. In line with the standard macroeconomic theory, changes in prices are postulated to affect real wages which, in turn, affect output. Modem macroeconomic theory says that the effects of a price change on output depend on whether the price change is anticipated or unanticipated (Levacic and Rebmann 1982;Santomero and Seater 1978; Lucas 1973). Suppose the economy is initially in a long-run equilibrium at point A, with output ys and with actual price P1_being equal to expected price P _ (Figure 1). At this price level, aggregate demand is AD 1and the short run supply curve is ASIsr_.Suppose there is an unanticipated increase in aggregate demand to AD2 such that the increase generates a new price level P2while the expected price level remains at p c. Initially, price increases more rapidly than money wage and hence the real wage falls, causing an increase in employnaent. Output expands

Chapter 6: Austria

Figure

261

1. Determination Output°

of Aggregate LR

Price

AS SR AS

p, 2

AD 1

'_ Y

along ASlSR and a temporary to

0 LLt 1)LIt Y_

equilibrium

occurs

at B with output

equal

YI"

After some period

of time, wage bargainers

adjust their expecta-

tions to conform with the new price level P2 and hence demand for a money wage hlcrease. As the money wage rises to conform with the new price increase, the short-run supply curve shifts to the left. Once the real wage has been restored ply curve has shifted

to its desired

level, the short-run

up to AS2S_ and the economy

as the new price level. The adjustment

Output toward

sup-

moves to C with P2'

is back to its equilibrium level at Y s. C occurs so long as the aggregate de-

mand remains at AD r If, as the nominal wage adjusts to the new price level P2, aggregate demand increases to AD 3, then the economy moves toward D (instead of B) with output still at Y1 but with a higher price level, Ps" This process occurs as long as the money wage adjustment lags behind the price level change. As shown in Figure 1, the long-run aggregate supply is invariant with any steady price level, giving rise to a vertical long-run supply curve, AS LR. The same analysis could be made assuming continuous inflation (Levacic and Rebmann 1982). The inflation rate is measured on the vertical axis instead of price. Each supply curve is associated with a particular inflation exceeds

expected expected

rate of inflation. Output will rise if actual inflation. If an increase in inflation is per-

ceived immediately such that expected inflation increases amount as the actual inflation, then there are no short-run output.

Output

remains

at its equilibrium

position.

by the same increases in

262

The Philippines beyond 2000: An economic assessment

The above theoretical relationships can be modelled by adapting the approach used by Helliwell et al. (1990) in modelling aggregate supply. In the short run, actual output is postulated to vary relative to steady state output in accordance with a Phillips curve type relationsbAp. Inflation depends on the gap between actual and steady state output and expected inflation. In Helliwell et al. (1990), this is represented as, n = O,(logY - logY s) + O2n_

(2)

where a is the actual inflation rate, Y is actual output and _ is the expected inflation rate. In fact, however, the theoretical discussion above makes it clear that it is output which depends upon changes in inflation rather than the reverse and so equation (2) is renormalized to, logY -=-(1/ O,)n- (02/ O_)n_+ logYs Substituting

(3)

equation (1) into equation (3),

logY = a0+ cdogK + [31ogL+ alT + kn - _n_

(4)

where x -- 1/01 and _ = (0J0x). Equation (4) is an aggregate production function capturing the effects of actual and expected inflation on fluctuations in output. If rational expectations are assumed, then 02 = 1 and _: = _. Equation (4) becomes, logY = a0+ alogK + [31ogL+ ajT + u(_ - n_)

(5)

where _ = _ = m. In a stochastic world, there will generally be a divergence between the expected and the actual inflation rates in any particular time period. In the long run, expectations are always realized, that is, n = _ "; thus, equation (5) reduces to the standard neoclassical production function. Dynamics The principal interest in the Philippine prodnction function is in the Iong-Ia.m relationship of the economic variables. However, the economy will not be in a long-run equilibrium position at any particu: lar time. This non-instantaneous adjustment to long run equilibrium values results primarily from costs of adjusting output in any given

Chapter 6: Austria

period factor

263

to its desired level. Nickell (1985) has demonstrated that this can be modelled using error correction models (ECM). These

models provide a way by which the dynamics of the adjustment process, both short run (changes) and long run (levels), can be modelled simultaneously. An important feature of this approach is that it ensures the consistency of the short-run adjustment mechanism with the desired long-run equilibrium position (Salmon 1982). One simple first order

ECM proposed

by Nickell (1985) takes the

form,

y- y(-l)= A[y°- f(-l)]+ B[y'(-l) - y(-l)]" where

y is an endogenous

variable

(measured

(6)

in logs); y° is its desired

long-run equilibrium level; A is the coefficient of adjustment to shortrun changes; and B is the coefficient of adjustment to long-run equilibrium changes or the coefficient of error correction (Murphy et al. 1986). For equations (4) and (5), the term [y°(-1) - y(-1)] in Equation (6) measures the deviation of actual output from its long-run value. The precise

dynamic

specification

can take

several

forms

and

the appropriate choice depends on the dynamic properties of the variables (Salmon 1982). Discussion of the data and the data sources is found in the Appendix. The data were first tested of their order of integration

using the augmented

show that output,

Dickey-Fuller

labor and capital

(ADF) test.l The ADF tests

have exactly two unit roots; that is,

they require second differencing before they are stationary series with constant mean and variance. On the other hand, inflation, expected inflation

and the difference

between

inflation

and expected

inflation

are integrated of order one. However, since these variables do not affect the long-run estimates of the parameters, they do not need to be of the same order as the other explanatory variables. Likewise, the ADF tests using the Hansen (1990) approach led to the conclusion

that there

is a cointegration

between

GDP and the ex-

planatory variables. Therefore, a dynamic relationship among ables that is not liable to the problem of spurious regression expected

the varican be

to exist.

In recent years, a concensus view has emerged that most macroeconomic variables are integrated of order one, that is, they require first differencing before they are stationary series with constant mean and variance. Failure to consider this property of the variables may lead to spurious regressions; hence, to misleading results.

264

The Philippines beyond 2000: An economic assessment

Error Correction Models (ECMs) An error correction model of order two was applied to both equations (4) and (5). Following Murphy et al.'s. (1986) extension of Nickell (1985), a general ECM(2) is specified as, y- y(-1) = Aa[y*- y*(-1)] + Ba[y*(-1) - y'(-2)] + Ca[y'(-1) - y(-1)] + D_[y*(-2) - y(-2)] Based on the above equation, ECM(2) for equations are specified as follows:

(11) (4) and (5)

CLGDP = Al*[a _+ _Cn + _._ + c_CLK+ _CLL] + B_*[_C_ + _C_ + aCLK I + _CLL,] + Cl*[a0+ _:Tr 1+ _TV,+ aLK 1+_LL_ + alT , LGDP1]+ Dl*[a o + l<g2 + _7_ 2 + _]LK 2 + _LL2+ alTz - LGDPz]

(4a) CLGDP = A_*[a1+ uCDIE +'c_CLK+ _CLL] + BI*[uCDIEI+c_CLK_+ f3CLL_]+ C_*[a0+ uDIE_ + c_LKI + [3LL_+ alT 1-LGDPI] + Dl*[a 0+ uDIE 2+aLK 2+ _3LL2+ alT 2- LGDP 2] (Sa) where a C in front of a variable name denotes a change in that variable (e.g., CLGDP delaotes change in the log of GDP); a number at the end of a variable name denotes the order of lag (e.g., LK_ denotes log of capital lagged by one year) and DIE is the difference between inflation and expected inflation rate. A_and B_ are the coefficients of adjustment to short-run changes while C_and D_ are the coefficients of adjustment to long run changes. The x and _ measure the response of output to actual and expected inflation, respectively; a and fl are the outpttt elasticities with respect to capital and labor, respectively; _ is output's response to price surprises; a_is a measure of technological change or productivity; and a0is a constant. The above ECM forms combinations of variables which are stationary and hence should allow valid inferences. In a steady state, no changes occur in the economy. Hence, the first and second terms in equations (4a) and (5a) become zero. The terms related to C1 and D_ are therefore the coefficients that measure the long-run behavior of output.

Chapter 6: Austria

265

Empirical Findings Since the model

is nonlinear

in parameters,

equations

(4a) and

(5a) were estimated using a nonlinear least squares (NLS) estimation technique (Table 5). The estimation was also done under the assumption of constant returns to scale Cobb-Douglas production function. Thus, the sum of output elasticities was constrained to unity. The estimates of equation (4a) are all significantly different from zero. The larger magnitude of A_ and B 1relative to Cj and D_ indicates that the economy adjusts faster in response to short-run changes or exogenous

shocks

than

it does toward

its long-run

equilibrium.

The

effect of a 10 percent increase in actual inflation rate is to lower output by 0.13 percent. This implies that the money wage adjustment is higher than the price level change. This increases the real wage and hence, lowers the output. On the other hand, a 10 percent increase in expected inflation rate increases output by 0.16 percent. In the neoclassical sense, output increases

only if inflation

is unanticipated.

output could occur if actual inflation expected inflation rate. The elasticity

However,

rate is higher

of output with respect

to capital

an increase

than the increase

is 0.65.

Given the

assumption of constant returns to scale, the output elasticity with respect to labor is 0.35. The higher estimates for a than b indicates that output increases by a greater amount with a unit increase in capital than with a unit increase in labor. The robustness of the estimates are shown not only by their significant t-values ties with the average factor shares computed accounts. 1996.

Labor's

average

The estimate

but also by their similarifrom the national income

share in GDP is also 0.35 for the period 1960-

for a_ shows that the average

total factor productiv-

ity (TFP) growth for the country during the period 1960-1996 percent. It is the same as that estimated by Collins and Bosworth for the period TFP growth the estimate

1960-1994. While this estimate

still supports

a negative

for the country, the growth has improved as compared to for the period 1950-1987 of -0.6 percent (Austria and Mar-

tin 1995). As will be discussed later, TFP growth proved during the past 10 years. The estimates of the difference measured

is -0.4 (1997)

for equation

between

(5a) are all significant,

actual

by u, is -0.14 percent.

has substantially

and expected

This implies

inflation

im-

too. The effect on output

that the expected

inflation

266

The Philippines

Table

5. Estimation

beyond

2000:

An economic

(4a)

Equation

assessment

results.

Variable

Equation

(5a)

-0.0013 (_1.89)*** 0.0016 (2,74) _*

t.)

-0.0014 (-2.09)**

0.648

0.649

(8.75)*

(7.78)*

rz'

-0.004 (-2.58) ....

-0.004 (-2,21)**

_z,_

2.94 (3.96)"

2.94 (3.51)" 0.99 (3.62)_

0.997 (6.5)*

B-I

0.99 (S.65)*

-0.38 (-3.2?)*

0.83 •(5.82)*

0.82 (5.76)*

2.07

0.73

O.98 (6.67)* -0.38 (_2.22)_,

Note: Numbers in parentheses are t-ratios, Significance cated by *, ** ***, respectively.

rate

exceeds

prises

that

almost results

the same as those are the same. The

residual that cients

the may

eqnality

sums

at 1 percent are

restriction

actual result

inflation

rate,

in a decline

of K and

of squares

_ was

(RSS)

significance

thereby

in output.

for equation

causing

The other

(4a); thus,

tested

of the level,

at 1, 5, and 10percent are indi-

using two

the

price

sur-

coefficients

are

inferences an F-test

equations.

hypothesis

about based

The

the

on the

test

shows

that

these

coeffi-

in which

equal

cannot

be rejected.

Thus,

equation

(5a)

was

imposed

is preferred

over

equation

(4a).

this

Chapter 6: Austria

Sources

267

of Growth

The findings show that growth in the country during the period 1960-1996 is capital-driven, with capital contributing 75.9 percent to the 3.78 percent growth of output during the period (Table 6). This result is consistent with those obtained by earlier studies; that is, that by far, the most important source of growth in developing countries is capital accumulation. Labor, on the other hand, accounted for 26.7 percent and total factor output growth.

Table

6. Sources

Average

Growth

productivity

of Economic

Annual

Growth

Rates

growth,

Growth,

-2.7 percent,

of the total

1960-1996.

(%)

GDP

3.78

Labor

2.8 8

Capit_

4.42

Rates

by Source

(%)

Capital

Percentage

2.87

Labor

1,0

TFP

-0.10

Contribution

to GDP Growth

(%)

Capital

75.93

Labor

26.72

TFP

- 2.65

Productivity

Performance

This section examines the TFP performance ent industrial regimes in the country. A detailed

vis-_t-vis the differdiscussion of the in-

dustrial

6). In brief,

regimes

is covered

by Medalla

(Chapter

the coun-

try during the period 1960-1980 was a classic case of the "import substitution syndrome," if one were to base it on the expansion of consumer goods production for the domestic market behind giving rise to import-dependent, inward-looking dustries.

In the early

1980s, attempts

the economy and promoting exports ment was still highly protectionist. The period iffs and the removal in trade

1986-1996, however,

were made but the overall

toward

opening

industrial

saw the gradual

of import restrictions.

policy in the 1990s as shown

high protective walls, capital intensive inup

environ-

reduction

of tar-

There was a clear-cut

change

by the move toward

a uniform

268

The Philippines beyond 2000: An economic assessment

tariff rate and the commitments of the country in WTO, APEC and AFTA. The liberalization of investments in the early 1990s was apparent in the change in restrictions with respect to entry and foreign capital ownership. These reforms were also accompanied by the foreign exchange liberalization in 1992 and the continued deregulation in the services sector, making it clear what the likely future direction of economic policies in the country would be. While the average TFP growth during the period 1960-1996 was negative, the annual performance shows a higher growth during the trade liberalization period (Figure 2). The productivity performance of the country was indeed low and declining during the trade protectionist regime. The growth of TFP was 0.185 percent during the period 19601965; -0.186 percent during the period 1965-1970; and 0.093 percent during the period 1970-1980 (Table 7). The improvement in TFP performance during the latter period could be due to the export promotion efforts in the late 1970s.

Figure

2. Annual TFP Growth Rate, Philippines, percent).

1960-1996 (In

0.06

U.020 0.04 _-0,04 -0,06 -0,08

.o,o_ -0,1

X /

-0.12 196(}

1965

1970

1975

1980

1985" - " ' " 1990"" ' ' ' i_}95 " "

The TFP growth worsened to -2.89 percent during the period i9801986. While this period covers the first phase of the Tariff Reform Program, it was also a period of macroeconomic and political crises for the country. The crises brought uncertainty to the trade regime and unpredictability to the incentive structure, Such uncertainty caused industries to be reluctant to incur the surLkcost of adjustment and hence, failed to adjust their productive capacity and production strategies to the new trading environment. In the end, it all resulted in the poor TFP performance.

Chapter 6: Austria

Table 7. TFP Growth

269

Rate, by industrial

Regime.

Period

industri_d

re,me

TFP estimate

1960 1965

Decontrol

1965 -1970

Trade Protection

-0.186

1970-1980

Trade Protection

0.093

(%)

0.185

Export Promotion 1980-1986

Trade

Protection

Macroeconomic Political 1986

1996

- TRP, Ph_e

-2.89

crisis

Crisis

Trade liberalization

0.93

Invesra_en_

2,12*

Foreign

libera]izarion

exchange

liberalization

Energ3' crisis

* Excluding 1990-1992.

The trade and investment the other hand, is characterized

liberalization period of 1986-1996, on by an improvement in TFP growth to

0.93 percent. TFP growth is much higher, however, at 2.12 percent if the energy crisis period of 1990-1992 is excluded. Although the period 1986-1996 covered two government administrations, for trade and investment reforms was more credible these

paved

the way for an environment

where

the commitment and stable. Hence,

firms

and industries

adjusted their productive capacities in response to the emerging trading environment, both local and international, in effect, the firms experienced What

an improvement

in their productivity.

Explain Changes in TFP Growth? This section looks at how trade and investment

policies

affect

TFP growth rates. To do this, TFP was regressed against trade and investment policy indicators. Again, the period covered was 1960-1996. The indicators include tariff rates, share of exports to GDP, share of imports to GDP, and foreign direct investments. The share of imports to GDP is used to capture the effects of trade liberalization whereby not only tariff rates were reduced but nontariff measures as well. The favorable effects of reforms are shown by exports and imports' increasing share in GDP (Figure 3 and Table 8). The share of imports to GDP during the period 1990-1996 was more than twice com-

270

The Philippines

beyond

2000: An economic

assessment

pared to that for the period 1960-1970. The share of exports creased from 13.8 percent during the 1960-1970 to 20.7 percent 1996.

Figure

3. Share of Exports percent).

and

Imports

also inin 1990-

to GDP, 1960-1996

(In

100 90 80 7O

expo_ Ii

50 60

....

import

,, J

_i_

....

Source:

National

Income

........

-,,

.............

Accounts.

Table 8. Average Share (In percent).

of Exports

and

Imports

in GDP, 1960-1996

Period

Exports

Imports

1960 - 1970

13.8

15.4

1970 -1980

16.2

21.5

1980 - 1990

16.4

22.4

1990 - 1996

20.7

33.1

Source: National Income Accounts.

Due to the incomplete covering

the period

time series

data

on nominal

tariff

1960-1996, tariff rates in this study were proxied

rate by

the ratio of tariff revenue over merchandise imports. Figure 4 shows the declining trend of this ratio since the early 1980s. Likewise, the share of FDI to GDP has increased significantly starting the 1970s (Figure 5). If the reforms made a significant favorable impact on TFP growth, the expected sign is negative variables.

for tariff rates and positive

for the other three

Chapter 6: Austria

Figure

4. Tariff

271

rates,

1960-1996

(In percent).

20,

......

,,,,

1960 Source:

..........

1965 National

Figure

1970

Income

5. Share

, .........

1975

1980

1985

1990

1995

Accounts,

of FDI to GDP, 1960-1996

(In percent).

4.00 3.50 3.00 2.50 _2,00 1.50 1,00 0.50

Source:

Bangko

Sentral

ng Pilipinas;

National

Income

Accounts.

that

Aside from trade and investment policies, past studies have noted countries which experienced macroeconomic instabilities regis-

tered

low GDP and TFP growth

policies.

Inflation

rates

rate is therefore

despite

used here

their

ovtward-oriented

as another

proxy for macroeconomic policy instability. Another factor influencing TFP is the expenditures

variable

on research

and development. However, this factor was not included in the estimation because of the nonavaflability of the data for the period covered.

272

The Philippines

beyond 2000: An economic

assessment

The results show a significant positive impact of exports to TFP growth (Table 9). Contrary to what is expected, imports have a significant but negative effect on TFP. 2Why is this so? Two possible explanations are raised here. First, an examination of the components of the country's merchandise imports shows that machinery trical machinery) and transport equipment accounted portion of total imports. These are the type of imports new production

techniques

necessm"y for increasing

(including elecfor only a small that come with

productivity.

These

imports accounted for a combined share of 14 percent, 26 percent and 37 percent of total imports in 1985, 1990 and 1996, respectively. This implies that it is the type of imports and not the increase in imports per se that have a favorable impact on TFP growth. Second, while new production techniques are embodied in the imports of machineries and equipment, it is also equally important to have the corresponding manpower skills for the operation of these machines as well as to maximize capital

utilization.

Otherwise,

the equipment

will just remain

idle or

be inefficiently used. Considering that there are more capital costs incurred by not operating the machines longer, productivity declines. impact

Tariff rate, on the other hand, has a negative, although weak, on TFP. It is possible that the more relevant variable is the ef-

fective protection

rate (EPR).

of EPR is unavailable.

Unfortunately,

Other studies

a time series

have shown,

however,

estimation that when

protection is reduced at a moderate rate, the rise in productivity is highest. When protection is reduced at an excessively fast rate or when it is not reduced at all, the rise in productivity is low. The coefficient for FDI has a positive value but it is insignificant (equation 1, Table 9). While it is argued that it takes sometime before FDI brings about .productivity increases, the inclusion of a one-year lagged FDI as one of the determinants of TFP yields a positive (though weak) effect (equation 2). However, including both total FDI and FDI in manufacturing as determinants resuhs in a significant positive effect of total FDI to TFP growth but a significant negative effect of FDI in manufactnring (equation 3). It is possible that the negative effect of FDI in manufacturing oligopolies possible

and

to productivity

technologies

that to the extent

transferred

is because are labor

that multinational

FDI may have led to intensive.

companies

Also, it is

are oriented

2Total trade (exports plus imports) as a percentage of GDPwas also used as one of the regressors, instead of export share and import share. The result shows a positive but insignificant relationship.

Chapter

Table

6: Austria

273

Determinants

of Total

Factor

Productivity,

1960-1996

Equations Variables

(1)

(2)

(3)

Constant

-0.016 (-0.69)

-0.018 (-0_76)

0.034 (0.53)

Share of Exports to GDP

C'.005 (3.41)*

0.005 (3.31)*

0.008 (2.41)*

Share of Imports to GDP

-0_003 (-2.27)**

-0.002 (-I,.99)***

-0.004 (-3.46)*

Tariff Rate

-0,83E-04 (-0_07)

-0.15E-03 (-0.13)

- 0.002 (-0.99)

Irfflation

-0.002 (-4_62)*

-0.002 (-4.91)*

-0.002 (-5.46)*

Foreign Direct Investment

(FDI)

-0.12E-05 (1.26)

0.33E-05 (2.14)**

FDIt_I

0.11E-05 (I.01)

FDI in the Mmmfactm-ing

Sector

-0.11E-05 (-1.85)**

DW Statistic

1.94

1.89

2_09

Adjusted R 2

6.53

0.52

0.67

Note: T-values are figure in parenthesis. percent levels respectively.

toward

global

aptation

rather

than

of technology Finally,

roeconomic

Beyond

local

as expected,

2000:

country's

riod

of industrial

may

be less room

for ad-

the degree

of mac-

environment.

inflation

has

there

at 1, 5, and 10

rate

indicating

a significant

negative

shown

there

effect

on TFP.

improvement

Challenges

analysis

the

profits,

to the local

instability

The

*, **, *_* indicates significance

total

here factor reforms.

has

that

productivity Given

country's

quest

for sustainable

question

is how

to sustain

growth,

the crucial

growth

the improved

was

at least

role

in the next

during

the pe-

of productivity

in the

millennium,

the next

TFP performance.

274

The Philippines

Enhancement

beyond

of the Country's

Competitiveness From the trade and investment only exports

have a clear-cut

2000: An economic

International

policy indicators

positive

assessment

effect

examined

on TFP growth.

above,

The chal-

lenge therefore lies in how to enhance the country's international competitiveness to increase exports. Since the Philippine peso has depreciated the least from the ongoing currency crisis in the region, measures have to be taken to make the country's exports compete against that of its neighbors with weaker currencies. One way is to ensure that the devaluation

is maintained

the form of higher However,

in real term and does not get dissipated

inflation

and wages.

it is also argued

that higher

productivity

and not the

peso depreciation is the key to international competitiveness and hence, exports. While it is tempting to raise a "chicken and egg" issue here, it is more important to understand the exports-productivity vicious cycle. Trade and investment liberalization increase production and exports which, in turn, contributes to improvements in productivity through economies-of-scale With the foreign

production and competitive pressures exchange earned from more exports,

port high quality ing productivity.

components

Another

and machines,

way to enhance

exports

thereby

competitiveness

from abroad. firms can im-

further

promot-

is for domestic

manufacturers to adopt certification standards. Manufacturers must begin to adopt and internalize quality and environmental standards and their relevant tools such as hazard analysis and critical control point (HACCP) and good manufacturing industries

practice

(GMP). Without

these,

are in danger of losing their markets.

The certification

would

increase importers' confidence that the country's exports meet international quality and environmental standards, which in turn, reduces the probability of exports being rejected at the border. Indnstries, in partnership with the government, should therefore invest in testing facilities for iSO 9000 and ISO 14000. Investment

in Vocational

and

Technical

As noted earlier, it is equally important manpower skills to complement tb-_ presence country

has a relativelyhigh

literacy

Education

that there are required of machines. While the'

rate compared

to other East Asian

countries, its educational system puts greater emphasis on general education as opposed to vocational and technical education. What is important

is for the educational

level to be high and to consist

of the

Chapter 6: Austria

275

correct mix of skills. The government should therefore provide incentives that will push for more investment in the provision of specialized technical skills and encourage the demand for vocational and technical trainings. Partnership

with

Multinational

Corporations

Via FDI

The best way of transferring technology is to forge partnership with multinational corporations (MNCs). This strategy will modernize production

and improve

productivity

as MNCs adopt the technologies

they are used to at their headquarters in the local setting. Likewise, to offset wage increases in developing countries, MNCs constantly seek to increase

productivity.

".....

The country countries

has not been as successful

in attracting

foreign

investments

as the other

because

developing

of poor infrastruc-

ture (Table 10). It has-been losing not only to the other ASEAN members but to China as well, a nation whose share in the total FDI of developing member

countries

of the Asian Development

Bank

is almost

percent during the period 1990-1995. As the next millenium approaches, by which time tariff protection would have gone down globally, the state of the country's infrastructure will become even more critical in determining

the country's

attractiveness

as an investment

site in the

in Total FDI of ADB's Developing

Member-

region.

Table

10. Average

Countries,

1985-1995

(In percent).

Cou_xry

1985-1990

Philipph_es I_dol_esia

5.71 8.15

3,20 7.72

Malaysia Thailand Viemam

15.85 13.89 0.11*

17,57 9.69 0.17

Chfiaa

41.64

54,61

• 1988-i990only. Source: Key Indicators 1997

-1995

276

The Philippines beyond 2000: An economic assessment

Appendix Data and Data Sources The period of analysis is 1950-1996, Output is measured by gross domestic product (GDP) at constant prices while inflation is measured using the GDP deflator. Data for both variables were taken from various issues of the Philippine Statistical Yearbook. Since the definition of labor force in the Philippines have changed markedly over the period under analysis, the working age population (age 15-64) was used to represent the labor force, Labor was not adjusted for quality as measured by education for the following reasons: • lack of a suitable series on investment in human capital; ° Patalinghug (1984) found that the role of improved labor force quality due to education does not appear to be a substantial source of growth in the Philippines; and, ° Sanchez (1983) also found that TFP estimates are insensitive to the choice of labor input used in the estimation. Capital stock and the expected inflation rate were generated following methods discussed below. Capital Stock The capital stock (K) was estimated using investment data at constant prices starting in 1959. The series was estimated using the perpetual inventory method,

g, --(1- h)K,_,+ z

(1)

where Kt is the capital stock at the end of each period; I t is investment in each period; and h is the depreciation rate. Due to the non-availability of data for the depreciation rate (h), the rate was assumed to be 5percent based on an estimate similar to that for Thailand (Limskul 1988). An initial value of the capital stock is required for the estimation of equation (1). Following Martin and Warr (1990), the logarithm of investment was first regressed against a time trend to obtain its average growth rate and a trend value of investment at the beginning of the sample, i o. Making the conventional assumption that the capital stock was in a steady state at time to, Kocan then be estimated as,

Chapter 6: Austria

Ko = Io/ (g + h)

277

(2)

where Ko is the initial capital stock; g is the estimated growth rate of investment; and h is the depreciation rate. Expected Inflation Rate Expected inflation was estimated based on the assumption that expectations are formed rationally. Following McCallum (1976), the expected value of a variable is specified as,

z*,.,--E(z+/j) =z+- h

(3)

where Z*.I is the unobservable value of Z expected at time t to prevail at time t+l; Z, denotes the one-period-ahead value of Z so that Z* represents anticipated values of Z,; _ represents the information available and utilized by market participants in forming their expectations regarding Z,; _ is a random vector that is uncorrelated with cp;and E is the expectations operator. The available information (q_) consists of past and present values of both the variable concerned and other exogenous variables involved in the process of expectation formation, j -- [Z, Z.,, Z2 .... Z_,,,X, X4.... X J

(4)

The expected value of a variable is then estimated as the "predicted" Z from regressing Z, on a matrix, W, of variables selected from q_.Any set of variables from (p can give consistent estimates. However, the values from the distant past would typically be poorer instruments than the ones more nearly contemporaneous with Z (Mceallum 1976). In this study, three lagged values of the actual inflation rate were used as instruments.

278

The Philippines beyond 2000: An economic assessment

References Abramovitz, M. 1956. Resource and Output Trends in the U.S. Since 1970. American Economic Review. Austria, M. 1992. Exports, Technological Progress and Growth: The Use of Panel Data. Economics Division Working Papers No. 92/2. Research School of Pacific Studies, The Australian National University. Austria, M. and Martin, W. 1995.Macroeconomic Instability and Growth in the Philippines, 1950_87:A Dynamic Approach. Singapore Economic Review 40(1 ):65-81. Balassa, B. 1978. Exports and Economic Growth. Journal of Development Economics 5:81-189. Balassa, B. 1985. Exports, Policy Choices and Economic Growth in Developing Countries After the 1973 Oil Shock. Journal of Development Economics 18:22-35. Denison, E. 1968. Why Growth Rates Differ? Washington D.C. Brookings Institutions. Dickey, D. and Fuller, W. 1979. Distribution of the Estimators for Autoregressive Time Series with a Unit Root. Journal of the American Statistical Association 74(366):427-431. Dowrick, S. and Nguyen D. 1989. OECD Comparative Economic Growth 1950-1985: Catch-up and Convergence. American Economic Review 79(5): 1010-1030. Feder, G. 1982. An Exports and Economic Growth. Journal of Development Economics 12:59-73. Felipe, J. 1994. Testing Endogenous Growth Models For Southeast Asian Countries: A Cointegration Approach. Paper presented during the International Conference on Modelling the Asia Pacific Economy, 24-26 August, Sydney; Manila. Felipe, J. 1997. Total Factor Productivity in East Asia. Mimeo. Asian Development Bank, Manila. Felipe, J. and McCombie, JSL. 1997. Some Methodological Problems with Recent Analyses of East Asian Miracle. Mimeo. Asian Development Bank, Manila. Fujita, N. 1994. Liberalization Policies and Productivity in India. The Developing Economies 32(4):50%521. Heliwell, J., Meredith, G., Durand, Y. and Bagnoli, P. 1990. Intermod 1.1 A G7 version of IMF's MULTIMOD. Economic Modelling 7(1):362.

Chapter 6: Austria

279

Heller, P. and Porter R. 1978. Exports and Growth: An Empirical Reinvestigation. Journal o Development Economics 5(2): 191-193. Hendry, D. 1986. Econometric Modelling with Co-integratedVariables: An Overview. Ox ord Bulletin o Economics and Statistics 48(3). Holley, R. 1968. Long-term Growth of the Philippine economy, 19021961. The Philippine Economic Journal 7(1):1-24. Intal, P. Jr. 1997. Sustaining The Philippine Economic Resurgence. Paper presented during the Philippine Institute for Development Studies' Symposium in Honor of Dr. Gerardo Sicat and Dr. Jose Encarnacion, Jr., September 23-25, 1997. Kajiwara, H. 1994. The Effects of Trade and Foreign Investment Liberalization Policy on Productivity in the Philippines. The Developing Economies 32(4):492-507. Kawai, H. 1994. International Comparative Analysis of Economic Growth: Trade Liberalization and Productivity. The Developing Economies 32(4):372-397. Kim, J. iI and Lau, L. 1994. The Source of Economic Growth of the East Asian Newly Industrialized Countries..Journal o the .Iapanese and International Economies 8: 235-271. Kormendi, R and Meguire P. 1985. Macroeconomic Determinants of Growth: Cross-country Evidence..tournal o Monetary Economics 16:141-163. Krugman, P. 1994. The Myth of Asia's Miracle. Foreign Affairs, November/December. Kwak, H. 1994. Changing Trade Policy and Its Impact on TFP in the Republic of Korea. The Developing Economies 32(4):399-421. Lampman, R. 1967. The Sources of Postwar Economic Growth in the Philippines. Philippine Economic .Journal 7(1):1-24. Levacic, R. and Rebmann, A. 1982. Macroeconomics : An Introduction of Keynesian-Neoclassical Controversies. Second Edition. London: McMillan Publishers Ltd. Levine, R. and Renelt, D. 1991. A Sensitivity Analysis of Cross-country Growth Regressions. American Economic Review 82(4):942-963. Lira, D. 1994. Exploring the Growth Performances of Asian Developing Economies. Economic Development and Cultural Change. Limskul, K. 1998. Economic Development and Cultural Change in Thailand. Dissertation. Nagoya University, Japan. Martin W. and Warr, G. 1990. The Declining Economic Importance of Agriculture. Invited Paper to the 34'h Annum Conference of the

280

The Philippines

Australian 1990.

Agricultural

beyond 2000: An economic

Economics

Society,

McCallum, B.T. 1976. Rational Expectations Hypothesis: Some consistent Estimate. 52. Murphy

C.W., Bright,

I.A., Brooker,

assessment

Brisbane,

Feb. 12-15,

and the Natural Rate of Econometrica 44(1):43-

R.J., Geeves,

W.D. and Taplin, B.K.

1986. A Macroeconometric Model of the Australian Economy for Medium-Term Policy Analysis. Technical Paper No. 2. EPAC, Canberra. Nickell,

S. 1985. Error

Correction,

Expository Note. 47(2):119-129.

Partial Adjustment

Ox ord Bulletin

and All That: An

o Economics

and Business

Patalinghug, E. 1984. Labor Quality and Growth Accounting: The Philippines. Philippine Review o Economics and Business 21 (3, 4):201217. Okamoto,

Y. 1994. Impact

the Malaysian 477. Okuda,

of Trade and FDI Liberalization

Economy,

S. 1994. Taiwan's

Trade

The Developing

Policies

Economies

and FDI Policies

32(4):461-

and Their Effect

Productivity Growth. The Developing Economies 32(4):421-443. Osada, El. 1994. Trade Liberalization and FDI Incentives in Indonesia: the Impact of Industrial mies 32(4):479-491.

Productivity.

The Developing

Econo-

Sanchez, A. 1983. Philippine Capital Stock Measurement and Total Factor Productivity Analysis. Unpublished PhD Dissertation, Manila, University of the Philippines. Solow, R. 1957. Technical Change and the Aggregate Production tion. Review o Economics and Statistics 39:312-320. Tsao, Y. 1994. Growth Without Economic 18:25-38.

Productivity.._ournal

o Development

Tybout, J. 1992. Linking Trade and Productivity: New Research tions. The World Bank Economic Review 6(2): 189-211. Urata,

S, 1994. Trade Liberalization Introduction and Major Economies 32(4):363-371.

Urata

and Productivity

Findings..tournal

S. and Yokota, K. 1994. Trade Liberalization Growth in Thailand. The Developing Economies

Func-

Growth

Direcin Asia:

o The Developing and Productivity 323(4):444-459.

Chapter 6: Austria

281

Williamson, J. 1969. Dimensions of Postwar Philippine Economic Progress. Quarterly Journal of Economics 83(1):93-109. Young, A. 1992. A Tale of Two Cities: Factor Accumulation and Technical Change in Hongkong and Singapore. National nomic Research Macroeconomics Annual.

Bureau

of Eco-

Productivity Growth ofthePhilippine Manufacturing Industry Caesar

B. Cororaton

and Ratn'maJsa

Chapterl l "[ /

AbdMa

20 years has been highly unstable, with swings seen especially he economic growth performance of the grew Philippines in the last in the 1980s. In particular, the economy at 6.1 percent per year in the second half of the 1970s. However, growth decelerated to 3.1 percent percent

in the early 1980s and subsequently registered a big dip of -3.9 in the mid-1980s. The second half of the 1980s saw a recovery

of an average growth of 6 percent but lost steam in the early 1990s with a growth of 2.3 percent as the economy was battered with crises of all sorts: political

(military

coup

attempts);

economic

(foreign

exchange

and energy crises) and natural calamities (typhoons, earthquake and volcanic eruptions). In the period 1995-1997, the sound economic reforms instituted by the Ramos administration combined with the unperturbed and brought percent.

political

environment

the country

drew in substantial

back to its good standing

foreign investment with a growth

of 5.4

At the backdrop of these developments in the political and economic arena is the vexing issue on sustainability. Crucial to this issue are the questions of whether the effects of the economic reforms are solid enough to break this sequence of economic ebb and flow; weather out the present recessionary pressures; prevent another downturn; and, most importantly, whether these reforms the root source of economic'instability.

act auxiliaries

in curtailing

The problem of sustainability stems primarily from the pandemonium in the macroeconomic milieu and the weak structure of the production

sector.

In the macroeconomic

scenario,

rate of inflation and foreign exchange predominated tence of dualism in the production sector hampered sioned

structural

transformation.

Both the agricultural

trial sectors exhibited diminishing contributions and employment. And for the industrial sector, been horrendous.

Compared

to neighboring

vacillations

in the

while the persisthe much-enviand the indus-

to overall production this retrogression has

countries,

the sector

stag-

284

nated

The Philippines

as it failed

to assimilate

beyond 2000: An economic

technological

assessment

improvements

and em-

ploy efficient use of resources. And this technological backwardness and inefficiency is in turn intertwined with the system of protection interwoven by the macroeconomic and industrial, •the country in the past. in this chapter, the link between the rickety growth

and the declining

productivity

export

earning,

pursued

nature

of economic

of the industry,

manufacturing sector, would, be established. of the manufacturing industry's performance employment,

policies

technological

specifically

the

It begins with an outline in terms of production, adoption

and technical

ef-

ficiency prior to and after the period of reform. It then, proceeds with the discussion of the determinants of the declining productivity; elucidating

on the greater

role of macroeconomic

and industrial

policies,

specifically the import-substitution policy in its bad shaping. ter then ends with a policy prescription note.

The chap-

Productivity in this chapter refers to total factor productivity (TFP) growth and technical efficiency (TE), which are to be discussed in the succeeding section. TFP estimates are presented for 23 manufacturing industries while TE coefficients are determined for selected five-digit industries

only.

Total Factor

Productivity

TFP is a customary

Growth: measure

Concept

and

of technological

Measurement progress

and effi-

cient input utilization of a firm, sector or a country. Measured as the residual of the output growth and the combined growth of factor im puts, such as capital, labor and raw materials, TFP then becomes a catch-all variable which approximates (1) the shift in the production function, (2) the economies of scale, (3) the technological advances in knowledge, (4) the improved mix, and (5) the disembodied

resource allocation and proper resource technological change. It is therefore in-

dicative of the improvement maximum potential output

in the 'best practice' of an industry and the under the cun°ent technology. At the in-

dustry

to approximate

the adoption

of the right

technology

and the efficiency

by which

level, it can be taken

machineries

and appropriate

the technology

is applied.

Approaches to TFP measurement may generally be classified into two: (1) the deterministic approach and (2) the stochastic approach. The deterministic Inta11997.

approach,

may,

in turn,

be broken

dow_a into two

Chapter 7: Cororaton

branches:

and Abdula

(1) the index

number

285

approach;

which

does not require

ex-

plicitly any specifications of production function; and (2) the growth accounting approach, which requires a specific production function. The formulation of the index number is usually based on the distance function, while the growth accounting approach makes use of either factor share calculations or programming methods. The stochastic approach, on. the one hand, assumes an unobservable production frontier function. Total output growth of the industry can be decomposed into input

growth,

technical

this paper,

the tradition

and TE using

growth

accounting

Accounting

Approach

Consider

a Cobb-douglas

production

(1)

Ot = A(t) PKk= 1 (Xkt)ak

The Growth

where

change

Qt is output,

A(t) is a catch-all

this approach.

approach

is employed.

function: ak > 0

variable

which

captures

technical

progress, Xk, are factor inputs, k the number of factor inputs, and ak are factor shares. Take time derive of (1), divide the result by Qt and rearrange

terms

(2) where

A(t+l)/A(t)

the

represents

bold

letters

the k al input's

= q/q - SKk=lsk xk / xk represent share

the

time

of output.

derivatives,

Usually,

and

the

sic

the time derivatives

are proxied by period differences of logarithmic values of Q and X, which are represented by their small letters, q and x. The term in the •left-hand side of the equation represents the growth in TFP, which is the difference between the growth of output and the weighted growth of factor

inputs.

Technical Efficiency Measurement In the traditional growth accounting

approach,

the

observed

output is assumed to be obtained by using the given technology to its full potential. This means that the realized or observed output level is the frontier output, which is 100 percent technically efficient. Therefore, the growth in A(t) is interpreted shifts in the production function.

only as the change In reality, however,

in technology or an industry (or a

firm, depending

upon the unit of analysis)

may not be operating

along

the production

frontier.

the industry

below

In cases

where

operates

286

The Philippines

the frontier accounting

beyond 2000: An economic

(also called the "best practice" method will give biased estimates

assessment

frontier), the growth of technical change.

Moreover, in the traditional growth accounting approach, factors are assumed to be paid according to the values of their marginal products. If this assumption does not hold, it can create another source of bias in the TFP estimates of total factor productivity. Estimating status

TE does not only contribute

of the t:irnl's production

more information

on the

but helps determine

whether

the given technology has been utilized to its fullest potential "From the policy point of view, these information are essential

as well. because,

without using on introducing Thus, outer-bound

technology

the existing technology to its full potential, new technologies is not meaningful.'2

a technically-efficient production

frontier

embarking

firm is one which

produces

on. its

to obtain the maximum

possible

output

using current technology. TE is measured as the ratio of actual output •to the potential output given by the outer bound production function for a given set of inputs and technology. However,

due to time limitation

and difficulty

in getting data, TE

estimation was performed for selected manufacturing industries only, namely: textile industry, garments, basic metal industry, chemicals and. chemical

products

Philippine Share

industry

Manufacturing: to output,

and food manufacturing Assessment

Employment

industry.

of Performance and Export

Earnings

Dualism in. the country's production structure remains pervasive. This is conclusive given the manufacturing industry's one-fifth share to total production while contributing to minute share of onetenth in total employment. The manufacturing sector, which accounts for more than 20 percent of the gross value added, fails to absorb a considerable amount of employment_ For more than three decades now, its share to employment ranges along the dismal rates cent and diminished even more in the recent decade.

of 10 to 12 per-

Neither does the sector's stake to gross domestic product give a very promising picture of a break away from this dualism. One fourth of the total production turing

sector.

during

1985-1995 is sourced

But in 1995-1997, this substantial

ered down to only 20-23 percent.

from the manufac-

partake

Signs of reversal

has been

seem to be unlikely

with its share in the first semester of 1997 down a percentage contribution during the same semester of the previous year. -_Kalirajan and Obwona 1994.

sev-

from

its

Na oo _o

Table 1. Share

of Manufacturing

Sector to Total Employment,

Sha re to cmployntent Agric.tdture

Indu._lry

Ma md'aelurlng

Servlc.es

Agriculture

Indt_try

tO total

Output

and Export Earnings.

ou_pu!

Manufactttring

Ser'vic.es

to total exports

Manufacturing Electronics No nma nufaclur

Garments ing

1960

61.2

12.6

12.1

26.2

1965 1970

56, 7 53.7

11.3 12.6

10,9 1I .9

31.5 32,1

1975

53.5

12,1

11.4

34. I

I980

51.4

tl .6

10.6

36.5

1980-1985

23.3

40.0

26,3

37.4

1980

34.5

11.6

8.7

65.5

¢_

1985

49.0

10.7

9.7

40.2

1986-1989

23,9

35.2

25.2

40.9

1985

41.4

14.6

10.8

59.6

"_. 0

1990

45.2

10.7

9,7

44_0

1990-1992

22.6

35.4

25.6

42.1

1992

74.7

27,7

21,6

25.3

1995

43.5

16,1

t0.2

40.5

1993-1995

22.2

34,8

2_5.0

43.0

1995

79,5

23.8

14.73

20.5

1995 Q1

21.8

31.9

23.0

46.3

1995 Q2

21,5

32.2

23.0

46.3

1996. Q1

22.3

31.4

22.0

46.3

1996 Q2

20.6

32.0

2=,,3.0

47.4

1997

21.0

31.0

21.0

48.0

Sources:

Cororaton et al. (i995) National Income Accounts,(August BSP, (May 1997)

1997)

_:_,'_.' "_ _a

)a,

Chapter 7: Cororaton

and Abdula

domestic

The increase

economy.

289

then in the manufactured

export

not only add very little to employment, but also significantly mined the country's trade position. This phenomenon leaves

did

underimpor-

tant implications to the competitiveness of the country as a whole and its susceptibility to the mayhems in the foreign market. in terms of world market share and merchandise trade balance, the country boring

is inevitably

countries.

placed in an inimical

It can be gleaned

from

position vis-gwis its neigh-

Figure

1 that the Philippines

has significantly lost its market share in the world market. In 1970, the country's share accounted for 17.7 percent of ASEAN total exports. This dropped to 6.9 percent in 1985 and further declined to 5.9 percent 1990. Compared to Indonesia, Thailand, Malaysia and Singapore, already inferior performance sia, Thailand and Singapore cent for the entire at a moderate

period

nesia

Figure

the Philippines

and Malaysia

almually trade

gap between

of Philippines

grew only

(Table 2). In terms

did not fare any better.

had respectable

the largest

1. Share

Malayof 18 per-

of 1980-1994 while the Philippines

rate of 10.8 percent

ing trade balance, pines evinced ports.

becomes even more perturbing. all managed an annual increase

positions

the Philip-

exports

to ASEAN/World

of posit-

In 1994, Indo-

while

merchandise

and im-

Market laSingapor,_ .Thailand IM_daysi_ mlndon_;sla -Philippines

].9851

19751

19701 0

i[(}

in its

290

The Philippines

Table 2. Merchandise

Trade

beyond

2000: An economic

assessment

of ASEAN Members.

Merchandise trade in billionS, 1994

Average annual growth rate

Exports

Imports

1980 - 1994

hadonesia

39.5

31.5

7,3

Philippines

13_4

21.2

10.8

Thaflmad

42.8

47.2

18.0

Malaysia

57.0

57.8

18_4

Singapore

89.2

99.2

18.4

Technological In terms

Change

and Technical

Efficiency

of technological

advancement,

technical

efficiency

and

best practice, the manufacturing industry stagnated and languished at its level three decades ago. For the period 1958-1991, the total factor productivity growth was at an insignificant level of 0.052 percent. mapping its movement through time, the correlation between chronic

pattern

of boom

and bust in the productivity

disturbances in the macroeconomy the sensitivity of the productivity one another. Figure

2. TFP of the Manufacturing

-5

- ]0

-13

-211

........................

indices

And the

and the

is highly palpable. Figure 2 shows indices and the macroeconomy to

Industry.

Na _D

Table 3. Average Growth Rate of Total Factor Productivity. i

Footwear

•

Fabricated

Electrical

Furniture

Glass

Industrial

Iron

& Steel

Leather

Metals

Machinery

& Fixtures

Products

Chemicals

Basic

Industry

Products

-5.36 2.75

3.44 4.95

- 23.23 -2.20

13.51 2. t8

- 3.67 -4.24

3.88 5.58

3.03 -3.59

1,53 3.62

4.99 5,54

4,96 10.6t

-0.05 2.78

-I7.54 0.96

-7.42 6.69

8.39 -4. 19

Machinery

Non-metallic Mineral

_,_.

