Summaries of Completed and Ongoing Research Projects, 1979-1985, Volume II

PIDS

ResearchProgram

(_com. mmarles pletedand ongo,ng research

projects

1979-1985 volume II

PIDS Research Program

summaries of co.mplet_ an.d

ongoingresearcn

projects

1979-1985 volumeII

All Rights Reserved by THE PHILIPPINE INSTITUTE FOR DEVELOPMENT STUDIES,- 1987

The Philippine Institute for Development Studies is nonstock, nonprofit, government research institution engaged in long-term, policy-oriented research.

It was established on September 26, 1977 by virtue of Presidential Decree No. 1201. Through the Institute's activities, it is hoped that policy.oriented research on Philippine social and economic development can be expanded to more directly and sytematicaUy assist the government in planning and policymaking.

PIDS publishes the output of its research program as part of its effort to promote the utilization of research findings and recommendations. The views expressed in published reports, however, do not necessarily reflect those of the Institute.

RP-

12/87 - 500

• FOREWORD This second volume of the Summaries of Completed Research Projects is a compendium of the objectives, major findings and policy recommendations of the completed research projects of the Philippine Institute for Development Studies (PIDS) between 19791985. Through this publication, the Institute hopes to disseminate valuable research findings as part of its continuing effort to promote policy-oriented development research. The research projects covered wide-ranging areas that include Employment, Human Resource'Development and Technology; Resource Mobilization; Trade Expansion; Poverty, Income and Wealth Distribution; and Regional, Urban and Rural Development.

This volume, therefore is a significant contribution to the limited number of policy-oriented materials aimed at providing comprehensive information to policymakers, planners, researchers, students of development,, and those who are interested in Philippine socio-economic development.

Dr. Filologo Pante, Jr. , President

v

TABLE OF CONTENTS

FOREWORD LIST OF ABBREVIATIONS I.

V XvIIi

EMPLOYMENT, HUMAN RESOURCE DEVELOPMENT AND TECHNOLOGY Completed Research Projects Philippine Employment in the 1970's Rosa Linda P. Tidalgo and Emmanuel F. Esguerra A Survey of Materials in Introductory Economic Education Gerardo P. Sicat Labour Market, Structural Adjustments in the Philippines* Rosa Linda P. Tidalgo Ongoing Research Project A Research Agenda on Nutrition and Welfare Center for Policy and Development Studies Measuring the Incidence of Health Expenditures From Secondary Data Panfila Ching

II.

RESOURCE MOBILIZATION Completed Research Projects Public Finance in the Philippines: A Review of the Literature Rosario G. Manasan Survey and' Review of Forecasting Government Internal Revenue Rosario G. Manasan

1

1

2

3

5

6

8

8 Models on

An Econometric Model for Forecasting Internal Taxes: A National Level Approach Rosario G. Manasan

8

9

An Econometric Model for Forecasting National and Regional Tax Collections: A Consolidated'Report Rosario G. Manasan Philippine Monetary Policy and Aspects of the Financial Market: A Review of the Literature E_ita A. Tan The Structure and Growth of the Philippine Financial 'Market and the Behavior of its Major Components Edita A. Tan An Analysis of the Behavior of Commercial Banks Mario B. Larnberte An Analysis of Tax Bases in the Philippines Rosario G. Manasan Foreign Direct Investment in the Philippines: A Review of the Literature Charles I4I.Lindsey and Ernesto M. Valencia Exchange Rate Flexibility and Intervention Policy in the Philippines, 1973-1981 Filologo Pante, Jr. A Review and Synthesis of Macro-Economic Models in the Philippines Virgilio T. Velasco On the Use of the DRC Criterion in Selecting Projects Erlinda M. Medalla Shadow Prices of Goods and Resources in the Philippines: An Assessment Erlinda M. Medalla Economic and Social Impact Analysis/ Women in Development (ESIA/WID) Project Monetary Aggregates and Economic Activity Mario B. Lamberte Local Government Finance Raul P. de Guzman and Angel Q. Yoingco Public Corporations in the Philippines in 1982: A Definitional and Taxonomical Exercise Rosario G. Manasan

10

11

11

12 13

14

16

17

17

18

18 23 25

27

VII A Comparative Study of Policy Response to the Balance of Payments Crisis: • Philippines and Korea, 1974-82 John 1-1.Power Effective Protection Rates and Internal Indirect Taxes ha the Philippine Setting Rosario G. Manasan User's Manual for Financial and Monetary Statistics Mario Lamberte, Mitsuo Ono and Marievel Bernabe Financing the Budget Deficit in the Philippines Eli M. Remolona The Role and Structure of State Financial Institutions Edita A. Tan Review and Appraisal of the Government Monetary and Fiscal Policy Response to the 1983-84 Balance-of-Payments Crisis Mario B. Lamberte, Rosario G. Manasan, Roberto S. Mariano, Erlinda M. Medalla, Manuel E Montes and Celia M. Reyes Short-Term Forecasting Model for Inflation and Economic Activity Roberto S. Mariano and Celia M. Reyes An Evaluation of the Gross Income Taxation Scheme Ruben B. Ancheta The Development Bank of the Philippines (DBP) and the Financial Crisis: A Descriptive Analysis Mario g. Lamberte Financial Liberalization and Internal Structure of Capital Markets: The Philippine Case Mario B. Lamberte An Analysis of the Institutional Framework of the Philippine Short-Term Financial Market Victoria S. L icuanan A Study of Philippine Real Property Taxation Cayetano W. Paderanga, Jr.

29

31

33

34

35

38

40

41

42

44

47 50

Vlll Estimating the Shadow Exchange Rate, The Shadow Wage Rate and the Social Rate of Discount for the Philippines Erlinda M. Medalla A Survey of Internal Coordination and Control Systems in Selected Public Enterprises Amelia C. Ancog A Short-Run Money Market Model Baldomero 1I. Regidor An Annual Model of the Monetary Sector in the Philippine Economy Rolando Z. Delfino The Impact of the Financial Reform Program on Rural Financial Institutions and Markets Severino B. Vergara The Rural Banking System: Need for Reforms Mario B. Lamberte Sources of Philippine Economic Growth, 1948-78 and Prospects for the 1980's and 1990's Harry T. Oshima Econometric Model of the Philippine Economy Dante B. Canlas, Rolando A. Danao and Manuel F. Montes Explicit Budgetary Sqbsidies to Public Enterprises Juanita D. Amatong Pinancial Management in Selected Public Utility] In frastructure Government Corporations Leonor M. Briones Policy Issues in the Coordination and Control of Public Enterprises in the Philippines Gabriel U. lglesias Impact of BOI incentives on Rate of Return, Factor Prices and Relative Factor Use: A Comparative Analysis of Incentives Under the Omnibu_ Investment Code of 1981 (P.D. 1789) and the Investment Incentive Policy Act (B.P. 391).

Rosario G. Manasan

51

53 55

57

58 59

61 62

64

67

70

72

IX Ongoing Research Projects A Macroeconomic Overview of Public Enterprises in thePhilippines, 1975-1984 Rosario G. Manasan and Corazon R. Buenaventura Philippine Balance-of-Payments: A Model and Analysis of Payments Policy Ponciano S. Intal, Jr. Evaluation Measures for Public Enterprise Performance CarolS. Guina Economic Contributions of Public Corporations in the Philippines Rosario G. Manasan

75

76

78

79

An Annual Model of the Philippine Economy Winifrida M. Constantino Mario B. Lamberte Roberto S. Mariano Celia 3/1.Reyes and Josef Z Yap An Evaluation of the Performance of the Philippine Tax System Rosario E. Querubin

80

Indicators of Sectoral Output Benvenuto N. Icamlna

81

HI. TRADE EXPANSION, AGRICULTURAL AND INDUSTRIAL DEVELOPMENT, AND ENERGY

81

83

Completed Research Pro/ects Industrial Promotion Polices in the Philippines Romeo M. Bautista, John H. Power and Associates

83

Sources of Philippine IndustrialGrowth, 1956-1978 Jesus P. Estanislao

84

Invention in Philippine Industry Erlinda 34. Medalla, Kent Mikkelsen and Robert E. Evenson The Impact of Economic Policies on Agricultural Development Cristina C David and Associates

84

85

X An Analysis of Fertilizer Policies in the Philippines Cristina C. David and Arsenio M. Balisacan Credit and Price Policies in Philippine Agriculture Cristina C. David Government Policies and Farm Mechanization in the Philippines Cristina C. David Research on Forest Policies for Philippine Development Planning: A Survey Marian Segura-de los Angeles Research on Minerals for Philippine Development

..