-t.31 3.96

8.23 7,79

5.9I 1.47

5.83

- 1_38 3.95

_ _

0.44 3.05

-6,93 6.72

-1.79 -9.27

4.27 2,25

- 1.45 5.00

1.39

2.24 19.70

0.80 0.37

4.7I 3,84

-3.86 5,02

-2.05 1.44

1.95 7.28

-2.06 2.53

_,,

-4.38 3.88

-2.33 -1.37

-9.52 1.79

-6.22 -0.24

6.75 - 22.62

- 14.32 0,82

-2.53 1.04

f,,,%

¢3

Table 3. Continueed... Paper

Petroleum

Rubber

Sugar

Products

Refineries

Publishing

Products

Milling

-2.48 -9.83 3.76 -12.86 0.20

4.69 3.99 6.08 2.3t 4.70 4.98 -5.89 4,99

-6.09 1.19 0.98 1.13 2.77 5.47 -2.40 5.18

-10.44 8.26 0.42 5.14 0.48 9.24 -6.48 5.23

Plastic

-0.41 -3,41 1,66 -6,04 -0.48

Printing

t7.51 9.64 7.36 -t4,30 14.32

Textiles

-6,41 2.71 3, 52 -3,22 0.45 -2.26 -6.77 1.57

Tobacco

Transport

Wearing

'Wood

Products

Equipments

Apparel

Products

-461 8.79 6.51 7.57 3.17 4.89 -4.35 3_45

8.56 9.05 1.69 -1.58 -3.20 9.59 -5.97 -I.68

-19,48 1.45 5,50 -10.11 -5.72

i_94 0,54 4_87 0.79 2.21 6,59 -14o85 4,65

296

The Philippines

The inefficiency

beyond

2000: An economic

of the manufacturing

sector

key manufacturing industries. TE estimates textile, basic metal, food manufacturing

assessment

is reflected

in the

of the electrical and chemical

machinery, industries

a year of high growth--the

electrical

machinery, garments, basic metal and food manufacturing exlffbited efficiency in production. After a decade, electrical basic metal and food manufacturing realized 80 percent,

industries machinery, 64 percent

declined

(Figure

3). in 1983--

and 71 percent of 'their potential outputs, respectively. Electrical machinery, which ranked first in terms of efficiency up to 1991, had lost its lead. Garments,

on the other hand,

has not only emerged,

most efficient in production but also managed to sustain •develop its efficiency. An enhanced TE of the ready-made -

ma-nnfacturing manufact(ire

as the

and even clothing

and the women's, girls' and babies' garments accounted fortiffs improvement. The reduction in the

efficiency of textile industry and chemicals industry, on. the other hand, was modest; while the decline in the efficiency of the basic metals was relatively

considerable.

The deterioration

steel both exacerbated

the inefficiency

in rolling mills and galvanized of the basic metal industry.

Both

experienced a reduction by almost half. Similarly, a deterioration in the efficiency in food manufacturing, was accompanied by the downward trend in the efficiency of milled sugarcane and crude coconut oil (including

cake and meal).

Productivity,

Industrial

The previous _ductivity

and

Policy

section

and

Investment

established

efficiency

Policy

the link between

of Philippine

the dwindling

manufacturing

and

the

,tracted effects of import-substitution policy. The system of protection to the severe misallocation of resources. As capital-cheapening asures were promoted, capital investment, and thus, substitution of ,iL_,l_u i,_bor, is enthused. This capital-intensive .... bodied t_chnology often suited to labor-scarce Moreover,

substantial

profit

margins

bias led to the use of developed countries.

from protectionism

discouraged

firms to adapt machines to local condition and factor proportion, further discouraging acquisition of domestic technological capability and eventual

technological,

mastery

(Medalla

et al. 1995).

Most importantly, the import-substitution policy worked for tax exporters and discouraged the further development of backward linkages. intermediate

As tariffs materials,

raise

cost

sourcing

of domestically inputs

locally

produced

raw

has been

dissuaded.

and

Chapter 7: Cororaton and Abdula

301

technological advancement has been facilitated by their highlydeveloped human capital. Current inflation and previous year rate of inflation are seen to exert debilitating effects on the productivity growth of the manufacturing industry. Inflation and the budget position are considered to be the two best indicators of how conducive macroeconomic policies are to growth (Fischer 1993). These macroeconomic factors introduce uncertainties in the price mechanism and therefore threaten its efficiency. The uncertainty often associated with high inflation or instability of the budget reduces the level of productivity and, in cases where the reallocation of factors is part of the growth process, the rate of productivity. Research and development (R&D) expenditure and export growth entail positive impact on productivity. The coefficients however are significant at 10 percent level only. Severe data problems impeded a deeper analysis of R&D expenditures' impact on productivity. Few studies, however, have shown the importance of the acquisition of knowledge and its transformation into prototype inventions of new materials, devices and processes, which allow larger production outputs and better quality products at cheaper costs. Its importance, however, has only been recognized recently. Under other instances, R&D expenditures have not been geared toward that end. Due to lack of competition and their inefficiencies, firms focused their R&D on product differentiation rather than cost-minimization (Lamberte 1988). Export growth, on the other hand, has been traced to have a positive relation to TFP growth. Its magnitude, however, is thwarted by the import-dependence of manufactured exports and weak interindustry linkages. Factor proportion changes arise in the process, and ._ork to counter initial gains in technical efficiency. _A minimum wage growth, on the other hand, has a negative thoughl'_significant impact. Minimum wage puts additional constraints on the cost"_,_production and, in some instances, induces capital substitution. And'_l_ over-investment in capital naturally turns out to be inefficient. Policy Implications Productivity fmcmauons m me industrial sector have been undoubtedly closely linked to the beha'qio,ur of the macroeconomy. Industries react and respond to changes in economic environment as

302

The Philippines beyond 2000: An economic assessment

well as affect and influence the overall economic performance. Therefore, to achieve sustained growth, improvements on both sides of the coin should be undertaken. Macroeconomic Policies and Investment Policies A sound macroeconomic environment, which stimulates investment and saving, is a fundamental requisite to better productivity in the manufacturing sector. Stabilization policies, such as those meant to manage inflation and budget deficits are necessary in fostering a good investment climate. As other sources of financing become more and more limited, the role of investment bnecomes emphatic. More is expected to be drawn from investment to meet societal and economic goals of clearing market imperfections, increasing market access, underscoring comparative advantage, fortifying competition and facilitating the transfer of technology. With the enormity of its conjectured contribution, the mere establishment of a stable macroeconomy is insufficient in enticing investment and translating it into improved productivity. Trade Policy The response of the industrial performance to the changing policy environment shows the enormous crippling effect of the importsubstitution strategy. Inefficiency became highly flagrant as protectionism inhibited competition. Reforms undertaken in the second half of the 1980s and in the 1990s, on the one hand, are still far from complete. Protection to local industries remains high and taxation to exportation is still prevalent. More reforms to further liberalize are needed therefore to increase production efficiency, Developing Technological Capability The mare toward a liberalized trade policy is a tread toward abating the bias against labour and exports. Elimi_g this bias, however, does not only require altering policies. T,h_ development of the technological capability of firms and indtw_es should be the first step to take if the country's human capitalist materials were to compete and suit the needs and demands of boffl the domestic and international markets. With insufficient techn6iogical capability, embarking upon technology transfer is meaningless because this does not lead to assimilation and efficient utilization of technology.

t. ......

306

The Philippines beyond 2000: An economic assessment

Patalinghug, E. 1996. Competitiveness, Productivity and Technology. College of Business Administration, University of the Philippines, Diliman. Policy Development Foundation, Inc. 1994. Science and Technology and Transfer and Assimilation of Foreign Technology: ARes earch Proposal. Makati City: PDFI. Stewart, F. 1979. International Technology Transfer: Issues and Policy Options. World Bamk Staff Working Paper no. 344. Washinton D.C.: World Bank. Tecson, G., M. Austria, V. Pineda, L. de Dios, D. Lapid, M.C. Medilo, C. Banzon, F.M. Trabajo and E.G. Mendoza. 1996. Philippine Trade and Industrial Policies: Carching Up with Asia's Tigers Volume II. Makati City: Philippine Institute for Development Studies. Urata, S. and Y. Kazuhiko. 1994. Trade Liberalization and Productivity in Thailand. The Developing Economies. Yap, J. 1989. Concept Paper on Science and Technology. Journal of Philippine Developmen_ 29,2.

_-_-

.. .._ .-.

....__

FiscalAdjustment intheContextofGrowth andEquity, 1986-1996 Rosario

Chapter/.

G. Manasan

hat a poor or deteriorating fiscal position on the part of the ecent ublicPhilippine sector effectively economicconstrains history provides the government"s compelling efforts evidence for economic recovery, sustainable growth and poverty alleviation. For instance, in the early 1980s, the government attempted to mitigate the effects of the second oil price shock by pursuing an expansionary expenditure program financed by foreign borrowing. As a consequence, the national government's fiscal deficit soared to 4.3 percent and 4.6 percent of gross national product (GNP) in 1981and 1982, resPectively, from an average of less than 1.5 percent in 1978-1980. HoweEggver._thJ_ approach proved to be unsustain_ons. First, the recession in the wor_ook longer than expected. Second, foreign capR_.a.1 was not as accessible during this period (compared to the_-t970s) so that the government did not have the wherewithal tO weather the external imbalance. Third, the financial crisis of 1981and severe political difficulties in 1983 led to massive capital flight that further exacerbated the situation. With external financing severely constrained, the government defaulted on its foreign obligations in October 1983 and had no choice but to adopt a stringent stabilization program under the auspices of the International Monetary Fund (IMF). Government spending, particularly that on maintenance and investment, was slashed. The fiscal deficit was subsequently reduced but the toll on the economy was heavy and the economy contracted by 7.3 percent annually in 1984 and 1985. Similarly, after rebounding from the 1984-1985 recession with a creditable gross domestic product (GDP) growth rate of 3.4 percent in 1986 and an annual average growth rate of 5.5 percent in 1987-1989, the economy faltered once again in 1990 when the GDP growth rate decelerated to 2.4 percent. Moreover, the GDP contracted by 0.5 percent in 1991and was practically stagnant in 1992. .._:.*

308

The Philippines

The unsustainable

beyond

growth

2000: An economic

assessment

in 1986-1989 may be explained

confluence of external and internal the developed countries dampened

factors. demand

by a

First, anaemic growth ill for the country's exports

during the period, Second, the country was badly hit by a number of natural calamities that had deleterious effects on overall output growth and devastated huge amounts of government infrastructure. Third, incessant political instability led to a crisis in investor confidence. Fourth, the Gulf War led to a sharp rise in oil prices. Fifth, part of the deterioration

in the economy's

performance

was policy-induced.

The govern-

ment stalled too long in adjusting petroleum product prices, resulting in huge consolidated public sector deficits (CPSD). Government-owned and controlled

corporations

also contributed

significantly

to the CPSD. Thus,

the CPSD ballooned from 3.1 percent of GNP in 1988 to 4.7 percent in 1990. Similarly, the national government's fiscal deficit rose to 3.4 percent of GNP in 1990 from 2.2 percent

in 1989 as the government

allowed capi-

tal outlays to rise to 3.3 percent

of GNP even as revenues

stagnated

showing substantial expansion. Also, the government's ment an. adequate energy program earlier on resulted outages.

There

was generally

a delay in the implementation

re_fO__an__onomy's prog_g

after

failure to implein severe power

structural

of policy weaknesses.

orthodox stabilization and _lp_licy. National gov-

f tigt_etary

ernment expenditure on. capital and maintenance b-or-e.th_, brunt of the adjustment again. Further improvements in tax effort were_Ms_9 put in place. Thus, the fiscal deficit was reined in anew such that in 1994 the national

government

posted

a surplus

(equal to 0.9 percent

of GNP) for

the first time in 20 years. This experience has been repeated in 1995 and 1996. The national government surplus was 0.6 percent of GNP in 1995 and 0.3 percent of GNP in 1996. In addition, the consolidated public sector itself registered a surplus of 0.2 percent of GNP in 1996. This is the first time the country years. ponent

Thus, it is observed of the adjustment

1986. At the same been favorable.

is in such a situation

in at least 20

that the fiscal position is an important program the Philippines has pursued

time, other indicators

In 1996, the outlook

of economic

for the economy

comsince

performance

had

was at its most optimistic

to date. The economy registered a GDP growth of 5.4 percent. Inflation was maintained at single digit levels since 1992. The gross international

reserves

reached

a record

high given the substantial

inflow

Chapter 8: Manasan

309

foreign investment, albeit a good portion came in the form of portfolio investment. Despite this, the economy was basically unscathed by the Mexican crisis, reflecting perhaps Philippine market. FDI approvals

increased investor confidence in the in the year also showed a dramatic

increase. However, the cun:ent account and the peso appreciated in real terms growth were made. Despite

the apparent

in the last decade, try persist. adjustment

several

depth questions

balance continued to be high even as great strides in export

of the fiscal adjustment

undertaken

about

of the coun-

the fiscal health

Is the present fiscal position sustainable? How much of the was the result of temporary events as opposed to funda-

mental policy changes? Was the character of the fiscal correction in 'the last decade growth-promoting and equity-enhancing? The answer to these questions is largely determined by the composition of the fiscal measures put in place during this period, in turn, such will impact on the country's future economic growth. The economic literature indicates that fiscal policy reforms

can

foster growth by: (1) promoting macroeconomic stability; (2) fina_.n¢-. ing/providing investments that the private ..- sector .will. notsu-ppl_, in•.......suf__ __ ......... ficient quantity but which _can boos_tp_ixate_ctivity; nancing governmen-t"_i_la-(anner that minimizes • ....

(3) fidistortions to

private sec_as rings and investment decisions and economic activity in gene1:a-1;"and (4) providing the institutional infrastructure needed for the market economy to function.1 In particular, the experience of other com_tries suggests that fiscal policy that is consistent with low inflation, availability adequate credit to the private sector and external balance is essential in providing a stable• policy environment wherein private sector investments can thrive (Goldsborough et al. 1996 as cited in Mackenzie et al. 1997). Also, investments in physical infrastructure cannot be adequately provided by the private market imperfections in many less developed tor in these economies vision of infrastructure tional literature

sector because of capital countries. The public sec-

has to play a vital role in the financing and proinvestments. The evidence from the interna-

as well as from Philippine

data demonstrates

public

infrastructure

investment

is positively

growth,

public

investment

expenditure,

in general,

sector

that while to economic is not. Ad-

Mackenzie et al. (1997)provides a succinct summary of the relationship between fiscal policy and economic growth.

310

The Philippines beyond 2000: An economic assessment

equate maintenance and other operating expenditures (MOOE) are subsequently needed to sustain the productivity of public capital stock. Again, the existence of market failure may justify the financing and supply of education by the public sector. For instance, the benefits from education may not be fully captured, by the student. This is particularly true of basic education where some of its benefits in telxns of better hygiene, better infant care and lower birth rates accrue to the community at large. Moreover, in poor areas, parents may apply an excessively high discount rate in valuing the benefits from formal education. The capital market is not fully developed in these places to lend students/parents money to fund edncational expenses especially in the primary and secondary levels. Likewise, health care expenditures in_ crease human productivity and may entail large externalities in. the case of primary and preventive health care expenditures. On the revenue side, tax reform contributes to macroeconomic stability by raising adequate revenues. Since taxes, in general, create distortions which may result in a suboptimal allocation of resources, it is also important that the tax structure be designed in a way that will minimize said disincentives to savings, investments, and labor supply. -_---_Y_a_Y-yTtt__asized that the concern for equity in the conduct of fiscal policy is not-o_alSY-_-_rportan_t, goal in itself but is essential, m reinforcing the political acceptability-and_._ability of the policies and measures that are instituted as well. Given this context, the objectives of this study at-c: (1) Toreview the growth in the size and the changing composition of national government revenues in 1986-1995 and evaluate recent changes in tax structure and administration with respect to three criteria: revenue adeqnacy, economic efficiency and equity; (2) To appraise recent changes in the size and. composition of government expenditures with respect to their possible impact on growth and equity; and (3) To review the evolution of the fiscal position of the consolidated public sector and assess its sustainability and implications for long-term growth. It is notable that the bulk of the fiscal adjustment in recent years (particularly in 1994 and 1995) is traceable to the large inflow of privatization proceeds (P29.9 billion or 1.7 percent of GNP in 1.994, and P22.8 billion or 1.2 percent of GNP in 1995) into national government coffers. Thus, without the revenue from the government divest-

Chapter 8: Manasan

311

ment program, the national government's fiscal position would have been in deficit rather than in. surplus in said years. While the national government would have posted a surplus even without the privatization proceeds in 1996, the same :annot be said of the consolidated public sector. is still apparent

the mid-1990s, tax effort (the ratio of tax revenue to GNP) appears have tapered off. Tax effort rose by a total of 3 percentage points

While some gains in tax revenue

performance

to of

GNP in the four-year period between 1986 and 1990. In contrast, it only increased by 1 percentage point of GNP in the period between 1992 and 1996. Tariff revenue is expected to contract as the government continues to lower import duties in line with its trade liberalization program. The problem of weak revenue generation revenue from sales of government-owned

will become more critical as firms declines in the next

few years.

of the tax system persists

a major

Consequently,

the enhancement

area of concern..

Capital outlays and government expenditures and other operating expenditures that have suffered during levels.

on maintenance major cutbacks

the adjustment period have not been restored to-their normal Likewise, unmet demands in the area of human prioi-ity con-

cerns (i.e., basic edu._c.ation,l_asic healthcare and sanitation)

coritinue

to be large.

and low cost water supply

It is therefore

important

nancing of expenditures on infrastructure and human ments be secured through budget restructuring without creasing total expenditures. Assessment

capital investnecessarily in-

of Tax Policy

The tax policy reforms will be assessed with respect and equity.

that fi-

undertaken to revenue

The overall revenue

during the period under study adequacy, economic efficiency

performance

of the tax system will be

gauged based on three measures: tax effort ratio, buoyancy coefficients and cross country comparison. Tax effort is defined as the ratio of tax revenue to GNP. As such, it is an indication of the tax burden relative to the economy's

ability to pay.

On the other hand,

the tax buoyancy

coefficient is the ratio of the proportional change in tax revenue to the proportional change in the tax base. 2 It measures the responsiveness

2In the aggregate, GNP is usually used as the proxy for the tax base.

312

The Philippines

of the tax system to changes changes in tax laws. 3

beyond

2000: An economic

in the level of economic

assessment

activity

as well as

Besides the indicators of revenue performance proposed earlier, this paper will also present updated tax evasion estimates for the individual, the corporate income tax and the value added tax (VAT). The tax evasion wherein

estimates calculated in this study follow the gap approach, the "true" tax base is first determined. Thus, data on aggre-

gate income/sales/receipts tax returns. Most often, counts

is obtained from sources independent of the these would be from the national income ac.-

(NIA). The corresponding

tax liability

for the income/sales

esti-

mate thus derived is then computed and is equated to the potential tax revenue take. The difference between the potential tax revenue and the actual evaded.

tax collection

is then presumed

to be the amount

of taxes

The major difficulty with the gap approach is the absence of alternative data sources on the appropriate tax base. This is particularly true of capital

gains.

But where

this

type of information

is available,

.the gap approach is deemed superior to the other procedures like the -elas.fici_ty approach or the tax audit approach. De'tared methodology for the estimafibn

.of.taxe_va_._sig_._n for the individual

income

tax, the VAT

and the co12aorate income tax are presented i-i_/-Appyndix 1. On the other hand, the Suit's index is used to assess the impact

changes in tax structure on income distribution, it is define.d....with reference to a Lorenz-like curve which plots the cumulative percent distribution of household income on the aMs and the cumulative percent. distribution of tax burden on the vertical axis (Figure 1). Analogous to the Gini coefficient, the Suit's index is computed as the ratio of the area • between

the diagonal

and the Lorenz-like

curve

to the area of the tri-

angle OAB. The Suit's index varies from -1 to +1. In the limiting extreme progressivity where the highest income bracket bears tire tax burden,

the Lorenz

the area between

the diagonal

case of the en-

curve lies along the sides OA and AB so that and the Lorenzdike

curve is exactly equal

,_Tl-,etax buoyancy coefficient for the various types of taxes may then be decomposed into: (1) the rate buoyancy (i.e., the buoyancy of the tax yield with respect to the 'tax base) and (2) the base buoyancy (i.e., the buoyancy of the tax base with respect to GNP). This becomes obvious from the following: e,_c,_. p = (dti/ti)/(dGNP/GNP) = [(dtiiti )/(dbi/bi )]_[(dbi/bi )/(dGNP/GNP) = e ,_b_ * et,_aN, where e,_c, Nprefers to the over-all buoyancy co-efficient for tax I; e,,_refers to the rate buoyancy for tax I; eb_c._e refers to the base buoyancy for tax I; ti refers 'torevenue collections from tax I; and, ,ji rei:e;-_to _he tax bas_ specific to tax I.

Chapter 8: Manasan

Figure

1. Lorenz

313

Curve. 1

Lorenz cumulative distribution

Curve

percent of tax burden

":------

cumulative

percent

distribution

of income

to the area of the triangle OAB and the Suit's index is equal to + 1. in the case of extreme regressivity, the Lorenz curve lie along the lines O1 and lB. Thus, the area between the diagonal and the Lorenz curve will be equal to twice that of the area of the triangle OAB and the Suit's index would be equal to -1. It should be noted that the Suit's index is sensitive to relative magnitudes magnitude

of tax burden across households but not to the absolute of the tax. Thus, the Suit's index is a useful indicator of the

relative redistributive effects of alternative taxes only if these taxes yield revenues of the same order of magnitude. On the other hand, the Gini coefficient can only validly rank distributions for which the Lorenz curves

do not intersect

(Habito

1984).

Lastly, economic

efficiency

effects

in recent years will be assessed rium analysis. Inventory

of the tax changes

qualitatively

based

introduced

on partial

equilib-

of New Tax Measures,

The government

undertook

an extensive

restructuring

of the tax

system in 1986. While previous efforts to change the tax policy were piecemeal in nature and generally concerned with revenue generation, the 1986 Tax Reform Package (TxRP) represented the first attempt at a comprehensive

reform

of the country's

ticulated

policy,

dictated

by the need for government

objectives age.

the measures

also received

• The next five sections

draw

comprising

considerable

heavily

tax system.

from

the TxRP were

revenues. weight

Manasan

In line with the ar-

Equity

not solely

and efficiency

in the design of this pack-

(1997).

314

The Philippines

The following Package:

were

(1) a shift from

beyond 2000: An economic

the major

components

the schedular

assessment

of the Tax Reform

to a more

global

approach

taxing individual income from compensation, business, trade and exercise of profession; (2) increase in personal and additional exemptions; (3) separate treatment of income of spouses; (4) an increase in the final withholding tax rate on interest income (from 17.5 percent) and royal ties (from 15 percent) to a uniform rate of 20 percent; (5) the phaseout of the final withholding tax previously levied on dividends; (6) the unification

of the earlier

dnal tax rate (of 25 and 35 percent)

levied

corporate income to 35 percent; (7) the introdnction of the value added tax (VAT) in place of the sales/turnover tax and a host of other taxes; (8) the conversion of unit rates formerly used for excise taxes to ad valorem rates; (9) the abolition tariff rates, s From

of export

1987 onward,

taxes;

and (10) further

the government

reduction

had to introduce

in tax

changes primarily to respond to the need to raise more revennes within the context of a series of fiscal adjustment programs. But not all were consistent with the spirit of the 1986 reform package. Some, like the import levy imposed in 1991, were put in place because they were administratively

and politically

convenient.

ally seen as highly distortionary term growth. Trends in Size Revenue

and

However,

and having

Composition

they were gener-

a perverse

effect on long-

of National

Government

Tax revenue is the national government's most important source of income_ It accounted for 86.2 percent of total central government revenue

in 1992-1996 compared

to 82.2 percent

in 1986-1991 (Figure

2).

Conversely, the share of non-tax revenue to total central government revenue declined from 17.8 percent in 1986-1991 to 13.8 percent on the average

in 1992-1996. This occuned

various

government

agencies

as grants

contracted

and charges

even as privatization

expanded. In particular, while national govermnent of assets increased from 0.5 percent to 0.7 percent of Treasury's charges,

grants

declined

tively, to 0.2 percent

and income,

from

inclusive

0.5 percent

and

collected

proceeds

receipts from sales of GNP, the Bureau

of income 1,9 percent

from

fees and

of GNP, respec-

and 1.7 percent.

s The last item is not usually viewed as part of the TxRP but as the main element of the Tariff Reform Program (TfRP).

Chapter 8."Manasan

Figure

315

2. Distribution of National Sources, 1975-1996.

Nontax Rcvcnuc 13%

Government

Revenue

Nomax Rcvcnuc 14%

Tax Revenue 87%

2-_tx.[_c'_.Cllttt__ 86_,,h.

1975-1985 1992-1996 Noratax Rcv'c IILIC 18%

82%

1986-1991

Nontax

revenue

reached

its peak

at 3.7 percent

of GNP in 1994

(Table 1). Of this amount, 1.7 percent of GNP came from privatization income. This figure likewise represents the highest revenue take from the government of said program

divestment program in any single year since the start in 1986. The privatization program also contributed a

substantial amount (1.2 percent of GNP) to the national treasury in 1995. However, by 1996, government income from sale of assets was down

to a mere 0.2 percent The 1986 Tax Reform

of GNP. Package,

together

with the other

tax mea-

sures put in place in the ensuing years, resulted in a significant improvement in the tax effort. The ratio of total tax revenue to GNP climbed

from

an average

of 11.3 percent

of GNP in 1975-1985 to 16.2

percent in 1996 (Figure 3). However, the improvement tax effort appears to have tapered off in more recent stance,

while the tax effort

increased

the four-year period between centage point in the four-year

by a hefty

3 percentage

points in

1986 and 1990, it rose by a mere period between 1992 and 1996.

These developments allowed the Philippines tax effort compared to that of other Asian countries, ued to lag behind

in Philippine years. For in-

the performance

of Malaysia,

1 per-

to improve on its although it contin-

Singapore,

South

Ko-

Chapter 8."Manasan

Figure

317

3. Tax and Nontax

Effort,

1975-1996.

14.00 12.00 16.00 10.00

s,oo

18.00

]

4.00 6.00 2,00

0.00

..........

_.._..._k_

_-......_

I[_ •

TAX REVENUE NON-TAXREVENUE

]

,_ ._ ,_ ._ ._ ,_,._ ,_ ,_ ._ ._ xd_aF

16.00

8.00 1.0,00 14,00 6.00

, ooi 4.00 ZOO 0,00 _

_._

1975 -1985

[] TAX REVENUE [] NON -TAX REVENUE

_! _J Ii 1986 -1991

]

1992 -1996

More significant than changes in the relative importance of the different tax groups are changes in their levels relative to GNP. The expanded

contribution

of revenue

from taxes

on income

and profits

even more dramatic when compared in relation to GNP. Taxes from the said source more than doubled from 2.8 percent of GNP in 19751985 to 6 percent in 1996. Moreover, it is surprising that all major types of indirect taxes exhibited some growth relative to GNP, albeit slower than direct taxes. Revenue from sales tax/value-added tax (VAT) and from import

duties showed

grew from an average in 1996. On the other from

an average

the largest

increase.

Sales tax/VAT revenue

of 2.3 percent of ONP in 1975-1985 to 4.1 percent hand, tariff revenue posted a minimal increase

of 2.9 percent

of ONP to 3 percent

of GNP. It appears

318

The Philippines

Table

beyond

2. Tax Effort in Selected percent of GDP).

2000: An economic

Asian

Countries,

1991

1994

Indonesia

17,2

15.5

Malaysia Philippines Singapore Thailand South Korea

21,2 14.6 15,8 17.6 14.9

21.4 16_0 16.9 16.8 16.9

assessment

199111994

( In

Source of basic data: Author's estimates using revenue data from the Government Finance Statistics and GDP data from the international Finance Statistics.

that the increased

dependence

due to the replacement

on. direct

of indirect

taxes in 1986-1995/6

was not

taxes by direct taxes. Rather,

it arose

from the marked rise in the overall direct tax effort. The yield of indirect taxes measured against GNP did not diminish while that of direct taxes increased significantly, indicating that the new tax structure successful in exploiting the revenue possibilities of direct taxes.

was

Tax Buoyancy Hand in hand with this progress, the buoyancy of the tax system with respect to GNP rose from an average of 0.93 in 1976-1986 to 1.31 in 1987-1996 (Table 3). However, it is.worrisome that the overall tax buoyancy coefficient has deteriorated from 1.41 in 1987-1992 to 1.15 in 19931996. This is largely driven, by the sharp drop in the buoyancy of tariff revenues, which continue to account for about one-fifth of total tax revenue.

The buoyancy

coefficient

of the individual

declined but to a lesser degree. In contrast, with respect to the buoyancy coefficient the corporate

income

tax also

some headway was achieved of excise taxes, the VAT and

tax.

Tax Structure Individual Income Revenue

income

Tax

from the individual

income tax was the fastest

growing

item (increasing at an annual average rate of 23.2 percent) among the major tax groups in the period 198%1996. The expansion was particularly rapid in 1987-1992, wherein the revenue from this source rose by 25.2 percent yearly on the average. The rate of increase has slowed

Chapter 8: Manasan

Figure

319

4. Distribution 1975-1996.

of National

Government

Taxes

by Sources,

40.00

35_00

3o.0o :>,/.-. 25.00

,___.__,

. >.

a 20.00 = 15.00 p _a 10.00 5.00 0.00

r/x.-_,-._x..

-_>---

,/_4"_'_'--. x =-_-_-l---1--_l

.:,

,: _

•

Income and Profits l"axI Excise Tax

VAT

--x-- Import Duties

35_00 -'_ 30.0025

m00

20.00-

15.00 -

10.00.

'.; -

5.00-

. _.,.

0_00.-1975-1985

1986q991

I .,' -, 1992-1996

Year

I VAT [] Income and Profits Tax [] Import Excise Tax Duties

down since then and slipped to an average of 20.3 percent per year in 1993-1996. Nevertheless, the individual income tax revenue continued to grow at a faster rate than gains have also been achieved

total tax revenue and GNP. Significant in terms of the revenue performance of

320

The Philippines

Table 3. OveraLl Buoyancy 1996.

beyond 2000: An economic

Coefficients

assessment

of Major Tax Groups,

1976-

1976-1986

198%1996

1987-1992

1993-1.996

TOTAL TAX REVENUE

0_93

1.31

1,41

1.15

Inctividual h_come Tax Corporate Income Tax Sales Tax/VATand Licenses Excise Taxes Import Duties

0.62 _t 0,90_ 0_95 1_22 0.71

1,62 1.60 1.52 0.80 1.25

1.67 1.57 1..43 0.60 1.88

1.53 1.67 1.67 1.14 0.29

tax effort

doubled

"refers to average for 1980-1986 Source: Author's estimates

the individual

income

from

of GNP in 1986 to 2.1 percent

1 percent

A comparison

tax. The individual of the Philippine

income

in 1996 (Table 1).

experience

with those

of other

countries in the region shows that the Philippine individual income tax effort is better than those of Indonesia and Thailand (Table 4). However, it is lower period

under

than

study.

those

of South

Korea

Note that Malaysia

and Malaysia

and the Philippines

parable statutory rate schedules but South Korea's erally higher than that of the Philippines.

Table

4. Individual Income Tax Effort Income Tax Rates in Selected

Indonesia Malaysia Philippi T_es Singapore Thailand South Korea

during

rate schedule

is gen-

and Statutory Individual Asian Countries. Statutory IIT Rates

IIT Effort 1.991 1994

1985

1.994

1.13 2.31 1.67 n.a. 1.89 2.99

15-35 5-40 3-70 3.5-33 7-55 6-55

10-30 0-32 0-35/3-30 2.5-30 5-37 5-45

1.48 2.46 2.02 n.a. 1.80 3.66

the

have com-

Source of basic data: Author's estimates revenue data from the Government Finace Statistics and GDP data from the international Finance Statistics. Statutory rates are from Yoingco 1996.

Chapter 8: Manasan

321

In like maimer, the buoyancy coefficient of the individual income tax improved substantially in 1987-1992. The buoyancy of the individual income tax with respect to GNP rose from an average of 0.62 in 1980-1986 to an average of 1.67 in 1987-1992. However, it declined to 1.53 in 1993-1996 (Table 5).

Table 5. Decomposition vidual Income

of the Buoyancy Tax, 1980-1996.

Coefficient

of the Indi-

1980-1986

1987-1996

1987-1992

1993-1996

Overall Buoyancy

0.62

1.62

1.67

1.53

Rate Buoyancy Base Buoyancy

0.59 1.05

1.90 0.85

1.93 0.86

1.86 0.83

Source:Author'sestimates

The decomposition of the overall buoyancy of the individual income tax shows that its movements were largely driven by movements in its rate buoyancy (i.e., buoyancy of individual income tax revenue with respect to compensation income and net operating surplus of households as reported in the National Income Accounts [NIA]). To wit, its rate buoyancy rose from 0.59 in 1980-1986 to 1.93 in 1987-1992 but posted a slight deterioration to reach 1.86 in 1993-1996. This indicates that while the effective tax rate increased dramatically from the period 1980-1986 to the period 1987-1992, it declined by a small amount in 1993-1996. In contrast, its base buoyancy (i.e., buoyancy of personal income with respect to GNP) decreased continuously from 1.05 in 19801986 to 0.86 in 1987-1992 to 0.83 in 1993-1996. This occurred as personal income grew at a slower pace than GNP in the late eighties to the first half of the nineties. 1986 Reform The trends discussed above suggest that the modifications in the individual income tax under the 1986 Tax Reform Package (TxRP) has had a significant positive impact on its revenue performance. It should be emphasized that the revenue impact of the various provisions of the TxRP were not unidirectional.First, it mandated a partial shift to the

322

The Philippines

beyond

2000: An economic

assessment

global approach in individual income taxation. Second, it increased the level of personal exemptions. Third, it reduced the income tax rates applicable to pure business/professional income. Fourth, it provided spouses the option to compute their tax liability separately. The first component was expected to lead to higher effective tax rates as taxpayers are made to add up their taxable income from different sources

before

applying

liability. 7 In contrast,

the prescribed

the last three

tended

tax rate to arrive at their tax to reduce

the expected

yield

of the individual income tax. The second component did this by reducing the tax base. On the other hand, the third and fourth component influenced the tax yield by effectively lowering the average tax rate. On the whole, the impact of the first component appeared to have dominated those of the last three provisions of the 1986 TxRP. Some aspects of the 1986 reform affected the tax base, this is not reflected in this paper's estimate of the base elasticity. This is because the personal income used as proxy tax base in this study is broader than

the legal tax base due to the inclusion

of personal

exemptions

the former. As such, any broadening of the statutory base is translated to higher effective rates and, consequently, to higher rate buoyancy estimates. In principle,

allowing

the spouses

to compute

taxes separately

under the 1986 TxRP was designed to mitigate the efficiency losses that arise when the secondary earner in a family (usually the wife) is subjected

to a higher

marginal

tax rate than the single (or unmarried)

individual. This consideration is important given the increasing participation of women in the labor force of the Philippines. There is some evidence in other countries that the elasticity of the labor supply of married women is higher than that of other groups. Furthermore, note that the imputed

income

from

housework

of the nonworking

untaxed while tax deductible.

work-related costs incurred by the working All these suggest that this reform is sound

the efficiency

and equity perspective

(Manasan

wife is

wife is not from both

1990).

7Under the schedular-type individual income tax system in place prior to 1986,the tax rate that was applied to business income is independent of the amount of compensation income that the taxpayer receives and vice versa. In other words, income from different sources (received by taxpayers with mixed income) were taxed starting from the bottom rates of each rate schedule. For example, a taxpayer which has a taxable income amounting to P20,000 divided equally between compensation and business income will' be taxed at the marginal rate of 3 percent for compensation income and 5 percent for business income reader the schedular system rather than at the mm'ginal rate of 7 percent under the global approtich of the 1986TxRP.

Chapter 8: Manasan

323

Manasan (1990) also showed that the 1986 TxRP is supportive of the horizontal equity principle of income taxation. That is, taxpayers in the same income bracket were taxed at the same rate regardless of their source of income, which contrasts that of the previous regime where pure nonwage earners bore the higher effective tax rates (ETRs) than pure wage earners, in the pre-1986 period, mixed income earners the lowest ETRs and where mixed income earners were situated somewhere in between. This disparity in the tax rates for salaried and nonsalaried individuals before 1986 may have distorted the incentive structure and affected their economic behavior. At the same time, estinaates of the Suit's index indicate that the 1986 tax measures have enhanced vertical equity. In other words, the individual income tax StlXlcture under the 1986 TxRP was more progressive than the one it replaced. Manasan (1990) showed that the Suits index rose from 0.48 to 0.54 with the advent of the 1986 TxRP. Simplified Net Income Taxation Scheme (SNITS) The SNITS was introduced in 1992. It (1) restricted deductions that can be claimed against gross income; (2) reverted the individual income tax system to the schedular approach; (3) increased the lowest marginal tax rate applicable to business/professional income from 0 percent to 3 percent while reducing the highest marginal tax rate from 35 percent to 30 percent. In that year, the BIR also expanded the coverage of the withholding tax system and increased the level of personal exemptions. Limiting the items which can be charged against gross income to arrive at the taxable income broadens the tax base. The shift to the schedular approach reduces the effective tax rate by allowing mixed income earners to use the lower tax brackets of each rate schedule in computing their tax liability. The impact of the compression of the rate schedule on the effective tax rate is not dear. The increase in the minimum marginal rate is expected to have a higher weight because of the larger number of tax fliers in the lower income bracket. On the other hand, the reduction in the top marginal tax rate might encourage more people to evade taxes less. All these data indicate that the SNITS resulted in a mild deterioration of the rate buoyancy in the individual income tax system despite some concomitant improvements in the withholding tax scheme. By disallowing taxpayers to deduct certain types of expenditures from their gross income, the SNITS clearly sought to plug the systemic

324

The Philippines beyond 2000: An economic assessment

leakages arising from the overstatement of tax deductions, particulm_ly those items where it is difficult to separate the business from the personal element such as transportation, representation and entertainment expenditures. Using this criteria, it is not clear why certain items like property insurance, taxes on business properties, payments to independent contractors of services and the like should be excluded under the "allowable deductions" of the SNITS. It has also been pointed out that the SNITS introduced certain uncertainties on what is and what is not deductible for income tax purposes. For instance, it is not clear whether the deduction for raw materials, supplies and direct labor under the SNITS encompasses all costs that would ordinarily be included in. cost of goods sold or cost of sales (Sunley et al. 1994). The shift back to the schedular approach after the introduction of the SNITS reversed the improvements in horizontal equity and economic efficiency that was brought about by the 1986 TxRP. This was because the SNITS allowed nonuniform effective tax rates to be applied to wage, nonwaged and mixed income earners. At the lower im come brackets (i.e., taxable income below P70,000), taxpayers with pure compensation income were subjected to a lower effective tax rate than taxpayers with pure business income. The opposite was true for higher income brackets. The SNITS was also less progressive than the previous individual income tax regime as indicated by the decline in Suit's index to 0.38 from 0.54. On the other hand, Table 6 shows a general downward trend in the individual income tax evasion rate in 1985-1996 despite some yearto-year fluctuations. The evasion rate fell from 73.1 percent in 1985 to 63.7 percent in 1991to 52.6 percent in 1996. The SNITS has had a positive impact on the collection efficiency of the business/professional individual income tax. Some 20.2 percent of the potential revenue from business/professional income tax was collected in 1993, compared to only 12.8 percent in 1992. (The impact of the SNITS was first felt in 1993 although it was already passed in 1992. This is so because individual income tax payments arising from business/professional income are largely collected the year after the income is earned.) Since then, this number has risen consistently to reach a peak of 34.2 percent in 1995 but deteriorated to 22.2 percent in 1996. Despite these improvements, the evasion rate for business/professional income tax remains high at 77.8 percent in 1996. This appears to confirm anecdotal evidence that under-reporting of income contributes more to tax evasion than excessive deductions.

Chapter 8: Manasan

Table

325

6. Level of Tax Evasion 1996.

h_ar

from

l_vadedT_xe_

Individual

Collectioa

Income

Rate

Tax, 1985-

Evasion

Rate

qbtzd

Fr- Salaln, es

Fr Bus/

"lbt[tl

Ft. Sai_u'ies

Fr ,Bus/

Total

Fr, Salarius

FY Btls/

(Pmillion)

(Pmi/lion)

Proflnc (.Pmi]lion)

Proflnc %

Prof [no %

37.22 24.16 34.68 22.95 43,24 35.77

83.72 87.18 79.76 72.05 65.8t 77.77

1988

16037.60

26.90

73.10

•1986

9564.70

38.30

61,70

1988 1990 1991 1992 1993 1994 •1995 1996

19940,30 29994.30 29599.46 37108,14 31743.61 24529.98 35651.09 48510.09

28.50 35.10 39.96 36.29 ,;2.38 53,80 48.26 47.38

71.50 64.90 60.04 63.71 57,62 46.20 51.74 52.62

9342.60 5239,58 9382.64 6412.14 18584.65 19748.,_-)

20256.86 31868,56 22360.97 18117.84 17(.166.44 28761,70

62.78 75.84 65.32 77.05 56,76 64.23

16.28 1.2.82 20.24 27.95 34.19 22.23

Source: Actual Revenue from Bureau of Internal Revenue; Potential Revenue, author's estimates, Note: NIA income distributed according to breakdown between wages and numbers in F1ES.

In contrast,

estimates

come

tax on compensation

from

56.8 to 77.1 percent.

of the collection income

rate for the individual

are consistently

It is the collection

higher--ranging

rate for tax on compensa-

tion income that is quite erratic. Significant when the collection rate rose to 75.8 percent

gains were made from 62.8 percent

Subsequently,

to 65.3 percent

the collection

rate declined

in-

in 1992 in 1991.

in 1993 be-

fore peaking at 77.1 percent in 1994. Then, it dipped to a low of 56.8 percent in 1995 but recovered somewhat to reach 64.2 percent in 1996. It appears that the success of the implementation holding tax system is rather erratic. Moreover,/ts years is lower than that in earlier years. Uncollected revenue from the individual

of the expanded withrecord in the last two income

to P48.5 billion in 1996. This is equal to 132 percent ment

tax revenue

for the year and 2.1 percent

tax amounted

of national

govern-

of GNP. This suggests

that potential revenue gains arising from any enhancement of coUection/enforcement mechanisms in the area of individual income taxation will be substantial. Corporate enue

Income

Tax

Like the individual income tax, the corporate income tax revexhibited rapid growth in 1987-1996, increasing at the average

yearly rate of 23 percent

during

the said period

compared

to 14.4 per-

326

The Philippines

cent in 1980-1986.

It showed

beyond

2000: An economic

the same trend

assessment

as the individual

income

tax: faster growth in 1987-1992 than in 1993-1996. However, its increase continued to be higher than that of total tax revenue and that of GNP despite the observed deceleration. Thus, the corporate income tax effort rose from 1.4 percent of GNP in 1986 to 3.0 percent in 1996. Meanwhile, the overall buoyancy of the corporate income

tax

improved significantly from 0.90 in 1980-1986 to 1.60 in 1987-1996. The bulk of the improvement occurred in 1987-1992, when 'the buoyancy coefficient averaged 1.57 although some incremental, improvement the buoyancy coefficient is also observable in 1993-1996 (Table 7).

Table

7. Decomposition Corporate

of the

Buoyancy

Coefficient

of the

income

Tax, 1980-1996.

1.980-1986

1987-1996

1987_1992

1993-1996

Overall Buoyancy

0.90

1.60

1.57

1.67

Rate Buoyaacy Base Buoyancy

1..50 0_60

0.88 1.82

0.82 1.91

1.00 1..67

Source: Author's estimates

By partitioning results

the overall buoyancy

show that the rate buoyancy

tax (with respect ment corporations

of the corporate

coefficient

income

of the corporate

tax,

income

to the net operating surplus of private and governas reported in the NIA) slid from 1.50 in 1980-1986

to 0.88 in 1987-1992

before

recovering

to 1.0 in 1993-1996.

The 1986

TxRP effectively raised the corporate income tax rate when it abolished the dual rate schedule of 25 percent and 35 percent in favor of a unified rate of 35 percent. of 1987) introduced

However, EO 226 (the Omnibus Investments the income tax holiday as a principal feature

investment

incentive

package.

This narrowed

tax base?

Other laws that provided

the corporate

the special tax treatment

Code of the income

of various

sectors were also passed in more recent years. The tax buoyancy estimates thus indicate that these exemptions tended to dominate the effects of the higher

statutory

tax rate.

SThis contraction of the tax base is not captured by our estimate of the base elasticity but is reflected in tile rate elasticity estimate.

Chapter 8: Manasan

327

On the other hand, the base buoyancy of the corporate income tax surged from 0.60 in 1980-1986 to 1.91 in 1987-1992 before declining to 1.67 in 1993-1996, showing movements generally responsive to changes in GNP.

in corporate

income

to be

Moreover, a cross country comparison confirms that the corporate income tax is one of the weaker points in the Philippine tax system. The Philippine statutory corporate income tax rate is generally higher than those of other countries ies show that the Philippine be lower than

those

in the region (Table 8). Despite this, studcorporate income tax effort continues to

of Indonesia,

Malaysia,

and Thailand

in the first

half of the 1990s. 9 However, the Philippine did manage to overtake South Korea in terms of corporate income tax effort in 1994.

Table

8. Corporate Income Tax Effort and Income Tax Rate in Selected Asian

Statutory Countries.

Corporate

Smtutory Corporate

IT E[fort

Corporate

IT Rates

i991

1994

1985

1994

Indonesia

9,37

6.47

15/25/35

10/15/30

Malaysia

7.26

6.89

'Philippines

1.94

2.60

25/35

Singapore

n.a.

n.a,

Thailand

2.91

2,64

35145

Souda Kocea

2,13

2.41.

20/30

18/30

Source of" basic data: Author's estimates using revenue data from the Government Finance Statistics and GDP data from the International Finance Statistics. Statutory rates are from Yoingco (1996).

At the same time, estimates dicate

no clear improvement

of the corporate

in the period

tax evasion

1991-1996.

rate in-

The collection

rate slid from 65.5 percent in 1991 to 56.9 percent in 1993 (Table 9). While the collection rate recovered slightly in more recent years, its 1996 level (61.2 percent) is still lower than its best record (65.5 percent) to date. Consequently, corporate income tax evasion level reached 11.7 percent of the national in 1996.

government

tax revenue

or 1.7 percent

It should be pointed out that both Indonesia and Malaysia's revenue includes the government's share in the income of firms tion and development of their oil reserves.

of GNP

corporate income tax engaged in the extrac-

328

The Philippines

Table 9. Potential the Level

beyond 2000: An economic

assessment

Revenue from the Corporate of Tax Evasion, 1992-1996.

Income

Year

Evaded Taxes (Pmillioa)

Collection RaEe %

Evasion Rate %

199.1 1992 1993 1994 1995 1.996

12706.85 20243.57 27011.51 31062.25 35128.93 431N.44

65.46 60.22 56.93 59.26 60.04 61.21

34.54 39.78 43.07 40.74 39.96 38.79

Tax and

Source:Potential revenue, author's estimates; Actual revenue, BIR Annual Reports.

It should

be noted, however,

for two reasons.

that these estimates

corporate income estimates of the NIA were based tios that date back to 1986. Second, the calculations mate the evasion the number

tend to be weak

For one, they tend to be on the low side because

rate because

no adjustment

on benchmark ratend to overesti-

was made to account

of BOI-registered

firms

that enjoy an income

Import Duties Revenue from import

duties

showed

a sharp

the

for

tax holiday.

expansion

in 198%

1992, increasing at 28.3 percent per annum on the average compared to 12.0 percent in 1975-1986. (In fact, tariffs were the fastest growing source of revenue in 1987-1992.) However, th.e growth rate of tariff revenues plunged

to art average

annual

rate of 3.8 percent

in 1993-1996, making

the most sluggish-moving revenue source during this period• Consequently, import duties plummeted from 3 percent in 1980 to 2.2 percent 1992. Thus, the tariff

of GNP

in 1986. It only recovered lost ground in 1987revenue rose during that period to peak at 4.2

percent of GNP in 1992, but suffered another reversal in 1993-1996. The 1996 tariff revenue during the period amounted to only 3 percent of GNP, Reflecting the movements described above, the overall buoyancy of import duties shows a substantial improvement in 1987-1992• It rose from a low of 0.63 in 1980-1986 to a high of 1.88 in 198%1992 (Table 10). However, the situation had worsened since then with the buoyancy coefficient

dropping

to 0.29 in 1993-1996•

Chapter 8: Manasan

Table 10.

329

Decomposition of the Duties, 1980-1996.

Buoyancy

Coefficient

of Import

1980-1986

1987-1996

1987-1992

1.993-1996

0.63

1.25

1.88

0.29

Buoyancy

0.85

0_74

1.28

0,14

Base Buoyancy

0.74

1.69

1,46

2.08

Overall

Rate

Source:

Buoyancy

Author's

estimates

The trend

in the overall

buoyancy

coefficient

is largely

deter-

mined by movements in its rate elasticity. '° To wit, the rate elasticity (with respect to total imports) was enhanced from 0.85 in 1980-1986 to 1.28 in 1987-1992. But this development the rate elasticity

averaged

was reversed

in 1993-1996 when

a low of 0.14.