Planning: A Survey Teodoro M. Santos The Philippine National Energy Accounts: A Methodological Note Leander J. Ale]o A Study of Energy-Economy Interaction in the Philippines Leander J. Alejo Studies on the Wood-Based Furniture, Leather Products, and Footwear Manufacturing Industries in the Philippines Niceto S. Poblador andAssociates Australian Direct Investment in ASEAN* Chia Siow Yue and Hal Hill Research Project on Trade and Services* Greg Seow and Gloria M. Arroyo Welfare Issues Affecting Landless Coconut Farmers: A Critical Review of the Current Research Problems Sylvia 11. Guerrero Economic Evaluation of the Philippine Alcogas and Cocodiesel Programs Arrnando C Armas_ Jr. A Comp_.utable General Equilibrium Model of the Philippine Economy: Specification, Calibration and Use Ramon L. Clarete

88

89

89

90

90

91

91

92 95 96

98

100

102

Xi Trade in Minerals, Energy and Processed Mineral Products* Praipol Koomsup and Teodoro M. Santos The Philippines ha ASEAN-Australia Trade in Manufactures* Casimiro K Miranda, Jr. Forestry 'Policies for Economic Development Wilfrido D. Cruz A Comprehensive and Critical Review of Tariff Policy Research Victor Marcos S. Venida Philippine Productivity Growth: Past Performance and Future Potential Richard Hooley and Erlinda M. Medalla Market Survey and Competition* David Lira and Casimiro V. Miranda, Jr. Philippine Trade iia Manufactures: Structural Change and Adjustment Florian A. A lburo Protection* Ross Garnaut and Norma A. Tan Philippine Shipping Industry and Policies: Current Devel6pment Joselito A. Supangco Philippine and Australian Perceptions on Issues Related to the New International Economic Order* Wilfrido V. Villacorta and Tcreso S. Tullao, Jr. Policy Imperatives for the Agricultural Sector Center for Policy and Development Studies Industrial Regulation in the Philippine Context Remedios Balbin Philippine-Australian Hal Hill

Economic

Relations*

Market Prospects and Trade Promotion for Rattan Furniture, Leather Products and Footwear in Australia and the ASEAN Countries* Felicitas U. Evangelism

102

t03 104

105

106 111

113 114

115

117

120 122 125

127

XII Ongoing Research Projects The Output and Government Revenue Effects of the Tariff Reform Program Manuelito C. Mabida Food Trade and Food Security _ Muhammad Ars]ad A nwar and Cristina C. David Recalculation and Analysis of the EPRs Using the 1979 I-O Tables Donnie Baldevieso and Zaida B. Pascual The Employment and Trade Effects of the Tariff Reform Program: An Empirical Verification of the Chung-Lce Model Ma. Theresa L. Quinto Economic Analysis of Resource Conservation

by Upland Farmers in the Philippines Marian Segura-de los Angeles On Tariff Protection and Comparative Advantage: The Philippine Fisheries Case Fe Fidelis C Gentiles The Impact of Export Taxes • Tariff Commission Background Paper and Theoretical on Trade Liberalization John H. Power

129 130

131

131

132

132 134

Framework

An Assessment of the Current Tariff Reform Program and Other Trade Liberalization Measures Erlinda M. Medalla A Study of Complementary Indirect Tax Reform Rosario G. Manasan A Special Study on Non-Tariff Barriers Erlinda 34. Medalla An Identification of Industries Most Likely to Have Major Adjustment Problems and General Study of Measures to Facilitate Adjustment John H. Power and Erlinda M. Medalla A Study of Revenue Implications, Output, Employment, and Balance• of payments Effects Erlinda M. Medalla, Raul F. Fabella • and John H. Power

135

135 136 137

137

138

,Rill A Study on Timing Further Reform and Appropriate Interim Policies Before and During Reform John H. Power and Erlinda M. Medalla A Study on PosSibilities of Securing Trade Commitments Concessions from Major Trading Partners and ASEAN Erlinda M. Medalla Problems and Prospects of Selected Non-Traditional Manufactured Exports Florian A. A lburo The Sectoral Incidence of the Coconut Levy on the Market Participants in the Philippine Coconut Industry A rmando C. A rmas, Jr. Economic Valuation of On-Site and Off.Site Effects of Forest and Watershed Modifications Wilfrido 1). Cruz Population Pressure and Migration: Implications for Upland Development Ma. Concepcion J. Cruz Towards More Rational Watershed Management Policies and Programs Wilfredo P. David Assessment Of Costs and Benefits in Commercial Forest Management Cerenilla A. Cruz Assessment of the Distribution of Costs and Benefits of Selected Communal Tree Farm Projects Eumelia B. Corpuz Cost and Benefits of Government Subsidies to Agriculture Ruperto P. Alonzo A Study on the Implications of Alternative Electricity Pricing in the Philippines Margarita R. Songco Agrarian Reform and Rural Employment Center for Policy and Development Studies Feedstuff -Livestock Sector of the Philippine Economy Center for Policy and Development Studies Agricultural Development in the Philippines: Policy Modelling and Analysis Cielito F. Habito

139....... or 139

140

141

141

142

143

144

144

145

146 147

148

148

XlV Food Consumption Parameters, Nutritional Impacts and Philippine Agricultural Development Ma. Agnes R. Quisumbing Multifactor Productivity in Philippine Agriculture: A Regional Analysis Moises L. Sardido IV.

POVERTY, INCOME

AND WEALTH DISTRIBUTION

Co mpleted Research Projects Tile Distribution of Income and Wealth: A Survey of Philippine Research Mahar K. Mangahas An Analysis and Synthesis of Poverty Research in the Philjpj_ines Florian A. Alburo and Eduardo L. Roberto Integration, Participation and Effectiveness: An Analysis of the Operations and Effects of Five Rural FIealth Delivery Mechanisms Ledivina V. Cariffo Population and Development Research in the Ptfilippines: A Stirvey Alejandro N. Herrin Distributive Equity and Public Policy: An integrated Economic Analysis Mahar K. Mangahas Ongoing Research Pro]ects Enhancing the Effective Delivery of Social Services Through Community -•National and Local Government Partnerships Ma. Aurora Carbonell Castilo •V.

REGIONAL,

URBAN

AND RURAL DEVELOPMENT

149

149

' 151

151

152

152

153

154

155 156

Completed Research Projects Urbanization and Spatial Development Philippines: A Survey Ernesto M. Pern_a and Cayetano W. Paderanga, Jr.

in the 156

XV The Spatial and Urban Aspects of Philippine Development Ernesto M. Pernia and Cayetano W. Paderanga, Jr. Changing Rural Institutions and Participatory Development: A Review of the Philippine Experience Gelia T. Castillo Public Policy and Urban Housing Market in the Philippines Edna S. Angeles Food, Fuel and Urbanization in the Philippines Alejandro N. Herrin, Manuel F. Montes and Rodolfo F. Florentino Infrastructure and Social Services in Two Regions of the Philippines Ledivina V. Cari_o Ongoing Research Projects.

Regional Growth and Interregional Felipe M. Medalla

Resource Flows

.157

157

158 159

161

163

Vl. OTHER PROJECTS Completed Research Pro/ects Micro-Software Development at the Philippine Institute for Development Studies Roberto S. Mariano, Manuel F. Montes, Josef T. Yap, and Samuel S. Chua

*Being coordinated

unaer

the ASEAN-Australian

Joint Research

Project.

165

xw

LIST OF ABBREVIATIONS

1, ASEAN - Association of Southeast Asian Nations 2, BOP - Balance of Payments 3. CB - Central Bank 4. CCHP - Comprehensive Community Health Program 5. CIF - Cost, Insurance, Freight 6. CGE - Computable General Equilibrium 7. COA - Commission on Audit 8. CSC - Civil Service Commission 9. DAP - Development Academy of the Philippines 10. DBP - Development Bank of the Philippines 11. DRC - Domestic Resource Cost 12. EPR - Effective Protection Rate 13. EROR - Economic Rate of Return 14, FSDC - Farm Systems Development Corporation • 15. FTI - Food Terminal Incorporated 16. GFI -Government Financial Institution 17. GNP - Gross National Product 18. HFC- Home Rnancing Corporation 19. ICC - Investment Coordination Committee 20. ISH - Integrated Survey of Households '21. LDC - Least Developed Countries 22. LWUA - Local Water Utilities Administration •23. MARINA - Maritime Industry Authority 24_ MEPS - Macroeconomic Energy Policy System 25. MMTC - Metro Manila Transit Corporation 26. MWSS - Metropolitan Waterworks and Sewerage System 27. NEDA - National Economic and Development Authority 28. NIA - National Irri_tion Administration 29. NIEO-- New International Economic Order 30. NPC - National Power Corporation 31. OBM - Office of Budget and Management 32. PCR - Philippine Commission on Reorganization 33. PNEA - Philippine National Energy Accounts 34. I'NOC - Philippine National Oil Company 35. PNR - Philippine National Railways 36. PPA - philippine Ports Authority 37. PVTA - .Philippine Virginia Tobacco Administration 38. RHU - Rural Health Unit 39. SCC - Selective Credit Control 40: SHDP - Sudtongan Human Development Program 41. SN - Samahang Nayon 42. SPDA - Southern Philippinesl Development Authority 43. TFP - Total Factor Productivity 44. TNC - Transnational Corporation 45. TRP - Tariff Reform Program

,

i

I.

ii

i

EMPLOYMENT_ HUMAN RF._OURCE DEVELOPMENT ANI_,TECHNOLOGY

PHILIPPINE EMPLOYMENT IN THE 1970's Rosa Linda P. Tidalgo and Emmanuel

E Esguerra

The study examines the Philippine employment situation the 1970s. A review of the literature indicates that most studies the p6riod tended to view the unemployment situation mainly the result of imperfections in the relative price structure due to plementation of incorrect policies.

in of as im-

The study emphasizes that policies to enhance-employment cannot be made in isolation due to the close interrelationships among the sectors of the economy; hence there must be a macroframework or a systems approach to plan and policy formulation within which policy's effects on other goals may be assessed. The study also recognizes that a country may have various development goals which sometimes conflict with one another. There is therefore a need to be more explicit in the assignment of priorities among objectives. Other more specific recommendations include: (1)

The need to have more timely information on unemployment and underemployment, particularly during recessionary periods;

(2)

The need to highlight the underemployment dimension of the situation in order to avoid the impression that the country has no unemployment problem; and

(3)

The need for the industrial sector to provide more jobs in the 1980s to absorb the rapidly growing labor force.

The study has been published

in book form by the Institute.

2 A SURVEY OFMATERIALS IN INTRODUCTORY ECONOMIC EDUCATION Gerardo P. Sicat This is a survey of materials used for elementary economic education in the Philippines, mainly those for courses in introductory economics in college. The materials used in secondary schools are also surveyed. Some books prepared for secondary schools have had some dual use as textbooks in elementary economics in the college level. The materials surveyed cover only those textbooks available before May 1983.

In general, the textbook situation in Economics has been in an unsatisfactory state and therefore can stand a lot of improvement.

This conclusion may be true not only in Economics but also in other social sciences considering that the field of Economics seems to be in relatively better shape, insofar as textbooks are concerned. There are a number of reasons given for the timidity to provide appropriate textbooks in the country: (1) thinness of the professional market for textbook writing; (2) the relative underemployment of professions; (3) perceived lack of market, (4) relatively low prestige of textbook writing among professionals; (5) underemployment of -the textbook and publishing industry, and (6) completion of foreign textbooks available at inexpensive prices.

To help improve the supply of locally-authored textbooks in the country, the improvement of income incentives to the teaching professions in the long-run is suggested. In-the short-run, there should be an active encouragement of textbook writing by social science societies, supported by a joint effort from government and .private publishing trades. AnÂŁ(ther suggestion is the offering of rewards for the preparat_n of textbooks. In addition, institutions can encourage textbook writing within their own staffs. Industrial incentives need to be restructured likewise to enable book publishers to acquire high quality book paper, printing ink, and other critical raw materials related to book publishing_ Finally, to keep the quality of teaching materials relatively high, foreign textbooks should be made available at lower prices.

This study is available as PIDS Monograph Series No. 4.

3 LABOUR MARKET, STRUCTURAL ADJUSTMENTS IN THE PHILIPPINES Rosa Linda P. Tidalgo The study examines the following two broad sets of labor issue_' that have significant policy implications: (1)

The effect of changes in the labour market on the rate and pattern of economic change and structural adjustment in Australia and ASEAN countries; and

(2)

The impact of labour mobility on structural adjustments undertakeninthePhilippines.

The studyexaminesthetransformation ofthePhilippine labour market,as the countryattemptedto grow and developduringthe post-warperiod.Itreviewsthe developmentstrategies adoptedby the government to achievegrowth,and how theseaffectedfactor use and output.It alsoexaminesthe performanceof the labour" market by lookingat demand and supplyforces, and theresulting employment and incomeeffects.

In particular, supplyconditions arcexaminedandrelatedtothe employment experienceto assessthe extentof labourutilization.

Accordingly, itwas found thatlabourunderutflization inthePhilippinescomes closeto 3.3millionor20 percentofthelabourforcein 1980.Moreover,this,does not includethemagnitudeof idlework force,thosewho areof workingagebut arenotinthelabourforce, generally among housewivesand students.

With regardto employment, an inverserelationship isfound evidentbetween the employment rateand educational level.

For example,the employment rateof college graduatescame secondto thatof the elementarygroup.This situation seemsto indicate an increasing over-supplyof labouras the educational levelincreases.

It thereforesuggests, a seriousmismatch between the educational system and the manpower requirements of theproductionsector.

Although an improvementin employability forhighereducational levels was observedby 1978,the potential socialproblem of high employment among thehighlyeducatedcannotbe underestimated.

As regardsearningsduringthe periodobserved,1957-1978, earnings didgrow fastbut notenough to catchup withtheerosion

4 of real earnings caused by inflation, and generally failed to gain from-productivity increases. The labour sector has not really experienced the often assumed trickles of economic growth as government planning focused on incentives for Capitalists to invest and to increase output growth. Labour was perceived as a cost of production and therefore was considered as a factor whose _cost of price ought to be held low. The oversight of the implied domestic market growth limitation and the social tension it generates are seen in the study as important factors explaining the slow economic growth.of the country: A separate section discusses the different streamsof international migration during, the post-war period. Among the findings is the relative size of foreign labour in the country which remains very small. However, the government is expected to rationalize its policy with regard to their entry into the country. Foreigners should not pre-empt jobs which Filipinos can take unless some reciprocity between countries can be arranged.

Finally, the study maps out government interventions in the labour market and examines how these operations affected the market. In general, the study concludes that in spite of modernlabour legislation designed to protect and promote the labour sector's welfare, the labour sector relative to other sectors ended up shouldering the greater burden of the growth effort.

The findings reveal that government planning has been focused mainly onthe growth objective and has not systematically incorporated its effect on the labour sector. Since unemployment, underemployment and declining real wages cannot be ignored over the long-term, the government resorted to ad hoc policy responses whose effects on other goals were not systematically assessed. In several instances, the government was observed to have adopted program] policies which negated other goals as it pursued a given goal. However, even if the use of some formal macro-model and sectoral planning framework might allow enough simulation analysis to guide policy-making, the problem of deciding priorities would still confront government poliCy-making.

At present, government is attempting to direct the economy in ithe 1980s towards a freer market system. However, it seems that it has not yet carefully examined what such a direction would re-

5 .quire in terms of changes in intervention in the various markets of the economy, including the labour market. Any decision to deregulate some sectors, given its impact on other sectors of the economy,, will necessarily have implications for policy action on the distribution of the burdens and benefits of economic growth. Hence, this move needs to be examined in greater detail using various perspectives.

The No. 13.

study

is circulated

as ASEAN-Australia

Working Paper

A RESEARCH AGENDA ON NUTRITION AND WELFARE Center for Policy and Development

Studies

The present research project synthesizes existing knowledge on nutrition-'related issues in the Philippines, with a view towards assessing the nutrition situation, and establishing trends and priorities for further research in nutrition and in other areas which affect nutrition ultimately. The project covers the preparation program focusing on nutrition and welfare.

It is undertaken

of a research

with the following problems in mind:.

(1)

Nutrition as a policy issue involves biological, agricultural, economic and-socio-cultural factor._ Thus, nutrition policy is not only a matter of ensuring an adequate supply of nutrients; it also involves the process by which agricultural, economic, socio-cultural and health factors are influenced so as to guarantee the access,ibility and utiliT.ation of an acceptable level of nutrients by the nutritionally-at-risk individuals.

(2)

There has been no unified attempt to integrate nutrition intervention programs, agricultural policies and nutrition data generation systems in a comprehensive study of the nutrition sector.

(3)

The response of nutrition policy to changing'Philippine economic conditions requires an evaluation of past and ongoing food policies and nutritiQn programs, as well as an assessment of the present nutrition situation.

The present

study calls for the preparation

of seven (7) state-of-

6 the-art review paperswhich will synthesize existing research on nutrition issues to bring to fore the findings and recommendations of these researches to policy-makers, and to serve as basis for the identification of research gaps and the formulation of future research agenda.

MEASURING THE INCIDENCE OF HEALTH EXPENDITURES I_ROM SECONDARY DATA Panfila Ching The study aims to: (a) provide an empirical analysis of consumption of health services, taking into consideration the relation between health Status and health service through a case study on Bicol (using.the 1978 Bicol Multipurpose Survey data); and (b) to determine the distribution of public health benefits, as well as the distribution of illness, both across income groups and regions in the Philippines, using the National Health Survey Data.

The study makes use of the 1984 Ching study on Bieol, extendhag the earlier analysis. Not only does it probe into the incidence of health expenditures but also the health condition of the Filipino people. Aside from the distribution of health benefits, illnesses experienced are also examined.

By employing theNational Health Survey data for the incidence part of the study, the proposed research fulfills the need for broader data base, in terms of more complete coverage of various income groups. In addition, interregional differences are also examined.

Moreover, the section on health, services utilization considers the impact of healtl_ service use on health conditions. Although research on the relation between health service use and health would be more appropriate for those with training in medicine than for those in the field of economics, a multidisciplinary approach would certainly be most fruitful. The use of health services is to be explained by examining the following factors: (a) health status; (b) _conomic, social, demographic and environmental factors; and (c)the interplay of (a) and (b). A simultaneous-e_uation model is developed to describe the interdependence of all these factors: more clearly.

This 'effort is useful for planning the future consumption of health services. In fact, most of the proposed features ,are important to

7 policy analysis at the macro level.

The expected output from this research project is a report which shall provide an analysis of the consumption of health services, and determine the distribution of illness, both across income groups axed across regions in the Philippines.

8 II.

RESOURCE

MOBILIZATION

PUBLIC FINANCE IN THE PHILIPPINES•: A REVIEW OF LITERATURE Rosario G. Manasan

•The review •covers the literature on taxation, government expenditure, the budget process, and public debt. The review indicates that taxation has been the most studied area of public f_ance, while the budget process and public debt are the least explored.

There is a need for a critical review of assumptions made in previous studies as well as more research on government revenue forecasting, long-term budgeting, effects of fiscal policy on the different industrial sectors, and on an integrated public sector model on public finance.

This report is contained in a PIDS special publication Survey of Philippine Development Research H

entitled

SURVEY AND REVIEW OF FORECASTING MODELS ON GOVERNMENT INTERNAL REVENUE Rosario G. Manasan The survey looks into previous research on revenue forecasting.

These models vary in functional specifications, number of behavioral equations, explanatory variables, time period and degree of aggregation of data used. It is found that tax bases as explanatory variables for tax i_venues do not always guarantee accurate forecasts;

9 the more aggregate the endogenous variable is, the better the simulations become. The elasticities approach yields the lowest forecast errors and a general underestimation in almost all simulations is to be expected for lack of other explanatory variables. Future research should deal with spatial or regional forecasting, more disaggregated forecasting, refinements in estimation procedures and specifications, and expanding the scope of forecast.

AN ECONOMETRIC MODEL FOR FORECASTING. INTERNAL TAXES: A NATIONAL LEVEL APPROACH Rosario G. Manasan This study aims to develop, specify, and estimate an internal tax forecasting model which has a. higher level of disaggregation, includes determinants other than tax bases in the specification, and considers various proxy variables for tax bases.

The statistics used to evaluate the forecasting capability of alternative regression equations, namely, t-statistics and root mean square error (RMSE) were found to be consistent with one another in general In most cases, no evidence of autocorrelation is found.