The low rate elasticity in 1981-1986 may be traced to the tariff reductions brought about by the first phase of the Tariff Reform Program during that period. shift was only neutralized

The negative revenue impact of this policy by the imposition of an import surcharge in

1983-1985 in response to the balance-of-payment crisis in that period. This is seen in the rise in the effective tariff rate in 1983-1985 after its decline

in 1981-1982 (Figure

5).

In contrast, the dramatic improvement in the rate buoyancy in 1987-1992 may be attributed to a number of factors. First, there were no significant

reductions

withdrawal corporations

of duty exemption under numerous

base. Figure total imports

in tariff

rates

during

this period.

Second,

the

privileges granted to GOCCs and private special laws in 1985 broadened the tax

5 shows a decline in the share of nondutiable imports to in 1986-1990. I_Third, the imposition of the import sur-

charge in 1990 through 1992 and the Estanislao peso (a levy equal to P1.00 per liter of crude oil/petroleum product importation) in 1.991 effectively increased the tariff rate and enhanced the rate buoyancy in 1987-1992.

_°Its base elasticity increased continually from 0.74 in 1980-1986 to 2.08 in 1993-1996. "In principle, column 10 should be subtracted from the sum of columns 7, 8 and 9 to arrive at an estimate of the VAT base prior to the capital formation adjustment. However, the amount of VAT collections repmxed by the BIR is gross of VAT credit for inputs to exports. Thus, our estimates of the VAT base reflect this practice.

330

The Philippines

Figure

5. Effective

50.00 40.O0

4_.oo 30.003500 25.00

Tariff

beyond 2000: An economic

assessment

Rates, "_1980-1996.

p_..

_..\

_/gL_""

.......

_/_

_-'_"__

1 "

i5.00

]000500 - _-.-:

0.00

.[980 1.981 1982 1983 1984

1985 1986 1.987 1988 1989 199{) ]991

1992 1993 1994 ]995

1996

Xd_ar

Effective

tanjff

rate

Effective

12ME[ra[e with rcspec[ tO dul:iaNe imports

--/--

Effective

tm-if:f rate with ]-esp¢cl, to i:otsl imports

computed

based

On the other hand, tional

imposition

portation) that were enough

o[:no]]-dul:iabJe

imports

actual

to total imports

collection.

the imposition

of the Leung

of P1.00 per liter of crude

peso (an addi-

oil/petroleum

product

im-

in 1994 and the tariffication of the quantitative restrictions lifted, in 1992-1993 under Executive Order No. 8 were not

to completely

the second

round

counteract

of tariff

the expected

reductions

under

revenue

loss arising from

Tariff Reform

Program

(EO470) in 1991-1995. Figure 5 indicates that the effective tariff rate with respect to both dutiable imports and total imports dropped, from 1993-1995 even as the share of dutiable constant.

imports

Meanwhile, another cross country Philippines has the highest tariff revenue ing its continued

heavy reliance

to total imports

remained

comparison shows that the effort in the region indicat-

on this revenue

source

(Table 11). While

the gap between the Philippine tariff effort and those of its neighbors has narrowed down by 1994, the Philippine tariff effort continues to be the highest in the region. It is at least three times as large as those of Indonesia,

South Korea

and Singapore

and is about

than

of Malaysia

and Thailand.

This suggests

those

adjustment internationally

that will be necessary

as the Philippines

competitive

in. the medium

stance

10 percent

higher

the extent

of the

moves into a more term.

Chapter 8: Manasan

Table

11o Tariff

331

Effort

percent

in Selected

Asian

Countries,

1991/1994

(In

of GDP).

Indonesia Malaysia Philippines Singapore Thailand Souttl Korea

1991

1994

0.94 3_17 4.15 0.57 3.59 1.53

1.07 3.04 3.47 0.48 3.16 1_13

Source of basic data: Author's estimates using revenue data from the Government Finance Statistics and GDP data from International Finance Statistics.

Excise

taxes

Excise 1980-1986. groups

taxes proved It

posted

at a 22.5 percent

to be the most

the highest average

growth annual

resilient

revenue

rate amongst increase

source

the major

tax

the period.

during

1987-1992, it reversed its trend by exhibiting the most sluggish growth (9.1 percent on the average). While the revenue yield of excise taxes picked

up in 1993-1996 (at 15.0 percent),

to lag behind

those

its rate of increase

of all other taxes with the exception

continued

of tariffs.

Reflecting these movements, excise taxes amounted to 2.1 percent of GNP on the average in 1976-1986. After peaking at 3.4 percent in 1987, it contracted continuously to 2 percent slight gains, reaching 2.1 percent in 1996. from

in 1992. It then posted

In like manner, its overall buoyancy of excise taxes deteriorated 1.40 in 1980-1986 to 0.60 in 1987-1992. It has recovered since then

to settle at 1.14 in 1993-1996. The movement in its overall buoyancy coefficient coincided with that of its rate buoyancy (with respect to the gross

value added

of alcoholic

products,

tobacco

leum products). Note that its base buoyancy 1980 (Table 12). The low rate buoyancy

products

and petro-

has been declining

since

of excise taxes in 1987-1992 may be attrib-

uted to a number of factors. First, its yield on petroleum products was diminished when the excise tax on fuel oil was abolished in 1987 and the effective

tax rates

1990 in an effort

on other

to cushion

petroleum

the economy

products from

were

the surge

reduced

in the world

_2Excise taxes are imposed on petroleum products, alcoholic beverages, cigars and cigarettes, fireworks, cinematographic films, automobiles, and other products classified as nonesseBtials.

332

The Philippines

Table 12.

beyond 2000: An economic

assessment

Decomposition of the Buoyancy Taxes, 1980-1996.

Coefficient

of Excise

1980-1986

1987-1996

198%1992

1993q996

Overall Buoyancy

1,40

0.80

0.60

1..14

Ral:e.Buoya_? cy Base Buoyancy

1.32 1.06 .

1.07 0.74

0.66 0.92

2.48 0.46

Source: Author's estimates market

price

of crude

manufacturers transfer pricing timated

oil during

the Gulf war. Second,

avoided paying the correct amount and the misclassification of brands.

the revenue

loss at about

some

cigarette

of taxes through Some analysts es-

P3 billion, per year (Monsod

1993).

In contrast, the higher rate elasticity in 1993-1995 may be traced to the passage of Republic Act (RA) 7654 in 1993. This act effectively raised the excise tax on cigars and cigarettes by (1) increasing the ad valorem tax on cigars from 5 percent to 10 percent; (2) introducing a floor tax on cigarettes (i.e., the imposition P5.00 per pack or 45/55 percent ad valorem Class A/B cigarettes); importer's) registered manufacturer's

and (2). shifting wholesale price

(or importer's)

wholesale

of a specific tax of P3.00/ tax, whichever is higher on

from the manufacturer's (or to the constructive or actual price

(MWSP/ISWP),

which-

ever is higher, as the basis of the ad valorem tax on cigars and cigarettes. _3 In effect, the use of the constructive price raises the revenue yield from the excise tax on cigars/cigarettes by 20 percent relative to the old system. The huge drop in the base buoyancy from 0.92 in 19871992 to 0.35 in 1993-1995 may be indicative of the sluggish, growth of the tax base relative of whether a negative

to GNP during

the latter

period.

This raises the issue

the present excise tax rates are too high such that they exert impact on demand and, consequently, on tax revenues.

13Class A cigarettes are locally manufactured cigarettes bearing foreign brands while class B cigarettes are those that bear local brands. On the one hand, the constructive MWSP/ISWP is defined as the price including the excise tax and VATat which locally manufactured or imported cigar/cigarettes are offered for sale to wholesalers or distributors as fixed by the manufactm'er/importer and registered with the BIR plus a 20 percent mark-up on such price. On the other hand, the actual MWSP/ISWPrefers to the price at which the purchaser actually pays or is obligated to pay the manufacturer/ importer in consideration of the sale/barter/exchange of cigars/cigarettes.

Chapter 8: Manasan

A comparison the region

indicates

333

of the excise tax effort of the different that while the Philippine

countries

excise tax effort is higher

than those of Indonesia, Singapore and South Korea, it is comparable to that of Malaysia and lower than that of Thailand (Table 13).

Table

13. Excise Tax Effort in Selected (in percent of GDP).

Asian

Countries,

199111994

1991

1994

Indonesia

0.98

0.82

Malaysia

2.20

2_32

Philippines

2.04

2,34

Singapore

1.05

0.95

Thailand

3.82

3.76

1.57

2.11

South

Korea

Source of basic data: Author's estimates using revenue Statistics and GDP data from intelmational Finance

Sales

Tax

data from Statistics.

the Government

Finance

and Licenses

Sales tax and licenses

consistently

posted a laudable

performance

in 1987-1996. During this period, revenues from these taxes grew at a faster rate than GNP and total tax revenues of the central government. This represents a large improvement relative to its growth in 1980-1986. As a result, revenues from sales tax and licenses rose from a low of 1.5 percent of GNP in 1984 to 2.2 percent finatly, to 4.1 percent in 1996. The overall buoyancy (VAT)/licenses

in 1986 to 3 percent

coefficient

also exhibited remarkable

in 1992 and

of the sales tax/value improvement

added tax

in 1987-1992, in-

creasing threefold to 1.52 from 0.45 in 1980-1986. Moreover, the buoyancy coefficient again registered an increase to 1.67 in 1993-1996 (Table 14). This occurred despite the deterioration in the base buoyancy late 1980s and early 1990s because of large positive increments rate buoyancy riod.

(with respect

The VAT's introduction

to GDP less exports) in 1988 largely

during

accounted

in the in the

the same pefor the credit-

able revenne performance of sales tax/VAT/licenses. Admittedly, the first two years of its implementation were problematic. The ratio Of revenue

from

sales tax/VAT/licenses

to GNP dropped

from

2.9 percent

334

The Philippines

beyond 2000: An economic

Table 14. Decomposition of the Buoyancy VAT, 1980-1996.

Coefficient

assessment

of Sales

Tax/

1980q986

1987-1996

1987-11992

1993-1996

Overall Buoyancy

0.45

1.52

1.43

1.67

Ra.t:eBuoyancy Base Buoyancy

0.46 0.98

2.04 0.74

1.60 0_89

3.37 0.50

Source:

Author's

estimates

of GNP in 1987 to 2.5 percent in 1988 before recovering 1989. It has risen consistently since then, indicating better revenue earner than the sales tax. Moreover,

the VAT was also shown

enhance equity. From an efficiency that the VAT has helped eliminate

to 2.8 percent in that the VAT is a

to promote

perspective, the taxation

efficiency

and

Manasan (1990) showed of intermediate inputs.

Thus, the difference between the effective tax rates and the nominal 'tax rates (which is used as an indicator of the extent to which inputs are taxed) are higher prior to the VAT than with the VAT. Also, the variation in the effective tax rates is greater before the implementation of the VAT. This arises not only due to the generally but because

of the greater

tax regime as well. On 'the other introduction -0.047.

hand,

degree Manasan

higher

statutory

tax rates

of tax cascading

implied

in the old

(1990) also showed

of the VAT the Suit's index rose marginally

This implies

that with the from

-0.052 to

thai the VAT system is slightly less regressive

than

the one it replaced. The implementation of the expanded value added tax (EVAT) in 1996 has been expected to be revenue enhancing. At the same time, Manasan (1994) showed that the EVAT is less regressive than the 1988 VAT law. Table 15 shows that the Philippines'

sales tax/VAT rate

is gener-

ally equal to those of other Asian countries. However, its sales tax/VAT effort is lower than those of Indonesia and South Korea. While the Philippine VAT effort is higher than that of Thailand, the former's statutory VAT rate is higher than the latter's. Consequently, the Philippines. registers

the lowest

sic rate) among _4The raised

efficiency

ratio (VAT effort

all the countries

efficiency ratio per percentage

ratio divided

by the ba-

in the region. 14

measures the amount point of the statutory

of 'tax revenue basic rate.

(as a proportion

of GDP)

Chapter 8: Manasan

335

Table 15. Statutory VATRates, Sales Tax/VAT Effort and Efficiency Ratio in Selected Asian Countries, 1991/1994. Statutory VAT Rates

Indonesia

VAT Ell!oft

Efficiency

Ratio

1991

1994

1991

1994

3.92

4.80

0.39

0.48

0.28

0.33

Malaysia

2.13

2.23

Philippines

2.85

3.33

Singapore

n.a.

Thailand

4.05

3_18

0.59

0.45

Soudl

3.83

4.27

0_38

0.43

Korea

Source of basic data: Author's estimates using revenue data from the Government Statistics and GDP data from the International Finance Statistics. Statutory from

Yoingco

Finance rates are

1996_

Estimates of potential revenue for the VAT indicate significant gains in the collection rate from 31.8 percent in 1985 to 40.8 percent in 1992. Despite some fluctuations during 1993-1996, further improvements in the collection rate was posted with 49.2 percent of total potential VATrevenues being collected in 1996 (Table 16). This improvement is largely driven by gains made in the administration of VATon domestic sales. Note that while the collection rate for the VAT on domestic sales is consistently lower than that on imports, the latter's record is erratic during the period under study. Despite this, the potential gains from an administrative reform of the VATsystem continue to be large. In 1996, the level of VATevasion amounted to 21.6 percent of national government taxes or 3.4 percent of GNP. Prospects Comprehensive Tax Reform Program Descripaon In 1996-1997, the government embarked on another round of tax reform under the Comprehensive Tax Reform Program (CTRP). The principal objectives of the CTRP are: "(1) to widen the tax base; (2) to simplify the tax structure to minimize leakages from undeclared revenues, overstated deductions and corruption; and (3) to make the system more elastic and easier to administer to ensure adequate revenues in the future" (DBM 1996). It has three principal components, namely: income tax reform, excise tax reform, and fiscal incentives reform.

Table

16. Level

of Tax Evasion

Year

from

VAT, 1985-1996.

Evaded Taxes Total (P million)

Fr. Domestic Sales (Pmillion)

Collection Ft. Imports (Pmiltion)

Total %

Fr. Domestic Sale s %

Rate

Evasion

Fr. Import s %

Total %

Rate

Ft, Domestic Sales %

Fr. Imports %

,,.

1985 i989

6432 26279.50

31.80 27,80

68.20 72,20

1990

26315.70

33.20

66.80

1991 1992

30347.30 46574,91

30995.58

15579.33

33.20 40.80

36.88

1993

46708.10

28569.58

18138.52

47.11

1994

55299.97

28769.91

26530.06

45.81

1995 1996

61623.49 79710,98

33778.38 45802.31

27845.11 33908.67

48.94 49.17

Source:

Author's

Estimate

47.30

66.80 59.20

63,12

52,70

41.41

54.14

52.89

58.59

45.86

46,95

44.52

54.19

53_05

55.48

46.68 47. i9

51.43 51.62

51.06 50.83

53.32 52.81

48.57 48.38

._.

g_ _a

Chapter 8: Manasan

337

In the past year or so, Congress legislated some of the components of the CTRP. For instance, Republic Act (RA) 8184, which provided for the restructuring of the excise tax on petroleum products hand in hand with tariff restructuring in the sector, was enacted into law in June 1996. Meanwhile, RA 8240 wb.ich reverted the excise tax on fermented liquor, distilled spirits and cigarettes back to the specific scheme from the ad valorem system, took effect in January 1, 1997. The automatic inflation adjustment provision outlined in the original proposal prepared by the Department of Finance and intended to make the tax more elastic was not included in RA 8240. Nonetheless, additional revenues are expected to be gained from these laws--approximately P410 million from RA 8184 and P7 billion from RA 8240 in 1997. Another law (RA 8241which also took effect January 1, 1997), on the other hand, expanded the list of items that are exempted under the EVAT to include printing, publication, importation or sale of books, newspaper, magazine, review, or bulletin, operators of taxicabs, rent-acar companies, operators of tourist buses, small radio and television broadcasting franchise grantees, the sale of real properties used for low-cost and socialized housing and lease of residential unit with a monthly rental not exceeding P8,000 a month. It also allowed firms engaged in the processing of sardines, mackerel, milk, refined sugar and cooking off to claim a presumptive input tax credit (creditable against their output tax) equal to 1.5 percent of the gross value of primary agricultural inputs. Consequently, these additional exemptions are projected to cost the govermnent P1.6 billion in 1997. Meanwhile, the fiscal incentive component of the CTRP has not yet been scheduled for discussion in Congress except with regard how the proposed income tax bills touched on the provision of tax incentives. To date, the income tax bills have been the subject of lengthy debate and discussion in legislature. Both the House and the Senate have come up with their respective versions of the Income Tax Bill (House Bill 9077 and Senate Bill 454) and a bicameral version is currently on the drawing board. House

vs. Senate

Versions of Income

Tax Reform

The House bill proposes to increase personal exemption allowances from the present P9,000, P12,000, and P18,000 for single, head of family and married income earners, respectively, to P60,000 per individual income earner regardless of status and from PS,000 to P6,500 for each dependent. It proposes to unify the rate schedule applicable to

338

The Philippines

compensation

income

beyond 2000: An economic

and business/professional

individual

assessment

income.

The

proposed schedule has six brackets with marginal rates ranging from 10 percent to 35 percent. In contrast, the present system's compensation income is subjected to an ll-bracket rate schedule with marginal rates ranging from 1 percent to 35 percent while business/professional income is taxed using a five-bracket rate schedule with marginal rates ranging

from

3 percent

to 30 percent.

I-I13 9077 also reimposes a tax of 6.5 percent on dividends received by individuals from domestic corporations. This tax was abolished under the 1986 Tax Reform Package. The House bill likewise increases the capital gains tax on real property sold by individuals from 5 percent

to 6.5 percent.

Lastly, it proposes

its of individuals from the 20 percent In contrast, SB 454 provides P20,000

per individual

est expense incurred allows for additional expense schedule

income

to exempt

long-term

final withholding tax on interest. for lower personal exemptions:

earner.

It calls for a deduction

expense. While it also applies a single rate and business/profession income, its mar_

ginal rates range from 5 percent to 30 percent. The Senate bill also reintroduces the tax on dividends from

of inter-

in the acquisition of the first home. It likewise deductions for medical insurance, hospitalization

and educational on compensation

by individuals

depos-

domestic

corporations.

However,

received

it proposes

tax dividends at 4 percent in 1998, 8 percent in 1999 and 10 percent in 2000 and every year thereafter. It also seeks to reduce the capital gains tax on unlisted stocks from 10-20 percent to 5-10 percent while increasing the capital gains tax on listed stocks from 0.25 percent to 0.5 percent. At the same 'time, it elects to impose a 1-3 percent tax on initial .public

stock

offerings.

The Senate

emption of the sale of individuals' gains tax on real property. On the corporate reduce percent trast,

bill is also recommending principal

side, another

Senate

residence

bill proposes

the corporate income tax from 35 percent in 1998, 31.5 percent in 1999 and 30 percent the House

of Representative the House

version

and Senate

retains

bills contain

the ex-

from the capital to gradually

to 30 percent (33 in 2000). In conthe old rate

percent.

Both

operating

loss carry

over (NOLCO)

and accelerated

depreciation,

addition,

the Senate

bill introduces

the minimum

corporate

tax which

is to be computed

at the 0.75 percent

provisions

of 35

of net assets.

for net in

income

Chapter 8: Manasan

339

Effect on Private and House Bills In_vidual

Sector

lncome

Incentives

of Senate

Tax

Partial Globalization income

The application of the same rate schedule to both compensation and business/professional income of individuals under I-IB 9077

and SB 454 greatly reduces the disincentives system for imposing different rate schedules sources. amount come

inherent to income

in the present from different

Under the present system, individuals receiving the same of income face different effective tax rates if their incomes from

different

compensation

sources.

income

comes either from business an unmarried

person

In this case, individuals

pay more

or the practice

earning

eanfing

taxes than individuals

whose

of a profession.

pure income

For instance,

P 100,000 in wages and salaries

is required

to pay Pll,965 while a similarly situated individual whose income comes from business is liable to pay income taxes of P9,150. Moreover, individuals

with mixed

income

not only benefit

from

the lower rates

ap-

plied to business income but also from the lower income tax liability. That is, since each source of income is taxed under a different rate schedule, the tax liability starting from the bottom who likewise makes from compensation

from each source would thus be reckoned rate of each schedule. Thus, an individual

P100,000 a year but whose income is sourced half and half from business is liable to income taxes of

only P8,325. Equal Personal Exemption Regardless of Status

Levels to Individual

Both HB 9077 and SB 454 provide level (P36,000

and P20,000,

regardless of their viduals are entitled

respectively)

Income

Earners

the same personal

exemption

to individual

income

earners

status. Under the existing system, married indito a personal exemption of P18,000 compared to

that of single individuals

of P9,000.

The elimination

of the disparity

the personal exemption levels would neutralize the tax treatment single and married individual income earners by subjecting them the same effective tax rates.

of to

Personal Exemptions Both emption

House

allowances.

and Senate In principle,

bills propose the purpose

to increase

personal

ex-

of these allowances

is to

340

The Philippines

beyond 2000: An economic

assessment

exclude income spent on basic necessities from taxation. From this perspective, it is worthwhile to compare the personal exemption levels provided come.

under

HB 9077 and

SB 454 with the poverty

threshold

in-

The poverty threshold income for a family of six in 1994 is P53,310. is Adjusting for inflation, the poverty threshold family income is projected to reach P66,120 in 1997. On the other hand, the aggregate personal exemption level for a family of six is P146,000 under FIB 9077 and P66,000 under SB 454 when both spouses are working. However, if only one of the spouses is working, the aggregate personal exemption level for a family under SB 454.

of six is only P86,000

under

HB 9077 and P46,000

Tax Base index In the literature, country

comparison

income

tax (Sicat

the tax base

index

of the broadness and Virmani

as the ratio of the threshold

is used in making

of the coverage

a cross-

of the individual

1988). The tax base index is computed

taxable

family income

of the typical

house-

hold to the average family income26 A tax base index of zero implies that no income escapes taxation while a tax base index of 0.3 means that 30 percent of average family income is excluded from the tax base. Table 17 shows that the tax base index is highest for the House Version at 0.613. The tax base index for the Senate version is estimated at 0.29. Compare 1993 (Mackenzie respectively, 1988). These under

these figures with Thailand's tax base index of 0.12 in et al. 1997) and the tax base index of 0.12 and 0.I1,

for the United

States and Japan

figures

that

imply

SB 454 appear

in 1988 (Sicat and Virrnani

while

the personal

to be consistent

(or slightly

exemption lower)

levels with

the

country's poverty threshold income, when the Philippine tax base index

they seem to be on the high side is compared with those of other

countries.

incidence

pines

Nonetheless,

suggests

indicator

the higher

that the poverty

of the appropriate

income

personal

of poverty

threshold

exemption

might

in the Philipbe the better

level.

15This figure is obtained from the National Statistical Coordinating Bom'd (NSCB). 16Note that all family income below the threshold taxable family income belongs to the "zero-tax" bracket. In the literature, mean family income for each country is computed as 5 times average per capita GNP assuming a family size of 5_ it also assumes one taxable earner per family.

Table

17. Tax

Base

Index,

Tax Base

High

Tax

Bracket

High Tax Beginning

Index,

Marginal/Average

Top

Average

Tax

Rates,

Tax

Rate

Progressiveness

Index

Bracket Index

Marginal Tax Rate

3/4*FGNP

I*FGNP

2*FGNP

3*FGNP

0,203 0,613 0.289

3.082 3.082 1.540

10 5

30/35 35 30

0.094 0.035 0.088

0, t 28 0,061 0.107

0.190 0.128 0,184

0,443 0.169 0.223

Thailand United States

0,121 0.120

15,220 2.340

Japan

0.110

6.930

Existing System House Bill Senate Bill

Index.

Progressiveness [*FGNP/ 2*FGNP/ 3/4*FGNP I*FGNP 1.362 1.743 1.216

1,484 2.098 1.720

Index 3*FGNP/ 2*FGNP 2,332 1.320 1.212

Proposed Memo items: 37

Note, FGNP = average family income computed as 5 times per capita GNP.

¢.a 4_

342

The Philippines

High Tax Bracket

beyond 2000: An economic

assessment

Index

The high tax bracket

index measures

the relative

position

highest marginal tax bracket to the average family income. tained by dividing the minimum income at which the highest

of the

It is obmarginal

tax rate begins to be applicable, by the average family income. The high tax bracket index was computed to be 2.34 and 6.93 for the United States and Japan, respectively, (Sicat and Virmani 1988) and 15.22 for Thailand (Mackenzie 1997). In contrast, HB 9077 and SB 454 (Table 17) have

a high tax bracket

index

estimate

of 3.08

and 1.54 re-

spectively. This means that the top marginal rate of 30 percent under SB 454 will apply to a significant fraction of taxpayers and is likely to have strong disincentive effects. In this light, the highest 454 appears

income

bracket

to be on the low side. This implies

of P250,000

under

that a middle-level

ex-

ecutive earning P25,000 per month and the top executive earning P100,000 per month will be subject to the same top marginal tax rate of 30 percent. Such a situation will not only be perceived as inequitable but is likely to result in greater evasion., particularly among the selfemployed. Marginal Tax Rates The House version of the income

tax bill proposes

a marginal

tax

rate of 10 percent for the lowest income bracket compared to the 5 percent ordained under the Senate version. Studies have shown that the incentive for evasion is likely to be greater when. there cant discontinuities in the marginal tax rates, particularly

are signifiin the first

income

tax rate ap-

brackets

(Virmani

1986). The beginning

marginal

plicable to the first income tax bracket under the House bill appears to be rather high at 10 percent. The 5 percent beginning marginal tax rate under the Senate bill is likely 'to encourage greater evasion. On the other

hand, the top marginal

tax rate is generally

set at a

rate equal to the corporate income tax rate to avoid giving undue pref_ erence to corporate types of businesses, in this sense, the top marginal tax rate for the individual income tax of 35 percent under House Bill 9077 is consistent with its proposed corporate income tax rate of 35 percent. The same can be said for the 30 percent top marginal tax rate in the Senate

bill.

The question

of which

is the more appropriate

marginal tax rate will have to be determined in relation to the rate income tax rate and will be discussed later in 'this paper.

top corpo-

Chapter 8: Manasan

343

Deductibility of Interest on Housing Loans This provision under the Senate bill provides

preferential

treat-

ment or tax relief for home ownership. Take the case of an individual who buys a house. The return to that asset in the form of imputed rent is not taxable. In contrast, if he were to buy some other financial asset and still rent a house, the return on the financial asset (in the form of either interest or dividend) will be subject to tax. Thus, the said individual is financially better off owning a home. The incentive in favor of home ownership is magnified if the individual.homeowner is allowed to deduct hardly

the

mortgage

interest

paid against

While support for low-cost the appropriate solution.

on Passive

income.

housing is desirable, tax preference is This is so because taxes paid by low-

income families (if they are taxable to really matter to them. Taxes

his taxable

at all) are too low for the tax relief

Income

Capital Gains on Real Property In principle, the ideal situation is where the tax is computed on the basis of the capital gains as they are realized, and where the returns from

different

types

of assets

are taxed

at the same rate.

At present,

the tax on capital gains on real property accruing to individuals is computed as 5 percent of the gross selling price of the real property. This system

is really in line with the definition

of a presumptive

tax. If real

property appreciates at the rate of 15 percent per annum, the prevailing •tax rates are such that this form of investments are favored relative to bank deposits if held for three or more years. ates at an even faster rate, then the prevailing

If real property apprecirates are such that real

property investments will be favored if held for two or more years. As such, it is easy to justify increasing the tax rate to 6.5 percent, as HB 9077 has recommended. The remaining

question

is whether

it is better to tax the capital

gains of corporations

using the final withholding

tax approach

applied

taxpayers

realized

to individual

to include

actual

currently

capital

gains

from real property in the computation of the corporation's gross income and subject the same to the corporate income tax rate. Ideally, the latter is the more desirable approach. However, administrative difficulties in enforcing this scheme may make it more desirabe to shift to the first option. This point is embodied in the Senate version of the income tax bill..

344

The Philippines

beyond

2000: An economic

assessment

Tax on Dividends is the corporate

income

tax shifted

forward

to consumers?

The

capital income of shm'eholders (when distributed as dividends and taxed as such) are subject 'to double taxation since such is also levied the corporate income tax in the first instance. However, this problem is tempered (Boadway

to the extent that the corporate income tax is shifted and Wildasin 1984). Because of this uncertainty,

forward there is

some justification in imposing a tax, albeit at a preferential rate relative to other assets, on dividends. The proposal to impose a 6.5 percent tax on dividends under HB 9077 (or 10 percent under SB 454) appears to have some basis. What is not so clear in the present treatment

given to intercorporate

and SB 454 subject

intercorporate

To even out the treatment, the same rate as dividends

proposals

is the preferential

dividends.

Note that both HB 9077

dividends

to a zero percent

tax rate.

intercorporate dividends should be taxed at earned by individual shareholders.

Capital Gains Tax on Shares The double taxation argument on dividends also applies to any call for the preferential treatment of the capital gains on shares of stocks. For greater

neutrality

in the treatment

that capital

gains

same rate.

It is suggested,

on shares

of financial

of stocks

assets, it is proposed

and dividends

be taxed

that 'the tax rate be unified

at the

at 10 percent.

Tax on iPOs under

The proposed 1-3 percent tax on initial public offerings of stocks SB 454 will tend to add on to the disincentive for equity financ-

ing (compared to debt finance) that arises because of interest expense in computing net income. Tax on Interest

Income

of the ded.uctibility

from FCDUs

On the one hand, the proposed

tax on interest

income

from For-

eign Cun"en.cy Deposit Units (FCDUs) aimed to provide equal treatment to deposits in peso accounts and deposits in dollar accounts. As such, this appears

to be desirable

the other hand,

it should

from the point of view of tax neutrality. be noted that FCDU deposits

are largely

On mo-

bile. It is not very difficult to open dollar deposits in other parts of the world (except perhaps for small depositors). Moreover, this type of deposits is not subject to tax in many countries, such as the United States, Singapore

and Hong

Kong.

Thus,

it is not clear whether

substantial

ChaPter 8: Manasan

revenue

345

can be realized

from this measure.

This move will tend to b_urt

exporters who depend on FCDUs for export financing as such a tax will increase tb.e cost of funds from this source. Given the underdeveloped level of export financing in country, the tax on interest FCDUs does not appear to be called for at this stage. Corporate

Income

Tax

The lower

corporate

income

tax rate under

income

the Senate

from

version

appears to be justified considering that the Philippines has the highest statutory rate among some Asian countries. Likewise, it sb.ould be empb.asized that the Philippines one) in the region

is one of the few countries

that has no net operating

(if not the only

loss carry-over

(NOLCO)

nor accelerated depreciation provision in its internal revenue code. The introduction of these provisions in the tax statutes should ensure that domestic firms will become more competitive parts in the rest of tlae region. On the other band,

the inn'oduction

relative

to their counter_

of the minimum

income tax (MCIT) under the Senate bill is inconsistent posed amendment allowing a deduction for the NOLCO.

corporate

with the proFurthermore,

it complicates tax administration as it adds more burden on the Bureau of Internal Revenue's (BIR) audit functions. With. the MCIT, the BIR has to audit not only the regular corporate income tax declaration but also the MCIT declaration as well. Note that asset valuation is not a simple

task (Deoferio

1997).

Progressivity burden

The concern for progressivity is distributed across income

involves the issue of how the tax groups. A tax is progressive if its

ratio to income rises when moving up the income scale, proportional if the ratio is constant and regressive if the ratio declines (Musgrave and Musgrave 1983). One is to measure a lower income

There are various ways of measuring progression. the change in the average tax rate as one moves from

level to a higher

income

level. Tb.is is called the average

rate progression index. 17 It should be noted that the degree of progression varies as one goes up the income scale. Table 17 sb.ows that the House

version

is more progressive

tb.an the Senate

17The average rate progression (ARPI)is compu,ted as follows: ARP = TI/Y 1 - T0/Y 0 YI _5(.o

version.

346

The Philippines

Revenue

beyond 2000: An economic

assessment

Impact

The potential revenue from the individual income tax provisions of HB 9077 and SB 454 was estimated using the income distribution implied by the 1994 Family Income and Expenditure Survey (FIES). The revenue estimates obtained were then scaled down to reflect the collection efficiency lections. The results

estimates derived from actual 1996 revenue colare summarized in Table 18. The House version is

projected to result in a revenue loss of P36 billion (or 1.1 percent of GNP) in 1998 while the Senate version will yield an additional revenue of P4.5 billion (or 0.1 percent of GNP): This comparison of the House and Senate versions of the income tax bill clearly shows the trade-off 'between revenue

distributional

goals (i.e., progressivity

generation. It should be emphasized,

however,

of the tax system)

and

that the tax effort target

of 18

percent of GNP in the year 2000 appears to be unattainable regardless of the package of income tax measures actually adopted unless the income tax holiday currently given to BOI-registered companies is concurrently withdrawn (Tables 19 and 20). The need for an income tax holiday to attract foreign direct investments is minimized once the lower corporate income tax rate, and the universal depreciation and the NOLCO are enforced. Assessment As indicated

application

of accelerated

of Expenditure Policy earlier, the last decade has been marked

by a worri-

some reduction

in MOOE and capital outlays. While this was done to in the short-run, the economy, if it is to grow in fashion, cannot afford for such decline to continue. Given

achievefiscal stability a sustained

that there are other deserving

but competing

demands

for its resources

(e.g., investments in human capital, poverty alleviation), the government must get better value out of each peso it spends. It is therefore imperative that the government reviews its spending priorities. It has to reconsider its role and scope of its functions vis-a-vis that of the private

sector, given changing

technologies

and

level of economic

de-

velopment. It also has to reassess how its limited resources can be spent most efficiently and effectively in areas where its participation is called for. The work of Manasan

(1994) tends

to show that not all types

government expenditures are associated with faster economic For one, she found that while total public sector infrastructure

growth. expen-

Chapter 8: Manasan

Table 18. Estimated

347

Revenue

Tax Measures

Gain/Loss

from Alternative

Income

in 1998. revenue

loss

house

senate

proposed version

-205.24

0.00

corp int/tbils

0.00

0_00

0.00

ind

0,00

0.00

0,00

corp

0.00

0,00

int/dep iud

teal prop ind corp m_listed

1271.75

-423.92

1271.75

0.00

211.9.58

2755.45

ir_d

0,00

-47.27

0_00

corp listed

0.00

-425.43

0.00

47.27

26.26

-236.35

189,08

0.00 0.00

5nd COil3 IPO ind

0.00

21.01

corp

0.00

189.08

DIVI

448.67

276.11

-32376.36

9434,82

5229.49

0.00

-541.41

0.00

FCDU

0.00

2644.67

0.00

CIT

0,00

-5125.46

-5125,46

IIT housirlg

loans

0.00 •

276.11

.NOLCO

-700.00

-700_00

-700.00

acc depr

-4200.00

-4200,00

-35997.53

3458.13

-466.40

-0.01

0_00

0.00

TAX HOLIDAY TOTAL REV LOSS %GNP

,348

Table

The Philippines

19.

Revenue

beyond

2000,: An economic

Using

House

Projections

Version,

assessment

1997-2000"

(In P million).

Total Tax Revenue With 1997 Measures

1997

1.998

1999

2000

430511.42

496952.25

573646.89

662177.82

Percem of GNP

16.50

AdditionN Revenu.e From Proposed New Measures m 1998

_35997.57

):nd.i,AduaI Income

Tax

-32376_40

interest ded.uctibility of housing lom_s rl_x on Interest Income

-205.24

Tax on interest on FC'D'U deposits Tm,c on Dividend

0_00 448.67

Capital Gums Tax on real property Capital Gains 'Fax on stocks

1271.75 -236_35

Corporate NOLCO

Tax

0.00 -700.00

Depreciation

-4200.00

Total Tax Revenue With _998 MeasLu_es

460954.68

532093.81

614211.85

15.58

15.86

16.14

903_00

4200.00

11140.00

46.1857.68

536293.81

625351.85

15.61

15.98

16.43

Income

Accelerated

Percent

of GNP

With&_awaI of TauxHoliday _lbtal Tax Revenue With. 1998 Measu.res and W/drawal of Tax Holiday Percent. of GNP

_'Assumes tax buoyancy of 1.15 based on historical level in 1993-1996, also assumes House version is followed. diture

"Granger-cause total

'''_ growth,

ture

and

also

found

that

while

public

vate

sector

investment,

public

The

public

United.

Nations

shows

that in a study

bigger

of their

sector

total

capital

sector

expenditure

infrastructure

to basic

current

do not. investment

non-infrastructure Development

of 25 developing budgets

public

countries, social

services

Moreover, crowds

investment

Programme

expendi-

does

(UNDP)

those were

that

she in prinot.

(1994)

allocated

able to achieve

isA variable is said to Granger-cause mlother variable if the former and its past values are good predicters of the latter in a statistical sense, regardless of the mlderlying theoretical relationship between them.

Chapter 8: Manasan

Table 20.

349

Revenue Projections (In P million).

Using

House

Version,

1997-2000

1997

1.998

1999

2000

430511.42

496952.25

573646.89

662177.82

Total Tax Revenue With 1997 Measm--es Percent

of GNP

1.6.50

Additional Revenue From Proposed NOw Measures in 1998

3195.58

Individual

9434.82

Income Tax

interest deductibJ]i_'_ ofhoush_g loans "fax on l]_teresl: '.Income

-541,41 0.00

Tax on interest on FCDU deposits T&x on Dividend

1322.34 276.11

Capital Gains Tax on real properqv Capital Gains Tax on stocks

2755.45 -26.26

Corporate Income _ux NOLCO Accelerated Depreciation

-5125.46 _700.00 -4200.00

Total Tax Revenue With 1998 Measures

500147,83

572927.64

656437.57

16.90

17.07

17.25

903.00

4200_00

11140.00

501050,83

577127.64

667577.57

16.93

17_20

17.54

Percent of GN-P With&awal of Tf_u:HoLiday' Total Tmx Revenue With 1998 Meausures and W/drmval of TKx JrIoliday Perceat

of GNP

'_Assumes tax buoyancy version is followed.

a higher

of 1.15 based

level of human

on historical

level m 1993-1996, also assumes

development.

This implies

H.ouse

that the human

development objective can be served by prioritizing investments in human capital, in particular those that relate to basic education., basic health

care and Level 1 and 2 water

supply

and sanitation.

Aggregate

National

Government

Expenditures

National markedly from

government an average

expenditures of 15.2 percent

on a cash basis _9 expanded of GNP in 1975-1985 to 18.9

350

The Philippines

percent

beyond

in 1986-1991 and 18.2 percent

2000: An economic

assessment

in 1992-1996 (Figure 6). This came

about as aggregate national government ontlay exhibited robust growth in both nominal and real terms. While total national government expenditure grew by a mere 0.4 percent yearly in 1975d985, it surged by 10 percent annually on the average in 1986-1991 and 2 percent per year in 1992-1996 in real terms. Total national government expenditures peaked at 20.2 percent of GNP in 1990 and persistently then to settle at 17.74 percent in 1996.

declined

since

These figures, and size of productive

however, are misleading government expenditures

indicators of the growth during the period. These

have not yet factored

in the explosive

in debt service

payments) 9.6 percent

growth

during the period. While interest payments of total national government disbursements

ate up 30.4 percent

of the budget

(interest

accounted for in 1975-1986, it

in 1986-1991. The share

of interest

payments in the aggregate national government expenditure contracted somewhat but remained substantial at 23.8 percent in 1992-1996. Relative to GNP, interest payments rose from 1.5 percent in 1975-1985 to 5.7 percent 1996.

in 1986-1991 and then slid somewhat

Consequently, •the national penditure 1975-1986

despite

government

the rapid

decline

in 1986-1996,

to 4.3 percent

in 1992-

in the overall

outlay

total national

government

net of debt service has remained fairly stable throughout (Figure 6). Moreover, yearly figures show that the national

government budget net of interest payments was on a downtrend tween 1981 'to 1989 and has only started to recover slowly from onward.

of ex-

Nonetheless,

total national

government

expenditures

debt service stood at 14.4 percent of GNP in 1996--a than the peak level of 16.4 percent of GNP in 1975. National The marked 1996 was largely

Government

Current

increase

in total national

due to the rapid growth

be1992 net of

level that is lower

Expenditures government

in, current

outlays in 1986-

expenditures.

Cur-

19Government cash expenditures data follow cash accounting and, as such expenditures are reckoned relative to the time actual disbursements for both current and prior year's obligations m'e made. In contrast, government obligation expenditure data are based

on accrual accounting wherein expenditures are reckoned relative to the time contractual obligations are made. The Department of Budget and Management (DBM) first releases the General Allotment Release Order (GARO)or the Special Allotment Release Order (SARO)which gives government agencies the autho_ -..... 1£ rele as e s. t'e es o.... _e of Cash Allocation (NCA) enter contracts rnen 11 con in'espo_ ........ ...... specmes "., ' . __al an agency wmcn me maximum amotu_z-_-_ -----_can ...... make from a government servicing bank.

3 • Natioanal

_able

Government

Cash Expenditures

by Object,

1975-I996

(As percent

of GNP).

Ic!75-85

Average. 1986-91

lC!92-96

1986

1988

19c_

i092

i994

1996

_TAL EXPENDITURG,q

15.I5

18.87

18.23

18.53

17.18

20,15

18,67

1&42

17._

Cq_LE_IT____ OPERATL?,TG EXPENDITURES hal Ser,aces

D.07 4.I7

15.25 5.34

15.50 5.39

11r22 4.19

14.34 5.15

17.23 5.,-'74

t5,84 5.37

15.97 5.34

3.73 0.61

2.77 0.65

2.46 2.40

2.52 0,60

2,47 0.55

2.79 0.70

2A3 1,46

2.70 2,72

Ratio to GNI? it, o/_

_i_tenance & other .&_ar_ce to LCqJs

O_erating

Expenditures

2.52

_. _' _"

In /_-e.st Payments

1.45

5.74

4.34

3.62

5.79

6,57

5,74

4.56

1,36

Su_idies

0.25

0.52

0.30

0.29

0.26

0.80

0,29

0.40

0,26

0.20 0.15

0.30

0.13

0.42 0.20

0, 56

0.25

0,29

4.63

2.94

2.75

4,03

2.15

3.07

2.67

2.4I

2.58 2. _9

2.29 0.55

2,59 0.14

1.96 2,07

1.92 0,23

2.52 0,4i

3.33 -0,66

1.94 0.48

Pel_de_sm Prices Ta>_xFenditures

tai!d.by FLlmd

._ o No

CAP1T_L C}UTI,&YS f Infr_tructure and Other Corp_ate Equity /

Capita]

Oudays

._. 0.09

CaDit_ TPansfer to LGKIs

CAP_ .and Acquisition & Credit Tr-ans tion Accx)tmts Transfer

NETLE

l_O

_ _e

0.13 0,74

DING

for NG expenditure,

0.45

CAGFt3OF for GOCC's

expenditure,

0.59

0.14

0,74

0.12

2.54

COA for LGU expenditure,

0,68

author's

4),15

0.16

computation

for other

0.04

data,

0.05

<,n _

Chapter 8: Manasan

353

The phenomenal rise in interest '.payments of the national government during this period may be traced to three factors: (1) 'the rednced ability of the government to access foreign nance the fiscal deficit after the 1984-1985 economic

loans that will ficrisis; (2) the con-

sequent rise in domestic interest rates as the national government shifted to domestic debt financing; and (3) the national government's assumption of the guaranteed liabilities of government corporations nancial institutions. On top of this, the government's mopping erations

(of "excess" liquidity`) that were undertaken

ity. targets

under the International

Monetary

Fund's

and fiup op_

to meet the liquid(IMF) stabilization

program has called, for larger volumes of domestic debt issue relative to what was required to finance the national government deficit. This has put additional pressure on domestic interest rates. Moreover, the government pursued a high interest rate policy in an attempt to keep the foreign exchange rate down. Part of the reason behind the dramatic ernment

expenditure

on personal

services

increase

in national

are the salary

gov-

adjustments

granted to government employees during the Aquino administration. These included the 10 percent across-the-board salary hike in July 1986, the 5 percent salary increase for career executive positions cent salary increase for rank-an&file employees in selected

and 30 pergovernment

agencies in 1987, and the increase under the salary standardization scheme in July 1989. These adjustments were more than sufficient to keep pace with inflation

during the period but were generally

as appropriate given that the government for a long time. However, the expansion

perceived

rates had remained frozen of personal service expendi-

tures of the national govermnent may also be explained by the rise in the number of government employees. While the average level of personal, set vice expenditure was maintained ments

at 5.4 percent of GNP during the Ramos years, interest paycontracted to 4.3 percent of GNP. The MOOE suffered further

reductions--settling However, transfers

at 2.5 percent of GNP on the average in 1992-1996. to LGUs increased heftily during this period to 2.4

percent of GNP from 0._pezce_-acSxcI986-1991 tion of_a_-_dv%_rnment Code of 1991. Public

Sector

The brunt

due to the implementa-

Investments

of the fiscal adjustme.at

can-ied out since 1983 has pri-

marily been absorbed by capital expenditures ment. Aggregate capital outlays of the national

of the national governgovernment shrank from

354

The Philippines

4.6 percent percent

of GNP in 1975-1985

in 1992-1996.

beyond

2000: An economic

to 2.9 percent

This contraction

assessment

in 1986-1991 and 2.7

was largely

in terms

of lesser

capital transfers from the national government to GOCCs. The figure declined from 2.1 percent of GNP to 0.6 percent and 0.1 percent. Meanwhile, national government investments on its own account was cut slightly only from 2.6 percent of GNP in 1975-1985 to 2.3 percent 1986-1991 and recovered to 2.7 percent in 1992-1996 (Table 21). outlays

Table 22 shows total public sector investment (the sum of capital of the national government, GOCCs and LGUs) declining from

4.2 percent turnaround

of GNP in 1985 to 4 percent in 1986-1991 before making a of 5.2 percent of GNP in 1992-1996. These figures are lower

than the average government capital expenditure levels in less developed countries (6 percent of GDP) in 1984-1993 (as cited in Diokno 1995). Infrastructure

investments

(i.e., capital

expenditures

on power/

energy, water resources development, and transportation and communications) contributed 77.8 percent of total public sector investments in 1985. This proportion

declined

to 66.6 percent

Aquino administration gave greater attention tors. The share of infrastructure investments

in 1986-1991 as the

to the social service sechas risen since then, av-

eraging 71.9 percent in 1992-1996 (Figure 7). Consequently, infrastructure investments was cut from 3.3 percent of GNP in 1985 to 2.7 percent in 1986-1991 before increasing to 3.7 percent of GNP in 1992-1996. Again, these numbers are smaller than the average infrastructure investment in East Asia (equal to 4.5 percent of GDP) in 1990-1992 (Kohli 1994). Sectoral

Distribution

of Government

The period 1986-1996 saw the reallocation resources from the economic service sectors the

debt service,

Government

general

expenditures

silient to the stringent years. During

public

on general

cost-cutting

the Aquino

services

Expenditures of general govermnent20 and national defense to

and social

service

sectors.

public

services

proved

to be re-

measures

imposed

during

the crisis

administration,

it was among

the second

fast-

est growing major item in the g6-W-_ment_latt_dget, next only tO debt service. During the Ramos years, general public _gf-'J_es--main__tained its position. General government expenditures on general public-_e_-vices rose from 2.2 percent of GNP in 1975-1985 to 3.2 percent in 19861991 to 3.8 percent

in 1992-1995 (Table 23).

20General government refers to the national government and loc_ government units (LGUs).

Table 22. Public

Sector _ Investments,

1985-1996

Average 1986-91 1992-96 GRAND TOTAL

(As percent

of GNP).