The percentage root mean .square error for the historical simulation (over the estimation period) for total internal taxes is 6.5 percent. The forward forecast errors for total internal tax collections is 4.8 percent for 1979, 7.5 percent for 1980, and 16.5 percent for 1981. However, the errors for forecasts of different categories of tax revenues vary from a low 1 percent to a high 34 percent in 1979, and frc;m 5 percent to 50 percent in both 1980 and 1981, respectively.

The use, of the projections made under the study are official BIR revised forecast for 1981 and is recommended for use in 1982 (with needed adjustments), in view of the implementation gross income taxation scheme.

of the

The study is circulated as PIDS Working Paper Series No. 81-08.

10 AN ECONOMETRIC MODEL FOR FORECASTING NATIONAL AND REGIONAL TAX COLLECTIONS: A CONSOLIDATED REPORT Rosario G. Manasan While the initial purpose of the study is to come up with a tax revenue forecasting model that improves earlier models, the natural by-products include the tax-base elasticity and buoyancy estimates for various types of taxes.

Tax buoyancy is the ratio of the proportional change in tax revenues to the proportional change in the tax base, with revenue change inclusive of the effects of the discretionary changes like introduction of new tax measures.

Tax elasticity, meanwhile, is the ratio of the percentage change in tax revenue to the percentage change in the tax base, with the revenue increase "cleaned" of the effects of discretionary factors_ Tax buoyancy and tax elasticity measures provide some estimates, of the responsiveness of tax revenues to changes in the tax base and/or tax rates. Thus, they are important for both government planners and policy makers in assessing the country's tax performance and public sector's ability to mobilize resources.

On the whole, the tax system in the period 1961-1978 yielded a tax buoyancy estimate of 1.139 implying an increase of 1.139 percent in tax revenue for every 1 percent increse in GNP. It speaks well of the responsiveness of the overall internal tax system •to economic growth.

In terms of particular types of taxes, the study estimates the tax buoyancy for income taxes at 1.204, while its elasticity with respect to GNP is 1.179 for 1961-67 and 1.114 for 1968-78. The elasticity of the individual income tax with respect to personal income is in the range of 1.30-1.46. In contrast, the elasticity of corporate income tax •with respect to corporate income is relatively low_,ranging from_).82-1.•07.With regard• to specific taxes,/the elasticities of the specific tax on both tobacco products and petroleum products with respect to their bases are considerably less than one.

This shows the inefficacy of specific taxes in raising revenues. A fur-

II ther study of the matter is called for to pinpoint alternative schemes for increasing government collections. ]'his study appears as a PIDS seminar paper.

PHILIPPINE MONETARY POLICY AND ASPECTS OF THE FINANCIAL MARKET: A REVIEW OF THE LITERATURE Edita A. Tan This review deals with the existing literature on the history of Philippine monetary policy and aspects of the financial market such as credit, interest rate policies of commercial and rural banks, government securities, the money market and money supply, price movements and savings behavior, and portfolio choice in the agricultural sector.

The study calls for more research that would focus on model building as far as financial institutions are concerned. It also recommends more extensive research on regulated and unregulated interest rates; credit allocation and its attendant financial costs as borne by borrowers,, the portfolio behavior of financial intermediaries, and savings.

The study appears in the first volume of the PIDS special publication Survey of Philippine Development Research.

THE STRUCTURE AND GROWTH OF THE PHILIPPINE FINANCIAL MARKET AND THE BEHAVIOR OF ITS MAJOR COMPONENTS Edita A. Tan This study aims to prescribe modes of behavior in the Philippine financial system. A descriptive analysis of the financial, market and its pattern of development over two decades is presented and models for finance choices are also given.

The study traces the progress of the country's financial network and observes that the financial system consists of a large public sector catering to priority activities of borrowers; a conglomerate of commercial and financial corporations; a small segment of rural and savings banks; and a neglected securities market.

12 On the whole, the study recommends more competitive trading in the financial market by limited use of rediscounting facilities to meet target levels of money supply; a more developed market for government securities, possibly a secondary market for these securities; funding of special projects through government issues or taxes; competitive rates of foreign loans to industry; the placing of Government Service Insurance System and Other employee savings into profitable enterprises; and deregulation of interest rates.

The study is circulated

as PIDS Working Paper Series No.81-06.

AN ANALYSIS OF THE BEHAVIOR OF COMMERCIAL BANKS Mario B. Lamberte The study looks into the behavior of 27 private commercial banks during the period 1977-1979. It views banks as multiproduct, multifactor producing units, whose outputs consist of loans (classified according to maturity and security), investments, demand deposits, and other bank services. Inputs consist of savings and time deposits, b.orrowed funds, labor services, and other operating inputs.

This approach recognizes the role of production technology in determining the optional mix of outputs and inputs and a least cost banking industry structure. It also allows one to make a distinction between savings in cost derived from expanding the scale of operation (economies of scale) and those derived from producing different products in combination (economies of scope). These operational concepts were not properly distinguished in discussions on universal banking.

Among the recommendations

of the study are:

(1)

Encouragement of output diversification in view of the present size of banks (due to the existence of economies of scope) through favorable policies like the lifting of policies/measures biased against long-term loans [this is a better proposition than the encouragement of mergers among banks, since economies of scale are nearly exhausted],'

(2)

Reduction of cost of banking services via new service packaging, new ways of organizing resources, and efficient methods of

13 credit monitoring and evaluation, instead of focusing on scalerelated technical change; (3)

An explicit pricing scheme for demand depositors to provide correct market signalSf0 r hanks and depositors;

(4)

Setting up rediscount rates by the Central Bank at levels competitive with the money market rates, so that den_nd for borrowed funds and demand-deposits become more price elastic and, therefore, more responsive to policy changes; and

(5.)

Lowering of the share of government securities in the total reserve requirements of commercial banks than is currently allowed to enhance effectiveness-of monetary control and to successfully develop the secondary market for government securities.

The study is circulated as PIDS Staff Paper Series No. 82-05, AN ANALYSIS OF TAX BASES IN THE PHILIPPINES Rosario G. Manasan

The stud_ identifies and defines tax bases in the Philippines and proposes a methodology for estimating them. A cross-country comparison of various tax base det-mitions among selected developing countries as well as an initial llst of variables that may be used in estimating tax bases are presented.

Most studies of tax functions and measurement of tax revenue elasticity use proxy variables for the tax bases. However, some country practices show that bases are narrowly defined, as in the case of income tax where deductions/exemptions are applied, thereby reducing the scope of the base. Hence, the use of Such definitions does not result in appropriate historical tax-income relationships. Instead of using proxies to "approximate" changes in incom_ as well as in other taxes, it is perhaps more meaningful to use proxies to approximate changes in the ba_s, and use these estimated changes to derive tax bases.

The cross-country comparison shows that the definition of the income tax base, as practiced in the Philippines, is narrower corn-

14 pared to others because of a wider array of items included as deductions or exemptions. In all other tax categories, though, the Philippine practice is analogous to those in other countries. There is, however, no tax based on wealth in the Philippines.

There is no single method that could be applied to estimate tax base. Instead, a combination of four methods, e.g., proportional adjustment, constant rate structure, dummy variable technique, and divisia index approachis applicable depending on the kind of data available.

The tax estimation

to be used will be based on the broad

categories of taxes of the Philippine tax structure. The preliminary classification of taxes in the Philippines indicates that there is a heavy concentration of taxes in the service sector.

Finally, the estimates of the tax bases for various tax categories proposed in this study can provide initial-information and data for: (1)

Cross-checking the forecasts of revenue collections derived from .the revenue forecasting model which the BII_ has developed (estimates of tax bases can be used to adjfist these tax forecasts);

(2)

Evaluating the pattern of taxation efforts in the economy determine the sectors which are heavily or lightly taxed, and

(3)

Analyzing time.

the nature

of the movement

to

of tax bases through

This study is circulated as a seminar paper.

FOREIGN DIRECT INVESTMENT IN THE PIHLIPPINES: A REVIEW OF THE LITERATURE .Charles W. Lindsey and Ernesto M. Valencia The study reviews and synthesizes the literature on foreign direct investment in the Philippines in terms of the size, composition, determinants, and the benefits and costs of direct investment in thePhilippines. The study indicates that the benefits from foreign invest"

15 ments are not really extensive while the costs have proven to be quite •substantial.

The study lists some of the benefits foreign investments like:

cited by proponents

(1)

The provision of much needed capital to the country;

(2)

Improvement of the balance of payments flow, exports, and import substitution;

(3)

Transfer of technology;

(4)

Stimulation

(5)

Generation

through

of

capital in-

of new industries; and of employment

opportunities.

On the other hand, it also cites some of the costs or limits to the benefits as enumerated by critics of foreign investments, like: (1)

Utilization of local capital .at the expense of.domestic enterprise and use of retained earnings rather• than new capital;

(2)

Worsening of the .balance of payments by repatriating capital and remitting profits, royalties, and other service incomes; and

(3)

Transfer of inappropriate

and/or outdated

technology.

In listing down such points, the study makes a qualifying statement that few, if any, have really attempted to make a comprehensive benefit/cost analysis for the Philippine situation. The study observes that the view of any writer may include factors that fall on both benefit and cost sides. Moreover, proper analysis of many: of the Studiescan only'be possible when more studies linkingthe subject matterwithOtherareasof theeconomy, andwiththecountry's economicdevelopmentingeneralarcmade.

Thus,itrecommends further research on the: (a) Impact of import-substitution, exports,transfer pricing, managemcnt fees,royalties, and otherfeeson thebalanceof payments_.