1986

1988

1990

1992

1994

1996

4.32

5.17

2.74

3.15

5.71

4.66

5.84

5.22

Services

3.28

4.10

1.53

2.23

4.56

4.04

4.81

3.68

2.94

3.65

1.40

1.94

4.09

3.76

4.41

3.14

Total Social Services

0.65

0.44

t. 15

0.49

0.58

0.27

0.28

0.65

General

0,29

0.46

0.04

0.38

0.34

0.32

0.62

0.49

Total Economic Infrastructure

Public Services

Defense

0.05

0.14

0.02

0.06

0.07

0.02

0.09

0.31

Others

0,05

0.04

0.00

0.16

0.01

0,03

0.10

• Public

Sector

blnfrastructure

Refers

to NG, GOCC and LGU.

refers

to Power

and Energy,

Water Resources

and Development,

and Transportation

and Communication.

356

The Philippines

Figure

7. Distribution P_b[_c "1% _ Services

T_ta[ _)¢l:_.l Services

beyond

of Public

2000." An economic

assessment

Investments,

1985 - 1996.

Sector

DefenSe

Pub/_

Def_n:_

7,%_ _ _t'vioes

(1%

..,,_ / _I 31]/_-3'_'o

i_ Others

[IbraJ Social 5et'v,ices

Ol:llt¢I" _uol'l_lrlic 7% 9%

0t;b_r h-(;OJiOixlic 8% _r-as_rucl rife 789_

Geneml Public

.1._21: i_ Lrtic L¢I I'_ 0_ 1986-1991

15%

De[erlsc 3%

?,,

• £

Services

"]_.) btl SOcial Od_e; F_cono_:lio 9%

In J:t-a_T,±'uc rw 'L_ 70% 1992- I996

The general

government

expenditure

on social

services

posted

significant growth in nominal, real and real per capita terms in 19861996. As a result, outlays for the sector rose from an average of 3.6 percent of GNP in 1975-1985 to 4.3 percent in 1992-1995,

in 1986-1991 and 4.4 percent

The share of the social service sectors in the aggregate general government budget was fairly stable at 20 percent in 1975-1995 because of the rapid expansion of the debt service (Figure 8). This number is exactly

one-half

of the UNDP norm of 40 percent

and well below the 32-

35 percent average for selected countries surveyed by the UNDP in 1988 (Table 24). However, the share of the social service sectors in total general government

expenditures

net of debt service

cent in 1975-1985 to 30.5 percent tures

rose from

23.6 per-

in 1986-1995.

On the other hand, the share of general government expendion human priority concerns (i.e., expenditures on basic educa-

tion, basic health

care and low cost water

supply)

to total general

gov-

ernment social expenditures ranged .from 49 to 54 percent in 1987 to 1994 (Figure 9). These figures are sli_hdy above the UNDP norm of 50 percent. However, some intra-sectoral variation ig a.pparc_x*_ On the average, the social priority ratio for education (65 percent) is higher than that for health (20-48 percent) in 198%1994. Consequently,

the human,

priority

ratio

(the share

of expendi-

Table 23. Sectoral

Distribution

of General

Government

Expenditure,

1975-85

Average 1986-91

1992-95

i986

1988

1990

1992

1994

1995

17, 12

22.65

21.72

19.98

21,88

24,52

21.03

2I .49

22.88 5_18

Sectors

GRAND

TOTAL

Total Economic

Services

1975 - 1995 (As percent

of GNP).

6.71

5.19

4.76

6 _71

4.09

5.22

4.35

4.99

4.49

3.33

3.44

3.21

2.82

3.49

3,35

3.86

3.43

3,55

4.29

4.41

4.66

4.08

4.46

4.04

4,25

5.03

Education

2.07

2, 86

2, 97

2,54

2,89

3.14

2.84

2.79

3,37

Health

0,64

0,74

0.79

0,62

0.76

0.78

0.77

0.80

0.28

0.26

0.39

0.23

0,18

0.26

0,29

0.40

0.51

0.56 2.21

0,43 3.I6

0.26 3.77

1.26 2.31

0.25 3.11

0.28 3.46

0.13 3.45

0.27 3.93

0.36 3.98

Others

0.85

0,16

0.15

0.28

0.03

0.24

0,08

0.17

0.18

De [ense

1.78

1.34

1.31

1.56

1.30

1.21

1,31

1.40

Debt Service

2.03

8.52

7,32

4.71

9.01

9.83

7.90

6.85

7.10

infrastructure Total Social

• Social

Servicers

Welfare

Services

Housing and Community General Public Service

So,_rce: DBM

Development

for NG expenditure,

COA for LGU expenditure,

NSCB

for GNP, author's

computation

for other

data.

¢,a "--a

358

The Philippines

Figure

beyond

2000: An economic

8. Sectoral Distribution of General ture, 1975 - 1995 (Percent Share

Defense 10_)?,

assessment

Government Expendito Total Expenditure).

Debt

Service 11%

Service 37%

Del:ense __

Economic

Economic Others

38%

Others

Social Welfare Services Ser_4 ces 21%

Ge:nera] Public / Serxdcc 15%

Services

GenevaP 6%p u bidc Ser vice i4%

1975-85

Social WelNre Serxiees I9%

1986-91

Debt Service 34#/¢

})elegise 6%

Economic Services

1% Others

Social ' WetDre 22% Services 20%

_ Genera/ .Publi c

tures

on human

penditures)

priority

varies

Service 17%

1992-95

concerns

to aggregate

from

8-11 percent

during

general

government

the period.

ex-

These figures

are just about half of the UNDP norm of 20 percent. This is despite Philippines' ability to meet the target for the social priority ratio. Evolution

of the Fiscal

Deficit

the

and its Sustainability

Table 25 presents the evolution of the consolidated public sector deficit and its components between 1985 and 1996. The reduction in the consolidated public sector deficit (CPSD) was impressive in 1987. It went down to 1.8 percent of GNP from 5.6 percent of GNP in the previous year. This was achieved largely because of hefty improvements in the fiscal position of the national government and monitored GOCCs. On the part of the national nificant

government,

gains in the tax effort

tal outlays even as interest backsliding

in central

the correction

came from sig-

as well as from sharp reduction

payments

govermnent

expanded finances

rapidly.

However,

was evident

in capisome

in 1988-1990.

This came about as interest payments continued to grow and as personal service expenditures also rose, Such dominated the revenue gains from

improving

tax effort

in these years. The monitored

GOCCs like-

Chapter 8."Manasan

359

Table 24. Selected

Country

Expenditure

Shares,

1988. ('20/20' TARGET)

Pubfic F--x]).

Soc(a.[ Allot.

Social Priority

H,_unan Exp.

Hum.:m Dev't_

Ratio

R_ttio

Ratio

Priortly llano

(=GE/GN-P)

(=SS/GE)

(=I,IDP/SS)

(=HD.P/GNP)

(=I-IDPRSE)

Zimbabwe

I2.7

24.5

Rep, of Korea Morocco

16 29

30 42

77 52

3-7 6-3

23,1 21,8

Mtdaysla

6.3

19.7

Thailand

2.5

15-5

Botswt_na

7.7

15.2

Co]ornbia

2.2

14,4

Costa Rica

5-3

13.0

Singapore

4,3

12.3

Brazil*

4.1

12.2

Sierra Leoae

1,6

12,1

,Philippine's

18/31

2.2

10.62/18,3

Mam_tius

3,1

11,6

China

2,1

ll.0

d'ordm_

5-5

11,0

Kuwait

3.9

10,9

Bangladesh

1-2

10.1

Chile

3,1

9.5

Tmaz_'m.ia-

2.4

8.3

Sri La r_ka

2.4

7.7

.Niget4a°'

2.2

7.6

India _:

2.5

6.8

Argentimt Pakistan*

41 25

35 21

16 14

2.3 0.7

5.6 2.9

Indonesia*

0,6

2.3

AVERAGE fALL)

30.00

32.40

38.20

3.6

12,0

(non-federal)

30.00

35.20

40,60

4,0

13,5

UNDP .Norn l

25.00

40.00

50,00

5.0

20.0

Cotultry

*Ltcge federal systems

Notes: GNP = gross national product (national income); GE = government expenditure; SS = social-sector (government) expenditures; HDP = human development priority expenditures Sources: GAA,DBM for Philippines; UNDP, Human Development Report 1991,Table 3.1, p. 41,for all countries. wise posted

a large

ture rose sharply.

aggregate

deficit

in 1990 as their

capital

Thus, the CPSD rose to a hefty 4.7 percent

expendiof GNP in

that year. A quick adjustment then occurred as its figure sharply dropped in 1991 when the deficit was cut to 2 percent of GNP. Since then, the financiM

position

of the consolidated

public

sector

has improved

con-

360

The Philippines

Figure

9. Social

Priority

beyond

2000: An economic

assessment

Ratios.

0,8 0.7 0,6

0.4 .

03 0.2

0,1 0

I987 II

1988 •

1989

]Tbtal Social

sistently such 'that a surplus tered in 1996. Note, however,

1990

1991

-4--

Educati.o_:t

in its primary

these primary GDP.

surpluses

balance

were large--averaging

of the Fiscal

In this section,

the sustainability

.1994

---i--- Healt]3, I I

public

since

Sustainability following Catsambas

1993

(the first one in two decades)

that the consohdated

ing surpluses

1992

was regis-

sector has been post-

1987. 21 From

1991 onward,

more than 4 percent

Deficit of the fiscal deficit

is assessed

the analytics of Anand and Van Wijnbergen (1989) and and Piga.to (1989). The framework they provide focuses on

the interrelationship

among

the fiscal deficit, domestic

and. foreign

debt

and key macroeconomic variables interest and currency exchange. as one which allows the economy

like the rate of inflation, GDP growth, It defines a sustainable fiscal deficit to stabilize its debt-output ratio. The

analysis

constraint

starts

with the budget

of 'the consolidated

public

sector (i.e., the government plus the Bangko Sentral ng Pilipinas [the Central Bank] and derives the following expression for the sustainable primary

deficit,

sus pdef :22

21The primm-y surplus is defi,ed as the overall surplus plus interest payments. By netting out interest payments from the conventional measure of the fiscal position of the government, the primary surplus presents a more accurate picture of the fiscal stance of the govermnent in the Culwentyem'.

Table 25. Consolidated Levels

in Billion

Percent

to GNP

Public Sector Financial Position,

_,:sos

1985

1986

1987

1988

1985-I996. 1989

1990

1991

1992

1993

1994

1995

1996

g_ Conso]idamd

Pub]ic

Public

Sector

Borrowing

Sector

Na tiona] CB Rcslruc Mon[to_:d OPSF

Surp]us*-/Deflcit

-5,9%

_6,6%

- 1.8%

-3.1%

-3,8%

-4,7%

-2.0_

-1,9%

-1.7%

-0.5%

-0.1%

0,2%

-3.0%

-4.3%

-i ,3%

-t.9%

-2.7%

-4.1%

-1.3%

-1.5%

-3,7%

-0A%

-0,8%

-0,6%

Go','emment

-2,2%

-5,2%

-2,5%

-2,9%

-2,J%

-3,40/6

-2,1%

-I,2%

-1.5%

0,9%

0.6%

0.3%

ttLrJng GOCCs

-I.4%

-1.1%

0.0%

0.4%

-0.3% -0.9%

-I.8% -0.1%

-0.6% 0,8%

0.8% 0,4%

-1.0% -1.7% -0,5%

-1.4% -0.6% 0,1%

-1.0% _0A% -0,5%

-0.6% -0,5% 0.2%

0.6%

1,8% 0,3%

1,5% -0,3%

0,8% -0,2%

0,50/$ 0, f%

0.5% 0,7%

.0,5% 0,056

0.2% -0,1%

0,8% 0.2%

0,4%

0.1%

0,1%

-3,0%

-2,3%

-0.5%

-1.2%

-1,1%

-0.6%

-0.7%

-0,4%

2,0%

0.0%

0,7%

0.8%

1.0% --2.7%

0A% --3,]%

0.8% -1.6%

0,6% "2,1%

0,8% -2.3%

lr0% "2,0%

0.6% -1,7%

0.6% -1,6%

0.8% "0A%

"0.7% 0.3%

0.0% 0.2%

0,4% -0.1%

"3.3% 0.1%

"2. 1% 0.1%

0.1% 0.1%

0.2% 0.1%

0.3% 0.2%

0.3%. 0.2%

0.2% 0A%

{3.3% 0,t%

0.4% 0,4%

0.2% 0,3%

0,3% 0,1%

0.4% 0.2%

-0.1% 0,0%

0,2% 0.0%

-0,l% 0,0%

4.8%

4.3%

4,1%

gequirer,

Adjustment of Net Lend[l_g Other Adjustments Other

Public

enL

and Equity

to GOCCs

Sector

SSS/GSIS BsP GFIs LGUs 'limln 8 Adju.stmems OLher Adjustmcr_t s Consolidated

Source:

Public

ui-Interest

Sector

Department

Prlmm-y

Payments

to BSP

SurlMUs+/D

L9%

2.8%

0A%

0,0%

-0,1%

0,0%

S,0%

0.2%

0,5% 0.0%

-2,8%

-1.5%

8, I%

3.9%

3.0%

2.5%

4.6%

4,5%

4,3%

of Finance

362

The Philippines

beyond 2000: An economic

(1) sus pdef = (Jr + q)m - (r - q)b - (i + Ehat-_r where

assessment

- q)(b* - rda)

_r is the rate of domestic inflation, r is the real interest rate, q is the growth rate of real GDP, i is the nominal foreign interest rate, Ehat is the proportional rate of change in the exchange m is the ratio of base money to nominal GDP, and b is the ratio of domestic

public debt to GDP,

b* is the ratio of foreign public debt to GDP, and nfa is the ratio of the net foreign assets of the Bangko ng Pilipinas Equation primary

deficit

rate,

Sentral

(BSP) to GDP.

1 suggests

that the government

as long as the revenue

may continue

from monetization

to run a

(both

from

seigniorage and the inflation tax) exceeds the servicing requfi'ements for public debt. In what follows, the sustainable primary deficit of the consolidated public sector is compared with its actual primary deficit. Sustainability requires that the actual primary deficit than the estimated sustainable primary deficit. Table 26 shows the derivation of the sustainable public sector deficit for 1985-1996. Figure dated public sector deficit was sustainable

should

be less

consolidated

10 indicates that the consoliin all the years during that

period except 1985 and 1986.' The required reduction in the primary deficit of the consolidated public sector was equal to 5.4 percent of GDP fia 1985 and 11 percent of GDP in 1986. The data also reveal that the government

actually

had substantial

room to maneuver

in the other

years. However, given the high initial level of public debt in the Philippines, a debt rednction implied by many years of lower levels of public sector deficits than warranted by key macroeconomic variables might be considered

prudent.

Structural This section

Fiscal

Deficit

will evaluate

how much

of the fiscal

achieved during the period 1985-1996 reflected transitory The structural overall deficit of the consolidated public

adjustment adjustments. sector is one

2_For more details on this concept o'fsustainability, the reader is referred to Appendix 2.

Table 26. Fiscal Sustainability, Year

1986-1996. r

i (for

nom)

ER (ave)

libor

sus pdef

act pdef

(% GDP)

Required

Deficit

Reduction (act

pdef-

sus pdef)

1985

-0.07307

0.23448

0,04552

0.08618

18.6073

-0,02721

0.02712

1986

0,03417

-0.00447

0.17447

0,06823

20.3857

-0.09194

0.01498

0,10692

1987

0.043i 2

0.03030

0,09870

0.07310

20, 5677

-0.01027

-0.05034

-0.04007

1988

0.06753

0.08932

0.06568

0.08128

21.0947

0.03390

-0.03890

-0.07280

1989

0.06205

0.12200

0,07500

0.09265

21.7367

0.03465

-0.02962

-0,06427

1990

0,03037

0,14171

0,10529

0,08316

24,3105

-0,01273

-0,02553

-0,01280

1991

-0.00578

0,18657

0.03843

0.06080

27.4786

0.00278

-0,04626

-0.04903

1992

0.00338

0.08947

0,08053

0.03929

25.5125

0,02861

-0.04576

-0,07437

1993

0.02116

0.07609

0.05491

0.03415

27.1198

-0.00234

-0.04364

-0.04130

1994

0.04388

0,09035

0.04765

0,05067

26,4172

0.05241

-0.04897

-0,10139

1995

0,04762

0.08080

0.04420

0,06097

25.7144

0.04271

-0.04423

-0,08694

1996

0.05485

0,08429

0.04571

0.05587

26.2157

0.03268

-0,04271

-0.07539

A negative

number

indicates

permissible

deficit

0.05433

increase.

_o o, L_

364

which

The Philippines

removes

measure

the effects

beyond 2000: An economic

of temporary

of the CPSD. In the Philippine

factors context,

from

assessment

the orthodox

the improvements

the fiscal position arising from the import surcharge imposed in 19851986 and then again in 1991-1992, the massive inflow of privatization proceeds in 1994-1995 and the additional P1 per liter levy on imports of oil products in 1992-1993 may be considered transitory in nature. These transitory adjustments on the revenue side accounted for approximately 100 percent of the fiscal adjustment undertaken in 1990-1992 (Table 27). The overall CPSD was cut by 2 percent of GDP--an amount that is "almost equivalent to the size of the transitory adjustments put in place. In contrast, the reduction in the overall CPSD in 1993-1994 was equal to 1 percent (equal

of GDP, just half of the incremental

to 2 percent

privatization of the Social surance

of GDP). This came

proceeds Security

transitory

about

because

adjustment part

of the

covered the deterioration in the fiscal position System (SSS) and Government Service and In-

System (GSIS). It has been noted that on the expenditure

side, maintenance

and

capital expenditures were cut deeply as part of the adjustment process. If these reductions are viewed as stopgap measures aimed at achieving stabilization,

then these

expenditure

reductions

may be netted

out of

the CPSD just like the transitory adjustments made on the revenue side. If the average level of maintenance expenditure in 1978-1982 (equal to 4 percent

of GDP) is considered

as consistent

with the country's

ex-

isting stock of capital, then one finds that the national government has consistently been underspending on maintenance by roughly 1.5 percent of GDP in 1985-1996. On the other hand, if one uses the average infrastructure as the norm, investing

expenditures of other Asian countries (4 percent of GDP) then it appears than the national government is under_

at the rate of I percent

1996. Note that the government tenance

and capital

outlays

to 1.5 percent

Of GDP per year in 1985-

has not restored

in a significant

the cutbacks

manner

in main-

in 1994-1995 de-

spite the dramatic improvement in the CPSD during that period. Total transitory adjustments was fairly stable at 2.5-3 percent of GDP in 1985-1996 except in 1988 and 1992-1995 when transitory adjustments

reached

4-6 percent

of GDP. In 1988, drastic

cuts in MOOE

and cai_ital expenditures were put in place, while in 1992-1995 substantial reductions in these essential expenditure items were contmued even as additional revenues were raised from the oil levy and the divestment program. Because of this, it is not surprising that the transitory adjustments have not affected the depth of the fiscal adjustment that took

Chapter 8: Manasan

Figure

10. Fiscal

365

Sustainability,

1985-1996.

7 5 3 1 -1

-3 -5 _7 _9 -11 1985 1986

1987 1988

1989 1990

1991 1992

1993 1994, 1995,.: .1996

Year

[ _

Sustainabc

place during

Plimary

Deficit

(%).

--_-

the period

under

study.

Actual

Primary

Deficit

That is, the reduction

(%) ]

in the over-

all CPSD was approximately equal to the decline in the adjusted CPSD: 7 percent of GDP between 1985 and 1996. Also, movements in the structural deficit

largely

mirrored

the movements

in the overall

cash deficit

of the consolidated public sector. However, these transitory fiscal measures did affect tlie size of the fiscal deficit. For instance, the consolidated public 1996 (instead

sector would have had a deficit of 1.4 percent of GDP in of a surplus of 0.2 percent of GDP) if the transitory mea-

sures were not imposed. Nonetheless, it is also worthy to note that the consolidated public sector deficit would have been sustainable still even if the temporary adjustment measures were not adopted in 1985-1996 except in 1990 (Figure Conclusions

and Recommendations

The data indicate sustainable

11).

that the consolidated

in all the years

during

sustainability were to be gauged does not increase its debt-output

that period

public

sector deficit

except

1985 and 1986 if

in terms of a fiscal position ratio, Given this perspective,

was

which the re-

quired reduction in the primary deficit of the consolidated public sector was large in 1985 and 1986 but the government actually had substantial

room for maneuver

in the other years.

However,

given the high

initial level of public debt in the Philippines, one can argue that the debt reduction implied by many years of lower public sector deficits than warranted

by key macroeconomic

variables

is in fact imperative.

Table

27.

Levels

ilx Billior_

Structural

Deficit

Pe-_-o s

and

Fiscal

Sustainability,

i985

1985-1996.

1936

1987

19B 8

1989

1'390

1991

1992

1993

1994

1995

1996

6.50

1.76

3.0 8

3.75

4.74

2.0 ,_

1.92

1.76

0.49

0.13

-0.22

2.71

1.50

-5.03

-3.89

-2.96

-2.55

-4.63

-4.58

-__.36

-4.90

-4.42

-4.27

0.80

0.18

0.75

0.45

0.41

1.73

1.93

1.42

3_45

2.23

0.42

e-_

0.80 O_O0

0.80 0.00

0.00 OAg

0.00 0.75

0.00 0.45

0.02 0.39

1_20 0.33

0.79 0.14

0.00 035

0.23 2.43

0.21 1.31

0.00 0.42

'_ _'_-_.

0.00

0.20

1.00

1.07

0.79

0.71

0.00

_r_

6.57

7.30

1.94

3._-3

4.20

5.15

3_81

3.85

3.18

3,94

2.36

0.20

_'_

3.31

2.30

-4.85

-3.14

-2_51

-2.14

-2.89

-2.65

-2_95

-1.45

-2.20

-3.83

1.69 1.69

1.39 1.53

2.70 1.12

3.42 1.55

2.59 1.10

2.11 1.20

1.71 1.10

2.77 1.S1

2.63 1.66

2.64 1.12

2.53 1.54

2.17 1.37

0.00

0.06

1.57

1.87

1.49

0.92

0.61

1.26

0.98

1.53

1.00

0.80

8.26

8.89

4.64

7.25

6.79

7.26

5.52

6.63

5.81

6.5_

4.89

2.37

5.20

3_89

-2.15

0.28

0.0 8

-0.03

-1.18

0_13

-0.31

1.19

0.34

-1.68

Dei_ clt

-2.72

-9.19

-1.03

3.39

3.47

-1.27

0.2 8

2.86

-0.23

5.24

4.27

3.27

y Ad justmer_ts

2.49

2.39

2.88

4. I7

3.04

2.52

3.44

4.7 0

4.05

6.09

4.76

2.59

% GDP

Ur_ad_x_t_d

Overall

Slz_plus(-)

/ Defi_t(

Ulmdj_sted

Prlmar

y Suxplu-_(-)

f Defiolt_}

Tzansitoxy

Adju_stments'

Import Levy P fivatlzaHon

Pro,=e_s

Oil Levy _M:lju.sted

Overall

Adjuzted

Pfirnzry

Surpltts(-)

! DeEiclt(_)

S,_plu_(-)/Deficit(+)

:_.._

g_ Trarmitor y Adjustments" Malntenar_c_ Expendlt Capital

Exwendltux

Adjusted

Owz=ll

Adjusted

Primary

Suxplu_(-)/Deflctt(*) S"urplu_(-)

Su.st z L_table Primary Memo

uzes

E's

! Deficit(*)

_ _

Item:

Toeal Transltor-

¢3

_. C,,

i Transitory

adjustment

on revenues

2Transitory

adjustment

on expenditure

g_ t_

Chapter 8: Manasan

Figure

367

11. Structural

Deficit

and Fiscal

Sustainability,

1985-1996.

7,00 9.00 5.00

3.00 _-

1.00 -1.00

.3.00 -5.00 -7.00 -9.00 -11,00

. i985

1986

1987

1988

ADJUSTED [_

Improving

• ,. 1989

1990 1991 Year

1992

1993

1994

1995

]996

PR_IMAILY SURPLUS(-)

/ DEFICIT(+)

ADJUSTED P1LIMARY SURPLUS(_) SUSTAINABLE PR3MARY DEFICIT

/ DEFICIT(+)

Revenue

Performance

While some gains ha tax revenue performance is still apparent the mid-1990s, tax effort (the ratio of tax revenue to GNP) appears have tapered

off. The tax effort rose by a total of 3 percentage

in to

points of

GNP in the four-year period between 1986 and 1990. In contrast, it only increased by 1 percentage point of GNP in the period between 1992 and 1996. Tariff revenue is at the same time expected to contract as the government continues to lower import duties in line with its trade liberalization program. Als0, weak revenue generation will become a more critical problem as revenue from sales of goverm_aent-owned firms declines in. the next few years. Consequently, tem remains a major area of concern. enue

how to enhance

the tax sys L

High rates of tax evasion as well as the lower-than-expected impact of the CTRP indicate that the government calmot

tinue to rely on changes in tax structure to address fundamental lems in tax administration. In other words, there is an urgent

revconprobneed to

provide what are essentially administrative solutions to tax administration issues. The following appear to be the more important ones: Improved Available (VAT) registrants

Monitoring of Stopt_lers data show that only 78 percent filed returns

of all value-added

in 1994. While no comparable

figures

tax are

368

The Philippines

available

beyond 2000: An economic

for other types of taxes, key informant

assessment

interviews

suggest

that

this problem is common to all types of taxes. The importance and inadequacy of the present system of monitoring stop-tilers is exemplified by this little story on how the recent and highly-publicized tax diversion scare was uncovered. The scare was first noted when one regional

district office (RDO),

which has a functioning manual taxpayer monitoring system in place, noticed that some taxpayers failed to pay their taxes. After making follow-up calls, the RDO was informed that the taxpayers already paid their taxes. The rest is history. What was observable from the scam was that the large amount involved indicate that it took a while before the ruse was discovered. toting

systems

This implies that many RDOs have weak moni-

in place.

To enhance

the monitoring

of stop-fliers,

the BIR has to have a

taxpayer masterlist. Since the absence of such a llst has been persisting, the BIR computerization program (or the integrated tax system) in 1999 is expected to address this. The installation and use of manual systems in the meantime is imperative. Also, under the computerized regime, it is important that the RDOs learn how to use the system properly so that they can fully maximize its capabilities. Initial reports in the pilot roll-out areas show that some RDOs had to request the data center to print out the list of stop-tilers and generate reminder letters even if the system InstMlatlon In principle,

already

allows RDOs to do these tasks themselves.

of Selective the objective

Audit Policy and Procedures of tax audits is not so much to increase

the generation of revenue as to improve voluntary compliance. The BIR's audit function is not only central to its effectiveness as an institution

but is key to the poor public

image

of the BIR as well.

Within the BIR, the attdit function is subject to great debates and some ambivalence even among its key officials. On the one hand, many revenue officers request that they be given authority returns even if it is beyond their ability to complete,

to examine all tax much less outside

their capability to subject such to quality audit (Deoferio same time, while some taxpayers have not been examined

1997). At the at all, others

have been subject to annual tax audits despite high tax compliance (UPEcon Foundation 1995). This has led to the widespread perception that tax audits are being used to systematically On the other hand, some key officials, to disregard

tax audit

harass many taxpayers. from time to time, seem

as a t0ol. Thus, one hears

of protracted

periods

Chapter 8: Manasan

369

during which the issuance of a Letter of Authority (for the conduct of audit) was suspended. While the BIR officially supports a program of selective audit (BIR Annual Report 1995), there appears to be some inconsistency between policy pronouncement and actual practice. For instance, Revenue Memorandum 26-94 prioritizes the audit of large taxpayers. "This not only prejudices said large taxpayers but also sends the wrong signal about being big and successful" (UPEcon 1995). The experience in countries with modern tax administration shows that tax audit is not an all-or-nothing proposition, in fact, it is the opposite. One of the principal means to enhancing the effectiveness of tax audits is the implementation of a selective audit program. The key to said programs is a means of selecting taxpayers who are shown to have the highest probability of under-reporting their tax liability. Usually this is aided through the use of statistical analysis. Upon full operation of the computerized tax system, the Bureau is expected to have this capability. However, it is one thing to know that there are provisions in the integrated tax system for the incorporation of a selective audit program; it is another thing to find out "whether the selection system fulfills the requirements of the Bureau before it becomes operational" (TAAP Memorandum, May 30, 1997). Third Party Information (TPI) Evasion estimates of the income tax tend to show that the bulk of the problem stems from under-reporting of receipts/income. Third Party Information is one way of addressing this issue. Initial efforts to collect and analyze Third Party Information have focused on oil/gas dealers. This work has been well-received by BIR officials. It has also generated some interest in extending its application to other sectors. •, ,. There has been some disagreement, however, on whether the TPI should be used to assess additional taxes through the issuance of letters of authority or whether concerned taxpayers should simply be encouraged to file amended returns. There has been some apprehensions that the first approach may lead to the harassment of taxpayers. In either case, it is important that a good internal control system be put in place to keep track of how data gathered from the TPI are used and to ensure that the same are not used to harass taxpayers. Data generated from the TPI be used to develop audit procedures and techniques, standards and norms specific to the concerned sectors/industries.

370

The Philippines beyond 2000: An economic assessment

improved Performance Evaluation System for Revenue Officers It has generally been agreed that one of the most serious problems of the BIK has to do with its personnel. For one, the public image of the BIR is one of inefficiency, if not corruption. Coupled with the low pay scale, this has resulted in the low morale of BIR personnel. To deal with this problem, it is important that an appropriate performance evaluation system for revenue officers be developed and put in place. Good performance should be rewarded in the same manner that bad performance is sanctioned. In this regard, while the reshuffling of revenue officers once every three years might be justified on the ground that it discourages special arrangements/relationships between revenue officers and taxpayers, the current practice of reassigning revenue officers to faraway posts as "a disciplinary device only transfers inefficiencies from one place to another in the revenue service" (Deoferio 1997). Training Front Line Personnel to Prepare them for a Computerized Regime The ongoing computerization program of the BIR has been met with great expectations. As "automated systems do not collect taxes, they only provide the supporting framework which can maximize the productivity of people" (Wesffall 1996), it is essential that human aspects of the shift toward the more computerized regime be carefully managed. In this regard, the very first step is to provide computer literacy training to frontline personnel. Undeniably, the degree of computerization in the Bureau prior to this change is low. As such, revenue officers view computers and the accompanying system with some trepidation, if not resistance. This problem has to be dealt with immediately even before training on the specifics of the new integrated tax system are conducted. Creation

of Data Centers

The creation of data centers is already proposed in the continuing streamlining effort at the BIR, as reviewed by the Department of Budget and Management. These centers are important in ensuring timely and consistent data input. They also appear to be the heart of computerized system's quality assurance system.

Chapter 8: Manasan

371

Improving Government Resource Allocation Capital outlays and government expenditures on maintenance and other operating expenditures which have suffered major cutbacks during the adjustment period have not been restored to their normal levels following significant improvements in the fiscal position of the public sector. Likewise, unmet demands in the area of human priority concerns (i.e., basic education, basic health care aud low cost water supply, and sanitation) continue to be large. Thus, it is important that financing of expenditures on physical infrastructure and human capital be secured by restructuring the budget without necessarily increasing total expenditures. Focusing government expenditures on basic services to the most needy is essential if the government is to provide support to the poorest of the poor.

372

The Philippines beyond 2000: An economic assessment

References Anand, R. and S. van Wijnbergen. 1989. Inflation and the Financing of Government Expenditure: An Introductory Analysis with an Application to Turkey. The World Bank Economic Review 3, 1:17-38. The World Bank. Arboleda, H. Forthcoming. Added.

Share of the Informal Sector in the Value

Bahl, R. and S, Wallace. 1994. Consultation on Philippine Tax Reform. Report submitted to the United States Agency for International Development, Manila. Boadway, R. and D. Wildasin. 1984. Public Sector Economics. 2nd Edition, Little Brown and Co., Boston. Catsambas, T. and M. Pigato. 1989. The Consistency of Government Deficit with Macro-economic Adjustments: An Application to Kenya and Ghana. Policy Planning and Research Working Paper Series 287. Country Economic Department: The World Bank. Deoferio, V. Jr. 1997. What's Wrong With Our Tax System? Unpublished, 1997. Department of Budget and Management. Budget of Expenditures and Sources of Financing, Fiscal Year 1997. Manila: DBM. Kochhar, K., L. Dicks-Mireattx and B. Horvath. 1996. Thailand-The Road to Sustained Growth. IMF Occasional Paper 146. Washington D.C.: International Monetary Fund. Kohli, Harinder. 1994. Infrastructure Development in East Asia and Pacific. Washington.: World Bank. Manasan, R. 1994. Breaking Away from the Fiscal Bind: Reforming the Fiscal System. Makati City: Philippine Institute for Development Studies. Manasan, R. 1990. An. Assessment of Fiscal Policy in the Philippines, 1986_1988. PIDS Working Paper No. 90-06, Philippine institute for Development Studies, Makati City. Mackenzie, G., D. Orsmond, and P. Gerson. 1997. The Composition of Fiscal Adjustment and Growth - Lessons from Fiscal Reform in Eight Economies. IMF Occasional Paper 149. Washington D.C.: International Monetary Fund. Richupan, S. 1984. Measuring Tax Evasion. Finance and Development 21. Sicat, G. and A. Virmani. 1988. Personal Income Taxes in Developing Countries, Final Version. The World Bank Economic Review 2:1.

Chapter 8: Manasan

Sunley,

E., D. Fanizza, pines: A Program

373

W. Grayston, and R. Shuldiner. 1994. Philipfor Reform of the Structure and Administra-

tion of the Tax System. International ing.

Monetary

Fund.

Forthcom-

UPEcon

Foundation. 1995. Proposed Reforms on Tax Administration. Final Report submitted to the United States Agency for international Development. Manila: USAid.

Westfall,

L. 1996. Closeout

Briefing

for the Commissioner

of the Philip-

pines BIR and Her Executive Staff: Findings and Recommendations from an Independent Review of the Proposed Organization Redesign. Report submitted to United ternational Development. Manila: USAid. Yoingco, A. 1996. Trends and Patterns in Taxation Region. NTRC Tax Research Journal 8(3).

States Agency

for In-

in the Asia-Pacific

374

The Philippines

beyond 2000: Arz economic

assessment

Appendix 1 Measuring Tax Evasion General

Approaches

There are several apploaches to the measurement of tax evasion: the gap approach, the tax elasticity approach and the tax audit approach, to name a few. In the gap approach, the '"true" determined. Data on aggregate income/sales/receipts

tax base is first is obtained from

sources national

independent of the tax returns. Most often, data from the income accounts (NIA) are used. The corresponding tax liability

for the

income/sales

estimate

thus derived

equated to the potential 'tax revenue potential tax revenue and the actual be the amount of taxes evaded. The major ternative

difficulty

data. sources

is then

with the gap approach

true of capital

gains. But where is deemed

this

superior

and is

take. The difference between tax collection is then presumed

on the appropriate

" the gap approach below.

computed,

is the absence

the to of al-

tax base. This is particularly

type of information

is available,

to the other procedures

discussed

In the elasticity approach, the potential tax revenue is estimated based, on some average tax function, m which tax collection is regressed on various determinants like the tax base and changes in tax structure. The typical

regression

equation

used is:

lnT = a + lnY where

T is the tax revenue

and Y is the

appropriate

tax base.

The

difference between the projected tax revenfie derived from the equation above and actual tax collections may be used as a measure of tax evasion. This

approach

assumes

that

there

is no significant

change

in the

composition of the tax base and that there is no change in the tax rate. With either a tax rate increase/decrease or a change in the-composition of the tax base that warrants a COlTesponding technique tends to underestimate tax evasion. that this procedure a good estimate (improvement) period's

does not measure

change in tax yield, this Richupan (1984) asserts

total tax evasion but it does provide

of additional (lower) tax evasion and the deterioration of tax administration va!ued in 'terms of the estimation

mean level.

Chapter 8: Manasan

In contrast, assessed

375

the audit approach

on taxpayers

makes

who are subjected

use of the additional

to tax audit.

this technique stems from the fact that the revenue pability is typically limited and from the possibility

taxes

The weakness

agency's audit that corruption

cain

the ranks of the tax enforcers usually lead to lower audit assessments than warranted and, consequently, lower estimates of tax evasion. • In this paper, the gap approach, will be used to estimate the level of evasion of the individual income tax, corporate income tax and the VAT. Measuring

Evasion

In this study, surplus

of households

of the Individual compensation

Income

Tax

of employees

and unincorporated

plus net operating

enterprises

as reported

the National Income Accounts (NIA) is used as the basis for computing the potential taxable base of the individual income tax? However, it is adjusted by subtracting items that are included in the national accounts definition household income

of personal income but which do not actually accrue to the sector and items which are not taxable under the individual tax provisions

of the National

Income

Revenue

Code (NIRC).

The first list includes the net operatilag sta-plus of unincorporated private nonprofit) enterprises while the second list includes employer's share of social security contribution. these excluded items are not available. The

employers'

of social

security

Time

series

(i.e., the

data on

contributions

approximated by taking half of the total social security contribution figures provided in the NIA. Thus, taxable compensation income of households (w) is derived as follows: less:

(I) (ii)

compensation income as reported in the NtA; 50 percent of social security contributions of households as reported in the NIA.

Income of unincorporated enterprises for 1991 and 1994 was estimated as equal to one-half of the difference between total net operating surplus of the household sector as reported in the NIA (NOSHPDNIA)

and income

from

entrepreneurial

activity

as reported

LProperty income which includes interest income, dividends and rents are taxed under the so-called passiveincome provisions of the NIRC.

376

The Philippines

beyond 2000: An economic

assessment

in the FIES (NOSFIES). 2 The level of private nonprofit enterprise income thus derived was subtracted from NIA's total net operating surplus of household sector to arrive at an estimate of net operating surplus of households net of unincorporated enterprises (NOSHLUEPD) in 1991/1994. The estimate of private nonprofit enterprise income derived for 1991/1994 was operating surplus.

also expressed as a proportion of NIA total The resulting ratio was then used to calculate

net the

level of income of private nonprofit enterprises in other years. Thus, the aggregate net operating surplus of households exclusive of net operating surplus of unincorporated enterprises (NOSHLUEPD) in 1991 and 1994 year was calculated (I)

aggregate net unincorporated depreciation

less:

(ii)

as: operating surplus of households and enterprises in NIA grossed up for

(NOSHPDNIA);

50 percent of difference between NOSHPDNIA (gross of depreciation) and total FIES income from entrepreneurial activity

(NOSFIES).

In other years, NOSHLUEPD

was estimated

NOSHLUEPDt=kl*NOSHPDN_ where t

k, = NOSHLUEPD1991/NOSHPDNIA1991, -- an index for the time period. 3

Total taxable

income

as:

and

in year t (TAXYt) is then derived

as the sum

of w_ and NOSHLUEPD c Subsequently, the estimate of total taxable income was then broken down into compensation income (COMPY) and

entrepreneurial

income

shares in 1991/1994. calculated as:

That

(ENTREY)

using

is, compensation

the respective income

income

(COMPY)

2Entrepreneurial income as reported in the PIES refers to gross receipts from entrepreneurial activity less cost of good s sold. Thus, net operating surplus as reported in the NIA is conceptually comparable to entrepreneurial income in the FIES less depreciation. Expet_csattribute the difference between NIA and PIES estimates of net operating surplus to a combination of the following: (I) statistical discrepancy arising primarily from under-reporting of household income in the FIES, and (2) income of private nonprofit enterprises. In this study, the difference was arbitrarily allocated equally to these two items. In computing NOSHNIAin 1991/1992,the income shares came from 1991FIES while in estimating NOSHNIA for 1993-1.996,the income share implied by the 1994 FIES were used.

Chapter 8: Manasan

377

COMPY t =/_z*TAXYt; and ENTREYt where

= (1 - k2)*TAXY _

k 2 = wFIES1991/(wFIES1991

+ ENTREYFIES1991).

At the same time, the 1991 and 1994 FIES data sets were further processed such that the decile distribution was disaggregated to show the number of dependent children (0, 1, 2, 3, 4, or 5), the number of income

earners

(0, 1, 2, 3, or 4), and the income

source

(compensation

income, entrepreneurial income, dividends, interest income, imputed rent, and gifts)? That is, households in each income decfle were further classified according .to the said three variables. The number

of income

tax payers

number

earners

determines

in the householdand

(1) the

potential

(2) the amount

personal exemption the tax filer can claim in his individual income tax return. In this paper, the first two income earners in each household were assumed to be married and were assumed to file a joint income tax return. However, the third (and fourth) income earner subject to tax was assumed to file a tax return on his own and was, thus, treated as an additional potential tax filer. The number of dependent additional

exemption

tax return.

In this study, if there

the

children

tax filer can claim

defines

the

amount

in his individual

were more than two income

income earners

a given household, the total number of dependent children in that household were assumed to belong to the "married couple" in the said household. The income source of each income earner in any given household determines (1) whether the income source is subject to individual income tax, 5 and (2) if it is so determined, whether tax rate schedule or the business/professional

the compensation income individual income tax

rate schednlc will be applicable. This distinction is important during the years when the schedular system was in place. On the one hand, the number of households shown in the 1991/ 1994 FIES was made to grow at the same rate as the national average rate of population growth to alTive at the number of households in 4Entrepreneurial income as reported in the FIES refers to gross receipts from entrepreneurial activity net of cost of goods so]d_ sRecall that dividends, interest.income, imputed rent, and gifts are not subject to individual income tax. Thus, said sources of income are excluded from the total income of the decile subgroup when computing for the potential individual income tax liability.

378

The Philippines

beyond

2000: An economic

assessment

each subgroup in the decile distribution for the years 1991-1996. On the other hand, the estimate of aggregate entrepreneurial income (ENTREY) and compensation income (COMPY) for 1991-1992 was distributed the different income groups using the decile distribution

to of

entrepreneurial income and compensation income, respectively, in the 1991 FIES while ENTREY and COMPY for 1993-1996 was distributed using

the

decile

distribution

of entrepreneurial

income

and.

compensation income, respectively, in the 1994 FIES. Following this, total household income subject to the individual income tax for each income subgroup was divided by the number of households

and by the number

of income

earners

in each household

arrive at the gross income of each representative income earner. A tax calculator model is developed to estimate potential individual income tax liability.

The model

works

as follows.

First,

the corresponding

personal and additional exemptions for the representative income earner in. each income subgroup were calculated using information on number of income earners and number of dependent children. Second, estimates of personal and additional exemptions were deducted from the total gross income of each representative income earner to obtain estimates of his/her legally each representative tax rate

using

professional the potential

taxable income. income earner

the

tax

schedules

Third, the taxable income level of was multiplied by the corresponding for compensation

income to estimate his/her potential tax liability of each representative

and

business/

tax liability. Fourth, income earner was

multiplied by the number of households in each income subgroup to yield total potential tax revenue from the individual income tax In this study, it is assumed that the tax liability arising from compensation income earned in the current year is paid to the BIR in the same year. However, tax liability arising from business/professional income accrued in the current year is assumed to 'be paid to the BIR in the succeeding year. On the other hand, taxpayers

the number

for each year was derived

of potential

by counting

individual

the number

income of income

earners who are required by law to tile an income tax return and after making the adjustment for the fact that some households have more than two income earners. 6 Finally, the tiling rate may be calculated as the ratio of the actual number of individual income tax tilers to the

6In this study, married couples are assumed to file a single return.

Chapter 8: Manasan

potential indication

379

number of individual taxfilers. of the level of tax compliance.

Measuring

Evasion

of the Corporate

This measure

Income

provides

some

Tax

The NIA estimate of net operating surplus of private and government corporations (NOSPCGCNIA) is the first candidate that comes to mind when searching for a measure of the corporate income tax base that is independent of information provided in the income tax returns. The potential revenue from. the corporate income tax may be estimated

as the product

of 0.35 and NOSPCGCNIA.

To derive the potential potential

revenue

from

number

of corporate

the corporate

income

tax tilers, the

tax may then be divided

by the amount of actual corporate income tax paid on the average corporations filing tax returns to derive the potential number

by of

corporate income taxpayers. The filing rate is then computed as the ratio of the actual number of corporate income tax tilers to the potential number of corporate income tax tilers. Measuring Evasion The Philippine

of the Value Added Tax value added tax (both the original

1988 version

and the expanded version or EVAT) is a consumption type, destination principle VAT where tax liability is computed using the credit method. As such,

in calculating

a firm's

value

added,

all business

purchases,

including those of capital assets, are deductible from its sales. At the same time, exports are zero-rated while imports are taxed. Also, tax liability of any given firm is computed as the difference between the tax on its sales and the tax on its purchases of taxable inputs. In addition, the Philippine to agriculture,

VAT exempts petroleum

sales and imports of agriculture, most inputs products, books and publications, utilities

and many services, a At the same time, sales of small firms exempted from VAT.

are

also

Conceptually, the VAT base may, thus, be derived as follows: (I) VAT-liable supply (sales of domestic producers plus imports less exports less sales of exempt sectors less sales of marginal

firms)

7The corporate income tax rate is 35 percent. BBothzero-rated and exempt goods do not pay taxes on their outputs. While zero-rated goods are given a rebate (or credit) for the taxes they paid on their inputs, exempt goods are not.

380

The Philippines

beyond 2000: An economic

less:

(ii)

less:

(iii)

creditable intermediate supply fixed capital formation

plus:

(iv)

VAT-liable purchases/inputs

of exempt

Sectors

plus: less:

(v) (vi)

VAT-liable purchases/inputs VAT-liable purchases/inputs

of marginal of exports.

firms

While

exempt

their outputs,

sectors

purchases

and marginal

they are also not allowed

or inputs

firms

assessment

totaxable

do not pay_ taxes

to get credit for the taxes they

paid on their intermediate and capital inputs. Thus, there is a need to add items (iv) and (v) in the computation of the VAT base. On the other hand,

exports,

their output intermediate

being

zero-rated,

are also not required

to pay tax on

even as they are allowed to rebate the taxes levied on their purchases. Consequently, there is a need to subtract item

(vi) in the computation of the VAT base. In this study, the estimation of the VAT base is divided

into two

parts: the domestic sales component 'and the import component. The estimation procedure for the import componem is fairly straightforward compared

to that for domestic

VAT Base 'for Imports The Balance of Payments of different

commodity

groups.

directly from this information goods from total merchandise VAT Base for Domestic Annual However,

data

sales.

(BOP) provides

The VAT base for imports source by subtracting imports.

Income

the value added ratios

Accounts

is thus derived

impoi_s

of exempt

Sales

domestic

sales

data on gross value added

the NatioJ_al

data on value of imports

is typically

not

available.

(GVA) by sector is available

(NIA).

Input-output

from the 1988 Input-Output

coefficients

from and

Tables are then used

to gross-up said GVA figures tO arrive at estimates of domestic sales 20 Thus, in this study, GVA adjusted for the presence of VAT-exempt inputs Years when the Census of Establishments are undertaken are exemptions to this rule. _0I-O tables are also available foJ.1990and 1992..However, both.were derived from the 1988I-Otable using the RAS adjustment. As such, both reflect the 1988production cost su_tcture. The 1.990I-O table is comprised of 177sectors while the 1992I-O table contains 58 sectors. In contrast, the 1988I-O table has 230 sectors. Since we are more interested in the production structm'e rather than the nominal input or output values and because the finer disaggregation available in the 1988table makes it easier to distinguish VATexempt from VAT-liablesectors, the 1988I-O table was used in the analysis.

Chapter 8: Manasan

is taken

381

as an estimate

of domestic

sales net of intermediate

input

purchases. This study has developed a pro-forma table used in the estimation of the VAT base for domestic sales. Entries in the first column correspond to estimates of sectoral GVA and were obtained from the NIA. Entries in the

second

multiplying sub-sectors

column

(GVA in exempt

sectors)

were

derived

column (1) by the "exempt ratio" (i. e., ratio of GVA h_ exempt to total sectoral GVA.