16 (b)

Role envisioned by government policy-makers for transnational corporations (TNCs) in the economic development plan, the purpose of the policies designed to influence the activities of foreign investors, and the relationship between the role envi- ' sioned and policies implemented, on the one hand, and the behavior of TNC's, on the other; and

(c)

Role of foreign investment, if any, in alternative development scenario envisioned by local critics of foreign investment.

The study appears in the second volume of a PIDS special publication, Survey of Philippine Development Research.

EXCHANGE RATE FLEXIBILITY AND INTERVENTION POLICY IN THE PHILIPPINES, 1973-1981 Filologo

Pante, Jr.

The study attempts to evaluate the exchange experience of the Philippines during the period of generalized currency floating up to 1981. It describes the Philippine exchange rate regime in the post1970s as having a limited, rather than full flexibility, with the domestic currency "crawling" rather than floating vis-a-vis the U.S. dollar.

This system of limited exchange rate flexibility has probably prevented more fundamental disequilibrium from developing, and has assisted the country in weathering the external shocks that began with the oil crisis of 1973-74.

The paper cites the importance of the current account in the exchange rate adjustments undertaken by the monetary authorities.

It also notes the importance of the monetary authorities' commitment to the nominal peso-dollar exchange rate. The paper, however, cautions that since the country is not immune to disturbances generated by exogenous currency realignments, authorities___should conSider effective exchange rate formulations in determining both'the extent and direction of intervention. Monetary authorities should also be vigilant of changes in real effective exchange rates. MoreoVer, the paper stresses the importance of retaining flexibility in exchange , rate policy in the future to be able to adjust to external imbalances.

Finally, it encourages research on the formulation and estimation of the exchange rate or balance of payments model which looks into

17 interactions among monetary,

fiscal and exchange rate policies_

The study is circulated as PIDS StaffPaper

Series No. 83-01.

A REVIEW AND SYNTHESIS OF MACRO-ECONOMIC MODELS OF THE PHILIPPINES Virgilio T. Velasco The study reviews the various macroeconometric models that have been developed for the Philippines after 1965. The review does not include industry or sectoral models.

Lack of data has put constraints on the modeUing efforts exerted so far. For instance, data on capital formation are sorely licking.

There is no disaggregation of private consumption by commodity groups. Inconsistency becomes a pxoblem, too, especially if data are taken from different sources. Frequent revisions of the national income, accounts as well as the timing of the data are additional problems.

On the whole, the paper makes no attempt to reconcile the different estimated parameter values of the various models, and neither does it compare the projection results. The paper recognizes that the models use different sources of data covering different periods and were developed for different purposes. However, it acknowledges that based on the observations made and the insights drawn from the review of various models, some preliminary specifications for a macroeconometric model for development planning can be made.

The stUdy appears in the first volume of a PIDS special publication entitled Survey of Phillipine Development Research.

ON THE USE OF THE DRC CRITERION IN SELECTING PROJECTS Erlinda M. M edalla The study aims to provide government planners with a working knowledge on the use of the domestic resource cost (DRC) as one possible criterion/methodology in evaluating and selecting projects.

It clarifies basic questions on the concept, appropriateness, and

18 measurement

of the DRC criterion.

The study is available as PIDS Staff Paper Series No. 83-02.

SHADOW PRICES OF GOODS AND RESOURCES IN THE PHILIPPINES: AN ASSESSMENT Erlinda M. Medalla The paper summarizes the existing estimates of shadow prices of goods and resources in the Philippines including implicit tariffs, shadow exchange rate, shadow wage rate, the social rate of discount, and the shadow price of capital. The usefulness of the estimates in. policy-making is also touched upon. For instance, these estimates are necessary in evaluating economic efficiency ratios of projects. The identification of eligible industries for corrective measures and the optimum level at which such measures can be imposed to help promote welfare hinges on the adequacy Of these estimates.

The study is circulated as PIDS Staff Paper Series No. 82-04.

ECONOMIC AND SOCIAL IMPACT ANALYSIS/ WOMEN IN DEVELOPMENT (ESIA/WID) PROJECT Principal Investigators: Na_tional Economic and Development Pasig, Metro Manila

Authority

Philippine Center for Economic Development University of the Philippines Campus PAliman, Quezon City Regional Development Region VI, Iloilo City

(NEDA)

(PCED)

Council (RDC- V1)

Institute of Philippine Culture (IPC) Ateneo University Campus Loyola Heights, Quezon City The project

aims to help improve

the capability of the Philip-

19 pine government in monitoring and measuring economic progress. social change, and the impact of development projects, as well as the effects of development on women in their dual roles as agents and beneficiaries of development.

The project is composed of five components: 1.

Macro Component

The Macro Component involves the development of a system of macro-indicators and the continuing use of that system in measuring, monitoring and evaluating the degree of achievement of the economic and social goals set forth in the Philippine medium-term and longterm development plans. It also involves an assessment of the existing statistical system, and the development and implementation of a statistical improvement program to meet the data requirement of the indicator system.

One of the outputs of the Macro Component is the formulation of the ESIA Indicator System. It specifies the development goals to be monitored and the key, as well as supportive indicators, which will be used to measure the degree to which these development goals are being attained. As assessment of the existing statistical system was conducted, focusing on the extent to which the data requirements of the indicator system could be met. The assessment indicates that data are available only for about half of the indicators comprising the system, majority of which are economic indicators.

The assessment report also identifies where the data are available, the frequency and duration of data availability, the weaknesses, and the adjustments that have to be made thereon to allow measurement of the relevant indicators on a regular basis. Measurements have been done for about a hundred indicators whose data requirements are currently available. The Component has published the "1980 Economic and Social Indicators" Which contains these indicators. A .second publication, "The ESIA Indicator System: Concepts, Framework •and Data Sources,." discusses the goals and sub-goals, with their correspondiflg key and supportive indicators. A third publication, the 1981 edition of the "Economic and Social Indicators," has also been prepared.

On the basis of the assessment of the statistical system, a statis-

2O tical program - the Macro Component Statistical Improvement. and Development Program (SIDP) - was drawn up to meet the statistical requirements of the ESIA Indicator System. Under the Program, 28 statistical projects were implemented. Eleven projects were subcontracted to various agencies and institutions. The rest, dealing mainly with conceptualization, estimation methodologies, and modification of present computation procedures, were done in-house.

Among these projects are: (a) the development of modules for the Integrated Survey of Households (ISH); (b) the conduct of a National Health, Nutrition and Social Services Survey; (c) the Pilot Housing Survey; and (d) the Inventory/Assessment of Data Sources/ Availability and Training Needs at-the Local Level.

2.

Micro Component

The Micro Component seeks to develop a better understanding of the mechanisms, processes and relationships through which development projects achieve their impact on various development goals or areas of concern. It involves the development of project-specific indicators and the initiation of their regular use for measuring, monitoring and analyzing the progress and impact of development projects on various areas of concern. It also involves the determination of efficient and effective means through which these indicators can be regularly measured and-monitored.

The Micro Component includes 12 project impact studies representing a broad range of project categories. Each of the studies -- six of which are intensive and six extensive ones -- has an analytical framework for progress and impact assessment. The framework contains a model or a set of. hypotheses describing the relationships among project inputs, outputs, and impact variables which are empirically validated. Prior to the formulation of the hypotheses, a review of the literature and knowledge base on project impact assessment was undertaken.

Two reports on information systems .development were prepared by foreign consultants of the Micro Component. These are the "Illustrative Agency Monitoring Systems to Support Socio-economic Analysis of Health Systems in the Philippines" and the "Nationwide Data Series for Evaluation and Monitoring Reflecting Areas of Concern from Fifteen ESIA/WID (Micro) Studies." The first report

21 presents alternative systems which would respond to an agency's management requirements and assist in the measurement of socioeconomic impact of development projects. The second report involves the survey of the indicators suggested by the Micro Component for impact studies of development projects, and an analysis of their consistency with the kind of data currently available from existing statistical and internal project information systems.

The Component also implemented the "Training Program on Impact Assessment of Development Projects." The training program aimed to enhance the capabilities of representatives of participating line agencies at the national and regional levels l'o design, analyze and _ use socioeconomic data for planning, monitoring and assessing the impact of developing programs and projects. It was jointly designed by the East-WestCenter of the University of Hawaii and the ESIA/ WID Project Management to respond directly and specifically to the training objectives of the Micro Component. Five Micro Component research coordinators (who are line agency staff detailed to the Component), two Research Utilization Component staff members, and seven NEDA Regional Office representatives attended the program.

3.

Region Vl Component

The Region VI Component's general objective is to explore and examine administrative and other related issues in promoting the extensive use of project progress and impact measurement systems at the regional level. Towards this'end, the Component: (a)

Identifies and develops means to facilitate the adoption and systematic use of project progress and impact indicators by regional personnel involved in planning and project development;

(b)

Designs and pilot-tests low-cost project progress and impact measurement systems forselected projects in Region VI; and

(c)

Documents the actual experience gained in designing and pilottesting such systems particularly with respect to the administrative and other operational issues involved.

The Region VI COmponent formulated and implemented 24

22 Monitoring and EvalUation (M and E) systems for 18 projects of the line agencies and 6 projects of the provincial governments in the region. Personnel from participating agencies in the region had earlier undergone a series of training seminars on topics deemed crucial to the formulation and implementation of them and E systems, and to the Region VI Component thrusts in general. Trial implementation of the M and E systems has been ongoing since the early part of 1980 to: (a)

Test the efficacy of the administrative for actual project progress monitoring and

structure in the region and impact evaluation;,

(b)

Determine the data requirements for monitoring and evaluation purposes which could be met by existing project information systems in the region.

Subsequently, the Component conducted two successful rounds of supplementary studies (the first in mid-1980 and the second in April-June 1981) to generate comparable data sets meant to facilitate the actual assessment of impact. Nineteen (19) out of the 24 projects have been chosen and subjected to impact assessment by the agency participants.