Entries in Colunm 3 (GVA of marginal firms) represent the product of column (1) less column (2) less column (5) and the "marginal ratios" (i.e., the ratio of GVA in the informal sector to total sectoral GVA). Entries in the fourth column (merchandise exports) were calculated

as the

product

commodity

groups

as reported

dollar these

dollar

value

of exports

in the BOP and the almual

of major

average peso-

exchange rate as reported by the Philippine Dealing System. Column 5 represents the GVA contribution of exports. Entries column

corresponding output). Column columns output

of the

were

obtained

by multiplying

value added ratio (6) is the difference

(2), (3) and (5).

column

(i.e., ratio of sectoral

Entries

between

column

in this column

(4) by the

GVA to sectoral

(1) and the sum of represent

GVA (i.e.,

less intermediate inputs) in VAT-liable sectors/transactions. As noted earlier, VAT is levied, in principle, on the value added in

VAT-liable sectors.

In other words,

the VAT base is akin to gross value

added. However, in practice, some sectors are VAT-exempt. Thus, firms are not allowed to receive a refund of the taxes paid on purchased inputs from VAT-exempt sectors because no VAT is paid on the same to begin with.

This implies

GVA adjusted adjustment the product

that the actual

for the

presence

VAT base for VAT-liable

sectors

of VAT-exempt

Such

inputs.

is carried out in column (7). Thus, entries in column (7) is of column (6) and the GVA adjustment factor. The GVA

adjustment factor is the ratio of the sum of GVA and VAT-exempt to GVA in VAT-liable sectors. Entries

in columns

exempt sectors, marginal (8) is obtained

(8), (9) and (10) represent

to GVA in exempt sectors.

VAT-liable inputs to

finns and export sectors, respectively.

by multiplying

column

Columns

inputs

Column

(2) by the ratio of VAT-liable inputs (9) and (10) are analogously

derived.

382

The Philippines

beyond

2000: An economic

assessment

Finally, column (11) is the sum of columns (7), (8) and (9). 1' The entry for the "total" row of Column (11) is the VATbase prior to the adjustment for capital formation while the entry for the "total" row of column (12) is VAT base after deducting capital formation, Note that portion of gross capital not deducted

formation in the NIA that is allocable from the VAT-base.

to government

UInprinciple, column D should be subtracted from 'the sum of columns 7, 8 and 9 to arrive at an estimate of the VAT'baseprior to the capital formation adjustment, However, the amount of VATcollections reported by the BIR is gross of VATcredit for inputs to exports. Thus, our estimates of the VATbase reflect this practice.

Chapter 8: Manasan

383

Appendix 2 of the Fiscal

Sustainability Anand

and van Wijnbergen

Deficit

(1989) and

Catsambas

and

Pigato

(1989) developed a conceptual framework that may be use to analyze the long-term sustainability of fiscal deficits in relation to the accumulation of public debt. The framework highlights the relationships among the fiscal deficit, the real interest rate, the real growth rate and the real exchange rate. It also indicates the conditions that would be necessary for a country to stabilize its debt/GDP ratio in the long-run. The presentation

that ensues closely follows that of Catsambas and Pigato. The analysis starts by consolidating the accounts of the government and the Central Bank (CB). In so doing, it redefines the conventional budget deficit by adding Bank's net worth to it. On the one hand, written as: a - r + nS where

(algebraically)

the budget

+ iEB"

identity

the change

for the government

= Cg + B + E_/"

Gis noninterest government T is tax and nontax revenue,

may be

(1)

spending,

n is average nominal interest on domestic B is domestic debt outstanding, i is average nominal interest on external E is nominal exchange rate, B ° is foreign debt outstanding,

debt, debt,

Cg is credit by Central bank to the government. The left-hand side of equation (1) lists its expenses non-interest and foreign

in the Central

(net of taxes):

expenditures plus nominal interest payments on domestic debt. These expenses are covered (on the right-hand side

of the equation) by the issue of domestic and foreign debt plus Central Bank credit to the government sector. On the other hand, the change in the CB's net worth may be gleaned from its income statement and expressed plus capital gains or losses on net foreign assets.

= m(NrA)+ (NFA) where

NW is net worth

of the Central

as interest

receipts

(2 ) Bank,

384

The Philippines

beyond 2000: An economic

I is the average nominal interest rate on foreign E is net foreign assets of the Central Bank, and over a variable denotes its time derivative. foreign

assessment

holdings,

At the same time, if Central Bank assets are of two types only: net assets and credit to 'the government, then its net worth may

also be gleaned

from its balance

sheet and expressed

as:

,vi_ = E(NFA)+ E(Yi'A)* C'_- M where net worth

M is the monetary

may alternatively

(3)

base. Therefore,

be defined

the change in the CB's

as:

N_V = E(NFA) + E(NlkA) + C'g - l_l

from

Now, the change

in the net worth

both the sources

of financing

to incorporate

'the CB's accounts

(4) of the CB must be subtracted

and from the fiscal deficit

in order

to equation

(1). Thus, equation

(3) is

side of equation.

(1) while equation

(4) is

G - r + nB + iEB* - iE(NFA) - F.(NFA) = ±E(NFA) - E(NI_A) + c'_ - cg +M + B + EB"

(5)

subtracted

from

subtracted

from right-hand

the left-hand

Collecting obtained:

side:

and rearranging

terms,

the following

relationship

G - T, + .S

+ iE(B* - NFA) = 1(4 + B + E (B* - NI_A)

The budget

constraint

may also be expressed

(6)

as:

o +rib + iEF- r._M + _i +EF where

(7)

F = B* - NFA. Equation

penditures

(7) says that the excess of noninterest

plus interest

payments

on both domestic

government

ex-

and foreign

debt

over taxes must necessarily be financed by changes in the stock of highpowered money (M), by issuing new government debt (B), or by using the proceeds of foreign borrowing (F). Dividing equation (7) by the price level, P, the budget real terms is obtained:

g + nb + ief-t

: __l£r+ --B + e __1_' P P p*

identity

(8)

Chapter 8: Manasan

where

a lower-case

variable

"Z." Note

is the foreign Then,

385

variable

"z" reflects

that e -- (EF)/P

the

real

value

is the real exchange

10 .... P

rate, where

price level.

of generic

10 M

(9) ,.

(lO)

where

_ = (P)/P and 7t* = (P?_)/P_ are, respectively,

and foreign inflation. By using Fisher's

identi_,

the rates of domestic

MV = PQ, equation

(10) may be written

as;

-P

:- (q + _ - O)m

(12)

where

q = @Q is the real rate of growth

change

in income

velocity

Substituting

equations

g -t

+nb +ieI=(q

of GDP, 0 = V/V is the rate of

of base money. (9), (11) and (12) in equation

+ _-O)m

+bTt +effr+f_*)

(8) yields: (13)

g - t + rb + r*ef= where

(q + n - O)m + t; + e f

(14)

r = n - n and r* = i - nL

Equation (14) says that the excess of government interest and non-interest payments over taxes must be financed through a change in the real value of domestic debt (b) or of foreign debt (dr), or by a change

in the real value of the monetary Noting that

base (q+_-0)m.

(el) = _f + e)¢ = ehat fe + elf where

ehat = _/e is the change g - t + rb

+ (r*

+ ehat)fe

(15)

in the real exchange = (q

+ _

- O)m

rate, we obtain:

+ b +(el)

(16)

386

The Philippines beyond 2000: An economic assessment

Equation (16) gives a measure of the operational deficit, i.e., the deficit expressed in real terms and with interest payments evaluated at real rather than nominal interest rate. It is the most relevant indicator of the fiscal stance when economic agents do not suffer from money illusion. Now, if equation (16) is divided by GDP so that "allthe variables are expressed as ratios of income, we obtain: g - t +r_, + (r* +ehat) Op=-(q + _ - O) _ + b + (ey) Y

(17)

where a lower case Greek letter represents an income ratio such that f3= b/y; 0 = ef/y; and g = m/y. Furthermore, Y

- p+

(18)

_ + + ,q

(19)

and y

Using equation (18) and equation (19), equation (17) may be simplified as g y+t +(r-q)[3

+(r'

+eh,,t-q)_

=(q +_-0)_,

+0 ++

(20)

If the government is interested in stabilizing the ratio of domestic and external debt to GDP, then we may set [3 = 0_= 0 and derive the value of the deficit that would correspond to a constant debt/GDP ratio, to arrive at: g Y- t _ (q + _Z - 0)la - [(r - q)_

+ (r" + ehat

- q)_Pl

(2.1)

Equation (21) tells us that the ability of the government to extract real resources through monetization is mitigated by the servicing requirements of the domestic and foreign debt. Those, in turn, are influenced by three factors: the real interest rate, the real growth rate and the change in the real exchange rate. The higher the domestic and foreign interest rate compared to the economy's growth rate, the less the available room for maneuver in the primary deficit: 2 Similarly, a real ,zThe primary deficit is the deficit that arise from noninterest expenditures,

component

of government

Chapter 8: Manasan

387

exchange rate depreciation which raises the real cost of servicing external debt limits the scope for noninterest government spending. Nonetheless, the government may continue to run a primary deficit as long as the monetization of the economy (in real terms) exceeds the servicing requirement

of domestic

and external

side of equation (21) may be greater side is also greater than zero. Equation

debt. That is, the left-hand

than zero as long as the right-hand

(21) may be rewritten

as:

(g - t._.....__) + (r - q)_ + (r." + chat - q)O = (q + _ - O)_t Y

(22)

It defines the sustainable operational deficit (on the left-hand terms of monetization revenues calculated at target inflation put growth rates. Alternatively,

one may set /_" -- _ = 0 in equation

for 0 to arrive at the warranted the a given structural

budget

rate of growth

side) in and out-

(20) and solve

that is consistent

with

deficit.

q = [(g - t)/y + r_ + (r" + ehat)d_ - x_t + 011]/[0 + _ + t_] (23) Equation

(23) the rate of growth

requiredfor

stabilizing

the debt-

output ratio would be higher, the higher the primary deficit, the higher the interest payments, ans the higher the change in the velocity for any given inflation rate. be lower, the higher

On the other hand, the required the inflation tax (Ttg).

growth

rate would

388

The Philippines beyond 2000: An economic assessment

Summary

Appendix 3 of New Tax Measures,

1986-1996

Executive Order 21, June 19, 1986. Revised upward the specific tax rates on petroleum products. Executive Order 22, July 1, 1986. Adopted a pure ad valorem tax scheme for fermented liquor, cigars and cigarettes. Executive Order 26, July 1, 1986. Abolished export duties on all products, except logs. Executive Order 37, July 31, 1986. Amended the income tax law by (1) reverting to global income taxation; (2) reducing the tax schedule applicable to business/professional income from 5-60 percent to 0-35 percent; (3) increasing personal exemptions; (4) introducing separate taxation of married couples; (5) increasing and making uniform the tax rates applicable to passive income; (6) phasing out of tax on dividends; and (7) adopting a unitary corporate income tax rate. Executive Order 36, August 1, 1986. Simplified the sales tax structure by reducing the number of tax rates to three; sales tax base was also broadened. Executive Order 41, August 22, 1986. Granted a one-time income tax amnesty. Executive Order 72, November 25, 1986. Imposed a schedular franchise tax with varying rates for different activities; withdrew the income tax exem.ption of franchise holders. Executive Order 93, December 17, 1986. Withdrew all tax and duty incentives granted to government and private entities except those granted by the Board of Investments, among others. Executive Order 195, June 17, 1987. Adopted a pure ad valorem tax scheme for petroleum products. Executive Order 226, Otherwise kmown as the Omnibus Investments Code, 1987. Introduced the income tax holiday as a major investment incentive measure. Executive Order 273, July 25, 1987. Instituted the value added tax in lieu of 'the sales tax. Executive Orders 303 and. 306, August 25, 1987 and October 20, 1987. Reduced the import duty on crude oil from 20 percent to 15 percent to 10percent. Republic Act 6956, June 18, 1990. Modified the excise tax on distilled spirits, wines, fermented liquor and cigarettes.

Chapter 8: Manasan

Republic

389

Act 6965, September on petroleum

products

1.9,1990. Revised

the form of excise taxes

from ad valorem

to specific.

Executive

Order 438, November 27, 1990. Imposed an import equal to 5 percent. Executive Order 443, January 21, 1991. Increased the import to 9 percent. Memorandum

Revenue

Orders

Order

and issuance

470, July 20, 1991. Provided

of a new Taxpayer for the gradual

in tariff rates by stages over a 5 year period 21, 1991 and ending in July 1995. Executive

Order

478, August

surcharge

(RMO) 63-91 and 7%91, July 8, 1991 and

August 29, 1991. Adoption tification Number. Executive

surcharge

23, 1991. Imposed

Iden-

reduction

starting

in August

an additional

specific

duty of P0.95 (P1.00) per liter on imported crude oil (imported oil products); sometimes referred to as the Estanislao peso. Republic

Act 7167, December additional poses.

Republic

19, 1991. Increased

exemptions

allowable

the basic personal

for individual

Act (RA) 7369, April D, 1992. Amended

income

Article

and

tax pur-

39c and (d) of

Executive Order (EO) 226 by extending the December 31, 1994 coverage of capital equipment incentives (i.e., tax and duty exemption credit

on imported on domestic

capital

equipment

equipment.

and equivalent Originally,

tax

said tax in-

centives lapses on August 12, 1992. Likewise, RA 7369 generally exempted from customs duties and other levies certain specified equipment importations for a period of 3 years starting January 1, 1995 to December 31, 1998. Republic

Act 7496, Otherwise known as the Simplified Net Income Tax Scheme (SNITS), May 15, 1992. Removed from the coverage of Sec. 21(a) of the Tax Code the taxable income received by selfemployed individuals and professionals and made it subject to a new tax schedule

with rates ranging

from 3-30 percent)

Un-

der this law, the allowable deductions of the aforesaid taxpayers were limited to the following direct cost items: (1) raw materials,

supplies

and direct labor;

rectly

engaged

inactivities

business

or practice

(2) salaries

in the course

of profession;

of employees

di-

of Or pursuant

to the

(3) telecommunications,

elec-

The rate schedule prescribed m_der Sec. 21(a) is now made applicable to compensation income earners.

390

The Philippines

beyond 2000: An economic

assessment

tricity, fuel, light and water; (4) business rental; (5) depreciation; (6) contributions made to government and accredited relief organizations; and (7) interest paid or accrued within a taxable year on loans contracted from accredited financial institutions. Republic

Act 7497, May 15, 1992. Exempted individuals earning pure compensation income from sources within the Philippines, except those deriving compensation income from two or more sources and those whose pure compensation income exceeds P60,000 per year, from filing an income tax return. Increased the personal exemption allowed to each married individual from P9,000 each to P18,000 each. Relieved the BIR from the responsibility of refunding excess amounts said responsibility to employers.

Republic

and shifting

Act 7499, Restructuring the Estate and Donor's Taxes, May 18, 1992. Raised the exemption level from P10,000 or less to P200,000. it also restructured the previous 15-rate schedule (that ranged from 3-60 percent) from 5-35 percent).

Republic

withheld

Act 7642, increasing

Penalties

to a 5-rate schedule for Tax Evasion,

(that ranges December

28,

1992. Increased drastically the fines and terms of imprisonment for violators of tax laws and rulings. Moreover, the fines and imprisonment

are to be imposed

simultaneously

in con-

trast to previous rulings where the judge was given the option to either impose a fine or to sentence the offender to a jail term. Executive Order 52, Requiring the Indication of Taxpayers' Identification Number on Certain Documents, January 22, 1993. These documents

include

the following:

sugar quedans,

refined

sugar

release order or similar instruments; domestic bills of lading; documents registered with the Register of Deeds; registration certificates of owners of 'transportation equipment by land, sea or air; and building construction permits to reflect TINs of owners/contractors. Executive

Order 53, January and instrumentalities

22, 1993. Directs all government to provide the BIR on a regular

evant information which in tax law enforcement. Executive

Order

54, January

can be effectively

22, 1993. Directed

utilized

agencies basis relby the BtR

the BIR to publish

an annual basis the list of: (1) top 4,000 corporations indicating their gross receipts and total taxes paid; (2) list of top govern-

Chapter 8: Manasan

391

merit officials who have files income tax returns indicating the amount of income declared and income tax paid. Republic Act 7646, Creation of Large Taxpayers Unit, February 24, 1993. For purposes of the Act, a large taxpayer is a corporate taxpayer satisfying the following criteria: (1) paid VATof at least P100,000 for any quarter; (2) paid excise tax of at least P1 million a year; (3) paid corporate income tax of at least P1 million a year; and (4) remitted withholding tax for all kinds of at least P 1 million a year. This law was aimed at improving the monitoring system for large taxpayers. Republic Act 7649, April 16, 1993. Requires government agencies and government owned and controlled corporations (GOCCs) to deduct and withhold before making payment for its purchases the VATdue at the rate of 3 percent on gross payment for purchases of goods and 6 percent on gross receipts for services rendered by contractors. Republic Act 7654, Revising Excise Tax on Tobacco Products, June 14, 1993. Revised the ad valorem tax (AVT) on cigars from 5 percent to 10 percent; subjects class A cigarettes packed by machine to 55 percent AVT or P5.00 per pack whichever is higher (previously these were subject to 55 percent AVT- thus, this law effectively introduces a floor tax); subjects class B cigarettes packed by machine to 45 percent AVT or P3.00 whichever is higher (previously these were subject to 45 percent AVT); subjects cigarettes class C cigarettes packed by machine to 20 pet'cent AVT;subjects cigarettes packed by hand to 15percent AVT; subjects imported cigarettes to 55 percent AVT. This law defines the tax base as the constructive manufacturer's or importer's wholesale price (CMWSP or CtWSP) or the actual manufacturer's or importer's wholesale price (AMWSP or AIWSP) whichever is higher. Previously, the tax base was the registered manufacturer's or importer's wholesale price (RMWSP or RIWSP). The "constructive wholesale price is defined under this law as the price including the excise tax and the VATat which locally-manufactured or imported cigars/cigarettes are offered for sale to wholesalers/distributors as fixed by the manufacturer or importer and registered with the BIR plus a 20 percent mark-up of such price. Executive Order 115,July 24, 1993. Increases the special duties imposed via EO 478 (August 23, 1991) on imported crude oil (imported

392

The Philippines

petroleum

products)

beyond 2000: An economic

from

P0.95 (P1.00)

assessment

to 1.90 (P2.00)

per li-

ter. Fuel oils, naphtha and low aromatic solvents are exempted from coverage of EO 115. Executive Order 132, October 26, 1993. Streamlining of the Bureau of Internal Revenue (BIR). Republic

Act 7660, Rationalizing cember percent types

Documentary

Stamp

Tax (DST), De-

23, 1993. Increased the rates (by some 17 percent to 900 over previous rates) of DST on 20 out of 25 general of documents/instruments

requiring

paymenXs..It

also

expands the coverage of the DST to include loan agreements, instruments and securities issued by the govemmem or any of its instrumentalities,

pre-need

plans, and other authorized

num-

bers game. It imposes the tax on documents regardless of place of signing provided that the documents concerned cover rights and obligations arising from Philippine the basis of the tax for certain documents, (from

per transaction

to a specific

sources. It changes e.g., indemnity funds

rate based value), leases and

other hiring agreements (from annual basis to a specific rate based on value of transaction), charter pro"ties (change in bracketing of weights of vessel covered Executive Order 160, February 23, t994.

by tax). Reduction

of the special

im-

port levy on off products from P1.90/P2.00 to P0.95/P1.00. Republic Act 7716, Expanded Value Added Tax (EVAT), May 5, 1994. 2 Widened the coverage of the VAT to include the following: (1) intangibles (e.g., patents, copyrights, trademarks, and other property

rights);

(2) sale of real property

held primarily

for sale

of customers; (3) lease of real propel_ty held for lease in the ordinary course of trade or business; (4) certain items previously

exempt

(e.g., imported

meat,

pesticides,

imported

cane

sugar and specialty feed); (5) proprietors, operators or keepers of hotels, motels, resthouses, pension houses, and resorts; (6) dealers in securities and lending investors; (7) franchise grantees of telephone, telegraph, radio and television broadcasting; (8) insurance premium with respect to services of non-life insurance

companies

services;

(10) printing,

and any newspaper,

(except

crop insurance);

publication, magazine,

importation review

(9) warehousing or sale of books

or bulletin;

(11) propri-

2The affectivity of this law was postponed until January 1, 1996by virtue of a Supreme Court order.

Chapter 8: Manasan

393

etors/operators of restaurants, and other eating places; (12) cooperatives (except electric cooperatives); (13) operators of taxicabs, utility cars for rent or hire driven by lessee, tourist buses and other common carriers by land, air and sea; (14) certain services

subject to EVAT only two years after affectivity

of EVAT

are: services of actors, actresses, singers, professional athletes, banks and non-bank financial intermediaries and finance com_ panies,

professional

and registered

professional

partnership,

international cargo vessels, airlines, and freight forwarders. EVAT exempts the following from the VAT: copra, ordinary salt, cotton and cotton seeds in their original state; sale of real property not held primarily for sale or lease or those for low-cost housing;

prawn

feed and ingredients

used in fish, prawn,

stock and poultry feeds; and importation vessel of more than 5,000 tons. Republic

Act 7717, May 5, 1994. Increased exchange

Republic

of shares

live-

of passenger/cargo

the tax on the sale, barter,

of stock listed and traded

through

the local

stock exchange or through initial public offerings. Act 7844, Export Development Act, December 31, 1994. Granted the following incentives to exporters in addition to those provided under EO 226: (1) exemption from PD 1853 (requiring deposits of duties at the time of opening of letter of credits covering

imports);

(2) zero percent

duty for a period

of 3 years

(until 1997) on the importation of machinery and equipment; (3) tax credit for a period of 5 years on all imported input and raw materials not readily available locally; (4) tax credit for increase

in current

year export

produced inputs/equipment, cent of the duties that would been imported. Republic

Act 7916, Special

Economic

revenue;

(5) for use of locally

tax credit equivalent to 25 perhave been paid had these inputs Zone Act, February

24, 1995. En-

titles business establishments operating within the Ecozones to the fiscal incentives provided under PD 66, EO 226 and RA 7844. Republic

Act 7918, February 1995. Exempts firms registered with the BOI (on or before December 31, 1994) from taxes and duties on importations of machinery and equipment within the prescribed period under their law of registration or until December 31, 1997 whichever

comes first.

Enterprises

which register

after Decem:

394

The Philippines

beyond 2000: An economic

ber 31, 1994 shall be subject

to the provisions

assessment

of RA 7716 and 3

percent customs duties up to December 31, 1997. Executive Order 264, July 22, 1995. Reduces the rates of duty on industrial products 1, 2003. Executive

Order

following

288, December

a phased

12, 1995. Reduces

non-sensitive agricultural products ule.ending on January 1, 2003. Republic

Act 8184, Restructuring June 11, 1996..increased ucts.

Introduced

schedule

ending

on January

the rates

of duty on.

following

a phased

sched-

of Excise Tax on Petroleum Products, the excise tax on all petroleum prod-

a P1 per liter tax differential

between

leaded

and unleaded-gasOline. Republic

Act 8240, Restructures July 22, 1996. Reverted cific scheme.

the Excise Tax on Alcoholic Beverages, excise tax on fermented liquor to spe-

Repubhc

Act 8241, Amends the EVAT, January 1, 1997. Introduced tional items thatare exempted from the EVAT.

addi-

AnAssessment of Infrastructure Policies* Ramonette

Chapter

B. Set.ca

investment, nfrastructure sustainable

productivity, and equity within the overall strategy for is a critical policy area affecting key elements growth and development. To attain the economic growth,of

the World Bank suggests that for every 1 percent increase in per capita income, a country needs to increase infrastructure stock by 1 percent of its gross domestic product (GDP). For the case of the Philippines, it estimates that between US$38 to US$48 billion will be needed to meet the country's investment 1995-2004 (Table 1).

requirements

in infrastructure

The figures in Table 1 signify a great challenge come by the country. The government's infrastructure requirements in terms ness of the policy environment

Table

1. indicative 1995-2004

Sector

Powcr 'lMecom "lYanspOrt Water and Sanitation Total Source:

Kohli

for the period that must be over-

role in addressing the country's of the adequacy and effective-

must be evaluated.

investment Requirements of the Philippines, (Private and Public Sectors). Baseline Scenario

Low Case Scenario

(WB's best GDP growth assump. ) In US$ % share % GDP .Billion

(GDP growth lower by 2 % pts,) In US$ % share % GDP billion

19 7 18 4 48

40,0 14.5 37,5 8.0 100,0

2.7 1.0 2.5 0.4 6,8

16 5.5 14 2 38

42,0 14,5 37.0 5,0 100.0

2.6 0.9 2.3 0.3 6.1

(1994).

* This paper has benefited a lot from the comments and suggestions made by Geoffrey Key and Nicola Shaw of Halcrow Fox, the Infrastructure Staff of NEDA, Gilbert Garchitorena of the University of Asia and the Pacific, Dr. Gaudioso Sosmefia, Jr. of the Local Government Development Foundation, and by the participants in the technical workshop held on January 23, 1998 at the PIDS, Makati_ acknowledges Ms. Hope A. Gerochi for providing excellent maining

errors

are the respons!bility

of the author.

The author also gratefully research assistance, All re-

396

The Philippin.es beyond

This paper

therefore

assesses

2000: An economic

the current

infrastructure

assessment

policies

and determines whether or not appropriate reforms have been put in place to direct the Philippine economy toward sustainable growth and development. First, it surveys the past infrastructure landscape and examines the policies that were initiated. Then, it ascertains the policies' impact and identifies critical issues before providing recommendations on how to improve the policy environment. The Economics

of Infrastructure

To better understand the sector and appreciate the constraints well as the possibilities for reform, the economics of infrastructure adopted as the framework for analyses. properties of infrastructure: 1 (1)

The following

It is characterized by a network, usually sion and distribution components: -

Exhibits

a high degree

of vertical

as is

are the economic

of production,

integration

transmis-

in one or more

parts of the network; -

Some components are natural monopolies (e.g., transmission) while others are naturally competitive (e.g., value-added services over the networks); Network

components

are complementary

Compatibility is what components possible; There and (2)

makes

may be close substitutes

to each other;

complementarity

of network

for each of the components;

Production and consumption externalities exist. It has huge capital investment requirements; high fixed costs, a good portion

of which

is sunk (i.e., unrecoverable

little value except for the purpose curred).

Sunk

costs impose

for which

and has no or

it was originally

"costly exit and therefore

in-

may dis-

courage entry in the first place. Note however that the degree to which costs are stalk may be influenced in part by government policy. (3)

The payback period is longer than a typical spanning several administrations.

project,

sometimes

(4)

Certain infrastructure are cite-specific. The value (and thus, the willingness to pay for these) differs depending on the market or

i Parts of this discussion are based on Armstrong et al. (1994),Economides (1996) and Bird (1994).

Chapter 9: Serafica

397

environment

(e.g., a one kin road

same as a one-kilometer rural area). (5)

It is nontradable. traded ergy).

in an urban

road of similar physical

Currently,

but this may change

all infrastrucmral in the future

area

is not the

attributes

in the

services

are not

(e.g., in the case of en-

(6)

Some have "public good" characteristics (i.e., nonexcludability and nom'ivalry). Example, roads and highways below congestion point.

(7)

Some are multiproduct industries; thus, economies of scope from joint production can be exploited but common cost problems arise.

(8)

Consumers the various

(9)

Some outputs are nonstorable and have fluctuating planning and coordination are vital.

have to make certain personal investments to enjoy infrastructural services (e.g., cars and telephone sets). demand;

thus,

In addition, the Philippines' geography poses special chaUenges for infrastructure development whereas its geographic location offers strategic opportunities (e.g., voice and data traffic in the telecommunications

sector

and maritime

traffic

in the transport

These features of infrastructure vide guidelines for efficient planning

sector).

industries do not only help probut also have implications for

policymaking and regulation. For one, a piecemeal approach to sectoral reform will not produce the desired impact because of the complex nature of particular industries involved. Detailed designs of regulatory issues (e.g., pricing, unbundling) will also have to be tailor-made depending sector.

on the unique The economics

ment on whether or to the private

technological

and economic

attributes

of each

of infrastructure

provides

no fundamental

argu-

to assign infrastructure provision to either the public sector. Historical evidence worldwide indicates that

both sectors can be efficient providers. The general trend of increased private financing and provision currently being felt across borders can be attributed to three major sion; precarious government

factors: disappointment with public provifinances; and the advent of new technol-

ogy. _ For the case of the Philippines, increased involvement vate sector can be attributed to exactly the same reasons. 2Klein and Roger (1996).

by the priAs the next

398

The Philippines

section

reveals,

structure

the Ramos

which

beyond 2000: An economic

administration's

have been

positively

Pre-Reform

Performance

Power, services

policy initiatives

received

opment practitioners and scholars--are infrastructure condition of the country.

assessment

in infra-

by mainstream

a logical responses

devel-

to the dire

indicators

telecommunications,

are so pervasive

transportation,

in modern

economic

and water--these

life that one cannot

es-

cape the benefits available as well as the costs incurred from inadequate or inefficient service delivery. During the 1980s, infrastructure growth in the Philippines lagged behind other Asian countries. As Table 2 reveals, it is only in the provision of safe water where relative progress can be cited. Table

2. Growth

in Infrastructure

Stock

and Services,

1980-1990

(Period

Growth

Rates;

In Percent).

Country

Paved Road

Elec. Gem Ca'paci ty

Elcc. Prod'rt

"tel Main Lines

Railroad Tracks

Access to Sat'e Water _'

Access I.o Sanitation

Philippines

-20b

-55

China Indonesia Korea Malaysia Thailand

1;'; ]20 36 69

105 312 134 107 142

107 534 197 143 206

64 184 299 301 262

-, 5 38 7 6

il" 18 15 14....

2'2 ... 24

Note: _% chmlge in coverage; decrease in the length of road

UAccording to the DPWH's Bureau of Maintenance, the network was due to some corrections and/or revisions in

the measurement of physical length. Source: Kohli (1994).

Part of the neglect uted

to the

in infrastructure

macroeconomic

crisis

Manasan

3 reveals,

capital

justments

carried

out during

investments

experienced

investments the period.

can be attrib-

by the

bore the brunt Of course,

country.

of the fiscal ad-

this situation

is not

unique to thePhilippines. Jimenez (1994) points out that due to the high ratio of capital-to-recurrent infrastructure spending, the infrastructure sector is usually one of the first to be subjected to budgetary cuts whenever from

a country

developing

s In Chapter

11.

experiences

countries

an economic

crunch.

Indeed,

show that with an elasticity

evidence

of 1.47, infra-

Chapter 9 Serafica

structure compared

399

is the sector most sensmve to changes m total expenchture as to others (e g defense and social sectors have an elastmlty

of 0 38 and 0 66 respecuvely) 4 Although scrimping on mfrastrncture qmck soluuon to 1mine&ate fiscal problems disregard

of infrastructure

has dire consequences

the early nineties the lack of mfrastructm ttons and Flhpmos suffered immensely stons (or lack thereof)

as demonstrated

Mamla which accounts output was not spared For other mfrastructural respect

to the quahty

m the power crisis

Even Metro

for roughly 30 percent of the country s total from the crippling effects of power outages serwces there was much to be demred with

and consumers

generally

Pre Reform,

1994 only 60 percent .

on the economy

e had reached crisis propor from the folly of earher deci

of the proxader Boxes 1 to 4 further describe introduction of reforms m each sector Box I

spenchng appears to be a all know that prolonged

had no choice m terms the situation

Ptrt_r

prior to the

Sector

of our population

had access to dee

TI_ electnclty intensity m GDP of the Phthppmes was 0 74 kWh/ -_ 1993 US$ This m&cates that the country needs 0 74 kWh of el_ _i_ty to reduce a dollar increase m our GDP A high mtensxty ! Ulmally connotes inefficiency and a c,onslderable growth m the ,I economy Ls attributable Per catnta consumption Cost of elecmc._ty

_ble

:$ _t_d

Country

Energy

Populatm_ wlth Access to Elec 1994

to the use of electricity is relatavely low due m part to the high

Inthcators Per Capita Elec Consumption 1993

Electricity Intenslty m GDP 1993 US$

Pl_fllppmes

60 %

327 kWh

0 74 kWh

indonesia Malaysm Thmland

35 87 82

206 1466 970

0 25 0 44 0 86

..........

Note Electti_t_ Intensity in GDPis defined as total electrmlty consumed dmded by Gm' Soar_ _ Hicks (1994)

400

The Phdzppmes

_ble

3 Se_

_gy

beyond 2000

An economw

lnthcators

assessment

Cotmtry

P0p_tl_tion wath Access to Elet_ 1994

Pel Capita Ele_ Consumpuon 1993

Electri_itv Inlenslty tn CDP 1993 US$

Phthppm_._

60 %

327 kWh

0 74 kWh

Indonesia Malaysm Thadand

35 87 82

206 1466 970

0 25 0 44 0 86

Note Elecaflcity intensity ha GDPis d_f_ed as total electricity consumed divided by G]UPat constant prices Source ADB(I996)

Philippine electricity rates are bagh compared to other countries For the whole of Asia the Philippines ranks second only to Japan

Table 4 Eleetricaty

Rates,

US$/kWh

(in Constant

1992 Prices)

Country

1986

1987

1988

1989

1990

1991

1992"

Philippines

0 152

0 139

0 _[17

0 100

0 095

0 092

0 100

lndonesm Malaysia ThmIand

0 114 0 104 0 096

0 081 0095 0 092

0 0"/2 0089 0 087

0 080 0075 0 080

0 072 0072 0 077

0 071 0069 0 073

0 068 0 07 0 069

Source of basw data ADB(1994)

•

The combination of high eleetncaty rates puts the Philippine eeonomy vas other countries

Tattle 5 Cost of _duetng

U_I

intensity at a dear

increase

and high elecmclty disadvantage vas a

in GDP

Cour_try

EleCtricity trntmshy GDP 1993 US$

ElectritatyRate_ (1992 US$)

Cost f Indutng US$1 mueaSe in GDP

pMlippines

0 74 kWh

0 100US$/kWh

0 074 U_ $

Ir_dolies_a Malaysia lhailaud

0 2_ 0 44 0 86

0 068 0 07I 0 069

0 017 0 031 0 059

Chapter 9: Serafica

401

Box 2. Pre-Reform: J

Telecommtmications

Sector

In 1993, the country had a low density rate of only 1.31, 3.5, and 0.08 for main lines, residential main lines, and payphones, respectively. As for the industry's performance within a 10-year period, the compounded annual growth rate for payphones was only 5.90 percent while for main lines the CAGR was just 8.2 percent.

Table 6. Telephone

Indicators.

Main lines

Residential

Couatry

Philippines Indonesia Malaysia Si,rlgapore Thailaud

Derlsity a (1993)

CAGR (%) 1984-1994

Main lines Density (1993)

1.31 1.02 12.62 43.45 3.76

8.2 16.7 12.9 5,8 I8. I

3.5 2.7 43,4 > 100 11.8

Payphones Density 1, (1993)

CAGR (%) 1984-1994

0.08 0.27 2.42 10.26 0.62

5.90 14.80 10.20 4.30 16.40

Note:

" Main lines per 100 inhabitants b Payphones per 1,000 inhabitants Source: ITU (1995).

•

A typical consumer had to wait an average of 8.9 years to get a telephone installed--the longest waiting period in the Southeast Asian region. w With respect to the quality of ser vice, call completion rates of the Philippine Long Distance Telephone Company (PLDT) reportedly declined from 68 percent in 1987 to 56 percent in 1990 for local calls and from 72 percent to 54 percent during the same period for international calls. In terms of subscriber trouble reports, there were roughly 17reports per 100main stations every month, a figure that is relatively high compared to the two or three trouble reports experienced in OECD countries. /

402

The Philippines

beyond

2000: An economic

assessment

Table 7, Waiting

List, 1993.

.......

Country

Waiting Time (Years)

Philippines

8,9

Indonesia Malaysia Singapore Thailand

0,4 0.5 0,01 6.3

Source: ITU (1995). Source: Smith et al. (1994). Box 3. Pre-Reform:

Transportafi0n

S eto,

Roads - The Philippine Transport sector ReView conducted in 1990 by Nathan Associates, Inc, (USAID) concluded that th_ num. bet one transportation problem in the country i_ the poo_eondi. tion of the public road network, which substantially raises transport cost. Data from the Department of Public Works and[ High, ways (DPWH) also reveal that a bigger propo_ion of tl_e road netvcork is not paved (either of concrete and asphalt standard) or of low quality. Nonpaved roads still account for :at least 80 perCent of the total road network in the country. *

'Other findings , Aviation nopolized

by the Philippine

domestic

air passenger

Table 8. Existing Year 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996

of the 1990 USAID.commissioned study include:". - The domestic air transport subsector was too,

Roads

Airlines

(PAL).' it provided

all

and cargo serviceS,

by Surface

',_)lal Roads (Length in kin.)

Concrete

158,498,90 1.57,809.78 157,447.53 159,059.49 160,560.12 160,709,97 160,843.43 160,882.58 160,947.73 160,970.24 161,264.27

5.91 6.06 6.23 6.38 6_45 , 6.65 8.32 8.33 8.44 8.52 8.98

"l_pe, 1986,t996. Asphalt

Source: DPWH,Bureau of Maintenance (1997).

% share ': Gravel

7.53 7.94 7.95 ' 7.92 7,94 8.16 8.16 8.16 8.15 8.16 8.39

Earth

8t_i45 80A0 80.06 ,, 80.27 80,31 79.90 78.23 78.22 78.13 78.09 77.29 ''

5.'90 " ' 5.76 ... 5_43 5._9 5.30' , 5._9 _ 5,29 ' 5,28 5 23 5.34

Chapter 9: Serafica

403

•

Domestic Shipping - Most passenger services, especially in the Third Class, were sub-standard in terms of comfort and safety. Overloading was common since passenger rates were kept low. The practice of combining cargo and passenger services also contributed to longer travel time to allow for cargo loading and unloading. • Ports - Facilities were in poor condition. Cargo-handling equipment, port land and storage areas were inadequate and unsatisfactory. Port facilities were not prepared or suitable for roll on/roll off operations, an ideal mode for an archipelago like the Philippines. recent study, the Philippine Transport Strategy conducted in 1997 by Halcrow Fox for the National Eeonomic and Development Authority (NEDA) concludes _t the number one problem is the maintenance, rehabilitation and upgrade of current infrastructure, particularly of the road network. Building new infrastructure is not a top priority since they find the road network to be adequate and the railway to be quite extensive although underused. They note that the Philippine National Railways (PNR) has consistently incurred losses and although a privatization study was completed in 1993, little has been done in implementing its recommendations. With respect to other transport facilities, they observe that the number of ports and airports at this point may be more than optimal. Box 4. Pre-Reform:

Water Sector

Pe_rformance of the MWSS: The Metropolitan Waterworks and Sewerage System (MWSS) is mandated to provide an adequate supply of potable safe water and to provide satisfactory and reliable sanitary wastewater disposal facilities at affordable rates to Metro Manila. Some areas covered by the MWSS receive no water for up to 22 hours a day. Other areas experience low pressure and about 30 to 50 percent of the agency's customers are affected by supply constraints. • Nortrevenue water accounts for an average of 55 percent of total water output for 1995. • Only 12 percent of the population within the service area of MWSS are connected to its sewerage system. Source:V6ateret. aL(1996).

404

The Philippines

Table 9. Estimated Water*

beyond

2000." An economic

Breakdown

of Sources

Source

% Share

Leakage

assessrnent

of Nonrevenue

77'.0 %

illegal Use

8.0

.Metering Error

9.5

Tarnpe_Sng

3.5

Operational

Use

2,0

*Used in demand projections in the MWSS Operational Strengthening Study: Issues * *

on Water

Piped water is a public service the MWSS provides to Metro Manila but only 60 percent of the population are served, Water levels in artesian aquifers have declined due to excessive pumping of ground water. The possibility of fresh water areas being intruded by salt water increases with each drilling. The four major river systems in Metro Manila have been rendered unfit for human consumption because of wastes and oil spill from industries. The Country has no sewerage system to speak of except in Metro Manila but existing sewerage systems in the metropolis serves only 15 percent of the population. Meeting the future water requirements of the metropolis will be an enormous challenge as population increases and as the economy gears toward development.

through

the years

Source: Ebarvia (1995).

Other

Pre-Reform

Performance

Factors

As for public investment in infrastructure, the sector's proportion of total public capital investments has improved over the last few years (Table 10). The Philippines, compared

however,

to its neighbors

still devoted

(Table 11).

less to infrastructure

Chapter 9: Serafica

Table

10. Share

405

of Infrastructure

Capital

Investments,*

Investment 1986-1994

in Total

Public

(In Percent).

1986

1987

1988

1989

1990

199I

1992

1993

1994

39-16

60.85

50.08

60.48

63.49

69.75

83.00

73.58

73.23

Power & Ene;g_V

15.42

25.27

14.32.

29.53

28.56

18.69

34.33

44.36

38-95

Water Resources & Develop_x)ent

4.46

3.61

3.52

3.88

2.93

3.79

3.44

2.02

1.N

Transportador_ &

19.28

31.98

32.24

27.07

32.01

47.27

45.23

27.20

33.05

national

gov-

Totalil.rff:r_-_trucrm:c I12VCS FD_CI2t

Coll.'It

rl U t_.i Ca t i OI3

*Includes investments by government-owned ennment and local government traits. Source: Dr. Rosario Manasan_

Table

11. infrastructure 1992.

3(6ar

Philippines

1990 1991 1992

2,3 3.0 2.5

Source: Kohli

and controlled

Investment

corporation,

as Percentage

of GDP, 1990-

China

Indonesia

Korea

M_daysia

Thailand

4_1. 4.5 5.1

4.9 4_3 3.8

4.5 4.7 4.7

4.4 6.9 6.0

4.1 4.4 4.3

Otl_ers b E_st Asia c 4.1 4.0 4.0

4.2 4.5 4.7

(1994)

"Using Dr. Manasan's estimates, which is composed of the investments made by the national government, GOCCs, and local government units, the percentage share of infrastructure are 3.6 percent, 3.8 percent, m_d 4.0 percent of GDP for 1990, 1991, and t992 respectively. Others include: Cambodm, F1j1, Lao PDR. Maldives, Mongolia. East Asia is defined to include China, Indonesia, Korea, Malaysia, Philippines, Thailand and others as defined above.

By NEDA's own estimates, the gap in infrastructure spending, which is the difference between programmed and actual expenditures, amounted to nearly t_81 billion for the period 1986 to 1992. Policy

Initiatives

The indicators

on Sectoral presented

Reforms

in the previous

section

uncovered

the

gravity of the infrastructure problem in the Philippines. Given the various competing needs faced by the government, it was clear that other avenues

for increasing

investments

and improving

service

delivery

had

to be explored. Toward the last part of the Aquino administration, the build-operate-transfer (BOT) Law was enacted signaling a new public-private

406

The Philippines

beyond

sector cooperation in infrastructure istration sealed this new partnership

2000: An economic

assessment

development. The Ramos adminand adopted bold policies that

placed greater reliance on the pri_ate sector and on the market. As shown in Table 12, privatization (i.e., transfer of ownership, management, etc. to the private sector), deregulation (removal of regulations), and liberalization. (opening up to new players) of the various infrastructure sectors were initiated. The status of the reforms introduced varies from one sector to the other. For example, amendments to the Implementing Rules and Regulations (iRR)of the BOT program, are continually being suggested to make it more attractive to investors as well as to safeguard the interest of the government.

In the telecommunications

sector,

there

are

strong calls from various interest gl oups, including the lead agency-the DOTC--to review the Telecommunications Act, which was just passed

in 1995. In the power

structural

inefficiencies

sector,

the law supposed

in the industry

to correct

had to be postponed

the

pending

the n.ext administration's initiative. Sadly, it seems that the extent and speed of reforms are a function more of the political economy governing each sector rather consideration. Post-Reform

than of any fundamental

Performance

(and urgent)

economic

indicators

in general, the outcomes of the sectoral reforms have been beneficial to the country. The passage of R.A. 7718, better known as the expanded BOT Law, intensified the private sector's involvement in the infrastructure

sector.

Institutional

mTangements

and procedures

were

enhanced to facilitate private financing of infrastructure projects. The power crisis that severely derailed economic activities in the early part of the decade was dealt with. by engaging the private sector in power generation resulting in several fast-track power projects. In telecomh munications,

de facto

monopoly

was dismantled,

yielding

impressive

growth in telephone density. The introduction of credible competition in civil aviation and domestic shipping expanded the choices of consumers

with respect

to modes

of travel,

rates

and service

quality.

For

the water sector,

improvements

in water

provision

are guaranteed

with

the privatization tem (MWSS).

of the Metropolitan

Waterworks

and Sewerage

Sys-

With the policy initiatives in infrastructure came varying degrees of increased supply, lower rates and better quality of service in one or

Chapter 9: Serafiea

cases.

forms

is evident

407

Mangahas

5 reports

that the effectiveness

in the high public

satisfaction

of sectoral

ratings

liberalized telecommunications and transportation respect to financing, the demands on public funds

re-

on the newly

industries. have eased

With some-

what due to the growth in the private sector's investments in infrastructure. Boxes 5 to 9 further describe the immediate impact of the policy reforms. Table

12.

Major infrastructure-related Ramps Administration.

Policy

Reforms

in the

I n[l-a-G_;l'le f;:d

Po_\,ut

T_l_cum n_ttn icat ion._

Tt-_ll_l)Ot[

M_VSS

R.A. 7718 (Tile Expanded BOT Lecky) An act al'J_ending certain sections O_ R.A. 6957 entitled "All act

R.A, 8180 ])eregulution ofdOwa._tceam oil illdustry (Mar 28, 1996)

R.A. 7U25 An atct to lPrOmok: ;rod gc,vul-n the dexclopmerd, ol' Philippi_le Telecommunication

E.O. 219 EstablishinN the dol'rlestlc and inlel-naliorlad civil aviation

R.A, ,'31.1-11 All act [o addrc_x the Natiomd Water CI.'iga ztnd rca_snns (June 7. 1995)

_uthorlz_iug Ille ['inancing, ctmsLt__iclion, pc n,t o)1 _rtd mainlcaance of in[rztstn.tcttu-c pr_) ecb, by the phatc <_t2ct()l' 8lid {'of other pm-l)OSCS

Downstream Oil Industry Deregulation Law repealing R..A. 8180 after 1he Suprem,a Cotlri _ltdlJ[ied tllu )_lie_, )L S a_V aS "ul]constJtl.tlioll8["

end the dellvcry of public telcco]_] services (Mz_r [,T995)

libendJzalion policy (J0rt 3, 19951

E.O, 109 Policy to {]]_pt'tYXIq_ provision ol_ lc_0l eXc 4a lgc carrier:

E.O. 213 Dercgu[alin}2 Donlest{c ,.qhlpping Rates (Nov 28,

(May

(Feb. 11, 1998)

_¢rvicc

19941

5, 1994)

R,A, 8479 New

E.O. 37 Rcat;d.in 8 the pz_x_lia..a/.ion poJiQ of the gov't (Dec. 2. 1q92) g,O 298 PEon's: lg _)_ulternativ¢ aud/or hlternludiate modes ,_[ plqV;tl.ig2ttlon puraum_{ to proclamati¢,u m_. 50 (Jan.. 30, 1996)

(July

12, 19931

E.O. 39 Manduliag E.O. 215 Private _eclor particiI:x:ltion in powcl' gcncra;d.iol] (OtllrlJbttg bill o4 Electric Powut' lnclual,t)'l

Memo4, =, )el-aliT,_ti¢_ ;_lld il/C/-gtl_e(I compctilioi/ in _:uppot'l set'vices sector ('ApI'il 23, 1993) A.O. 129 Directing the ach:_l._Jo_ oi',skmdm.d pl-occs_,i ng tlmc in the bidding and award pl-oCe_S lk)l" ifl['l%_N[fkl£:htfe and tjt[_dt c)rst "tlCtiOI1 W rk_ ancl consuh.hlg sm-vice_ CCIILIItCI_ Ill"tile l]_ItJOllLt] goVet'_]13"lunl [May 16, 19941 Memo Circulaf 44 Speedi_g ttp ol: infrastructure projects (April 23, 1993)

s Mangahas (1997).

h/kercollne_Jt.ioo N. 1993}

E.O, 2.,]2 (Feb,

A<:qelel-_ttJllg he d<:nlonopolization and pr h,atJz_i.io n

DOJC Ch-cuJar93-273 Domestic Satellite Communicatic, ts Policy (Jt_ln_: 1993)

pl-ograr_ for govcrunlm_t port (Nov 28. 199d,) E.O. 185 Opening the dorneSl.jc water [i't1118J)Ot'titldtTsl, t'y I__ ,'few o]_erab.lt',,i allCI Jnvcsl.)-s (It lC 78, ]994) R.A 7471 The Phil Ovc.t'seas Shippi_lg Developmmtt Act (Nov 17, 1992) gO. 410 Repealing E,O,212, in i'eCO_D.ilioi] o[ tile HPA ul]d_r I-',D, NO. 857 " _lpJGIl'l_ltl Llle policy oi accelcr?_thl_ tile dc_lo_opolJzation and privatizatioJl o[ gox,e,t-illn_ll p(l/-ts in the co_mt 3' (May 1,1997)

E.O. 311 El_coulv'_gJ_lg pfivale sector participation ill the ol_ratlons and lhcilitics of Ille Melropolitan Waterworks and Sewm-age Symem /MWSS) (Mm- 20, 1996

408

The Philippines beyond 2000: An economic assessment

Box 5. Post-Reform:

infra-General

,,'',

•

R.A. 7718 reinforced the role of the private sector in infrastructure development. Under a typical BOT arrangement, the private sector takes responsibility for the financing, construction, operalion and maintenance Of a facility for a Specified period while, the government 'retains ownership. • Energy-related infrastructure account's for a majority of the BOT ,, ,:projects in terms of both total, value and absolute number. ,:

Table 13. Profile of BOT projects Sector

(As of March 31, 1997).