The reports covering these assessments haste been finalized. The Component has also completed a report on the administrative and other feasibility issues involved in the implementation of the Region VI Component.

4.

WID Component

The WID Component aims to determine the degreeand extent of participation of Filipino women in the development process to facilitate the design of policies and programs necessary to enhance their participation.

To achieve this objective, this Component develops and uses indicators that are necessary and appropriate for measuring women's participation in development. In addition, special studies are conducted to fill the gaps in the existing knowledge about womeia's development activities.

The WlD Component has completed a Pilot Survey, which explored and tested methodologies for coldection of data on three experimental indicators covering women's participation. These are the domestic, quasi-domestic, and market activities; women's patti-

23 cipation in community organization; and women's use of, and access • to community development services. similarly, seven special studies have been undertaken. These studies generated information on women's activities and conditions in areas where there are large concentrations of women, and identified possible indicators of women's roles in specialized sectors.

The Component has likewise accomplished its Three-Region Survey aimed at testing further• the indicators of female participation as suggested by the Pilot Survey and the special studies. Also, it identified the determinants of women's changing roles, the impact of these on family welfare and other areas of development concerns.

5.

Research Utilization Component

The Research Utilization Component has completed the conduct of nine ex-post evaluation studies, based on the methods of analysis develooed by the Micro Component. Concept papers on the five ex-ante analyses done under the Component have also been prepared.

MONETARY AGGREGATES AND ECONOMIC ACTIVITY Marto B. Lamber re Monetary management in the Philippines can more effectively support development objectives through closer study and control of the growth rates of monetary aggregates. SpeeificaUy, there is a need to determine whether a monetary aggregate can serve as an intermediate target of monetary policy. To do this, two criteria may be used: (1)

The aggregate must bear a close and predictable relationship economic activity; and

(2)

The aggregate must be controllable Central Bank.

to a large extent

to

by the

The existing monetary aggregates currently used and recognized by the Central Bank are M 1, M2 and M3. M 1 is currency in circulation, meaning currency being issued by the Central Bank and peso deposits subject to check by the monetary system, unused overdraft

24 lines and managers' and cashiers' checks. M1 excludes cash held in vaults by the National Treasury and the commercial banking system.

M2 is M1 plus savings and time deposits of deposit money in banks, excluding national government deposits, and M3 is the sum 'of M2 plus deposit substitutes of deposit money in banks. The growth rates of these aggregates have diverged from each other, thus there is a need to determine which among them can serve as an intermediate target of monetary policy.

The_ has been a lot of recent financial changes which may have exerted a significant impact on the payments process, and obscured the link between monetary aggregates and economic activity. Some of these motivations include the rapid emergence of other financial intermediaries and changes in regulations. Thus, there is a need to construct additional and broader monetary aggregates such as M 1A, M2A, M3A and M4A. M1A is currency in circulation plus demand deposits of all financial institutions; M2A is M1A plus savings and time deposits of all financial institutions; M3A is M2A plus deposit substitutes of commercial banks and non-bank financial intermediaries; and M4A is M3A plus marginal deposits of commercial banks.

The semestral growth rates of these seven monetary aggregates show a perceptible upward trend although their growth rates markedly diverged from each other. To determine the relationship between GNP growth rates and the growth rates of the monetary aggregates, a regression analysis was performed. ]'he analysis showed that the broader monetary aggregates, M3, M3A and M4A, predict future economic activity more accurately and have better foreGasting capability over narrowly defined monetary aggregates.

Controllability is interpreted to mean closer relationship between the monetary base, which in essence constitutes Central Bank actions, and the monetary aggregates. In this respect, M3 bears a close and predictable relationship with economic activity and is found to be controllable to a large extent. Although M3 has less impact on. economic activity compared with aggregates, M3A and M4A, it nevertheless could serve as an intermediate target of monetary policy. However, the movements of M3A and M4A need to be monitored closely in view of the growing importance of non-deposit money banks and the policy to encourage merging among financial institutions.

For the Central Bank to be able to exercise greater control over monetary aggregates, it can avail of at least two alternatives. One alternative is to stabilize money multipliers through : (a) uniform reserve ratio for'all types of deposits regardless of f'lnancial institutions; and (b) prescription of a ceiling of foreign exchange holdings of commercial banks. Another alternative for greater control would be for the Central Bank to predict variations of money multiplier which would initiate offsetting actions through the monetary base to achieve desired growth rates of the aggregate. However, this alternative can only be pursued if the monetary multiplier is accurately predicted.

Finally, there is a need to determine whether management • of the monetary base is governed by considerations other than monetary control, i.e. Central Bank's provision of adequate funds for priority areas( as determined by government} and sale or purchase of foreign exchange not intended for control but stabilization of the •exchange rate. Also, there are other influences upon GNP excluded from the model which may or may not alter the value of the coefficients of the growth rates of the monetary variables. Still, results of the study remain instructive for policymakers and planners in monetary management.

-The study is circulated as PIDS Staff Paper Series No. 83-03.

LOCAL GOVERNMENT FINANCE Raul P. de Guzman and Angel Q. Yoingco The study examines local government finance in order to determine ways and means by which local government can promote and optimize resources for development and essential public services, both from revenue and non-revenue so.ur,ces. Specific areas of local finance axe looked into in order to make recommendations that will institute changes in policies and management resources.

The findings of the study are: (1)

Impact of National Allotments on Local Finance. The national allotments do not necessarily depress local initiative to raise revenues f.rom its own sources. They have a stimulative effect with respect to development expenditures but a non-stimula-

26 tive effect with respect to infrastructure

expenditures.

From the point of view of equity, accountability, elasticity, and activity, the Philippine allotment system 'has not been very satisfactory. It is not equalizing since the distribution formula does not allow for variations in increased fiscal capacities.

(2)

Revenue-Raising Powers of Local Governments. The most reliable and productive revenue sources among the local taxes and fees are the real property and business taxes. Local units generally relied more on the national allotments for revenues.

However, growth of revenues from local taxes have recently been impressive.

D_spite reforms introduced, real property taxation has still been saddled by lack of adequate assessment tools, technical manpower, and systematic recording system.

Tax collection has lagged behind the taxable capacity of local governments. This has resulted in low tax efforts of local units in the collection of real property and business taxes.

(3)

Operation of Local Enterprises.

All enterprise activities managed by the public sector (and studied in the project) can be transferred to the private sector, particularly electric plants, telephone systems, and commercial buildings. Majority of local governments, however, do not favor the management and operation of markets and slaughterhouses by the private sector because of good possibilities for cost recovery.

While some public enterprises are operated by the local government at a profit, others experience losses due to mismanagement and competition-from the private sector.

(4)

Credit Financing. credit financing as a method for funding local ,government projects in the Philippines is still underdeveloped in terms of level and emphasis of utilization. Major constraints to its use are the role of authorized lending institutions, financial as well as no,r-financial requirements, and administration and management.

(5)

Allocation

of

Local

.Govert_ment

Financial

Resources.

The

27 balanced budget requirement capital projects.

hampers the pursuance

Of needed

Methods and systems for estimating and analyzing expenditures and revenues are lacking or elementary in the conduct of local government finance. Additionally, there are no control mechanisms by which use of funds and accomplishment of expenditure projects may be assessed.

Local governments realize large budgetary surpluses which deprive local units of the opportunities for growth and development.

(6)

Administration and Management of Local Taxes. The problems met in real property tax administration are negative taxpayers' attitude, assessment deficiencies, political interference, incompetence of personnel and land reform.

With respect to the business tax, the most persistent lem is .the undervaluation of gross sales of business.

prob-

The study is circulated as a seminar paper.

PUBLIC CORPORATIONS IN THE PHILIPPINES IN 1982: A DEFINITIONAL AND TAXONOMICAL EXERCISE Rosario G. Manasan The study provides: (1)

A working definition of the term "public corporations";

(2)

A listing of public corporations the definition adopted; and

(3)

A classification of the Philippine public corporations set based on the motive, the sectoral, and controlling government agency criteria.

in _e Philippines in 1982 using

With respect to (1) above, the study sugggests the definition of a public corporation as a productive entity engaged in the production and/or marketing of a private good without consumption ex-

tenaality, whose ou_ut is actually marketed, and which is owned/ controlled, by the gox/ernment. Such definition differs from the official Philippine usage in these aspects: (a) The latter limits the term to those organizations of corporate legal form which are owned or controlled by the government, thus excluding departmental/ministerial undertakings of the business type; the former, however, does not; (b) The latter includes all government corporations regardless of the nature of the goods/services produced, while the former ex eludes those government corporations producing public goods, i.e., those perI-orming purely governmental functions; and

(c) The latter is silent on the issue of "marketedness" Based on the broad

definition

(which

includes

of output. educational

and health institutions), there are 254 public corporations in the Philippines in 1984. Using the limited definition, the number falls to 173.

With regard to (3) above, the study presents a taxonomy of the Philippine public corporation set. The framework is derived from a scheme suggested by Diokno (1981) which presents public corporation cases with their corresponding stated motives and the Pareto efficiency conditions violated. The motives may be grouped on the basis of (1) allocative efficiency, (2) equity, and (3) public sector revenue raising condition. "Market failures" or violations of the Pareto optimum conditions give rise to the allocative efficiency rationale for public corporations. These violations include increasing returns to scale resulting in the existence of natural monopolies, consumption and production externalities, absence of a full set of markets, excess capacity, and labor unemployment.

Finally, the study suggests the conduct of a number of research studies which will provide a better understanding of the role of public corporations in economic development. These are: (1)

Measurement and analysis of the profitability Philippine public corporations;

and efficiency of

(2)

An analysis of internal and external control in Philippine public

29 corporations; and (3)

Measurement and analysis of the contribution of Philippine public corporations to economic growth in terms of value added, employment effects, and the like.