Value i.n Million, I.,IS,_' ,'

C & Ou Share

PiPeline

_lbtal

9.99,4,18

', , , n.a,

9,994.'18

70 ,

1,11,7.69

2,043,05

3,160_74

Energy

Number of BOT projects (inchKling variants of 'BOT) C & Ob .Pipeli,ne, "lbm'l 48

48'I.00 , '204.57.,

685,57

3, : I

%lecorn Odlers" 410,97 TOTAL 12,003,84"

: 73.55

484.52

: , 2;32'1.J7 ' , ]4,325,01

100

"l'ransport Water

% Share

,-'

-,,

100

",Total value does not cover all projlects due to incomplete data. i, C&O refers to completed and ongoing projects., SOurce of basic dam: National Economic Development Auth0riiy-Public Staff ,(1997,).

•

Investment

Funding for the Ramos Administration Flagship Projects also reflect the =significant contributions of the private sector. As Table 14shows, private enterprise projects account for 48% of the total flagship projects while 33 .% are BOT-type projects. • . A major component of private enterprise projects is the basic tele= phone program,, which is estimated at around _ 177.5 B. ,'

','

, ,

Chapter 9: Serafica

409

Table 14. Sources

of Funding

ship Projects

of the Ramos

Administration

Flag-

....

Source of Funding

1btal Amount

% Share

P 156.9 B

3 Private Enterprise Projects

228.8 B

70 ODAassisted/locally-funded (appropriated)

96 B

23 BOT Projects

Note; Of the 96 flagship projects. 8 are not primarily infrastructure projects. Source: PCFPP (1997).

Box 6. Post-Reform:

Power

Sector

•

The major consideration of this sector was the eradication of the power crisis that slowed industrial productivity and over-all economic growth during 1992 and 1993. To end the crisis, the government engaged the participation of the private sector in power generation through E.O. 215. The immediate impact of the reform was several "fast-track" power projects.

•

According to the World Bank, the financial price and economic costs of early IPPs were high. However, considering the damage being caused by the power outages actually made valuable economic avoided costs during than tariffs.

•

on the economy, these IPPs contributions. In fact, the

the 1993-1994 period

were four tO six higher

.The price and cost of post-crisis plants are, on average, cent lower. This can be attributed to better procurement flees and a more competitive

environment,

among

12 perprac-

other things.

410

The Philippines beyond 2000: An economic assessment

Table 15. Average Ph_ pplne Prices Load,Ge_ration (In US$/kWh). _,'_!:,,,, ByCommissioning.

Financial . '_' _= "

' riod

_ i Ecormmic.

...

P ee°

1991to early 1994

" " ""

0.0687 .

0.0591

' L

1994ortward

0.0604

0.0521

' Financialassessment.f0cusesonleVelizedenergy'prices"tha_NPC,or payfor eachproject_ . ..' _ bEconomicanalysis',estimatestotalg_t_eration'Costs and viability. _ Source:WorldBank(1994), '

_,. '_. .' _" ,,

' ".

:;,?,

1b further ensUre the reliability and long, t_rn-i energy: .: the country, R_A. 7638 was,enacted, Energy that.'acts as 'the.'central ergy-related:policies and programs... " " Another reform in the sector was the deregulation Of " stream industry through:RA. 8180:inMarch'D96 ,It opening of the industry.to.new players and the end _ ment inter vexaion in oil price setting. Full fect in February 1997but Was later nullified as unco_itutioiiai by the Supreme Court in November. A new deregulatlo_ law was formally signed:last February I0, 1998. i " _"""' " A major restructuring Of the power sector is being proposed under the Omnibus Bill on Elect the bill, the generation and transmission aspects r will be Unbundled, the National Power Corporation w_lt be priv_tized and all regulatory functions will be consolidatedilato a si_ agency. t The reform is generally aimed at opening the :sector t O_ewplayers and in time bring about lower tariffs, total ielectri_ation of the country and secure electricpower supply f0rthe co_gyears, Explicit provisions against market dominance mad anti.perjUre behavior are also contained in the proposed' bill '

Chapter 9: Serafica

411

t993 the government:_ :.

[i'_h¢market to compcta'tion to . President Ramos, signed of a new policyreThe first, E.O. 59, mandated intea-connec, _orks. The second, E.O. 109,embodied the'service area licensees of lucrative cellular and international. _s:to also provide fixed-link telephone service in parts of the country using a formula devised by the Commission. reforms, telecommunications experienced unprec-

..... ,Iklecom Density"

:..i'.. :71993' 1994 : '1995 '1996 "1997 ':. 1998

1.17 1.21 1.67 2.01 4.66 8.31b 9.78b

0.09 0,16 0.26 0.70 1.33

0AI '.. 0,34"".'. '.i 0,46" ":'. _.':.:_ :.: 0'.68_,." "_.".ii ..i.... '.'.... :...: ........

'i .,Per i00 persons,bProjections. ' ."$OUrca of basicdata:NationalTelecommtmtcatioas Commission_1997).

....... ' '

Waiting time for telephone installation also improved. During the pr¢-reform period a typical consttmer had to wait an average of 8.9 years for a connection. Today, the Philippines' waiting time ia 2.30 days for a business line while residential lines can :be in. , stalled in 14-385 days as reported in the As/an Wa//Street Journal ,lastJune 1997. ' "" ' .. . By theend of1998,most municipalities willhaveaex,_stotde:iphemeservices.

412

The Philippines

Table 17, Telephone

Service

Region ' 1992

, ,,

beyond 2000: A.n economic

Growth

assessment

by Municipality.

Munk:ipalities Served (%) 1996 'End of Program

2 ' 3 4 5 ' 6 7 8 9 '10 '11 12 NCR CAR ARMM

23 43 ' ' 24 ' 11 15 8 8 , , 6 ,I.1 13, 5 011 0 ,, 0

,,58

' TOTAL'

32 , 55,, '34 28 , 23 17 9 10 18 22' I7 100 12 ' 2

43 ,95 59 100 '100 '93 98 ,: 87 97 100 , t00 , 100 47 , 68

27,'

,',

Source: simeon L: Kintanar, Cabinet' Briefing on the Status of Telecommunications in the Ph!lippines,,(1997)_

Box 8. Post-Reform: •

Transportation

Sector

Aviation - The issuance of E.O. 219, liberalized the domestic and international civil aviation. The opening up of civil aviation ushered the entry of three new localcompanies" Grand international Airways, Inc., Cebu Pacific Air, and the Air Philippines Corp. Although Philippine Airlines remains to be the major industry player (e.g. in 'terms of th e number of available flights) the effect of the liberalization is demonstrated in the lower rates offered by the new airlines. : '

•

Shipping

- In 1994/E.O.

port industry

1851opened

to new operators.

the domestic

Liberalization

water trans-

saw the influx of

new shipping companie s registered with the Securities and Exchange Commission,a s well i'as those who are applying for the Maritime Industry Auth0r!ty's (MARINA) accreditation., Correspondingly,, there has been sustained increase in the number of ' vessels approved for acquisition from years'1994-1,995. It should be noted that there is an emerging dominance of importation over ',, bm'eboat charter (a program in which operators are allowed to ,,,use

the vessel

for commercial ,,:

purposes

under

al lease

arrange,,

Chapter 9: Serafica

413

ment) as a mode of acquisition, reflecting greater confidence on long.term investments. Also, younger vessels were acquired as reflected by a decrease in the average age of the vessels compared to the previous years. The liberalization of the sector also brought about the deployment of luxury passenger vessels to major routes. Amenities offeted by the newly acquired vessels approximate those of hotels, thus changing the negative impressions previously held against sea travel. Table 18. Shipping Indicators. Year

No, of Companies SEC Registered

Applying for Marina Accreditation

1992 1993 1994 1995 1996

35 49 50 53 66

25 46 92 159 96

Source:

Lorenzo

Mmhml-Approved Vessel Acquisition Pro)cots Importation Bm_eboat Ch_uler qbtal No. of Ave. Age No. of Ave. Age Vessels Vessels Vessels 34 62 97 131 108

20 10 22 28 30

19.3 15.9 16.5 15.7 14.3

54 78 119 159 138

(1997),

Box 9. Post-Reform: *

15.7 17.8 17.5 16.5 14.6

Water Sector (MWSS)

In March 1996, with the issuance of E.O. 31, government signified its policy to transfer the responsibility for water supply and sanitation to the private sector. The following year, two concessionaires were awarded through public bidding the operation and maintenance of the infrastructure. They are also responsible for infusing investment where needed during the period. However, MWSS still retains ownership on all fixed assets. The service area of MWSS are geographically divided into the east and west zone. The Ayala's Manila Water Corp. won the east zone while the west-zone was awarded to the Lopez's Maynflad Water Services, Inc. The fierce competitive bidding brought down rates for both the East and West zones.

414

The Philippines

beyond 2000: An economic

assessment

Table 19. MW_ Water,Rates* '

Geographical ..

', _

ZOne,

Average Rat_S CP/cubic m6ter)

,,,........

' '

Witho_it' With ':, Pri_ati_ation

_':",i,_ >i,i::,I

East Zone

8'.78,

2.37

, i ,,,_,,,

West Zone

8;78 ',

4.96

,,_,,',,i

Source: David et al, 1998.

', ",

, i

,"__i

The awarded,concession_tes are required t0"_ " 'performance targets: ", :"i ,, /

Table 20. Coverage Tar_(_(In

Water Supply x

s_,,,0_ _

* " ' ' Sanitation-

]

":?.

Percent).

2001

: 2006

East 2011

' ' 2'016

2021

2001

200_

77,1

94,t

94.1

9_,1

94.6

'87.4

, .97'.1" '. 97.4

. 32

,9'

.. 43

241'

West . :, .'_i i i ,2011' .i"20_'._1'//'] ' _' "' " " I ',,97{q: ' '.i"98i_!:..'.:'i

'_ 4_j'

! 43

.27i

_J I

"Expressed as a percentage of the total,population in ,thedesignated city :pality at the time of target (exeludingusers who are water, other than from the MWSs system), t _" _ zExpressed as a percentage of the totalp0pulatlon in the,designated city _r ratmlet_,,, 'pality connected,to, the Concessi0najre',,s'water system'at the _dme of the target, l_r' locations designated by the cities or,_Unicipalifies as areas;,thi_setargets maY be met by the installation of,or_ public standpipe 1 ',_Sanitation coverage decreases oveg"t_meas sewer Ctmaaeetio$coverage ,,,sincewaste water sevc_r_ the concessionaire. " ,,_:'

Common,

Crosscutting,

Privatization,

and Critical

liberalization

ize the reforms

undertaken

the immediate

impact

ture pictnre

has improved.

Issues

and deregulation

to address

of these refonlas

policies

the infrastructure indicates,

character-

problem.

the over-all infrastruc-

The economics of infrastructure, as said earlier, provides no fundamental argument for or against the superiority of private financing

Chapter 9: Serafica

415

and provision of infrastructure over that by the public sector. Indeed, the impetus for the change in policy direction stemmed from neither theory nor ideology but simply from disenchantment over the performance of the various sectors under the old regime of either public or private monopoly provision. It was also a logical solution to the shortage of public budgetary support. With the paradigm shift, the expectation is that the country can finally overcome infrastructure bottlenecks to growth and productivity. The benefits from this strategy however are not automatic and neither is the efficiency of the market mechanism guaranteed in the liberalized sectors. There remain problems that potentially undermine the sustainability of the new policy environment and therefore threaten to overturn the initial successes achieved. After the broad policy framework had been defined and established by the Ramos administration, the next step is to work on further improvements to ensure that the expectations from the new strategy are met. Using the economics of infrastructure as the framework, the section analyzes the 3Cs of infrastructure--these are issues that are: * Common - because they affect at least two sectors; • Crosscutting - because they touch on other policy concerns of the government;and • Critical - because we have to deal with them to ensure that the gains from previous reforms are preserved and even surpassed: Competition Policy in Infrastructure Opening up previously monopolized markets to new players is a step toward creating a competitive environment. However, liberalization alone does not lead to effective competition. There are sources of asymmetry between an established firm and new players that may frustrate competition. For utility industries, incumbency advantages, which serve to weaken the competitive environment, come from two major sources. Armstrong et al. attribute these to either "asymmetric opportunities" (e.g., control of essential facility) and to "strategic asymmetries" (i.e., first-mover advantages). Since both types of incumbency advantages are present in the utilities industry, assistance to new players should be an important consideration in the liberalization policy on • infrastructure. Consider the case where a segment of a vertically-integrated monopoly is opened to competition as depicted in Figure 1 (Armstrong

416

The Philippines

Figure

I. Vertical

beyond

Integration

2000: An economic

assessment

with Liberalization.

Network and other natural monopoly activities:

Monopolist Access --_ price regulation

Potentially competitive activities:

_ Monopolist

.. Othe,.s

[

................................................ ................. ............... ................... ].............. " Consumers:

[

Market l

]

[

T Market2

et al.)? If the incumbent retains control of the bottleneck facility, is an incentive on its part to engage in noncooperative behavior delaying access or charging high access rates) in. order to raise

there (e.g., com-

petitors' cost and induce the latter's exit. This situation is most applicable 'to the telecommunications

sec-

tor although

it also serves

'to highlight

potential

issues in the restruc-

turing of the power sector. Among the possible forms of assistance to new players, which Armstrong et al. 7 list, perhaps two are most applicable to the Philippines' telecommunications sector. One is to limit fur_ ther entry and the other is to ensure favorable terms of interconnection. Another

form of assistance

cited is to relieve entrants

from obli-

gations placed on the incumbent. Unfortunately, this is exactly the opposite of what the Service Area Scheme mandates--testimony to the country's lack of understanding of the obstacles faced by an entrant in an infrastructure sector such as telecommunications? Indeed, the experience

of the telecommunications

countries where effective competition tance was given to new players.

sector

worldwide

succeeded,

reveal

that

in.

some form of assis-

6Ibid., p. 5. 7Ibid., pp_120q25. The Service Aa-eaScheme imposes service obligations on entrants and not on PLDT. See Serafica (1997) for a discussion of some of the problems with this scheme.

Chapter 9: Serafica

417

In the other industries, incumbency advantages usually arise from simply being a first mover. For example, one source of power of a dominant firm in the air transport sector is its preferential access to airport facilities. 9 The same is true for access to port facilities. In the case of interisland shipping in the Philippines, an incumbency advantage that inhibited entry of new operators was embedded in the guiding principles of the route franchising system itself. These principles include •the prior operator rule, which gives preference to existing operators in servicing additional capacity; the protection of investment rule, which guarantees an operator monopoly status for a given period; and the capacity regulating rules, which confers on. the regulator the right to determine the needed capacity.l° h should be noted that the prior operator rule is still, reflected in E.O. 185, particularly in sec. 1.3, which deals with "Deregulating Ent_. of Newly-Acquired Vessels b_to Routes Already Served by Franchised Operators." These examples serve to illustrate that not only does an incumbent generally enjoy first-mover advantages over potential rivals but, in the case of infrastructure industries, additional advantages are conferred on an incumbent due to the inherent economic properties of such industries as well. Thus, this calls for regulators to be active proponents of competition in market segments where competition is desirable and even feasible but not automaticaUy attainable due to possible abuse of incumbency advantages. A hands-off approach will not serve the market well in. the early stages of liberalization. Regulators have to introduce weU-targeted assistance to new players to level the playing field vis-a-vis the incumbent. What may happen if the basic asymmetries within newly-liberalized utility industries are ignored? Clearly, the transition to an effective competitive enviromnent would only be prolonged. The longer the transition period, the more difficult it is to remove distortions, 'the easier for interest groups to influence regulatory outcomes and the higher the probability of policy reversals. Under these circumstances, the effectiveness as well as the credibility of the Philippines' liberalization policy would be undermined. The RegMatlon of Inl:rastructure In embracing market-oriented reforms, the govemrnent has also expanded and compounded the role of the regulatory institutions. As 9Kahn (1989). _0SGV (1992).

418

The Philippines

Ergas n points out, introducing

beyond 2000: An economic

competition

assessment

into utilities imposes

a heavy

cost in terms of supplementary regulation. Whereas the main economic issue facing regulators in the pre-reform period was tariff or rate setting, today's regulators are faced with a wider range of industrial organ nization

issues.

The economic

questions

cover industry

structure

(e.g,

delineation of boundaries for monopolistic or competitive provision, number of players), conduct (e.g., pricing, determination of access rates, setting of interconnect;on rules), compliance with obligations). ture

and performance

(e.g., quality

and

For example, recall that a major economic property of infrastrucis its network-like characteristic. Some components are natural

monopolies while others outputs can be produced

may be naturally competitive. Also, different from the use of the same facilities. These fea-

tures give rise to cost and risk allocation both the product attaining issue be

price regulation

problems,

and access

which

price

complicate

regulation.

Since

universal service is still a paramount concern (whether the electrification, telecommunications or water supply), addi-

tional factors

enter the decision

calculus

of regulation

(e.g., use of cross-

of some regulatory

issues. 12

subsidies). Table 21 presents

an overview

That regulators face a new set of economic questions is recognized in all the industry-specific studies surveyed here. 13 The value of competent, fast, transparent and consistent regulations for encouraging in.vestments in utilities and for inducing efficient behavior among firms is obvious especially in light of the private sector's increased role. But are the regulatory institutions prepared? The case of the telecommunications regulation sights and lessons

into the dynamics

the need for reorientation, National Telecommunication regulate

the Philippine

To illustrate,

in the country

and

Long Distance

Telephone

Co. (PLDT) effectively.

and testimony

furnished

the regulator

had to

by the company.

that the regulator did not have the capability to conduct indeand comprehensive financial audits as well as the expertise

and resources straints,

offer in-

in his study; Gay;no (1992) found that the Commission (NTC) was ill-equipped to

he cites the case of rate setting where

rely on the information appears pendent

of regulation

should

to monitor

he recommends

perforp2ance

standards.

a shift in the orientation

Given

these

of regulation

confrom

ii Ergas (1994). _2The policy questions in the first column are adopted from Au-mstronget al. (1994). _3See, for example, World Bank (1994) and Halcrow Fox (1997).

Table

21. Examples

of Regulatory

PUBLIC POLICY QUESTIONS

POWER

in Philippine

TELECOMMUNICATIONS

Unbundling

Control over bottleneck Telcos as ISPs

of services

Utilities TRANSPORTATION

facilities

¢/3 t_

structure

Service Area Scheme BELLTEL case

Open Skies Policy Cabotag_.aw

If M does operate in potentially competitive activities, should assets be broken up into competing units?

NAPOCOR to be broken into seven gencos

Regional str uc_ure Is M a nationwide monopolist or is there a separate natural monopolist in each geographic region? Product

price

WATER

Does M have exclusive right or is there free entry? Should entry be restricted, assisted, or neither? Horizontal

Issues

_-_

Vertical integration Is M allowed to also operate in potentially competitive activities? Liberalization

and Policy

regulation

East zone and West zone

•

Which products have their prices regulated, and what form does regulation take?

Computation of rates based on RORB formula

Metering and rate rebalancing Foreign currency adjustment

Access price regulation On what terms can firms obtain access monopoly services toofnatural M?

Interconnection power grids

Intercormection operators

Regulation of noapriee behavior How does regulation apply to nonprice conduct of firms?

between

Deregulation

of shipping

Contested 300 MLD which is distributed in the West but passes through the East zone

between

Universal Service Obligations Grade of service requirements

Application of currency exchange rate adjustment

Safety

regulations

Service obligations concessionaire

of 4k

420

The Philippines

one that is excessively trol orientation")

beyond 2000: An economic

concerned

with the process

to one that is more

assessment

of approvals

results-oriented

("con-

("development

orientation"). Note that Gavino's observations were made in the prereform days. Today, the NTC faces at least 1_ 177.5 billion, worth of additional

investments to regulate._4 The point that must be stressed

complemented upgrade

with regulatory

the technical

is that

reform.

capabilities

policy reform

For one, there

of the regulatory

should

is the need to

staff, particularly

with respect to economic issues. The relationship of the regulator versus the regulated is inherently asymmetric. Firms know more about their real cost and., to some extent, regulators do have to rely on in.formation furnished by these firms. Regulatory staff should therefore possess the right skills to be able to evaluate the evidence and employ other devices for benchmarking a firm's conduct (Box 10). In addition,

there

authority

to carry

enough

is the question

of whether

out its function.

There

regulators

are given

are two sides to this

issue. On the other hand, unbridled discretionary behavior breeds graft and cor_.lption and creates uncertainty for investment planning. On the other hand,

too little room

for discretion

regulators, Paderanga

which then diminishes (1996), "decision-making

istratively

hazardous

and difficult."

curtails

the authority

their effectiveness. According to in government has become adminHe reveals

that

under

the anti-

graft law (R.A. 301, as amended), public officers are liable for "causing any undue injury to any party, including the government, or giving any private party any unwarranted benefits, advantage or preference in the discharge of his official, administrative or judicial functions through manifest partiality, evident bad faith or gross inexcusable negligence (Sec. 3e)." Thus, a public official is liable if it is shown that the government or a third party suffered some loss, even if he himself did not profit

from

the decision.

Paderanga

ar_es

that since the grounds

for

initiating antigraft action are so broad, it is not surprising why officials at the undersecretary, assistant secretary and director levels are reluctant to make difficult decisions. trative

This situation may provide important viability of including procompetitive

ization

policy of the government.

a new player,

insights into the adminisprovisions in the liberal-

Note that between

it is easier for an incumbent

an incumbent

to demonstrare

and

actual losses

than it is for a new entrant to ]usti'fy potential losses due to a regulatory decision that could affect current to fnture operations. Thus, following the path of minimum

resistance,

regulators

would be compelled

Chapter 9: Sera._ca

421

Box I0. Rate of Return on What? In utility regulation, tariffs are usually set so that utilities can earn a rate of return on the fair market value of assets (e.g., 12 percent). Thus, suppose that B is the rate base, then firms are allowed to adjust prices so that they are guaranteed a revenue (usually net of operating expenses, depreciation expenses and taxes) that is equal to O.12*B. Since 12 percent, the rate of return, is a given, then the only way that a utility can justify increased rates is to manipulate B, the rate base. This can be done using accounting sleight of hand whereby an expense is capitalized thus inflating the value of the firm's asset base. Another practice is to include in the rate base certain investments which are not directly related to the service in question. With these practices, it is evi-Jent why good regulatory capability is important. Of course, the solution is not to simply devote more resources to institution building (e.g., training of staff). One needs to evaluate the success of such "investments" in the past to determine their effectiveness. Gavino (1992) reports that the National Telecommunications Commission (NTC) has received a lot of assistance through foreign-assisted projects to build up its administrative capability but that the results of these efforts are not clear. The situation may be the same in other institutions. Another means to improve regulation is to design schemes that have built-in incentives for firms to behave efficiently. Notice that under rate of return (or c0st-of-service) regulation there is no incentive for the firm to cut costs since he is assured of earning a specified rate of return. Under a high-powered scheme, the firm is the residual claimant of his efforts to be an efficient provider. Thus, an alternative to the cost-of-service regulation is to impose price caps wherein

422

The Philippines

beyond 2000: An economic

adopt policies that inflict the least harm on incumbents decisions that directly or deliberately weaken the latter's (e.g., by providing Finally,

any assistance

a fundamental

and to avoid market power

to new firms).

issue that needs to be addressed

Philippines' overall institutional environment and sustained investments in infrastructure?" the fixed investments

assessment

in infrastructure

is: "Is the

conducive to long-term Again, recall that part of

is sunk and that the payback

period is quite long. The time element alone exposes infrastructure investors, whether public or private, to more uncertainties (i.e., higher risks) than a typical business investment. More important, however, is the presence of substantial sunk costs that may give rise to potential expost commitment problems between contracting parties (e.g., the regulator and firms) which then influence ex-ante investment decisionmaking.

Fear of expropriationfl

or even perceived

arbitrary

behavior

which

can be fueled by actual

from regulatory

and policymaking

institutions, may lead to sub-optimal levels of investments (Box 11) as well as affect the nature of the investment itself (e.g., with respect to the choice

of technology).

The Infrastructure The success cient planning,

Bureaucracy

of indnstry

coordination

regulatory and monitoring

reforms

also rest on the effi-

of infrastructure

programs

i.sBroadly defined, such may not necessarily involve the confiscation of assets. For example, it can take the form of a reduction in the rate of return from an investmen_ brought about by unanticipated change in the rules for tariff setting.

Chapter 9: Serafica

and projects.

423

In the United

lems experienced

States for example,

with the deregulation

one of the major

of civil aviation

prob-

was severe con-

gestion of airport runways. This could have been anticipated by better planning of airport capacity and traffic control (e.g., more accurate forecasting of traffic volumes and patterns). 16 Likewise, when the US power sector was restructured, a major consideration was to make sure the introduction of competition would not create reliability problems in the production dination between unbundling among

of electricity, which requires generation and distribution

of the power

sector

requires

network components The planning and coordination

minute by minute coorfacilities) 7 That is, the

a high level of cooperation

of infrastructure

projects are the government's responsibility. investments in the sector, avoid duplication

programs

and

Its job is also to monitor and identify gaps. It is the

government that must set the direction for infrastructure development in the country and thus, pertinent agencies must be organized to facilitate strategic planning and coordination. handles

The Department of Transportation and Communications two infrastructure industries, which are not related

(DOTC) except for

certain

instances

(e.g., pay-

when they can be considered

ing your bill by phone).

Sources

of efficiencies

as substitutes

(or cost savings)

from

the "joint production" of transportation and communications however are not obvious. In other words, if the DOTC were a firm, one would be hard pressed to explain its existence since there are no major economies of scope from the two operations, which are necessary for the viability of a multiproduct firm) 8Also, infrastructure work for roads and bridges is under the charge of another agency, the Department of Public Works and Highways (DPWH). The overlapping of responsibilities is best illustrated in the case of Metro Manila where DPWH is promoting an elevated expressway masterplan along many of the same corridors that are inclnded in the DOTC's LRT masterplan) 9

_0Although part of the solution lies in setting efficient prices for landing fees too, which is in turn a regulatory concern. _7Analyses of the U.S. experience with the economic deregulation of these two sectors are discussed in Brookings Paperson Economic Activity Microeconomics, M.N. Bailey and C. Winston (eds_), 1989. _8Another way to view it is in terms of cost complementarity (i.e., the cost of producing one service must go down as you produce more of the other to justify joint production). 19As Geoffrey K. Key of Halcrow Fox explained, Metro Manila is crying out for an integrated m-ban transpol_ policy, which should also be integrated with land use planning.

424

The Philippines beyond 2000: An. economic assessment

Box 11. Institutions

', In a comparative

Matter

analysis of the regulation of private telecoms

utilities in five countries, including the Philippines, it was found that the goodness of regulatory "fit" with the country's political and judi_ ciaI institutions was an important factor'.in determining the success of regulations in terms of encouraging investments and inducing ef- [ ficient behavior amongfirms. Other findings include: * A necessary condition for sustained..and large-scale private investmentin utilities is to make sure administrative arbitrariness be restrainable. .. . .., , Complementary mechanisms must be available to restrain arbitrary administrative action.. Such mechanisms include substantive restraint on the discretion of theregulator, formal or informal procedural constraints on changing the regulatory system and the institutions that enforce these substantive and procedural constraints, i , i, . A country's institutional endowment (which includes the legislative, executive and judicial institutions, their administrative capabilities, customs and norms, and the character of the contending social interest, including the role 0fideol0gy)strongly affects government's ability to put in place a credible regulatory system. ,,

in their conclusion, Levy and Spiller rate the various countries in terms of the potential for attaining success in regulation given their institutional setting and unfortunately assign to the Philippines (along with anothe r country).the fate of not being able "in the short term, to develop a domestic regulatory system capable Of sustaining long-term private participation and investment" (p. 249)_However, as critics of their paper are quick t0 p°intout, the good news is that institutions themselves are endogenous, The. capability of a country's institutions to provide credible commitments

can Ibe improved! ,i

Sources: Levy and Spiller (1994). Also 'the comments of David E',M, Sappington on Levy and Spiller (1994) and AshokaMody on Levy and Spiller (1994). Note: The Philippine background paper for the Levy and Spiller cr0ss-country analysis' was prepared by Esfahani (1994). He examined the historical performance of PLDT from .1928 (American 'Occupation) to 1992 (Period of Normalization). He detected a strong pattern of political'business cycle in PLDT% investment behavior--high when the political climate is perceived to be "friendly" and 10w when there is fear of expropriation thus supporting'the thesis that contracting problems weaken the incentive to invest. For a brief survey.bf 'this and other .competing views explaining PLDT's ' i i 'prereforna performance, see Serafica (1998).

Chapter 9: Serafica

Of course,

425

it can be argued

that being a nonfirm

(i.e., an organi-

zation that is not motivated by profit maximization), the structure of government agencies cannot be explained by economies of scope. But this brings to question what the appropriate criteria for organizing the bureaucracy should be. It seems tion, so to speak, of infrastructure stands

to benefit

from

reasonable to expect that the producstrategic plans, program, and projects

the sharing

of common

inputs

ship or authority (for control and accountability), coordination) and data (e.g., demand projections the institutional knowledge of related activities would

planning

road network,

including

must be within

tive jurisdiction

2° since these are highly related

side (exhibiting

management for planning).

(for Also,

built over the years from the concentration help frame coherent policies and increase

the continuity of projects. Policymaking and strategic

demand

such as leader-

bridges,

a high degree

for transportation

and the

a single administragoods

of substitutability)

both from

the

and from the

production side (representing complementary components of one vast network that will take individuals from one point to another). Meanwhile, with of the convergence

of telecommunications,

information

tech-

nology, and broadcasting, the huge and complex task of planning and policy-making for a 21 _t century information infrastructure should be enough

responsibility for one agency to handle? 1 Another way to rationalize the infrastructure

bureaucracy

is to

separate the policy, regulatory and implementation functions within each sector. Tables 22 to 25 show the existing institutional arrangements for each of the sectors, revealing the breadth of responsibilities of certain

agencies. 22

20Refer to Halcrow Fox (1997) for other recommendations regarding institutional reforms in the sector. 2tThe creation of a Department of Information Technologyand Communications (DITC) has been suggested in various fora of telecoms and IT experts. See also Johnson M. Chua. 1997.A Review of Telecommunication Policy:Keeping the Lines Open. CRC Economic Policy Papers No. 1. 22This issue was pointed out by Halcrow Fox. The author of this chapter adopts its framework in describing the institutional arrangements in the power, telecoms, and water sectors.

426

The Philippines

Table 22. Power Sector

Sector's

Pollcy

beyond 2000: An economic

Assigned [_egulador O]x=ral ing Sl.;,IDd0,L-ds

Entry

assessment

Agencies.

PritzinLz

Pro.icct Phmrliqg

Tmp|cmenmcic_r_ Consn-uction OI_ration_ ,_[_1J nlcn_lc_

Private Pow_n Uti/ific_

DOE

DO -I-_ Congress

DOE • •

ERB

DOLE/ Private

Privaue

Private

Coopmz_dvcs

]DO_' N?-A

N_A.

D_E/ NI_A?

Fg.B

Pl'J_t[e/ NEA

Cool3t_l_/CJ v_s/ Priva 1"_.:

CooDcl_ITIvcg

.Note:?= not clear Source:Based on the NPCRestructuring and Privatization Study by F. Viray, 1997.Update orl Restructuring the Power IndustTy and Privatizing the NPC. Paper presented at the Philippines National Infrastructure Forum, May 1997, NEDA, Philippine National Infrastructure Forum Policy Papers.

Table 23. Telecommunications Sezctor

PoJicy

Sector's

Assigned

Agencies. ,, ['zTJpJ_:mcut_tkion Consm:ctlon Operations/ Mailli.e:rla rice

Enl:r),

f_gul[trlon OpcratJng Sl.al/d_wd8

Pricirlk.'

Project Planning

Privace

DOTC

Ccsrl.'.'rcss NTC

N'f'C

NTC

Pj qv;,ll.c

P4qV;.xl¢

Pl'iVal:e

Pttbliu:

DOTC

N-I'C

N:I"C

NTG

DOTC

T:lZLOF/ Pr'i'¢a I._"

TEl_OF

Table

24. Water Sector's

Sccl;u:

Assigned R.c.i'.tI tl _ Olx;l;.lli Ilg $1:;,uldcwt;I8

Policy Elllry

Agencies. Pi'icing

Project Plunnim_

ImpleiuerlluLion CollscltlctJon 0 [x:r:.ltions/ M:tirll.ttrl_lrlct_t

_{11v'.r" District_

NWRB

LWUA

l.,WUA

[.W'UA

NWRB/ Private

Pcivcu_

Pri'¢alc

Privutc Systems

NWRB

NWI_I]

NWI_.B

Private

l'rlval?

Privatt:

MW$S

NWRI3

rl/_l

M½VSS

NWI":.I3/ MWSS gourd

MWSS/ DPWI-r

Private

l"rivai;e

LGU

[-OU r_Lics,.

NWR.B (T,)

NWR13 (?)

NWR'I3/ ILGU

LG[J

LGU

I'.,GU/Private

Note: ?= not clear Source: Based on reports by NERA, APhilippine Water Regulatory Commission., World Bank, Oct. 1996 atad Binnie Thames Water, MWSS Operational Strengthening Study, June 1996. Financing

of lnfrastructure

The Philippine scheme

infrastructure

Privatization

Program

or the BOT

an important

and timely

solution

to the infra-

is considered

structure bottleneck. frastructure projects,

Its adoption has produced significantly more inwhich could not have otherwise been. undertaken.

Even local government scheme

units (LGUs) have realized

the benefits

of this

as an alternative source of financing for their projects. To encourage private sector participation in infrastructure

projects,

the government

assumes

a number

of risks that the other party

Chapter 9: Serafica

427

Table 25. Transportation Sub_¢k:ctor

Sector's

_-qicy

AsSigned

Agencies.

£mry

Require:ion Ol:_ratin_ Sta.rtdmds

Pricing

Projcc:t Phtnuing

lmpk:mcntarlon Const2x_ctiun Opcr_Jons/ Maill[_narlo_

" DPWH/ P_fvaw Pri,_a re

DPWIq/ Privale Private

Roads NariunM Roads lbll Roads

" DPWI-[ NgDA DPWI-I NEDA

DPWFI

DPWH

rl/a

DPWH

DPWI-r/ TPO3

DPWN'/ TRB

'I'RB

DPWFr/ Priv;.tlc

Local

RDCs

I.G U_

LGUs

n/a

1.G U,s

:[111 el Lll'l)atll BtlSCS

Roads

(DOTC)

I_'l'l:'[(l_

[,T FF_I3i 1;IFO

[.ZFFRJ3

I_1jv;.tte

LGUs/ (pcivace) Private

LGUs/ (private) Private

Trucks Railways

(DOTC)

(LTITRB

LTO

none

JzII.'JvLt tc

Priv-al e

Private

PNP_

DOTC/ NEDA DOTC/ NEDA

DOTC/ Congress DOTC/ Congress

PNR

(DOTC?)

DOTC/ PNR (Private/ BCDA/ PIV_A?)

PNR/ Private (Pfi_ttc/ BCDA)

PNR/ (Pfiw_e) (Pxqv-atc)

ATO Ai qz_)l-t_

DO'I"C/ ATO/ NJT.DA

DOTC/ ATO

ATO

No.n-ATO Air]:x_l_.s

DOTC/ ATO

ATO

PrJvale

Plfvatc

Private

Ot]Ju*' Airlx_rl. Authorities (MIAA, MCIAA, ere.)

DOTC/ NEDA

C,.,ngress

ATO (;,dl_id_ I:acility)

Self

Sell

Self/Ih'iwtte

S,:df/Ptivate

A.ir lirto-s M[.uJli m_

DOl-C?

CAB

ATO

CAB

Private

plIiVat_

Priv0,t_

PPA [3bl-ts

PPA/ NEDA

PPA

Non-PPA (_,g, Feed_zc [_:_±ts)

DOTC, PPA

I'I'A

PPA

PPA/ LG [_Ts

DOTC

LGUs

Otl)w I_,11 Anlh¢.n-iti_s ('C[_, I3CDA, cm,)

DOT@ N_DA

DOTC/ Congress

Se[17

Sel.l:

Serf

8_lf/Plivtffe

Sell:/Prbm[e

Private Potxs Shipping

P_1 DOTe/ MAILINA

PPA ,MARINA

PPA _MARINA/ PCG

PPA ,_4ARINA

Private Pri_alc

Private Private

Plqvate

AviatiorJ

Source: Halcrow Fox (1997). cannot or will not bear. Thus, although there is less direct pressure on public sector resources due to the private sector's increased share in infrastructure investments, there is nonetheless a concomitant rise in the go V erument

s guarantee

provision of guarantees ernment must manage According

exposure

with every risk that it covers.

creates a contingent efficiently.

to Llanto and Soriano = there

liability,

which

is currently

This

the gov-

no compre-

hensive and detailed accounting and monitoring system for contingent liabilities that are brought about by the BOT scheme and its variants. Since the growth in contingent liabilities poses potential fiscal problems, Llanto and Soriano recommend the adoption of an appropriate and explicit

accounting

ties. Other

recommendations

23Llanto and Soriano (1997).

and budgeting include

method unbundling

for contingent

liabili-

and the proper

as-

428

The Philippines

beyond 2000: An economic

assessment

signment of risks; the introduction of an exit strategy for guarantees; and the development of appropriate pricing of government guarantees, Another concern regarding the BOT program has to do with the financing

structure,

The BOT scheme

and its variety

are highly lever-

aged with a substantial foreign funding component. As shown in Table 26. about 73 percent of the projects are financed from debt? 4 It should be noted

that the average

debt-equity

ratio

Corporation

infrastrncture

projects

is about

for International

Finance

58:42. 25 I

Table

26.

Breakdown of Funding Schemes, As of March

Project. Type

Sources of BOT/Other 31, 1997.

Debt

Similar

Equity Foreig._

Local

75.4 %

21.3 %

3.2 %

W/o trans[:ec ar'range.ment

73.1

26.5

0.4

Independent Power Projects

66_7

33.3

0.0

Joint venture

69.1

25.0

6.0

73,3

24_0

2.7

W/transfer arrangement

(BOT)

Agreements Overall

Rural

lnfrastructure

The lack of adequate a neglected investments structure

infrastructure

in rural

areas has long been

problem. Urban centers receive the bulk of infrastructure by both the public and private sector. In particular, infraprovision

is concentrated

in Metro

Manila

(see Box 13).

This problem was raised by Gilbert Garchitorena of the University of Asia and the Pacific (UA&P).He adds that a large portion of the debt in the financing package came from syndicated foreign,loans (63%) and fi_temational bond issues (12%). 25Financing Private Infraszructure (World Bank, Washington D.C., 1996).

Chapter 9: Serafica

429

for the

.and _gation--[_dlities

that dire .._. _u_"

,of resourcesin the regiom). ,Iu:::i99Z, an have an. Economic.lrifrastructur¢ I(Ei) ¢_ bnly that of the.NCR, Improvement in the next tWo Ycm 19_4, NCR's mean '6,5 timesgreat_r than, (i.e:, ARMMi,_

i:,_ and.IV) were also tthe componentsofEl _frastructure Indicators :_Thesetwo categories have influen¢_ _ the deof a given space k_id both remained highly conTransport indicators revealed that the 14other infrastructure facilities below 25 percento[_the NCR, for communications infrastructure is even worse. The 15percem_of what is available in the there has been marled improveraent in the di_ercommunications infrastructure, ,In 1992, the mean value of 138.31 percent higher thanthat of the worst-equipped reIn 1994, the dispersion statiati¢ declined to43.22 percent. N_theless, the inadequacy of communication infrastrUctureis still r_ected in the low mean values. In 1994, an average t_gion would ofity have communication facilities roughly 13.04 percent of NCR. Water Supply infrastructure indicators showed high concentration in regions within Luzon. The best-equipped regions under this category were regions I, iI, and HI _e the worst- equipped im_,gionswere VIIT, IX, and ARMM. Energy and Irrigation infrastructureindicators were the categories that showed the smallest disparities in For both categories, NCR was not included in the (MERALCO) provides its dec"while irrigation facilities are not applicable to the,econor_i_!'acfi,vifies in the region. ,it,,can be observed that the absence of:,,_Ittes for NCR resulted in,_higher mean values and less i,

430

The Philippines

severe disparity for therest NCR is an "outlier _''interms economic

infrastructure

beyond 2000: An economic

of the regions. of infrastructure

indicators,

assessment

This may indicate that provision. In the other

particularly

t_nsportation

and

communications, the NCR captures the bulk of public investment while the rest have meager shares. Though irrigation registered the highest

mean value among

decline

over the period.

by land reclassifications

all economic

This marked

indicators,

it has exhibited

declin e may partly

that took place within

be explained

the three

years.

Source: Basilio and Gundaya (1997), Note: Due to lack of complete time+series data for CARAGA,Ioniy Regions 1 to 12, I_R, CAR,and the Autonomous Regkmof MuSlim Mindanao Wereconsidered in the analysis _""_/' " "' ' i i

The disparity

has obvious repercussions

for the long-term

growth

and development of the country. Ranis and Stewart (as cited in Bautista and Lamberte) 2s found that differences in infrastructure provision for electricity explain

and road network differences

countries. Balisacan regions

in rural

between

Taiwan

industrialization

and the Philippines experienced

help

by the two

With respect to equity objectives, simulations done by 27 indicate that narrowing the infrastructure gap between the alleviate

both the poverty levels and the poverty

gap in the coun-

try. Given the nonviability of private sector provision of infrasta-ucture in the rural areas, it is clear that the responsibility falls squarely on the .public sector (at least in the short-run). But who exactly in the government should take care of rural infrastructure? As earlier mentioned, certain kinds of infrastructure are location- or site-specific. In addition, infrastructure is jurisdiction-specific. Thus, as Bird argues, "Which public

infrastructure

are built, where

operated, maintained way in which, various are organized

ernments

and how they are

or built. ''zs

With the devolution the delineation

they are built,

and utilized invariably depend largely upon the public sector institutions involved in the process of certain

of responsibilities

becomes

functions between

a little tricky. A guiding

to the local governments, the national principle,

and local govwhich

Bird sug-

"+Ranis and Stewart (1993a); Ranis and Stewart (1993b);and Bautista and Lamberte 0996). _7Balisacan (1995). zsBird (1995).

Chapter 9: Sera_ca

431

gests for local infrastructure, is that in general, "the central government does not know what to do, (while) the local govermnent does not know how to do it.''29 Given this information asymmetry, it is best to approach the provision of local infrastructure utilizing the comparative advantage of each branch of government. Alburo 3° , for example, advocates devolution of authority to local governments to identify and administer regional infrastructure projects that suit the local needs and conditions. The national government agencies, on the other hand, usually have the advamage in terms of technical expertise, which they should share with local government units. To be sure, the Local Government Code does provide for assistance by national agencies to local government units. 3_It is unclear, however, as to the extent these mechanisms have been undertaken and if they have been effective. Unfortunately, there is a lack of documentation even in the popular media of success stories (if there are any) of national-local government partnerships in infrastructure provision compared to those involving private-public partnerships. 32 The role of regional development planning is also unclear. Soriano 33asserts that planning at the regional level is still weak and thus, notes that the enactment of the Code has left a vacuum between the central and local governments. As suggested by Dr. Gaudioso Sosmefia, Jr. of the Local Government Development Fund, defining the role of local governnlent in the infrastructure sector may be approached in a number of ways. One is through a system of stratification where the administrative, financial and technical competencies of local authorities can serve as a guide in determining what complex infrastructure projects can be devolved to local authorities and what should not be decentralized. The other approach is through incrementalism. Through experiential learning, local authorities in the long run will learn how to manage infrastructure projects from the simple ones to the more complex. Another policy option is through selective decentralization. Under this alternative, responsibilities are decentralized only to those who are competent.

29Bird (1995). 3°Alburo (1993). 31Sec. 25b and c. _2On the experience of LGUs in tapping private capital, see, for example, E. Pardo. 1996. Country Report of the Philippines. in B. Royston and W. Allen (ed.). Urban Infrastructure Finance. Asian Development Bank. 33Soriano (1996).

432

The Philippines

beyond

2000: An economic

Needless to say, the need for greater structure remains and should be addressed.

assessment

spending on rural Simply infusing

inframore

money is not the solution. In this era of decentralization, the proper delineation of national-local government roles may prove to be a more critical factor in rural infrastructure development. Conclusion This paper has presented a picture of the pre- and post-reform infrastructure environment. Although further restrncturing of the various industries

has yet to take place, one can already

policy initiatives of infrastructure

in terms of improvements services.

An assessment ture

growth

This paper

of the over-all

and development looked

policy environment

reveals

at five areas

that certain

that need

policy,

and quality

for infrastruc-

weak spots remain.

further

identified policy steps that should be undertaken the momentum from the reforms implemented. In the area of competition

see the benefits

in the quantity

improvements

and

to be able to sustain

a more pro-active

stance

must

be taken to ensure a level playing field. Simply allowing the entry of new players is not sufficient in establishing a competitive environment given the asymmetries within To regulate the various country's effectively

infrastructure industries. sectors, the technical capabilities

of the

regulatory institutions must be strengthened so as to deal with the complex demands of a market-oriemed policy re-

gime. Indeed, the paradox of deregulation is such that the rules of the game must first be in place before the market can be expected to function efficiently. Another recommendation

borrows

from the structure-conduct-

performance paradigm of the industrial organization literature. That is, to improve the performance of government, the bureaucracy must be restructured in a manner 'that facilitates the conduct of infrastructure strategic plans, programs and projects. The first two recommendations--the

creation

of a competitive

environment and the need for competent regulation--are related, and their importance cannot be stressed enough.

very much The combi-

nation

environment

of private

is the worst

monopoly

scenario

power and a weak regulatory

that the country

can possibly

find itself in. One

has only to recall

the state of the telephone

service

prior to liberaliza-

tion to appreciate

this point. The third issue, which

calls on the reorga-

nization

of lead agencies

in a way that would

facilitate

coordination

Chapter 9: Serafica

433

and strategic planning, is also related to the second recommendation. In effect, these two are complementary steps toward making the whole infrastructure bureaucracy as globally competitive as the industries these agencies are charged to oversee. The fourth concern deals with fiscal policy as applied to infrastructure financing. Even as the private sector takes a bigger role in infrastructure development, the government must not be reckless in assuming and managing contingent liabilities. Lastly, with regard the perennial problem of inadequate rural infrastructure, it is suggested that in order to achieve some headway, we must work within the context of the current governance structure through the proper delineation of national-local government roles. Involving the private sector in the provision and development of infrastructure has been an emerging trend in the region. The public sector has neither the finances nor sufficient managerial and technical capability to be directly involved in meeting all current and future infrastructure needs. However, despite the private sector's expanded role in infrastructure, the government's role remains to be important. The government is responsible for creating the policy and regulatory framework that will safeguard the public's interest while at the same time enhance the new alliance with the private sector. The policy direction of privatization, deregulation and liberalization create a new operating environment for the infrastructure sectors, which promises to be exciting as the effective control of the agents (i.e., firms) shifts from bureaucrats and politicians, to stockholders and consumers. Needless to say, there is still a long way to go before one can claim unqualified success. The more-than-half a century old Public Utilities Act must be examined to make it more attuned to current realities. The list of industries covered by the Act must be revisited to see if the rationale for the conditions set therein is still relevant. There is, for example, confusion as to whether or not certain industries are still under return-on-rate base regulation. The suitabihty of the rule itself must be reconsidered in view of the incentive problems associated with it and the fact that various industries will have a different cost of capital depending on the risks inherent in each. In addition, the regulatory issues must be reviewed in detail to make sure they are consistent with the overall policy framework. In particular, one has to address the common practice of embedding equity-related goals (i.e., so-called missionary or universal service objectives) in the price structure of infrastructure services. This practice is not sustainable in a competitive environ-

434

The Philippines beyond 2000: An economic assessment

ment, which requires that prices do not deviate from the cost. Moreover, the distortion in the tariff structure tends to misallocate resources because end users do not face the real, cost of their consmnption decisions. There is therefore a need 'to craft explicit and transparent programs that support equity_related objectives while remaining consistent with the equally important objective of promoting efficiency, both productive and allocative. No doubt, each sector will experience difficulties as the transition from a dormant policy environment to a more open and dynamic one takes place. Such "growing pains" are to be expected and it is important not to lose sight of the goals set for each industry. Every decision made or action taken must be a step forward. This paper cannot be concluded without at least mentioning the single most critical setback to all efforts in improving the state of infrastruct_uce in the country. This, of course, is graft and corruption, which is generally known to be prevalent in infrastructure projects. Again, the economics of infrastructure can. explain why this problem is more serious than any monetary figure will bear. The existence of consump_ tion externalities means that every peso diverted from infrastructure results in a loss of more than one peso worth of benefits to users in particular and society in general. There is much room. for improvement in the systems and procedures involved in infrastructure projects (e.g., bidding, procurement, etc.) that should immediately be addressed. The interviews for this paper also reveal that the budgeting process (both on the executive and legislative end) contribute to sub-optimal allocation and utilization of infrastructure funds. Indeed, improving the policy environment will be useless if not accompanied with direct measures that curb practices of diverting badly needed resources away from infrastructure programs. Solving one without addressing the other is like taking one step forward and two steps backward--definitely not the right move towards sustained growth and development beyond 2000.

Chapter 9: Serafica

435

References Alburo, A. 1993. Policy Options Relating to Infrastructure, Transport and Energy. In Emmanuel de Dios (ed.) Poverty, Growth and the Fiscal Crisis. Makati: Philippine Institute for Development Studies. Armstrong, M., S. Cowan and J. Vickers. 1994. Regulatory Reform: Economic Analysis and British Experiences. Cambridge: The MIT Press. Asian Development Bank. 1994. Energy Indicators of Developing Member Countries of ADB. Oxford Press. Asian Development Bank. 1996. Key Indicators of Developing Asia and Pacific Countries. Oxford Press. Balisacan, A. 1995. Aspects of Employment Location, Regional Redistribution, and Poverty and Inequality in the Philippines. Discussion Paper No. 9508. Quezon City: University of the Philippines School of Economics. Basilio, L. and D. Gundaya. 1997. The impact of Collective Public Infrastructure on Regional Income Disparities. Undergraduate thesis, University of the Philippines. Bautista, R.M. and M. Lamberte. 1996. The Philippine Economic Development and Prospects. Asia-Pacific Economic Literature 10 (2). Bird, R. 1994. Decentralizing Infrastructure: For Good or for Ill? Policy Research Working Paper No. 1258. Washington, D.C.: World Bank: David, C., et al. 1998. Optimal Water Pricing in Metro Manila. Paper Presented during the Second Workshop on Urban Water Pricing in Metro Manila by the Presidential Task Force on Water Resource Development and Management and Philippine Institute for Development Studies at SEAMEO INNOTECH, 17 March, Diliman, Quezon City. Ebarvia, M. 1995. Watering Metro Manila: Today's State, Tomorrow's Challenges. PIDS Executive Memo. Makati: Philippine Institute for Development Studies. Economides, N. 1996. The Economics of Networks. International Journal of Industrial Organization 14(2). Ergas, H. 1994. Comment on Appropriate Regulatory Technology: The interplay of Economics and Institutional Conditions by L. Jones.

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in Proceedings

beyond

2000: An economic

of the World Bank

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Annual

assessment

Conference

on De-

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The Political Economy of the Philippines' Telecommunications Sector. Policy Research Working Paper No. 1294. Washington D.C.: World Bank. Halcrow

Fox. 1997. Philippine Transport Strategy Study. A Study commissioned by the National Economic and Development Authority (NEDA).

Gavino

Jr., I. 1992. A Critical Study of the Regulation Utility: Some Options for Policy Development.

of the Telephone Ph.D. Disserta-

tion, University of the Philippines. International Telecommunication Union 1995. Asia-Pacific nications Jimenez,

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Geneva,

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Telecommu-

ITU.

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pers on Economic Activity Microeconomics. Washington D.C.: Brookings Institution. Klein, M. and N. Roger. 1996. Back to the Future The Potential in Infrastructure Privatization. In Private Sector: Infrastructure. ington D.C.: World Bank. Kohli, H. 1994. Infrastructure Development ington: World Bank. Levy, B. and P.T. Spiller.

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Mangahas, M. 1997. Tracking the People's Economic Well-being: The Social Weather Surveys. Paper presented at the Symposia for Dr. Gerardo Sicat and Dr. Jose Encarnacion, Jr. Makati: PIDS. Paderanga,

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R. 1997. An Economic Analysis of the Service Area Scheme. Philippine Review of Economics and Business 34(1). Smith, P. et al. 1994. Telecommunications Sector Reforms in Asia. Washington, Soriano,

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V. 1996. Regional Planning and Uneven Spatial Development: Assessing the Philippine Experience (1965-1992). Masteral thesis, University of Hawaii.

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World Bank. 1994. Philippines World Bank.

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Ma-

Washington,

DC:

AnAssessmentof theHealth, Nutritionand BasicEducation Sectors,1992-1996 Alejandro

Chapter4/ J|| JLU

N. Herrin

critical

aspect of the future

capacity

of the economy

to support

a growing population at higher standards of living is the quality of its human resources_ Data on health, nutrition and basic education among children, however, suggest that unless rapid and sustained improvements in these human resource indicators are made 'today,

the productivity

of the labor force

in the 21st century

may not

be high enough to support a larger population at higher standards of living. The interrelationships among slow improvements in. heahh, nutrition and basic education and the future productivity of the labor force as a contributor to sustainable growth and development may be briefly described as follows: • The mutually reinforcing

effects of malnutrition

and poor health

•

among infants and young chilch'en rednce their survival chances; Among the survivors, malnut_-ition and poor health will adversely affect their mental and physical development;

These mental

and physical

handicaps

are cmTied forward

until

they reach school age, contributing significantly to their low levels of achievement and early dropping out of school; °

Upon entering the labor force, these children who are now young adults are doubly handicapped, first by the effects of poor mental and physical development during early secondby less schooling and poor achievement

As a consequence, ductive members the overall

and

these young adults will become the less proof the labor force, th.us significantly reducing

productive

These relationships

childhood, in school;

potential

of the economy.

are reinforced

by two other

important

fac-

tors, namely: of households

poverty and high fertility. Povel_y refers to less capacity involved to obtain adequate nutrition and health care,

and to provide

for better

education

for its members.

440

The Philippines

beyond

2000: An economic

assessment

Tbe role of fertility is more complex. High fertility adversely affects infant and child health and survival, child nutritional status and child care, and schooling

performance

of children.

In contrast,

fertility at the household level would not only provide direct health efits to mothers and children but would provide the household

lower benwith

added opportunities as well to invest more resources and time per child to improve their health, nutrition and schooling performance. At the aggregate level, rapid fertility declil;c and 'the resulting moderate population growth could reduce the pressure on government resources to expand basic health, nutrition and education services merely to accommodate the rapidly growing population. mean added opportunities for increasing

Such reduced the coverage

pressure could and improving

•the quality of such services. Thus, in addition, to directly addressing the problems of child health and survival, nutrition and basic education as well as addressing source formation

the larger problem of poverty, for furore productivity requires

a positive human readdressing the prob-

lem posed by continued high fertility and rapid population growth. This paper, however, will focus on health, nutrition and basic education. This paper in health,

nutrition

reviews

(1) recent

and educational

ages, and (2) major policies and basic education during tifying

trends

during the period

outcomes,

particularly

1992-1996 in the early

and programs promoting health, nutrition the same period, with the view of (3) iden-

key issues for policy beyond 2000. The next two sections reviev¢ recent

trends

and policies

influ-

encing such trends based on the vision of human development and the twin strategies of people empowerment and global competitiveness contained in the Medium-Term Philippine Development Plan 1993-1998 as well as in vm°ious component plans, The major policies and programs affecting health, nutrition and basic education implemented during the period are discussed in the fourth section, with attention to issues raised regarding their effectiveness. The final section summarizes tile main challenges Policy

beyond

Framework

year 2000. for Human

The policy framework

Development

for responding

to the challenge

of human

development is contained in the Philippines 2000, 'the Medium-Term Philippine Development Plan 1993-1998 and its update (1996-1998), and in various component plans. Viewed in its entirety, the policies and programs addressing human development encompass a wide range from

Chapter 10: Herrin

direct

441

interventions

in specific

sectors

to poverty

alleviation

and gen-

der equity. Philippines Philippine

2000 and the Medium-Term Development Plan, 1993-1998

Philippines 2000, the Ramos Administration's blueprint for naeconomic recovery, seeks "to achieve international competitive-

tional

ness and people empowerment and achieve NIChood by year 2000." It aims for economic development that is driven and sustained by economic efficiency and social equity. lates

The Medium-Term the socioeconomic

goals, strategies themes: human tainable

Philippine Development Plan 1993-1998 transdimensions of Philippines 2000 into a set of

and action programs. It revolves around three basic development, international competitiveness and sus-

development.

The main goal is to improve

the quality of life of

Filipinos by targeting a gross national product (GNP) growth of at least 10 percent in 1998, a per capita income of at least $1,000, and a reduced poverty rate of 30 percent. Development efforts are organized into five generally inten-elated areas: human development, agri-industrial development, infrastructure development, development administration and macroeconomy and development financing. On human development, directed toward the following

government efforts and investments are objectives: (1) to enable the majority of

the population to meet their basic needs; (2) to extend focused basic services to reach people who lack access and opportunities; and (3) to harness the productive capacity of the country's human resource base for international competitiveness. These objectives translate to the following targets for the health, nutrition and education sectors in the 1993-1998 Plan, namely: •

Better health

and nutrition

for Filipinos

as measured

by (a) longer

average life expectancy from 65.7 years to 67 years, infant mortality from 55 to 49 per 1,000 live births,

(b) lower (c) fewer

proportion of underweight children, (a decrease from 12 to 8 percent) with a corresponding increase in the per capita energy •

intake to 1,977 kilo-calories per person, and Improved access to and quality of education nos as evident in the following: (a) increased 95 to 98 percent, literacy

with a corresponding

levels; and (b) elementary

63 to 72 percent.

provided to Filipiliteracy rate from

increase

achievement

in functional

rate to rise from

442

The Philippines

In the Updated •

beyond 2000: An economic

Plan 1996-1998, the targets

assessment

are:

For health and nutrition: increased life expectancy from 68.7 years in 1995 to 69.7 years in 1998; reduction, in infant mortality rate from 48.9 per 1,00 live .births in 1995 to 44.3 per 1,000 live births in 1998; increase

in per capita

energy intake

from

1,872 ki.localo-

ties in 1993 to 1,977 kilocalories in 1998; reduction in moderately and severely underweight preschool children from 8.4 percent

•

in 1993 to 5.9 percent

in 1998; and reduction

infants, women.

the elderly,

preschoolers,

of anemia

and pregnant

among

and lactating

For education: increased simple literacy rate from 95.8 percent in 1995 to 98 percent in 1998 and functional literacy rate from 83.9 percent in 1995 to 84.2 percent in 1998; increased elementary

and secondary.level

and 61.2 percent respectively; grades from

participation

in 1995 to 95.8 percent

rates

from

91.1 percent

and 65.8 percent

in 1998,

increased cohort survival rate for the elementary 67_5 in 1995 to 75.1 in 1998, and for secondary levels

from 75.9 percent in 1995 to 81.2 percent in 1998; improved achievement levels for elementary and secondary schools based. on the National Elementary Admission Test (NEAT) and National Secondary percent 1998.

Admission

Test (NSAT) from

in 1995 to 52.6 percent

45.6 percent

and 47.2 percent,

Public Investment Program for Health, and Basic Education Sectors

and 40.9

respectively

Nutrition

For the period 1994-1998, the Plan allocates 17.7 percent of the total public investment program resources of P643.8 billion for human development. and education Basic

The specific types of activities sectors include the following.

for the health,

nutrition

Educa_'on

The quality

of basic education

shall be improved

through

fine-

tuning of the basic education curriculum for better programming of subjects and topics, greater mastery of fundamental learning skills and rationalized fund allocation.; the strengthening ence and Technology, Math and English; fuller

of the teaching of Sciprovision of basic edu-

cational

of monitoring,

requirements;

and assessment

systems.

and the strengthening

feedback

Hand in hand with these developments

is the

Chapter 10:Herrin

443

upgrading of teachers' welfare through adequate financial compensation and an improved school-level management. Nonformal education (literacy and functional literacy activities) and alternative learning and delivery schemes (e.g., multigrade educational programs) shall be designed and provided to target areas, specifically to remote barangays. In the area of higher education and training, activities shall be implemented to further improve maritime and agricultural education and technology. In the area of manpower planning and training, government training institutions in youth and nonformal training, as well as school-based technical and vocational training shall be improved. Health, Nutrition and Family Planning Various heakh and disease control programs shall be expanded to strengthen preventive health care, including the monitoring of the prevalence and transmission of human immunodeficiency virus (HI'V) infection and dissemination of information on how its spread can be controlled. The Medicare Program will be expanded to cover the rest of the population. The National Drug Policy will also be implemented through advocacy and capability/institution building activities. Direct health and nutrition services for"specific urban poor population groups will be provided through grants 'to nongovernment organizations (NGOs) and local government units (LGUs). The access of target groups to family planning services will be sustained in partnership with NGOs and the private sector. The nutrition sector, on the other hand, shall provide technical and financial assistance to nutritionally depressed areas, provide promotive, preventive and curative health and nutrition services to severely and moderately undernourished preschool and school children; pro-. vide selected food subsidy to targeted population groups; establish local nutrition surveillance units; and provide nutrition interventions and self-sufficiency building to low-income/high-risk families in nutritionally depressed municipalities. Advocacy for health, nutrition and population and family planning programs will be conducted among legislators, policymakers, local chief executives, program managers and implementors. Capabilitybuilding activities for local implementors and workers will likewise be conducted. Lastly, health, nutrition and family planning/population data base will be improved and research and information systems for policymaking and planning will be further developed.

444

The Philippines

Sectoral

Plans

and

beyond

2000: An economic

assessment

Programs

Sectoral plans and programs elaborate on specific concerns contained in the Medium-Term Philippine Development Plan. These include concerns about among others.

children,

Philippine

women,

Plan of Action

The PPAC was adopted Proclamation Filipino

health,

for

education

Children

in January

and population,

(PPAC),

1993-2000

31, 1992 through

Presidential

the country's

vision for the

No. 855. The PPAC presents

Child in the Year 2000. It specifies

34 goals

in five areas

concerns, which are: (1) family care and alternative parental arrangements; (2) basic health and nutrition, welfare and social security and safe environment; (3) basic education, leisure, recreation and cultural activities; (4) protection of children and (5) fundamental civil rights. Phih'ppine 1995-2025

in especially

Plan for Gender-Respm2sive

difficult

Development

The PPGD is the latest in a series of government to give Filipino

women

circumstances;

(PPGD),

initiatives

a more active and participatory

meant

role in the de-

velopment process. It is the Philippine governments's 30-year perspective framework for pursuing full equality and development of women and men_ The PPGD takes

over the Philippine

•Development

Women, 1989-1992, and addressed the need 'to institute gies, programs and projects as well as the mechanisms

Plan for

policies, strateto ensure that

women participate on the basis of equality agents and as beneficiaries of development.

with men, both as change The PPGD also addressed

specific women's concerns such as violence prostitution, media and arts and culture.

against

Education

for All: Pldlippine

The Plan identified institutionalization

Plan

of Action,

four major development

of early childhood

women,

migration,

1991-2000

areas. These are (1)

and development

as a basic ser-

vice for all children; (2) universalization of quality primary education to address the persisting problems of low cohort survival rates and low achievement rates; (3) eradication cation and development.

of illiteracy;

and (4) continuing

edu-

Chapter 10:Herrin

445

Ten- Year Pubic Investment Plan for the Health Sector Based on the vision to attain Health for All by 2000 and Health in the Hands of the People by 2020, the DOH in 1993 declared guiding policies in the areas of primary health care, preventive and promotive health, people empowerment and participation, population managemerit, Philippine medicine, health care financing, partnership with organized groups, peace-building, and health systems management. In line with these policies, the DOH prepared the Ten-Year Public Investment Plan for the Heatth Sector, which was approved by the Investmerit Coordinating Committee of the National Economic and Development Authority (NEDA) on October 1994. The investment strategy for the central government was formulated in response to the need to (1) assure the sustainability of current national health programs such as the Expanded Program for Immunization (EPI), Control of Diarrheal Diseases (CDD), Control of Acute Respiratory Infection (CARD, and control of prevalent diseases particularly of the workforce, including tuberculosis and cardiovascular diseases, and (2) address the gaps in priority programs such as family planning, maternal care, nutrition and environmental health; (3) support the development of new institutional arrangements and capabilities under devolution; and (4) rationalize capital expenditures for health facilities, equipment and infrastructure necessary for the personal health care needs of the poor. The investment strategy proposes to mobilize additional resources in support of the following packages: (1) safe motherhood and women's health, (2) child survival and development; (3) control of prevalent diseases affecting the workforce; (4) health service capacity improvement; (5) safe water and healthy environment; and (6) national health insurance. Philippine Plan of Aca'on for Nutria'on (PPAN), 1993-1998 The PPAN serves as the springboard for the administration's goal to decrease the prevalence of malm_ :rition in the counu-y by employing two strategies, namely: (1) promotion of household food security; and (2) prevention, control, elimination of micronutrient malnutrition. Complementing these two strategies are five major impact programs: home and community food production; micronutrient supplementation and food fortification, credit assistance for livelihood, nutritional education, and food assistance.

446

The Philippines beyond 2000: An economic assessment

Social Reform Agenda (SRA) The government's goal of human development has two dimensions: economic growth and social reform. Social reform is seen as a continuing process that addresses the basic inequities in Filipino society through a coordinated social reform package. The SRA addresses the disadvantaged sectors' minimum basic needs (1) for survival: health and nutxition, water and sanitation; (2) for security: income security, shelter, peace and order; and (3) for empowernaent: basic education and literacy, and participation in governance. The government has set up two kinds of targets: (1) sectoral: farmers, fisherfolk, indigenous cultural communities, urban poor, workers especially in the informal sector, and other disadvantaged groups-women, persons with disabilities, youth and disadvantaged students, elderly, and victims of disasters--that cut across all sectors; and (2) geographical: the country's 20 poorest provinces and/or poverty packets. The social reform package recognizes that although most government programs and services are already designed to help improve 'the lives of the people, 'the specific acute needs of the marginalized sectors call for specific focus. These are translated into nine social reform flagship programs, namely (1) agricultural development for farmers and landless rural workers; (2) fisheries and aqnatic resources conservation, management and development for the fisherfolk; (3) protection of the ancestral domains for the indigenous cultural communities; (4) worker's welfare and protection for workers especially in the informal sector; (5) socialized housing for the urban poor; (6) comprehensive integrated delivery of social services for members of other disadvantaged groups consisting of disadvantaged families, women, children, youth, persons with disabilities, the elderly and victims of natural and man-made calamities; (7) institution_building and effective participa_ tion in governance for all sectors; (8) credit for all sectors; and (9) livelihood programs for all sectors. Recent Trends in Health, Nutrition and Basic Education Outcomes Health (Mortality) Recent estimates of mortality include the official estimates of infant mortality released by the National Statistical Coordination Board (NSCB 1993); life table estimates fer regions and provinces for 1970, 1980 and 1990 made by Flieger and Cabigon (1994), and the infant, child

Chapter 10: Herrin

and maternal

447

mortality

estimates

for 1995 by the NSCB, Technical

Work-

ing Group in Maternal and Child Mortality (1995). Data show that the infant mortality decline slowed down considerably during the 1980s even when the rate for 1990 was still relatively high compared to countries in the region with similar socioeconomic development such as Thailand (Figure 1). For example, for males, the infant mortality rate of 93.8 infant deaths per 1,000 live births in 1970 declined to 65.2 in 1980 and only to 59.9 in 1990. In fact, based on survey data, infant

mortality

the 1980s, most probably Figure

1. Infant

might

have risen a bit during

the middle

due to the effect of 'the econotnic

Mortality

crisis.

Rate.

110

I00 l'-_ ..................................................... 90 .............................................................................

i 70

......

_sT ih_£G; bix_dd 66 ..............................................

iiiii!!iiiii ..... iiiiiiiiiiii .....................

4°I_0 t;__' 1;_4't;6_' Jbd_s'_;7_;I;7__':;74' _;Td _;7_' t:)s0'i_s2"l;s4' I;_6' .,;ss' 1;9d' Sources: Cabigon (1990)and Flieger and Cabigon (1994) for estimates based on census data and NSCB (1993)for estimates based on sm-veydata.

After a decade of poor performance fant mortality is projected to decline from 1990 to 48.9 per 1,000 livebirths

in mortality reduction, in56.7 per 1,000 livebirths in

in 1995 (NSCB 1995)._ Child mortality

also projected to decline from 79.4 per 1,000 children under five in 1990 to 66.8 per 1,000 children under five in 1995. The infant and child mortality

rate by provinces

show

large

differentials.

In 1990, the top

five high naortality provinces had infant mortality rates that are twice as high as the five lowest mortality Drovinces (Table 1). The projection model was based on regression analysis of provincial-level socioeconomic indicators and provincial-level infant and child mortality estimated for 1990.

448

Table

The Philippines

1. Infant

Mortality

beyond 2000: An economic

Rate, Child Mortality

nal Mortality Rate National, City Level, 1990 and 1995.

assessment

Rate and Mater-

Regional,

Provincial

and

Rcg_on/Provillcc/City

infant Mortality ]_al;e.I 1990 1995

PJ-lJ.LIPPINES

56-7

48.9

79.6

66.8

209,(/

179.7

NATIONAL. CAPITAL REGION (NCR)

45.8

32.2

62.2

38.5

170.1

119.1

1st District, MM Manila City 2.nd District. MM Ouezon City 3rd District, M M C;.t[oocaln City 4th District. MM Pasay City

42.4 38,1 29.6 46.7 46.2 43.1 42,9

27.6 22,5 18,6 32.2 31,4 28,9 28.3

55.6 50.4 41.8 64.3 61.2 59.6 56,7

32.7 • 28,2 23.1 39.4 37,4 35.4 33.6

169.0 165.4 159.1 258.,'7 253,7 179.2 174,4

109.9 105.9 100.2 178.4 172.5 120.1 115,1

CO]ZD1LLE1;kA-CAR

63.0

54.9

90.3

76.9

221.6

192.8

Abra BengueE Bag_Iio CJty lfugao Kalirlga-Apayao MotmtaL_ Province

60,0 55.4 43.0 68.3 65,4 65.i

58.6 44.6 30.6 64.6 53,7 62.9

85.3 77.8 56,6 99.5 94.6 93,9

83.1 59.6 38,8 93.0 91.5 90.0

239,3 197.0 188.5 N8.8 N9.1 N7.5

234.5 159.6 133-8 236.4 241,6 240.1

I>@_GION1 - II,OCO5

55.6

45,7

78.J

61.4

196.3

161,0

Ilocos Not'Le Laoag City llocos Sur La tJt_ion Partgasirmn ])agupan City Saa Gin-los City

52,2 50.7 59.8 52,7 56,3 44.7 50.1

47,2 43.1 48.2 45,2 45.3 31,3 3e,.(_

72,3 69.4 84.9 73,2 79.2 60.1 68.3

63,8 58.2 65.6 60.5 60.7 40.8 48.6

195,3 188.8 207,7 225.8 183.8 180.3 181,9

175,8 160.5 168.2 194.2 147,0 126,2 132.8

REGION/1- CAGAYAN YA,I_LE'YREGION

61,7

53,7

88,I

74.6

219,3

190.8

Bal;ane,s Cagayan isabela Nueva Vizcaya QuilSno

68.3 60.8 57,0 58.7 70.6

56.2 57.4 52.2 51,5 58,2

99.6 80.1 80.6 83,2 103,4

78.4 80.8 72,1 70.7 82,3

227.1 N2.6 187.8 285.7 245.9

186.2 228.0 172.8 233.8 201.6

Region 1.11- CENTRAL LUZON (lit)

44,8

40.4

60.9

52.6

189.7

170,7

Batn;:tl_. Bulaca.n N,,_tevaEcija Cabat_am:.m Palayan City Sal?,,lose CiLy Pampanga Angeles City TarJac Zambaies OIongapt) City

48.6 43.9 47.2 45,4 47.3 46.5 41.9 38,8 44.8 51.3 41.2

42,6 34.8 44,4 37,7 40.2 38.6 36.7 29.1 , 44.0 45,0 30.9

66.7 59,0 64.3 60.1 62.4 61,1 55.9 50.6 60.3 70.6 54.0

56,4 43.1 59,2 50.0 53.2 50.8 46.4 35.7 58.6 60,3 40.2

232,2 188.7 211,3 204,5 210.4 208,7 143.7 136,4 266.9 234.4 184,0

204.3 149-1 198.6 169.7 178.8 173.2 126 .g 102.3 261.6 208.3 138.0

Child M.orta]ity R.at_ "_ 1990 1995

Maternal Motxa]_ty Rate _ 1990 1995

Chapter 10: Herrin

Table

449

1. continued... InLanLMorla/ity Rate 1

CltildMortality

Rate 2

1990

1995

J990

1995

1990

1995

REGION IV. SOUTHI&2RN TAGAt,OG 1IV)

53.2

44,9

73.8

60.0

165.1

138.9

AUt'OFLt l_:_tttngas t3_'_t_._tlgas City Lipa City Cavite

58,6 46.4 40,8 40.6 48,6

55.1 41.4 32.6 32.1 3.'3.8

82.5 02.8 56,0 54.9 66,4

7%0 54.0 44,0 42.6 44.7

331.5 156.3 155-1 153.8 156.7

311,6 139.1 J24.1 121,5 116.0

Cavite City Tagay_.ay City "fl.'ccc MaJ't h'es Laguni_ S_m PabJo City Marinduque Mhnc[om Occidental [VI.it/doroOtl.lt...nt;;tJ Pa].awan • Pueal_o Ptqncesa Quezon Luccna Ci ty IZiz_ Rocablon

42:8 42.2 43,9 49.5 43,5 54.8 59.b 58.5 61.1 52.7 51.9 47,7 47,1 60.4

29.1 28.7 31,2 37.2 30.5 53.1 56.3 54.5 57.(, 44.8 493 3&2 38.2 57.2

56.6 54,2 60.0 67,8 57_7 76.4 84.3 82.5 86.8 71.8 71,7 64.4 63.9 85.7

3,'3.4 33.9 38.8 aT.0 36,2 73,6 78,8 75.9 81.2 61.2 67.6 51.7 48.9 80.3

152.9 146.6 156,3 202.9 189,6 305.6 236.2 254.9 263.1 253.1 188.6 184.3 173.0 229.5

104,0 99.7 111,0 152,2 132.7 296.4 221.1 237.1 247.3 • 215.1 179,2 147_4 140,1 218.0

REGION V- FIICOt_

63.7

58.3

91.3

82.3

180.0

165,6

Albay Legaspi City Camarines Nort¢ Camatines Sur Iriga CitT Naga City Catanduane,'; Masbatc Sosogon

_58.7 51.1 66.7 57,0 53.4 49,6 65.2 662 62_7

53.8 41.9 61.6 55.7 48.1 42.2 60.1 64.3 59,4

82.8 70.4 96.7 79,9 73.0 66.6 93.3 95.6 89_7

74.8 57.9 88.0 78.1 65.8 56,2 85,3 92.5 84.0

173.4 171.3 237.7 152.8 147.8 150.7 206.3 222.7 186,9

159.5 140.5 218.7 148.6 133,0 128,1 189.8 216,0 177.6

REGION VI.- WESTERN VISAYAS

60.8

55.2

86.2

77.4

202.4

184.2

Akjan Antique Caplz R0xas City lloilo I1¢oiloCil y Negros Occklent,zd Bac o1¢__1 City Bago City Cadiz City La Car[otu City San Cm-los CiLy Silay City

64.9 66.0 64.1 46.1 53,1 42,5 56.8 43,5 50.5 52.7 51.4 49.8 52.5

60,4 59-] 57.0 36,9 49.6 33,2 52.i 33.5 41.9 44.3 42.7 40,3 44.1

93.2 95,2 92,0 65.2 73.6 55-5 79,6 56.9 70,1 73,1 70.9 682 73.0

86,1 83.6 80,4 52.3 68.1 43,4 72,1 43,9 58.3 61.5 59.0 55.4 61.4

225.3 250.3 215.1 208,1 191.2 186.5 196.7 192.4 193.3 194.6 194.4 192,6 195.6

209.5 222.8 191.4 166.5 177.8 143.5 181.0 148.2 160.4 163.5 161,4 156,0 164.3

REGION VI(- CENTRAL VISAYAS

55.2

47.3

77.1

64.0

183,9

158,2

Rcgion/Provhlcc/Ch

Maternal

Mortality Rate 3

450

The Philippines beyond 2000: An economic assessment

Table 1. continued... Imfra',lMortailty Ra_e j

Child MorLa]_ity'Rme z

Maternal Mortality Rate 3

Regloll/Pvovince/Cffy

1990

1995

1990

1995

1990

1995

Boho] Tagbilai_m City Cebu

94.0 51.3 46,3 35.6 42.8 42.0 34.2 43.5 59.8 52.6 56.8 46.2 802

53.9 41.0 43,8 26,7 35,5 32.8 25.7 35.7 54.2 42,l 47.1 35,6 59.3

79.3 62.7 63,0 46.0 57.8 55.1 44,4 58.0 84,7 66.8 75,9 57,7 85,5

74.9 50.3 58,3 34£ 48.0 43.0 33.4 47.7 79.3 53,6 63.2 44,5 84,0

208.4 204.6 177.0 159.3 168,1 167.7 169.6 176,1 I78.7 176£ 171.9 170,3 210,9

208.4 163.7 168.2 119.5 139.5 130.8 1.27.2 144.4 162.6 3.41.3 142.7 131.1 206.7

REGION VIr2[-EASTE,KN VISAYAS

76,3

64,3

113.5

92.6

225.9

189.8

Ezx_terrl Sfffll_.t,tLeyte Ormoc City Tac obact City Somh_'n Lcyte NorthcnT_ Samar Samar Caibayog City

79,7 63,6 52.5 51.3 64.4 79.1 80.5 59.0

65,8 57,8 43.6 42.1 63.0 86.5 67,1 39,8

119.7 91.0 70.7 68.6 92.4 118,4 121.1 79.0

95.1 81,7 58,9 56.4 90.3 96.1 97.4 58,4

N6.2 221,4 215,5 208.7 258.2 220,3 305.7 281..3

204.4 201.5 178.9 171,1 253.0 .185.i 253.7 202,5

ILEGION IX - WESTERN MINDANAO

63,6

58.6

9.1.4

82.8

217.7

200.3

IMsEan Zamboaftga del Notre Dapitan City Dlpolog Cir.9, Za mbc_anga de[ Suc Pagadian Cib' Zamboanga City

68.5 87,6 47,4 48,2 60. I 47.9 43.6

60.5 58,8 36,5 37.6 56.0 40.7 34.9

99,5 98.0 73.8 73.2 85,5 69.6 56.4

86,2 83.1 57.1 56.8 78.6 99.3 45.2

266,0 9,242.3 2-94.6 239,3 205.4 200.8 188.0

234.1 210.8 172.9 186,7 t9J,0 170.6 150.4

,REGION X _ NOP,,_U_iERN MI[NDANAO

5%5

53.7

80,6

74,6

239.3

224,9

Agusan del ,Nortc Butuan C.il,'/ Agusmn,cle].Sur BuMdnol:t Caralguin MJsarnJs Occidental Oroqujem City Ozamis City Tangub City Misamis O15enIaI

63.8 45,9 66.6 56,9 61,9 59,1 45,5 44.5 47.5 52.3

57.5 36.7 59.0 55.4 54,4 53.1 37,8 36.5 39,4 48.2

91,4 65.0 96.2 79.8 88,0 83.3 69,4 68.0 71,5 72.3

81.3 52.2 83,5 77.5 75.5 73.7 57.8 55.9 59,5 65,3

268.4 251,3 290,7 234.1 263.6 N6.5 0,243.4 N0,8 245.1 192,9

241,6 201.0 258.7 227. ] 232.0 221.9 202.0 197.5 203.4 177.5

Cag_5_ande Oro Gingoog CiLy SurlgaO del Notre Stn,_gao City

42.0 44.7 57.1 44,3

33.8 36,7 56.9 36.3

54.0 61.1 80.2 61.8

43,3 50.2 79.9 50,8

175.2 190.3 N4,6 237.7

1402 156.1, 244,6 194.9

REGION X1- SOUTHERN MI .NI2_NAO

55.8

51.8

78.0

71-6

239.3

224.9

Cebu

CJ/5,

D&,'lao City Lapu Lapu Ch:y • Mandaue Cit,y "fbledo C ix,,, Negros Oriental Bai__City Can aon City .Dumaguctc Cky SiquJjor

Chapter

10: Herrin

451

Table

1. continued... hxgLu/l: X'loL'[::IIII'_'['_:.l[._'

Child

Moru.xl'[ty I_.akc 2

Maternal

Murtaiity

Rate

R e_-zh-m/P t'()vi r)cc/C it, '

.t990

_99_

1990

199,5

19_)0

1995

D:-tv_.toold N_)_'ce Davao dcl Sat

64,8 50,8

56.9 47.7

92,8 69.8

80,2 64.5

186.7 158.1

164,3 148.6

Davao City Davzto OlSental

39.1 59.2

29.3 58.6

:54.1 83,6

40.7 82.8

146.2 166.9

109.7 165.2

South Cotabato Genera] $antus

55.4 43.2

51,2 33,3

77.4 57,2

70.5 44,1

2.14.1 210,0

197.0 161.7

Sutigao

de1 Sur

66.1

59,5

94,9

84,6

240.0

216,0

I?,EGI.ON Nil - CI'N'I'RAL MI.NDANAO

56,5

53.5

79. l

74,0

I97.1

187.3

.Lmao

d¢l Notre

59. I

53.7

83.5

74.8

225,1

204.8

lligan City .No_h Cotabato

45,4 53,0

37.2 52,0

68.6 73.4

56.4 71.7

168.5 187-5

138.2 164.2

Stdtan

58.5

58,0

82.4

81.7

269.7

267.0

44.0

36.1

60,9

50.0

182,_

149.9

C;ty

45.7

37.9

65.3

54.3

192,5

_59.8

?,.I_,MM - M USLIM MINIDANAO IkEG ION

74. [

63.4

]09.7

91,1

376.8

320.3

tZtll_t(I de] Sur

70,7

69.6

103.6

101.8

349,5

346,0

MaguindaP_ao Sultl

73.5 76.8

59.8 64.1

106.7 114.2

85.0 92.1

343.8 402.0

278.3 333.7

Tawi-'l_awi

78.9

00,2

118.1

85.5

393,6

299.1

Kudar_{

Cotabato Mamwi

City

Infant deaths per 1,000 livebirths. zNumber of deaths among children less than 5 years per 1,000 children less than 5 years of age. aNumber of maternal deaths per 100,000livebirths. Source: NSCB, 1995,Technical Working Group on Maternal and Child Mm_ality.

Nutrition Recent

data on nutrition

include

the 1987 and 1993 National

Nu-

trition Surveys conducted by the Food and Nutrition Research Institute (FNRI), and the 1989-90, 1992 and 1996 updates. The latter surveys were limited

to anthropomenic

old and below

but consisted

measurements

among

of larger

sizes than

sample

children

10 years

the regular

national nutrition surveys. The regular surveys include not only anthropometric measurements, but also food consumption and measurement of micronutrient deficiencies. Nutritional

Status

Some progress children

between

of Children

has been achieved in reducing

malnutrition

1987 and 1993, but the rates still remain high.

among More-

over, there exists large variations among regions. Using the 1985 Philippine Reference, the prevalence rate for underweight children aged 06 declined from 9.9 percent in 1987 to 8.4 percent in 1993; for stunted

452

The Philippines

beyond 2000: An economic

assessment

children, this declined from 8.2 percent to 5.6 percent in the same period. There was no statistically significant change in the prevalence rate for wasted children, which stood at 6.2 percent in 1993 (Table 2). Large percent

regional differentials existed in 1993 (Table 3). Among children 7-10 years old, the 1993 data showed were

underweight,

5.6 percent

were stunted,

that 7.0

and 7.7 percent

were wasting (Table 4). There was no comparable data for 1987. Large regional variations also exist with respect to 'the three indicators. Recent data for 1996 show declines in the prevalence of underweight and stunted but not for wasted children from 198%90 and 1996 for both preschoolers and school-age children. The data show that among

children

0-5 years

from 9.8 percent stunted declined The prevalence

old, the prevalence

of underweight

declined

in 1989-90 to 8.4 percent in 1996; the prevalence of from 6.5 percent in 1989-90 to 5.1 percent in 1993. of wasted

children

was not significantly

different

in the

two periods, and in 1996, this stood at 4.6 percent (Tables 5 and 6). Among children 6-10 years old, the prevalence of underweight declined from 8.5 percent in 1989-90 to 7.4 percent in 1996; the prevalence of stunted children declined from 6.5 percent in 1989-90 to 5.5 percent

in 1996; and the prevalence

significantly

during

the period

of wasted

at 6.6 percent

children

did not change

(Tables 5 and 6). The 1996

survey is die first survey that obtained data at the provincial differentials by provinces are noted (Table 7). Micronutrient

Det_ciencies

Mi.cronutrient

deficiencies,

particularly

level. Large

iron and iodine,

remain

high. among children, and among pregnant and lactating women. The prevalence of iron deficiency anemia declined from 37.2 percent in 1987 to 28.9 percent in 1993 among the general population, but the prevalence remained high in 1993, especially among children aged six months to one year (49.2 percent) and among pregnant tating (43.0 percent) women (Table 8). There has been an increase

(43.6 percent)

and lac-

in. the prevalence

of iodine deficiency

disorders (goiter) among the population 7 years percent in 1987 to 6.9 percent in 1993, affecting

and above from 3.5 mostly females, and

particularly women. •

pregnant

(around

25 .percent)

and lactating

(21 percent)

Table

2. Percentage

of Malnourished Underweight 1993

1987 Philippines All urban areas Metro Manila Other urban

Children

Aged

0-6 Years

Old,

1987

and

1993 National

Nutrition

Change

1987

Stunted 1993

Change

1987

Wasted 1993

Change

Surveys.

Number of children 1987 1993

9.9

8.4

(1.5)*

8.2

5.6

(2,6)**

5.5

6.2

0.7

3334

5669

9.8

(2.6)**

8.3

5.6

5.3 6.9 5.6

1697

9.1

(3.3) *'_ (3.6)**

0.2

(2.9)**

5.0 4.1 5.5

5.1

10.1

7.2 9.0 7.2

0.0

i459

3113 1254 253I

9.8

9.5

8.1

6.0

(2.1)**

5.8

7.0

1.2

1636

2556

(a)

Rural

( ) = decrease * = significant at 5 percent ** = significant at 1 percent (a) = based on a special survey conducted Source: FNRI, Fourth National Table 5.

Nutrition

simultaneously

with the Fourth National Nutrition

Survey, Philippines,

1993 as reported

Survey

in Viilavieja, C. M., et. al., 1994, Part B: Anthropometric

Survey,

4_ %/1

454

The Philippines

Table

3. Percentage

beyond

2000:

of Malnourished

By Region,

Childen

Underweight

0-6 Years

Smuted

Wasmd

Philippines

8.4

5.6

6.2

Metro Manila

9.0

4.1

6,9

Iloeos CAR

9.8 3.8

3.5 3,1

4.7 5.5

Cagayan Valley Central Luzon

6.1 6.4

3.2 6.0

4.3 5.9

Southern Bicol

9.3 1,1.9

5.5 5.9

6,3 7.8

Wes Lern Visayas Cerm-aI Visayas

10.0 4.8

7.9 4.3

8.2 6.4

Eas_er_ Visayas Western M.inda'rlao Northern Mindanao Southern Mindanao

13.0 7.9 9.7 6.8

7.7 4.4 7.0 5.9

9.7 5.0 6.0 4.4

Cen tra] Mindanao ARM.M

7.5 11.0

4.1 12.0

4.8 9.5

Tagalog

Source: FNRI, Fourth National Nutrition Survey, Villavieja, C. M., et al., 1994, Part B: Anthropometric

Basic

(simple

pation,

of the performance

and

survival

functional) and

progress

has

progress

in improving

been

Data

from

Media

Survey

percent

write

Philippines, 1993, as reported Survey, Table 12.

and

of basic such

achievement. made

1994.

Simple

and

functional

areas.

There

are

in fact,

female

literacy

show

that

in 1994.

as partici-

that

levels,

while there

Literacy,

simple

some

little

73 percent

literacy

rates

tend

to be slightly

secondary

participation

and

rose

from

(ability

in 1989 to 84 percent

literacy

are lower

literacy

Education

literacy

Functional

from

no substantial

rates

literacy

1994 Functional

rose

urban

show

literacy

outcomes.

(FLEMMS)

compute)

include

outcomes

below

in increasing

the 1989 and

education

schooling

Data

schooling

in 1989 to 95 percent

read,

Old,

Education

Indicators

Mass

Aged

assessment

1993.

Region

rate

An economic

in rural

gap between higher

than

the

sexes,

males

(Table

9). Elementary cent

and

64 percent,

and

respectively

rates

in SY 1996-1997.

stood

at 92 per-

However,

cohort

e Table

4: Percentage

of Malnourished

Children

Underweight

Aged

7-I0

Years

Old,

National

Nutrition

Survey

1993.

Number

Stunted

Wasted

children

7.0

5.6

7.7

2531

7.7

4.1

9.5

1351

7.5 7.8

1.8 5.0

12.0 8.5

203 1148

Rural

6.4

6.8

6.3

1180

Source: FNRI, Fourth National Nutrition Survey, Table 10.

Survey, Philippines,

Philippines AI1 urban Metro Other

areas Manila urban

(a)

1993 as reported

in Villavieja, C. M., et al., 1994, Part B: Anthropometric

456

The Philippines

Table

5. Trends

in the

Wasted 1989-90

beyond

Prevalence

2000." An economic

Children to 1996.

Aged

assessment

of Underweight, 0-5 and

Stunted

6-10 Years

Percent Prevalm_ce

and

Old, Philippines,

1989-90

1992

1993

Difference 1996 vs. 1996 vs. 1996 1989-90 1993

0 - 5 yem's old UrJderweight Stun_:ed Wasted

9,8 6,5 4,6

10.0 6,4 5.6

8.2 5.4 5.9

8.4 5.1 4.6

-1.4 ** -1A ** 0.0

0.2 ns -0.3 ns -1.3 _'_

6 - 1(3years old Underweight Stunted Wasted

8,5 6,5 6.9

9.4 6.5 7.4

7.6 5.7 7.8

7.4 5.5 6.6

-1.1 _* -1.0 :'_'_ -0.3 ns

-0.2 ns -0.2 ns -1.2 *

Nun-itional status

• * Significa'at at 0.(31level. • Significant at 0.05 level. Source: FNRI, 1996 Updating of Nutritional Level, FNRI Special Bulletin, July 1997.

Table

6. Trends

in the

Wasted

Prevalence

Children

Philippines,

Status of Filipino Children at the Provincial

of Underweight,

Aged

1989-90

0-5

1989-90 Nutritional

status

0 - 5 years

okl

Old,

By Sex:

1992

1993

1996

Boys

Gh'ls

Boys

Girls

Boys

GMs

9.7 7,7 4,9

9.7 5.3 4.3

10,5 8.2 ¢>,3

9,5 4.7 5.0

7.7 6,7 6.5

8.7 4.2 5.2

8.5 6.0 5,0

8,3 4.1 4,4

8.9 6.1 7.5

8.2 6.9 6.1

10.2 6.0 8,6

8,7 7.0 6,2

8.4 ,5,3 9.8

6,7 6.2 g.6

8.3 5.3 7,7

6.5 5.7 5,4

old

Source: FNRI, D96 Updating of Nutritional Level, FNRI Special Bulletin, July 1997.

survival

rates

remained

for secondary The

based

Years

(In percent).

Girls

U rider weight. St'tinted Wasted

cent

6-10

and

Boys

Underw_'ight Stumed WastLed 6 - ]() years

and

to 1996

Stunted

respectively,

at 68 percent

education

achievement

on the NEAT

low

and

in 1995.

Status of Filipino Children at the Provincial

for elementary

in SY 1996-1997

(Tables

levels

for

elementary

and

NSAT

were

only 45.6 percent

recent

reports

and

10 and secondary and 40.9

of the results

69 per-

11). schools percent,

of NEAT

and

Chapter

10: Herrin

459

Table

8. Prevalence

of Anemia,

1987

and

1993.

1.987

1993

Decrease

6 rues to < i year 1 - 6 years 7 - 12 years 13 - 19 years, male 13 - 19 years, female (a)

70.4 38.7 41.2 26.3 36.9

49.2 26.7 30.8 20.0 23.9

21.2* 12.0" 10.4" 6.3* 13.0"

20 - 59 yem._, male 20 - 59 years, fcmale (a) 60 ye:al'S and above Pregnant

21.3 38.9 46.9 45.2

12.7 24.0 45.6 43.6

8.6* 14.9" 1.3 1.6

Lactating

50.6

43.0

7.6 _

Total

37.2

28.9

8.3*

'_'Excluding pregnant and lactating women. ' Statistically significant. Source: FNRI, Fourth National Nutrition Sul-vey, Philippines, Kuizon, et al_ (1994), Part D: Biochemical Nutrition Survey.

Table

Simple

Literacy

Household gion,

Rate

and

Population

Functional 10-64

Years

1993 as reported

in M. D.

Literacy

of the

Old,

By Sex

and

Re-

1994. Simple Literacy

Region

Rate

Functional

Litccacy

Both Sexes

Male

Female

Both Sexes

Male,.