The study is circulated as PIDS Staff Paper Series No. 84-02.

A COMPARATIVE STUDY OF POLICY RESPONSE TO THE BALANCE OF PAYMENTS CRISIS: PHILIPPINES AND KOREA, 1974-82 John 1t. Power

The study looks at the balance of payments (BOP) experience of the Philippines and Korea in the periods following the two oil price shocks in 1974 and 1980, and examines the policy responses to the BOP crises by the two countries. It also looks into the factors that brought about the crisis and the resulting impact on the two countries. Such analysis provides an indication of general prospects for both Korea and the Philippines in the near future.

The findings of the study pointed out that: (1)

Both Korea and the Philippines suffered sharp increases in their current account deficits following the two oil price shocks in 1974 and 1979-80 but experienced different results:

In the case of Korea, the first crisis was sharp and short-lived.

Korea largely ignored its balance of payments and opted for continued export-led growth. The strategy worked for Korea leaving its external debt position none the worse: The second crisis was prolonged and compounded by the internal shock of 1978, due to the over commitment to investment in heavy indtistry, and the agricultural disaster of 1980. As a result, the BOP could not be ignored any longer and Korea began to take measures to dampen the rate of inflation, reduce the emphasis on heavy industry, liberate market forces as well as aim at more modest growth targets.

311 With respect to the Philippines, the rise in the current account •deficit in the first crisis was retarded because of the favorable effect on export earnings by high sugar and copper prices in 1974. Reserves dropped in 1975 and recovered in 1976 but this was accompanied by a sharp rise in external indebtedness. The Philippines, like Korea, chose to ignore the balance of 15ayments and opted for growth. Investments were made in rural infrastructure while government deficits provided the stimulus to aggregate demand to offset lagging demand for traditional exports. The real crunch came in 1982 as exports dropped more than 15 percent below 1981. The result of this disaster was a large current account deficit, a substantial decline in international reserves, and a substantially increased external indebtednesso The Philippines' continued excessive dependence on its traditional exports, a result of its inward-looking industrial and trade policies, is as much to blame as its terms of trade losses.

(2)

The shock-accommodation analysis corroborates_the findings above that Korea has a far superior BOP adjustment. It also shows the predominance of the terms of trade effect and the much greater severity of the shock to the Philippines. The analysis shows little evidence of a determined effort to respond to the BOP shocks as such. Rather, it appears that each was intent on growth and was willing to borrow abroad when necessary to maintain growth. For Korea, this was made viable by an outstanding export performance. For the Philippines, it did not succeed, despite some success in efforts to promote new exports. The level of exports was not sufficient to permit an all out growth strategy.

(3)

The savings-investment analysis also shows that both countries were opting for growth and were unwilling to allow BOP concerns to stand in the way. Korea was more successful in this strategy, not only in expanding its export share, but in generaring growth out of savings as well. Philippine growth was retarded by an incremental capital-output ratio that remained high,• relative not only to Korea, but to most developing countries, owing in part to distortions from government price intervention policies.

(4)

The immediate policy response to the BOP crises was similar in the two cases, except for Korea's modest exchange rate adjustment, The difference in Korea's and the Philippines's per-

31 mance lies in the long-ruf_ strategies and policies, not in the immediate responses. Korea's outward-looking '_rade and industrial policies apparently gave it a great advantage over the Philippines, whose market price distortions from its own trade and industrial policies not only hampered the more rapid growth of non-traditional exports, but also undermined the efficiency of translating a high level of investment into growth.

(5)

The outlook for developing countries in general is not very bright due mainly to increased protectionism and slower growth in the industrialized countries. Two strategies are called for in the face of this prospect. One is to promote diversification of the rural sector through medium-and small-scale industrial enterprises. The other is to promote more trade among developing countries,

these takes pines, other

Both countries are fully aware of the need to move toward directions. More importantly, both are aware of past misand have undertaken measures to correct them. For the Philipthis has particular reference to its trade liberalization and reforms under its structural adjustment program,

The study appears as PIDS Staff Paper Series No.83-05.

EFFECTIVE PROTECTION RATES AND INTERNAL INDIRECT TAXES IN THE PHILIPPINE SETTING Rosario G. Manasan The study examines the importance of indirect taxes in the measurement of effective protection rates, under various schemes to provide guidelines on which the government can base its actions, regarding the so-called "realignment issue."

The study considers four types of ihdirect taxes; the specific tax, the local sales tax, the advance sales tax and the compensating tax. It points out that the protective effect of the Philippine indirect tax system is due to one or a combination of some of the features of

32 the system, such as: (1)

Differential goods;

tax rates for imported and domestically

produced

(2)

The timing of the tax payments produced goods;

(3)

The valuation of the tax base of imported and domestically duced goods;

(4)

The mark-up and

(5)

The extent

for imported and domestically

that applies to the tax base of imported

pro-

goods;

to which tax credits can be availed of.

Four different EPR estimates are made based on the 237 x 237 i-0 tables for 1974. The first estimate (EPR1) takes into account both the existing tax credit (i.e., a non-uniform value-added system), and the additional capital holding costs arising from advance payments of sales tax on imports. The second estimate (EPR 2) considers the existing tax credit system but assumes that the tax credit is obtained i_nmediately and costless in all cases. The third estimate (EPR3) assumes a uniform value-added system and no-additional capital costs. The fourth estimate assumes a hypothetical situation where the 1985 tariff rates and the 1983 internal tax rates are operative but where no tax credit is allowed for taxes on imports.

The resulting EPR estimates are compared to measure: (a)

The degree of protection (EPR1-EPR2);

attributed

to capital

holding

(b)

The amount of protection due to non-uniform internal indirect tax rates applicable on imports and on locally produced goods (EPR2-EPR3); and

(c)

The protection/disprotection added systems (EPR2-EPR4).

arising from the existing

On the basis of the differences the study concludes that:

costs

value-

of the four EPRs estimated,

33 (i)

The prolective is slight;

effect

of the additional

capital

holding costs

(ii)

Ignoring capital costs, the existing internal indirect tax system has no protective effect in the case of intermediate goods, and goods which are subject to uniform sales tax rates-,

(iii)

The protective effect of the value-added tax system, in cases where a good is subject to non-uniform rates, is considerable;

(iv) The protective effect of the mark-up provision, if in fact a source of discrimination, is not negligible although it is less than (iii_; and (v)

The protective effect of the shift from a single-stage sales tax to a value added tax system is large.

The study appears as PIDS Staff Paper Series No. 83-04.

USER'S MANUAL FOR FINANCIAL AND MONETARY STATISTICS Mario B. Lamberte,

Mitsuo Ono and Marievel Bernabe

This manual, primarily directed to users of financial statistical data, is the first in the series of technical documentations, assessing the nature and adequacy of mayo-statistical data, reflecting levels and changes in the key sectors of the economy. It also provides information on sources, contact persons and other administrative details.

Clearly, policymakers and analysts need to know how published statistical information actually depict reality andlor accuracy, rather than changes arising from the use of different concepts and measurement methods.

In view of the importance of the f'mancial sector in the functioning of the economy, this initial work evaluates selected time series data concerning money and banking. Future studies will assess data on _her sectors sucti as trade, prices, and production activities.

34 FINANCING THE BUDGET DEFICIT IN THE PHILIPPINES Eli M. Remolona The study examines how chronic budgetary deficits in the past were financed and proposes a rule for financing them in the future.

The main results of the study may be summarized as follows: (1)

Between 1970 and 19_1, close to 16 percent of the budget deficit was financed by the creation of base money, that is, by the Central Bank holding government debt. However, nine percent ended up as required bank reserves, so that only seven percent of the deficit was financed by the creation of currency and excess reserves, or what we know as the printing of money.

(2)

Nearly 38 percent of the deficit was financed by domestic borrowing outside the Central Bank. Four percent was in the form of eligible government securities which banks held as required reserves. This means the total amount financed by the creation of required reserves was 13 percent and domestic open-market borrowing financed 34 percent.

(3)

The rest of the deficit was therefore financed by foreign borrowing accounting for 46 percent, by far the most important source of financing during the period.

(4)

the most erratic source of financing was currency creation, financing as much as 33 percent, and detracting by as much as 29 percent of the defi.cit. The years of the big deficits were also the years when the governnient turned heavily to foreign borrowing.

(5)

In the presence of trade and financial repression, particularly binding ceilings on interest rates, the reserve requirement is the best instrument for fifiancing a budget deficit, since it is the only known instrument that does not exacerbate the existing distortions.

This means the Philippines relied too much on domestic open-market borrowing and foreign borrowing, and too little on raising reserve requirement in the 12-year period under study.

35 (6)

Once trade and financial liberalization has been achieved, the reserve requirement becomes the worst instrument to use since in driving a wedge between deposit and loan rates, it is the only one that distorts production. The inflation tax and open-market 'tradeoff between them depend on various elasticities of the demand for money and for future wealth.

(7)

Estimates of demand elasticities for real balance and future wealth, however, indicate that there should be exclusive reliance on open-market borrowing and follow Friedman's fullliquidity rule in avoiding the inflation tax.

The study has focused on the purely efficiency aspect of financing a given budget deficit. Since the policy should somehow reconcile goals of efficiency with goals of stabilization, there is a need to look more closely at the latter.