Female

Philippines

95.0

94.6

95.5

83.8

81.7

85.9

.NCP,

99.2

99..I

99.2

92.4

91-8

93.0

CAP, l]ocos

91,3 97.3

91,8 97. I

90,7 97.6

78-6 86.4

76.8 85.t_

80.5 87.3

Cagayan Valley Central Luzon

94.7 97.4

94.7 97,1

94.7 97.7

86.6 87-3

86.6 86.1

86.6 88.5

Southcrn BJcol

97.5 96.1

97.5 95-7

97.5 96-5

88.0 82.8

86,3 81-3

89,8 84.5

Wcsterx_ Visayas

93,6

92,1

95,2

80,9

77,3

84.8

Central Visayas Eastern Visayas Weslccn MIHcluHao Notthern Mirldmam?

94.9 92.6 90.7 95,6

94.7 90.4 90,5 94,7

95.1 95,0 90,9 90,6

80.9 79.7 75.4 83,4

78,5 75,7 72.6 79.3

83.2 74.2 78-I 87,4

St)tll]l_:'['ll

92.9

_ 2 -_

93.3

79.4

75.6

83.2

91.7 73.8

90.9 75.9

92 5 71.8

77,4 01,2

74.2 03.2

80.7 59. I

Literacy, Education

and Mass

C;ellL['gtl

ARM M

't2tgalog

MiBtl_tll;tll Mir_dmmc,

Source: NSO, 1966, Highlights of the 1994 Functional Media Survey (FLEMMS) Results.

460

The Philippines

beyond

Table

10. Participation Rate in Public Schools, SY 1996-1997o

2000." An economic

Elementary

_-lefIltJl_LLtl-)/"

assessment

and Secondary SG CO1_ cla_." ).'

Populatio,a (7-[2)

Enrolmt:nt 17-121

NOR CAR

1120715 193103

963551 168841

86,0 87.4

694909 154828

505457 68711

72.7 44.4

A RMM

310897

257657

82.9

206807

149432

72.3

[locos Cagayan

551699 388530

535598 338187

97.1 87,0

358805 245160

310742 190943

86.6 77,9

Region/Division

ValJey

Central

Luzoa

PopuJaI.Joll Enrulmenr (13-I61 (ZI3-16]

Rare (%)

Rate (%)

973640

958743

98.5

(_22320

577835

92,9

TagaJog

1394868

1327517

95.2

880305

591.814

67.2

Visayas

693501 880398

613958 771304

88.5 87,6

436017 563121

207259 332538

47.5 59.1

CenLral Visayas

746856

7!3509

95.5

465745

225362

48.4

I_,astern Visayas Western Mindanao

527213 435964

476075 392528

90.3 90,0

331490 270015

115942 88999

35,0 33.0

Soul;bern Bicol Western

Nordlerrl

MJndanao

385142

355235

92.2

233970

187932

80.3

Soulhern

M h_danao

706729

063827

93.9

434394

217368

50,0

374257

337004

91,1.2

22N,89

119486

52,5

310527

2_13444

92.7

196384

152034

77.4

10000039

916%38

91.7

6321759

4041854

63.9

Central

._vl hldanuc_

CalLtga

TOTAL

Source: DECS report during the Budget Hearing, 1997.

Table

11. Cohort

Survival

Rate

by Level,

SY 1996-1997.

JSlonlt:nl::ry Gr. 1 Etu'ohnenI

GI'.

Sccollcta_'v

VI "['_ll£oh'no_tl

FiPsl

"_{,tzlr

Four'th

Ycal"

Re_ion/Divl._lon

8Y 1991-92

$Y 1991-92

CSR 1%1

8Y 199.3-94

1996-97

CSIR.%

NCR GAla,ARMM Ilocus Cu!-,av_Ln V.lllu,v Cunl:vii1,u"/.¢) [1 Bicol _\i?_tur-nVi'.<ayas Ccnlral \/i,_aLya,_ r-2asternVisab_ls W,:stmn Mindan_Lu Norlherrt Mindsnao Soulhc]m Mhlclanao CelltD:llM ilIcl;£u luIil Caruga

162704 41-100 107715 106808 80612 120872 265775 152542 194951 152784 118153 110202 85182 1.t8179 86300 72764

137126 20483 38999 93758 56090 148789 205472 1041-17 12392-/ 101105 69444 56771 53113 93798 50540 4.5996

84.3 64.0 36.2 87.8 70,3 82.3 77,3 118.3 63,6 66.2 58.8 51,8 62.4 63,3 58,6 63.2

111753 18318 14297 66532 39652 90138 I29184 72271 10721I 60638 53280 43483 33137 65529 37046 30585

82169 [2571 10321 5,1642 29601 64676 91868 46990 6553.-I 44301 33429 29457 21010 :12593 22901 21468

73.5 68.6 72.2 82.1 74.7 71.8 71.1 65.0 61.1 73.1 62,7 67.7 63,4 65,0 61.8 70,2

'lblal

2068949

14{16154

O8.0

973054

673552

69.2

75 percent

and

.-qou [hcl'n

"IkL_tlo,_

Source: DECS report during the Budget Hearing, 1997.

NSAT show

that

the percentage

above in four subject

of examinees

areas rose slightly

during

rating

the 1994-1996 period.

Chapter 10: Herrin

461

Macroeconomlc Sectoral

Trends,

Polieies and Macroeconomic The recent

are associated

trends

Public

Sector

Expenditure

Priorities

and

Programs Trends in human

resource

indicators

in part with the overall performance

just described

of the economy

and

with. the impacts (or lack thereof) of sectoral policies and programs. Past analyses suggest that underlying the limited progress in the health, nutrition and. education sectors in the 1980s is the poor performance of the economy,

side by side with the persisting

tion of income. The poor economic is reflected in continued high rates capita

incomes

and high poverty

highly unequal

distribu-

performance over the last 20 years of poverty. The slow growth in per rates,

in turn,

meant

a correspond-

ingly slow growth in the capacity of both the government and households to expand human resources. Moreover, the persisting income inequality education

also meant services.

inequalities

The more recent trends,

which

period

are expected

in access

to health,

nutrition

1992-96 saw more favorable

to have some

positive

and

economic

impact

on human

resource development trends. From a GNP growth rate of 0.5 percent in 1991, the economy grew to 6.8 percent in 1996. Other macroeconomic indicators also showed favorable trends_ The unemployment rate, which was 10.5 percent in 1991 declined to 8.6 percent in 1996. Moreover, the inflation rate, which was 18.7 percent in 1991 declined to 8.4 percent in 1996. This favorable

economic

performance

since 1992 has contributed

from 39.9 percent

in 1991 to 35.5 percent

to the reduction

in poverty

1994. However,

the poverty rate is still high, and it is much

worse in the

rural (47.1 percent) than in the urban area (24.2 percent) in 1994. There also exist large poverty differentials across regions and provinces. These constrain faster improvement in the overall levels of health, nutrition and educational outcomes. Expenditures for Human Development National Government Spending An analysis of the pattern the recent 1997 Philippine Human 1997), revealed

that the share

in total government

spending

Priorities

of government spending reported in Development Report (HDN and UNDP

of human

development

was 10 percent

priority

on the average

concerns during

the

period 1987-94. This level of spending is only half the norm of 20 percent and slightly lower than the average for a sample of 25 countries. Moreover,

taking

inflation

and population

change

into account,

the

462

The Philippines

per capita

human

priority

beyond 2000: An economic

expenditures

assessment

in 1985 prices stood at P253 in

1994. This is lower than the peak level of P285 in 1989. The human development priority ratio measures the total government expenditures on human priority concerns to total spending or GNP. Human development priority concerns include basic education, basic health care, and low cost water supply. Basic education in turn includes

education

from

elementary

levels to high school

while basic

health care includes primary health care, disease control, maternal and child health, reproductive health including family planning, nutrition supplementation Human _nder

and fortification, Development Devolution

and basic curative

Priority

The share of local government

heakh

services.

Expenditures spending

in total government

ex-

penditure stood at seven percent in 1985-91. In 1992-94 after devolution, LGU spending rose to 12.6 percent of total government spending or 2.7 percent

of GNP. Because

after devolution, the increased by internal revenue allotment ernment. rose

local revenues

did not rise significantly

levels of LGU spending was supported (IRA) transfers from the national gov-

In 'terms of human development priority from 4.3 percent in 1991 to 10.3 percent

ratio for provinces, in 1994. However,

this this

ratio falls short of the norm of 20 percent. Moreover, some 19 provinces have lower ratio in 1994 than in 1991, indicating a shift away from human development spending. Like the national government, there is much room for improving expenditures for human development by LGUs in general,

and among

certain

LGUs in particular.

The composition of spending have also changed with devolution, according to the HDN and UNDP (1997) report. In general, LGUs have underspent on health and social welfare relative to levels prevailing prior to devolution. However, LGUs spent more on education in 1994 relative to levels prior to devolution. This might be partly due to the existence of the Special Education Fund (SEF), which is an additional levy on real property

earmarked

for the education

sector.

Health Prior to 1992, a number stituted

(Herrin

1990). Foremost

of health among

sector reforms these

have been. in-

is the Generics

Act of

1988, which is part of the National Drugs Policy. The Act provided for the use of generic terminology in the importation, manufacture, distri-

Chapter 10:Herrin

463

bution, marketing, advertising and promotion, prescription and dispensation of essential drugs. It is expected that this policy will help control the cost of essential drugs (a major component of the total cost of health care) by giving consumers greater choice in the purchase of drugs. Two major developments in the health field during the 1992-96 period are the devolution of health services to local governments and the passage of the National Health Insurance Act in 1995. The former has far-reaching impacts on the delivery of health services while the latter has yet to show visible impacts. Devolution of Health Services In 1991, the Local Government Code, which devolves substantial political and administrative authorities to local government units, was enacted. In particular, the Code devolves to the LGUs the responsibility for the delivery of basic services, which include the following: (1) health (field health and hospital services and other tertiary services); (2) social services (social welfare services); (3) environment (community-based forest products); (4) agriculture (agricultural extension and on-site research); (5) public works (funded by local funds); (6) education (school building programs); (7) tourism (facilities, promotion and development); (8) telecommunications services and housing projects (for provinces and cities); and (9) other services such as investment support (Brilliantes 1997). The Code also devolved to LGUs the responsibility for the enforcement of certain regulatory powers such as the inspection of food products and quarantine. The Code provides the legal and institutional infrastructure for the participation of civil society in local governance. More specifically, it allocates to NGOs and people's organization (POs) specific seats in local special bodies mandatory. These special bodies include the local health board and the local school board. The Code increased the financial resources available to LGUs. This was done by broadening their taxing powers, providing them with a specific share from the national wealth exploited in their area, such as mining, fishery and forestry charges, and increasing their share from the national taxes or the IRA, from a previously low of 11percent to as much as 40 percent. A number of issues and problems have surfaced during the implementation of the Code. These include concerns regarding financial support, participation of the NGOs, and problems arising with the

464

transfer lows: •

The Philippines

of personnel. Concerns

beyond 2000: An economic

As described

by Legaspi

regarding financial

support°

assessment

(1995), these

are as fol-

The LGUs have

been

ex-

pecting that the amount for the sustenance and maintenance of the devolved services and functions would be more than the cost of personal barely fected

services.

Unfor'mnately,

covered the cost of personal many of the municipalities,

the amount

not as stable

as that of city governments.

the transfer

of the hospitals

for the revisions

transferred

services. This situation afwhose financial position is

has been

Among

the provinces,

an added burden.

in their tax rates, fees and charges

Except

as mandated

by the Code, most LGUs have not fully used alternative financial mechanisms availment of credit facilities, build-operate-transfer (BOT) scheme, and bond flotation to generate additional resources. °

Participation of NGOs. In some LGUs, the accreditation has been a problem because of very stiff requirements. mum required has not been

number of NGOs in the Local Development met due to the few number of accredited

Local government remain

of NGOs The mini-

officials,

particularly

wary of the participation

Council NGOs.

the local chief executives

of NGOs in local special

of the NGOs' motives

bodies.

They seem

to be suspicious

when their formedtheir

political opponents who lost in their candidacies own NGOs and have remained visible and influen-

tial in local development activities. Problems arising with the transfer of personnel. ries of devolved the local level,

especially

For one, the sala-

personnel are higher than their counterparts at Demoralization among the ranks has been re-

ported but this seems to exist even more among the devolved personnel. Traveling allowances have been reduced as these are now tied with the financial unit. In addition to monetary

capability of the local government incentives, the devolved personnel

have viewed

as a loss of better

their

transfer

career growth and advancement. pervisory positions are so limited or even years, for some high-ranking Thus, opportunities for promotions

opportunities

for

At the local level, higher susuch that it will take some time, positions to become become nil.

vacant.

In addition to the above problems, there has been the resistance of certain devolved agencies to devolution (mostly the Department of

Chapter 10: Herrin

Health

465

[DOH]) and the subsequent

moves

by some

members

of Con-

gress to recentralize the health sector (the Senate Bill 1679, for example, provided for the reversion of supervision and control over devolved hospitals to DOH.) Two surveys conducted by the DOH in 1994 and another in 1995 indicate that most of the devolved personnel would like to move back to the national government. Currently, several hospitals have been slated for renationalization_ Furthermore, there are at least 50 bills in the House of Representatives creating rural health units (RHUs) and hospitals which, according to Gaffud (1997) should actually be within the jurisdiction of local governments already. As Gaffud notes, Congress may be encroaching on the authority of LGUs over devolved functions. While dressed

a number

and innovative

of transition responses

problems

of LGUs have been ad-

to these problems

have been made,

several problems persist that, unless adeqnately resolved, could limit LGUs' capacity to promote human resource formation. The problems and the

needed

(Legaspi

1995; Brilliantes

1997; Gaffud

include

the following

1997):

assistance

in helping

pacity to explore nancial resources;

alternative

schemes

Management.

There

is a need

those

with limited

for raising

for improved

ca-

additional

management

ficapa-

bility, particularly in the management of devolved hospitals as well as local water and sanitation projects; Personnel. There is a need to professionalize local personnel administration such as plotting the career path of local personnel, mandatory

local human and optional

resource

development,

positions,

among

and reexamining

others;

Participation of NGOs and POs. There is a need for greater participation of NGOs and POs in local special bodies in the spirit of trust and cooperation, Code; and

resolution

for technical

effecting .

to their

Financial Capacity. in addition to resolving the issue of equitable distribution of the internal revenue allocations (IRA), there is a need

approach

as mandated

by the Local

Government

Intergovernmental Cooperation. There is a need to develop alternative modes of intergovernmental cooperation to deal with issues of service

delivery

and monitoring

tional boundaries and to consolidate advocacy and social mobilization.

that cuts across jurisdicand strengthen

efforts

466

The Philippines beyond 2000: An economic assessment The National

Health Insurance

Act of 1995

The National Health Insurance Act of 1995 provided for universal health insurance coverage. Prior to this, the compulsory health insurance was provided by the Medicare Program, which covered only from 40 to 50 percent of the wage and salaried workers in 1993. Studies showed that the premium contribution structure was regressive: the second poorest group subsidized the poorest. The Medicare benefits (which are limited to hospitalization costs) had a low (52 percent) support value in 1993. While the support value was low and declining over the years, Medicare was accumulating large reserves. Health care providers were compensated on the basis of fees up to reimbursement ceilings, but were allowed to charge patients beyond the reimbursement ceilings. Separate funds were maintained for government workers at the Government Securities and Insurance System (GSIS) and private sector workers at the Social Security System (SSS). • A recent review of the Act (Solon 1997) observed that it "represents an opportunity to reform Medicare but does not state a particular approach to address Medicare's weaknesses." In. particular, Solon notes the following: "Financing sources were identified to support premium subsidies to low-income beneficiaries, but specific mechanisms for enrolling those outside the wage and salaried sector were not identified... The law provided that the specification of program benefits is budget driven. But for a given budget, a number of alternative packages of benefits can be specified. The law has delegated the responsibility of choosing from a set of feasible ahernatives to the implementing agency. An important issue in this regard concerns whether benefits provide first-peso coverage or address catastrophic insurance needs... The new law recognizes that progressive premium contribution schemes are desirable but does not present any specific structure. It only provided for a contribution ceiling expressed as a percentage of total family income.._ As far as provider compensation is concerned, the new law allows for a wide range of payment systems_from global budgets to fee-based reimbursement schemes. It even expanded the set of providers eligible to provide in-

Chapter 10: Herrin

surance

467

benefits

including

HMOs and community-based

organizations." The law created

the Philippine

Health

Insurance

Corporation

(PHIC) to formulate the implementing rules and regulations and to manage the health insurance program. To date little progress has been made with respect to expanding the coverage of health insurance beyond the membership

of the former

main problem

Medicare,

particularly

is that the extent to which

among

it can subsidize

the poor.

The

the premium

payments of the poor depends on the budget provided for the purpose, and this has not been forthcoming at a level to make significant impact. In sum, while the Act has noble objectives in reaching the poor by subsidizing premium payments of indigents, lack of funding hampered widespread implementation of the law.

has

Nutrition Efforts

toward

the goal of hnproving

the nutritional

status of the

population received a boost in 1974 with the issuance of Presidential Decree No. 491 known as the Nutrition Act of the Philippines, which declared nutrition provision as a priority concern of the government. The decree also created the National Nutrition Council to "formulate an integrated national program on nutrition; supervise, coordinate evaluate the implementation of the integrated Philippine Food Nutrition

Program;

of all agencies

and coordinate

and instrumentalities

and integrate

policies

of the government

and and

and programs charged

with

the prosecution of existing laws, policies, rules and regulations concerning nutrition." While the main thrust of earlier and current national nutrition programs was the implementation of specifically designed direct nutrition intervention programs, it was, and still is, clearly recognized that economic and sectoral policies and programs are critical in promoting nutritional well being in the long-run. In 1993, the Philippine Plan of Action

for Nutrition

(Medium-

Term Philippine Food and Nutrition Plan, 1993-1998) was adopted "as the country's blueprint for achieving nutritional adequacy for all and as an important

element

for international

competitiveness,

people

em-

powerment and human development" (NNC 1993). The plan employs two strategies: promotion of food security; and prevention, control, and elimination of micronutrient malnutrition.

468

The Philippines beyond 2000: A.n economic assessment

Along these two strategies, five major impact programs will be implemented. These are food assistance, micronutrient supplementation and fortification, growth monitoring and promotion and nutrition education, home and community food production, and credit assistance for livelihood. A review of these programs, as implemented in the past, suggests that while gains have been achieved, a number of design problems remain. Food Assistance This has been a major program since 1974. While the program. has reached an increasing number of children over the years of implementation, several design problems have been noted that have constrained the effectiveness of the program. Following are the problems and the proposed modification to address them (Heaver and Hunt 1995; NNC 1992 and Tuazon 1998): • Donated foodstuffs not suited to local tastes. Substitute locally produced foodstuff of required quality suited to local tastes. • Poor targeting. Much of the food went to older children rather than those at the peak ages for wasting, many of whom were not covered by the program. Tightly target assistance on nutritionally at-rislc pregnant women (to combat low birth we@t) and on children ages 6-24 or 6-36 months whose growth are faltering or who are moderately or severely malnourished. ° Leakages. Much of the food was distributed on a "take home" basis so that an unknown, perhaps large, quantity was shared with older family members. Feed children onsite to ensure that they actually get the supplement intended for them. • Long periods of participation. Depending on the implementing agency, children might stay in the feeding program for more than 12 months, which may not be necessary, thus encouraging dependency on food assistance from outside the family. Restrict the time children spend in the supplementation program to, for example, less than 12 m.onths and accompany supplementation with intensive education on better care and feeding' in the home. Successful management of a program with the above characteristics, however, is expected to reqnire a lot of time from fieldworkers. How well this recommendation will work in a cost-effective manner in the Philippine setting still needs to be tested.

Chapter 10: Herrin

469

Alicronutrient Supplementation and Forty.cation Before 1993, micronutrient supplementation was through measles

done

only

routine sessions of the health system (e.g., Operation Timbang, immunization, well-baby chnics, and regular consultations at

health centers).

Thus micronutrient

supplementation

is given to a rela-

tively small proportion of the total population (UNICEF 1997). In 1993, the government launched the Araw and Sangkap Pinoy (ASAP) and Alis Disease or National Immunization Day (NID) campaigns, which provided the venue for mass distribution the prevention disorders.

and control

In ASAP, vitamin children coverage

of iron, iodine

A capsules

and iodized oil capsules

wide in sangkap

centers.

remained

of micronutrient

and vitamin

are distributed to women

supplements

A deficiency

to 12-59 months

of childbearing

Since it was first implemented

high especially

for vitamin

for

old

age nation-

in. 1993, ASAP's

A capsules.

As a result,

ASAP implementation will be continued up to 1998 in partnership with LGUs, private corporations, NGOs and national government agencies (NGAs). Moreover, the integration of micronutrient supplementation activities with the NtD in 1993 to 1995, and in the Knock Out Polio campaign in 1996 facilitated the delivery sule nationwide (UNICEF 1996)_

of the first dose of vitamin

A cap-

While target beneficiaries were given Vitamin A capsules and iodine oxide capsule (tOC) during ASAP and routine sessions,

(VAC) there

was no existing nationwide program to address iron deficiency anemia (IDA). Furthermore, issues like higher cost is required for iron supplementation

and lack of more practical

ture. It is expected

however

alternatives

aggravated

the pic-

that for the rest of the plan period,

steps shall already be undertaken to address the IDA problem. In food fortification, two programs were implemented:

bolder the Na-

tional Salt Iodization Program and the Sangkap Pinoy Seal Program. The National Salt Iodization Program, with DOH as the lead agency, includes

social

marketing,

advocacy,

establishment

of salt iodization

plants through the provision of iodization machines and fortificants, and legislation for universal salt iodization_ Republic Act No. 8172 or the Act Promoting Salt Iodization Nationwide and for Related Purposes was signed into law on December 1995. While the country has the potential

of meeting

74 percent

of its

supply requirement for iodized salt, there is still a need to address the gap of 26 percent and to provide wider access to iodized salt by bringing it to the most

popular

outlets

that

are the public

markets.

The

470

The Philippines

beyond

2000: An economic

Multi-Indicator

Clnster Survey (MICS) 1996, however,

assessment

showed

that only

15 percent of the total population are presently using iodized salt. Lack of awareness of the benefits of iodized salt was cited as one of the reasons for the low demand,

Hence

a good marketing

strategy

employed in. order to effect more demand for it. The Sangkap Pinoy Sea] Program (SPSP) encourages facturers

to fortify

their food. products

The seal is envisioned

should be food manu-

with iron, iodine and vitamin

to be a prestigious

stamp

to be awarded

to food

manufacturers who are able to meet standards with either vitamin A, iron or iodine. Through

for fortifying products intensive consultations

with food manufacturers, the SPSP guidelines mented. Applications of food manufacturing

were finalized and implecompanies with products

including canned sardines, cheese, catsup cessed by the SPSP Technical Board?

and margarine

are being pro-

Growth Monitoring and Promotion and Nutrition Education Growth monitoring and promotion programs (GMP) requ_e careful design, training and supervisory support to be effective. The current programs Timbang

such as the Under-Six

have been assessed

Clinic Program

as not working

and the Operation

too well (Hearer

and Hunt

1995). In the first approach, mothers are encouraged to bring their children to the barangay health service (BHS) or RHU for monthly weighing, at which time health, and nutrition edncation, other services are delivered. For several reasons, regularly

bring to the facility children

immunization, and mothers may fail to

most in need of the program.

In the second approach, growth monitoring takes place one a year, implemented on a campaign basis with the help of the rnral health midwives, barangay nutrition scholars, and barangay health workers. art mmual intervention is considered too infrequent to catch most children in nutritional trouble and cannot educate parents by demonstrating monthly

weight

gains. The Operation

Timbang

is undertaken

only

2The SPS Technical Board, created through DOHDepartment Order No. 299 s. 1995,is composed of representatives from DOI-I,Food and Nutritrition Research Institute (FNRI),' Department of Trade and Industry (DTI) and NNC,It handles the technical aspects and recommends approval on all applications to the DOll Secretary. An SPSP Programme Manual of Operations was also developed. The guidelines on micronutrient fortification of processed foods was likewise finalized and adopted through Administrative Order No. 4-Adated February 14,1995by the DOHBureau of Food and Drugs (BFAD).This serves as basis for the rational addition of nutrient(s) to processed foods by avoiding over- or under-fortification that may create imbalance in the diet as well as avoid misleading label claims to gain competitive marketing advantage.

Chapter 10:Herrin

471

once a year, hence it is limited to serve as a vehicle for nutrition education. Moreover, the coverage of the program (i.e., the proportion of eligible children actually weighed) vary widely among municipalities due to a number of factors, on of which is that it might even be a biased tool for targeting of interventions. What has recently been recommended is that the GMP program for under six children be reoriented from a clinic to an outreach approach, with monthly monitoring and counseling carried out in the barangay, and that monthly growth monitoring be targeted on children dining the peak period of wasting, that is, the first 24 or 36 months of life, with qnarterly monitoring for older preschoolers. This approach however is also staff-intensive, and needs to be tested for cost-effectiveness, affordability and sustainability before widespread adoption. Home and Community Food Production Promotion of dietary change through cultivation in home gardens and consumption of micronutrient-rich foods is considered the hardest to implement and sustain. Maintaining a home garden is not always inexpensive: inputs can be costly (lack of available land, water supply and seeds). Moreover, it is time-intensive especially for those using bio-intensive garden techniques (Florentino et al. 1993). As a resuit, sustaining commitment and enthusiasm for such activity by both households and program agencies become difficult. Credit Assistance for Livelihood Studies have found that in most cases credit resources

often end

up in the hands of the nonpoor, including those designed for the poor. Village politics and patronage relations often cause additional problems for effective and focused targeting. Moreover, the direct impact of livelihood programs of the type envisioned by the credit assistance program on child nutrition is likely to be small. A study in Bukidnon shows that a doubling of income is needed to effect a 5 percent change in child nutritional status (Bouis and Haddad 1990). The reason for this limited direct effect is that there are many links between income and nutritional status, and each link is determined by other factors_ Not all income is spent on food. The translation of food expenditures to calorie availability per capita depends on household age and sex composition, among others. The translation of calorie availability into child nutritional status further depends on

472

The Philippines

intrahousehold allocation status of children° Basic

beyond 2000: An economic

of calorie

and nutrients,

assessment

and on the health

Education

Prior to the period 1992h96, in particular during the period 198792, major initiatives were mounted in the education sector 'to address access, quality, these initiatives •

relevance are:

and

efficiency

issues

(DECS 1998). Among

The full implementation

of the new curriculum

in elementary

and secondary

as part of the reforms

under

education,

gram for Decentralized the Secondary tively;

Educational

Edncation

Development

Program

(PRODED), and (SEDP), respec-

• •

Introduction Introduction

•

Adoption tion;

of free public secondary education in 1988; of the Government Assistance to Students and Teach-

The significant upgrading of teacher's compensation Salary Standardization Law of 1989; and

•

Comprehensive review of the country's system by a Congressional Commission

ers in Private

Education

the contimfing

Improving lowing: •

access

Reducing

program;

for All (EFA) Philippine

problems

as well as improve

tem, a number of initiatives riod. These included: •

(GASTPE)

of the Education

To address basic education

the Pro-

of access

of rural

the

to and quality

of the education during

and quality of basic education

the number

under

education and 'training on Education.

the efficiency

were implemented

Plan of Ac-

barangays

of. sys-

the 1992-96 pethrough

'the fol-

without

elemen-

tary schools (from 6019 to 4231), 'the number of incomplete elementary schools (from 6136 to 2569), and the number of municipalities without any secondary school (from 75 mu•

nicipalities

to 26);

Reducing

the entry

age for Grade

creasing

the cohort

of entering

I to 6. years, thereby

Grade

I pupils.

in-

An annual

National School Ertrolment Day has been. set in January of every years to give DECS sufficient time to plan effectively for teachers, classrooms and other basic educational facilities.

Chapter 10: Herrin

•

473

Launching of the DECS Pre-School Program in 1993 in 20 SRA provinces in support of the Early Childhood Care and Development Program. The program has organized 1,428 classes with an enrolment of about 40,780 pupils. Implementation of the Muhigrade School Program

through

the provision

training

of teachers of program teachers schools. °

of multigrade and supervisors implememation.

were handling

Introduction

instructional

package,

and monitoring and evaluation As of June 1996, a total of 19,055

19,155 multigrade

of quahty

improvement

classes

measures

in 11,283 by increas-

ing number of class days from 185 to 220; reintroducing ence as a subject for Grades I and II; contact hours increased

for English,

Science and Math subjects

Sciwere

for elemen-

tary and English and Science subjects for high school. The replacement of Values Education for third and fourth year with English, Math and Natural mitted for private schools. •

Adoption Master

Science

of the DECS Modernization

Plan for Basic Education.

subjects Program

was perunder

Under this program,

the

DECS

intends to introduce and utilize modern technology particularly information technology and its various tools to improve the teaching

and learning

process,

educational

management

and support operations in the educational system. An initial step towards the modelTtization thrust is the setting up of a Center central

for Education• and Technology (CET) at the DISCS office in June 1996_ The functions of the CET revolve

around the review and development of multimedia instructional materials, curriculum development using multimedia °

and conducting training programs. Implementing legislated education reforms •

In accordance with the recommendations of the Congressional Commission on Education to restructure DECS, two separate

bodies

and vocational •

concentrate Education

to oversee

tertiary

education

were

education

created,

and technical

allowing

on basic education. The Commission (CHED) and the Technical Education

Development entities from

Authority DECS.

(TESDA) have become

DECS to on Higher and Skills

independent

474

The Philippines

beyond

2000: An economic

assessment

•

Implementation of RA 7836 of 1994 which provides for strengthening the regulation and supervision of the practice of teaching in the Philippi_nes and prescribing a licensure examination for teachers.

•

Implementation lishing Industry mulation,

of RA 8047 of 1.995 known as the Book PubDevelopment, which provides for the for-

adoption

and implementation

of a National

Book

Policy and a corresponding Book Development Plan that will serve as basis for fostering the growth and viability of the book publishing industry. The DECS was mandated out in three years its elementary and secondary °

production and distribution functions. Deregulation of private education. DECS liberalized policies

governing

herent advantages tives were:

private

education

of private

in order

government

to capitalize

on in-

Among

the major

initia-

fees charged

by private

educa-

schools.

of tuition

to phase textbook

The deregulation tional institutions.

The lifting of the moratorium on the offering grams which was imposed during the Aquino tion.

of new proadministra-

The issuance

for Private

of a new Manual

of Regulations

Schools which relaxed, many previous regulations, those which were considered to be n.ot directly

especially related to

academic standards. Additionally, voluntary accreditation by nongovernment accrediting agencies was strongly encouraged as a means of improving educational standards and above the minimum reqnired for recognition. In. addition attention

to the focus on. elementary

has also been

and secondary

given to the potential

benefits

over

education,

of early

child-

hood education on the one hand, and the problem of drop-outs from school. Below are specific projects and initiatives that dealt with these concerns. Third

Elementary

Education

Project

(TEEP)

Two main issues in elementary

education

that have persisted

"variations in outcomes by a World Bank report

and adverse social selectivity." (World Bank 1996a):

are

As summarized

Chapter 10:Herrin

475

Most children have access to a school, but only 68 percent complete elementary education. For many of those who complete, little learning takes place as evidenced by low mean achievement scores. Moreover, there are great variations around the mean, both student scores and school scores, and urban-rural differences were particularly pronounced. This suggests that raising quality would require not only increasing average performance but also reducing variations across students and schools by targeting the worst schools. The Third Elementary Education Project and the Multigrade Programme in Philippine Education were designed to help address these problems. The proposed Third Elementary Education Project (TEEP) has two investment components: (1) capacity-building for school effectiveness; and (2) division education development plans (DEDP). Under the first component, activities are expected to enhance the capability of DECS in (a) providing managerial support to decentralized implementation delivery; and (b) providing professional support for effective teaching. Under this component, the project will finance technical assistance, civil works, training and equipment, supplies and materials, and. incremental and operating expenses. Under the second component, the project will (a) enhance the capability of the DECS division and district offices in the areas of educational planning and management, instructional supervision, administrative and financial decentralization, information management, and collaboration with LGUs; (b) enhance school management by strengthening school leadership of school heads, instructional effectiveness of teachers, community participation in school improvement programs; and (c) assist in the preparation of DEDPs. In short, the TEEP will "rely on and support the structural and operational decentralization of public education management with the aim of progressively allocating administrative authority and financial control towards divisions, districts and schools." Under what conditions would this strategy achieve its intended impact? Close monitoring and careful evaluation are necessary to draw out lessons for possible replication in other provinces.

.476

The Philippines

beyond 2000: An economic

assessmen_

Multigrade Program in Philippine Education Multigrade teaching (MGT) has been in existence in the Philippine public elementary education system since the 1960s. It has been the teaching

practice

in small schools

in sparsely

of them in remote, far-flung villages praisal study (SEAMEO-INNOTECH teaching

populated

of the country. 1996) noted

has not been given the necessary

areas, most

A recent rapid apthat: "Multigrade

suppot_ services

needed

systematize the conduct of multigrade classes, much less provide the necessary technical assistance teachers need.." The study points to the following lessons and insights for enhancing the effectiveness of MPPE activities:

(1) adequacy

of teaching

and learning

and teachers is one of the major prerequisites menting the MPPE; (2) success of multigrade

materials

for pupils

for successfully impleteaching depends a lot

also on closer and adequate supervision by principals and supervisors; and (3) preservice preparation and inservice support for multigrade teaching equate

are two strategies

which,

preparation

that teachers

Secondary

Education

The secondary tize access

together,

II (SEDP

program

opportunities

the ad-

teaching. II)

(SEDP II) aims to democraand improve

ondary education through staff development, lum, revision of learning materials, research, special

will provide

need for multigrade

Program

education

to educational

taken

projects to provide school buildings in 1989, a year after the gov_i-nment

the quality of sec-

review of the curricuand implementation of

and equipment. adopted the policy of pro-

viding free secondary education, the Secondary Education. Development Progrmn (SEDP I) was implemented nationwide. The program focused on key activities, which included the implementation curriculum, retraining of teachers and school administrators,

of a new develop-

mere of instructional materials, and upgrading of school facilities. Noteworthy was the implementation of a new curriculum since the last curriculum reform was made as far back as 1973. Currently,

a second

program

the quality

of secondary

education,

strengthen

institutions

for effective

cation

planning

involves provision

and management.

(SEDP ll) is designed improve

decentralization Improving

of secondary

the quality

of quality inputs such as upgrading

vision of textbooks and other learning Improving access involves establishing

to improve

access and efficiency

and edu-

of education

of facilities,

pro-

material, and teacher training. quality schools in unserved at-

Chapter 10:Herrin

477

eas and provision of alternative delivery systems in isolated areas and for secondary school drop-outs. Early Education and Development (ECCD) The ECCD program was designed to respond to the problems of (a) poor health and nutritional stares among 0-6 year old children due to economic problems and inadequate parenting skills, particularly among disadvantaged families; and (b) a high drop-out rate among grade I pupils resulting from poor adjustment to schools and inadequate ECCD services and preschool education experience. ECCD services consist of the following: the Day Care Center Program maintained by LGUs but coordinated by DSWD; the Preschool Education Program implemented by DECS; and the Parent Effectiveness Service Program, also implemented by LGUS but coordinated by DSWD. The Day Care Center Program In spite of RA 6972 enacted in 1990 which mandated the establ.ishment of day care centers in each of the 41,924 barangays, coverage is still limited. In 1996, only 27,540 day-care centers were in operation. Moreover, the quality of the day care center program is low. For example, Heaver and Hunt (1996) [1995 in Reference?] notes that educational materials are in very short supply in most centers, and the work of day care workers who had only on-the-job training is of significantly lower quality than those with full training. Suggested steps have been made to bring the day care center program up to an acceptable level of quality (Heaver and Hunt 1995) by fielding additional persom_el, hmiting class sizes, adequate provision of worker allowances and materials and other inputs. All these reqnire large recurrent costs and need to be tested for cost-effectiveness in the Philippine setting before it can be considered for a possible nationwide implementation. The Preschool Education Program Under this program, socialization and reading, language, and numeracy preparedness activities are introduced during the first 8weeks of Grade I. Teachers and supervisors are trained on the 8-week curriculum and materials for both pupils and teachers are provided. Although there has been no forn_al evaluation of the department's preschool pro-

478

The Philippines beyond 2000: An economic assessment

gram, it has been generally expressed that the educational approach is too close to formal elementary schooling, largely because preschool classes are taught by primary school, teachers steeped in traditional methods. The department has recently responded by creating in each region a core of preschool trainers whose job is to reorient the pedagogical approach (Hearer and Hunt 1995). The Parent Effectiveness Service Program Under this program, parent volunteers are provided materials and trained to reach out to other parents in neighborhood through parent sessions focusing on common parenting problems and solutions. At present, coverage remains small. UNICEF's midterm review notes that the program benefitted a total of 431,263 children 0-6 years old through the efforts of 2,154 trained parent volunteers. No recent independent evaluation of the program is available. It has been suggested that an evaluation be undertaken especially after the implementation of decentralization. "There is a need to look at the outcome of the program to determine if this is making a difference in the lives of children" (UNICEF 1996). In addition to the above ongoing programs, an Early Childhood Development Project, which is an integrated package of health, nutrition and edncation services with funding from the World Bank and Asian Development Bank, has been approved by the government for implementation in the next six years beginning 1998 in three regions. How well this project will actually perform in actual field situation needs to be closely monitored so that lessons can be drawn for possible wider adoption. Nonformal Educatio_ Project In view of high drop-out rates, tllere was a recognized need to supplement formal schooling programs with programs to reach those unable to continue formal school. The Nonformal Education Project of DECS was a response to this need. This project which started in 1995 and with funding from the Asian Development Bank covers 24 provinces in nine regions selected on the basis of composite ratings of lowest functional literacy rates and lowest elementary school participation rates. The project is designed as a community-based undertaking, tapping LGUs and accredited NGOs in the implementation of functional literacy activities.

Chapter It): Herrin

479

The project

has three components:

(1) functional

education

and

literacy program; (2) continuing education and life long learning, which includes implementation of alternative learning systems, and accreditation and eqnivalency program; and (3) capacity and institution building, which includes project management training, and organization of coordinating committees. Drop.Out Intervention In addition to addressing outs in the elementary

Program the continuing

training

education

school, it was recognized

of trainors,

needs of drop-

that a major undertak-

ing should be directed toward the reduction in the incidence of dropouts in the first place, and, at the same time, improve the achievement levels of elementary

pupils.

Thus, the DECS established

the Drop-Out

Intervention Program. The first phase of its implementation was conducted on a pilot study in 30 schools in five regions during the SY 19901991 and SY 1991-1992. in these pilots, the interventions used were: (1) multi-level

materials

(MLM) assisted

sn_tction with parent-teacher

instruction;

partnership

(4) school feeding with PTP. 3 Based on the initial positive

(2) MLM assisted

in-

(PTP);. (3) school feeding; and

gains noted

in the program,

the pro-

'gram was expanded to 54 schools in nine.regions in SY 1993-1994. The interventions used were school feeding and school supplies; MLM assisted

instruction

provision although

and PTP.

However,

due to budget

constraints,

the

of school feeding and school supplies lasted only for two years, the other interventions are still ongoing. The schools were

• requested to adopt their own program as alternative to school feeding. Further expansion of the program was made in line with the implementation of the Social Reform Agenda. In this expansion, 81 schools from 13 divisions included in the SRA provinces were selected as beneficiaries

of the program.

The interventions

used were the pro-

Multi-LevelMaterials (MLM)are learning modules in Filipino, English and Mathematics designed to meet the varying learning abilities needs in the classroom. Since this instructional material leads itself to self-pacing, learning difficulties may be remedied and thus discourage drop-out. Parent-Teacher Partnership (PTP) involves parents and teachers working jointly to improve conditions for learning in families and schools to improve school attendance and achievement level and reduce drop-out rates. School feeding involves the daily provision of a free meal for all pupils in the school. It was assumed that a daily supplement to the diets of school children will improve their physical and mental development and their nutritional status, thereby improving school attendance, minimize drop-out and raise the achievement level.

480

The Philippines

vision

of school

supplies;

beyond 2000: An economic

MLM-assisted

instruction

fast feeding program in Grade i was implemented high di-op-out rate in Grade I. Continued

monitoring

and assessment

assessment

and PTP. Breakin 33 schools

of the expanded

program

is needed. An important issue is the sustainability of the program, ticularly with respect to the financing of the intervention inputs. Challenges

Beyond

The prospect

with

par-

2000 of achieving

rapid and sustained

improvements

health, nutrition and basic education so as to be globally competitive in 'the 21st century is partially dimmed by the current economic crisis and the lack of systematic information on the effectiveness, efficiency and eqnitable impacts of various sectoral programs in the face of lackluster economic performance. In the health functional

sector,

integration

the main challenge

of the health

service

is how to maintain

delivery

the

in the face of de-

centralized government. Partly related to this is the need to preserve significant gains in certain programs on immunization, CDD and CARI, and sustain current initiatives, for example, on women's health and safe motherhood.

In nutrition

and education,

the challenge

is in assess-

ing what program may reduce malnutrition and improve educational performance of children, respectively. Finally, there is a need to face another challenge: how to deal with these sectoral challenges, not only in the face of uneven economic performance, but "also in the face of continued rapid population growth. Health

Sector

Prior

to devolution,

the public

sector

health

system

was func-

tionally organized into an integrated referral system consisting of BHSs, RHUs, district hospitals, provincial hospitals, and regional hospitals. Each of these facilities provided a set of services to a given, catchment population.

At the low end of the referral

system were BHSs and RHUs,

which provided basic primary health care, while at the upper end were hospitals of different categories providing specialized care. The DOH managed

and financed

the integrated

system.

With devolution, the ownership (as well as the management and financing) of the different facilities was transferred to the different local government units. The BHSs and RHUs became of the municipalities while the district and provincial the responsibility

of the province.

A number

the responsibility hospitals became

of regional

hospitals

re-

Chapter 10: Herrin

mained

under

481

the responsibility

of the DOH. On the other

hand,

city

hospitals still remained under the cities' ownership and control even after devolution. What are the implications of devolution in this case? The functional integration of the different facilities in the delivery of health

care was compromised,

and in fact, weakened

ing: •

Technical

standards

differ

among

fect overall

quality

of health

care;

dne to the follow-

local governments,

which

afthat

Financing adequacy differ among local government some underinvest in their own health facilities;

such

Monitoring

down

and reporting

local governments thorities; and °

Health orities

of changing

diseases

breaks

have little incentives

to report

to national

priorities differ among local, governments diverge from national priorities.

The first research what, other

problem

in fact, is happening local health systems

parallel

services;

is to determine

(and

as au-

and LGU pri-

to document)

to local health systems, their linkages with in the hierarchy of referral services or in

and their

linkages

with national

priorities.

Are the

present events and conditions compromising the effective delivery of quality health services? If the above factors are indeed verified, the second research problem is to determine whether there exist local govermnent deal with the issues. A few initiatives have been identified.

initiatives to For example,

in Bukidnon,

a $20 million

loan from projects

provincial

anthorities

initiated

the ADB to fund a mix of physical including

municipal

ters and day care centers. the national government.

health

stations,

and sourced

and social infrastructure rural

water

supply

cen-

Some of the projects are being subsidized by Municipalities share some of the cost by pro-

viding land and shouldering recurrent expenditures. is the Davao Integrated Area Development Program

Another project initiated by three

Davao provinces along with Davao City. Are there initiatives of cooperation among local governments

many more of such in the delivery and

financing of health services? If there are, there is a need to document such initiatives to learn more about their effectiveness, sustainability and replicability. There are potentially

several

modes

of interlocal

government

cooperative arrangements as well as modes of local government and national government cooperative arrangements. These arrangements

482

include

interlocal

velopment ers. There

The Philippines

beyond

2000: An economic

government

cooperative

agreements,

councils, and intralocal development is a need to determine and document

ent types have actually

assessment

interlocal

de-

councils among othwhich of these differ-

been tried. The idea is to learn from them

the standpoint of effectiveness in addressing health the cooperation, support needed to sustain such replicability on a wider scale, possibly nationwide.

from

issues, viability of cooperation, and

The National Health Insurance Act of 1995 provided for universal coverage of the population_ Yet the implementation, of the law has been slow. A major problem outside

the formal

is the lack effective

employment

sector.

ways of insuring

One approach

those

to achieving

the

objectives of the law is to allow local governments to design and implement their own. health insurance schemes, and later to have these schemes reinsured by the Philippine Health Insurance Corporation (PHIC). Lessons from a few existing local government sponsored health insurance schemes, such as that of Bukidnon, could provide basis for developing schemes in other provinces. But a systematic schemes as in Buldctnon still needs to be done. Nutrition

Sector

Relatively

few assessments

.been done.

Of these,

tion problems

that make nutrition

stantial

on children

impact

of specific nutrition

they generally

point

to design

interventions

and on pregnant

study of such

interventions

have

and implementa-

not likely to have suband lactating

women

the context of Philippine macroeconomic performance. The challenge is to find out what design and implementation .mode would be more effective, efficient and equitable. But prior issues need to be resolved. One is the use of an. appropriate reference for estimating prevalence rates. The published data from the FNRI are based on the Philippine reference rather than an international

reference.

The difference

in the prevalence

by these two methods international standard,

is quite large. the prevalence

For example, in 1987 using the for underweight preschool chil-

dren was standard.

17.7 percent compared to 9.9 percent using the Philippine It probably makes a difference .in the design of interventions

if the magnitnde

of the problem

cent.

issue is with regards

The second

ernment.

rates obtained

What aspect

ment intervention

is 18 percent

of the nutrition

for efficiency

reasons?

rather

than just 10 per-

to the appropriate problem

role of gov-

really justifies

Is the problem

govern-

one of imper-

Chapter 10: Herrin

fect information

483

or of intergenerational

tify subsidies

in backyard

gardening?

Basic

Education

Sector

rate

externalities?

The main problem in basic education in elementary and secondary education

scores,

especially

among

poor population

Would these jus-

is still the low survival and low achievement

groups.

The DECS is now

implementing the third elementary education project. What lessons have been learned in the first and second projects? What worked and what did not? Are the factors affecting poor educational performance outside of the education sector that should be dealt with more directly in those sectors

(e.g., health

Major policy challenges by the Ramos administration (DECS 1998): •

for the next administration include, among others,

as identified the following

Financing of the needs of the basic education sector. The options include the reallocation of resources within the education sector in order

to benefit

resources

from tertiary

and colleges;

book rental;

the basic edncation

allowing

tutional provision tiate cost recovery

•

and nutrition)?

educational

sector

by rechannelling

especially

state universities

a more liberal interpretation

of the consti-

on free basic education sector in order to inischemes on a very selective basis such as text-

and exploring

alternative

sources

of financing

from

local governments, communities and parents (World Bank 1996b). Devolution of the education function to local governments "to enable the educational system to accommodate local preferences, make the curriculum more relevant to local conditions and needs, and generate

greater

support

from

local governments,

commu-

nities and parents." In summary, some progress tion and basic education sectors.

has been made in the health, nutriBut overall, the Philippines is still

performing poorly relative to what it could do and relative to the experience of neighboring countries. A major part of the poor performance on human

resource

formation

is the poor performance

of the economy

in the recent past and the slow and uncertain recovery. This affected household investments in human resource formation. In addition, public programs that deal directly with health, nutrition and basic education have performed unevenly. While new initiatives have been made, there

484

The Philippines

beyond 2000: An economic

assessment

remained basic problems. First, is the incomplete response to changing political and. administrative environment such as the devolution of basic services to local[ government units. This principally had significant impact on the delivery of health, and nutrition services. And secon.d, a number of issues remained unresolved with respect 'to the design, implementation and financing of health, nutrition and basic education programs that partly reduced their impacts.

Chapter 10: Herrin

485

References Bouis,

H. E. and L. J. Haddad. 1990. Effects cialization on Land Tenure, Household

of Agricultural CommerResource Allocation, and

Nutrition in the Philippines. Research Food Policy Research institute.

Report

Brillantes,

A. B., Jr. 1997. Historical

of Philippine

Local

Govenmlents: Five Year Assessment of the Implementation Local Government Code. National Consultation Workshop

of the on the

UNDP Decentralized

Development

79, International

Governance

Research