The study is circulated as PIDS Working Paper Series No. 85_02

THE ROLE AND STRUCTURE OF STATE FINANCIAL INSTITUTIONS Edita A. Tan Governments in modern times attempting to accelerate economic growth may choose from several sources of finance - taxes, private saving, foreign borrowing and Central Bank credit or inflation. Political considerations impose ready limits to a government's ability to impose high taxes. Up to a point, private savings can be increased .by all sorts of incentives such aS high interest rates, tax rebates and the like. Foreign borrowing may be tapped to the extent that it can be invested efficiently. These sources of development funds have natural limits. In contrast, inflationary f'mance is unlimited. Modern central banks are generally empowered to create money, and governments .who may decide to use this power cando so at will.

Inflation as a tax requires no direct consent from the governed while regular taxes have to be alaproved through some legislative process and implemented via some collection mechanism. The ease with which CB credit can be created makes inflationary financing of development an easy choice for less prudent governments. This explains-

36 the extensive adoption of rediscounting as a major selective credit • control (SCC) instrument by the least developed countries (LDCs).

The paper shows the serious disadvantages of using rediscounting as a tool. It shows how this tool goes against the development of f'mancial market institutions with a good substitute for intermediated private savings. Rediscounting shifts the supply of funds and leads to lower interest rates. In some cases like the Philippines and Pakistan, cumbersome rediscounting rules are imposed which exacerbates the intervention in the intermediation process. These rules are usually chosen in an ad hoc manner on the basis of intuitive reasoning rather than economic rationale.

The experience of four countries in the use of selective credit control and the role and importance of their government financial institutions (GFIs) in their SCC program,-reveals the undesirable consequences of cumbersome inflationary finance. The four countries Korea, Pakistan, Philippines, and Thailand - used different combinations of SCC, with varying reliance on rediscounting.

At the extremes are the Philippines and Thailand;the Philippines for utmost control and rediscounting, Thailand for the least. Their SCC and general credit programs are summarized below.

(1)

Korea followed a high interest rate policy; the government owned and controlled all financial institutions; and preferential rediscount and loan rates were given to a limited number of specific sectors. All non-preferred sectors had high loan rates reaching 28 percent in the late 1960s. Non-preferred rediscounting rate almost equalled the deposit rate, thus discouraging rediscounting for ordinary loans. The high inflation rate some -• times rendered the real deposit and loan rate negative despite the very high nominal deposit and loan ceilings. The management probloms expected of government banks appeared not to have cropped up in Korea, and bank performance proved to be fairly good. Because of inflation, Korea's financial market developed• at a slow pace. Its M/GNP practically stagnated at about 42 percent after its rapid rise around 1970.

(2)

Pakistan adopted a very bad combination of low loan rate, government ownership and control of all financial institutions, cumbersome loan and rediscounting schedules. With one exception, its specialized institutions relied on CB credit and govern-

37 ment budgetary support for their loanable fund supply. Longterm loan rates were set lower than time deposit rates. This interest rate structure worked against banks' drive to attract deposits and therefore was inconsistent with its active saving mobilization drive. Some of it_ GFIs had serious default problems.

(3)

Thailand is the least interventionist of the four countries studied except for the interest rate ceilings imposed on loans and deposits. Government ownership and control of financial institutions are limited to four fairly small specialized institutions. It is the most conservative as far as inflation rate and inflationary finance are concerned. The low inflation rate made the ceiling rates not so restrictive. Preferential rediscounting is limited to a very small set of priority activities. The loan raterediscounting spread is low relative to the loan-deposit rate spread allowed to non-preferred borrowers. .Consequently, banks avoided rediscounting and relied mainly on funds from p_ivate saving and other surplus. Implementation of the ceiling rates was reported to be lax so that the market was able to operate relatively free. All these led to faster financial growth as shown by the upward trend in M/GNP reaching a level that is e_,en higher than the more developed Korea, 45.5 percent.

(4)

In the Philippines, cumbersome rediscounting and loan structures, easy redlscounting facilities for all types of loans, preferred and non-preferred, a large public financial sector, and until 1981, low loan and deposit ceilings, all combined to repress financial development and misallocation of the country's financial resources. At the same time, rediscount)rig led to inration. Utmost reliance on CB credit permitted the GFIs to diverge from economic lending criteria and misallocated their resources to bad projects. As a consequence, the default rate in two major GF.ls has reached crisis proportion. The country shows the lowest financial development with its M/GNP at 22.0 percent, or half of Thailand.

The most serious flaw of the Philippine policy lies with rediscounting. It obstructs the intermediati0n process, creates a built-in inflationary bias and permits (and possibly encourages) inefficient GFI management. The interest rate liberalization of mid-1981 to

38 early 1982 has not brought about desired results, for the rediscounting policy continues to discourage intermediation and competition by the GFIs. Theoretically, rediscounting should be available only as the last resort of the financial system. Loanable funds should come from mobilized savings and current surplus, for unless they do, the funds distort the borrowing and lending decisions of financial intermediaries.

q It seems too simple-minded to blame rediscounting for the ills that the financial system presently experiences. Yet one could not help but be convinced that if the GFIs and other banks were mainly acting as financial intermediaries rather than as conduits of CB banks, they would not have been as imprudent with the rinds as they were in the last five to ten,years. Alternatively, the GFIs may be denationalized and made to compete with existing private banks.

The study

is available as PIDS Staff Paper Series No. 84-04.

I

REVIEW AND APPRAISAL OF THE GOVERNMENT MONETARY AND FISCAL POLICY RESPONSE TO THE 1983-84 BALANCE-OF-PAYMENTS CRISIS Mario B. Lamberte, Rosario G. Manasan Roberto S. Mariano, Erlinda M. Medalla Manuel F. Montes, and Celia M. Reyes This study has attempted to document and critically evaluate tile various stabilization measures adopted by government in ressponse to the 1983-84 BOP crisis. Their effects on the overall balance of payments, inflation, output, employment and income distribution have also been investigated. The major findings are the following: (1)

When the crisis struck, policy measures taken by government became very restrictive and mostly oriented towards putting more control on the external sector. But as the need to obtain the standby credit agreement with the IMF became more pressing, the government began using the orthodox policy instruments to ease the balance-of-payments difficulties. The latest measures have strong long-term components, relying more on the free market systemi

39 (2)

Early indications show moderate success in reducing the current account balance, mainly due to large cutbacks in imports. Exchange controls seem to be the dominant factor curbing imports. This was aided by the series of de facto devaluations which increased thereal effective rate;

(3)

The efforts to manage the budget deficit consist of raising government revenues by increasing taxes, and broadening the tax base and moderating growth of expenditures. The first set of revenue raising measures relied heavily On the external sector as a source of revenue, while the second set, on the internal sector.

The measures produced favorable results in terms of reducing the budget deficit. However, there seems to be rigidity in the budget proces_ Specifically, the net lending item exhibited resistance to cutbacks primarily because of pressures from the financially-starved public corporate sector;

(4)

In contrast to 1982, monetary policy during the period 1983-84 shifted in the direction of disinflation and credit restraint. The effort was focused mainly on reducing the money multiplier and putting a cap on the growth of reserve money;

(5)

Wage adjustments during the period 1983-84 seem to indicate that government's wages policy was directed towards protecting real wages of minimum wage workers. With regard to sufficiency of wages, it is found that for a household with two minimum wage workers, the basic food needs can be met but not all the other basic needsi

(6)

For 1984, increases in petroleum product prices, interest rate and liquidity were major contributory factors to inflation. In contrast, adjustments in wages and price ceilings of other basic necessities had minimal effect on inflation; and

(7)

With regard to the sharing of the burden study found the following:

of adjtlstments,

the

(a)

The additional import tariffs and export taxes have widened the EPR variation across sectors:

(b)

Most of the tax measures to ir_crease government revenue are indirect taxes and as such are regressive. The expendi-

40 ture pattern of government distributive effects-;

also tends to have regressive

(c).

The massive increase in lending to the public sector and to government financial institutions required an equally massive withdrawal of credit to the private sector. Thus, the burden of adjustments in themonetary sector fell more heavily on the private sector: and

(d)

The crisis has occasioned a huge shift of real and financial resources towards the government sector. Both monetary and fiscal policies Eave assured such shift.

The study is circulated as PIDS Monograph Series No. 8.

SHORT-TERM FORECASTING MODEL FOR INFLATION AND ECONOMIC ACTIVITY Roberto S. Mariano and Celia M. .Reyes The primary, objective of this project is to develop several econometric models for forecasting and policy analysis, in the Philippine economy. Specifically, the project aims to: (1)

Develop short-term forecasting procedures for monthly tion and quarterly sectoral output in the Philippines; and

infla-

(2)

Assist the UP School of Economics groulb (Danao, Montes, Canlas) in their project of constructing a semestral econometric model for the Philippines.

A eorrollary objective is the establishment of data bases with appropriate documentation and maintenance procedures from which the econometric models of interest will be estimated and simulated.

I

This project has generated calendar year 1984, such as: (a)

the following

outputs

over the

A monthly forecasting equation- for inflation in terms of flue'tuations in oil and non-oil prices, money supply relative to output, and the peso-dollar exchange rate - official and black market;

41 (b)

Forecasting procedures for quarterly and semestral seetoral output in the Philippine economy.

(c)

A semestral econometric

(d)

Monthly and quarterly data bases for inflation (CPI for the whole Philippines) and various factors affecting it.

model of the Philippine economy; and

The study is available as PIDS Monograph Series No. 10.

AN EVALUATION OF THE GROSS INCOME TAXATION SCHEME Ruben B. Ancheta The study aims to evaluate and assess the gross income taxation scheme based on the equity objective and efficiency consideration.

The equity objective requires that every taxpayer should pay a tax in accordance with his ability to pay. It calls for equal amount of taxes to be paid by taxpayers with equal abilities to pay and for different amounts when such abilities differ. In turn, the equity consideration calls for a progressive tax rate structure in order to distribute the tax burden equitably.

Efficiency, 6n the other hand, pertains to reveffue generation and tax administration, i.e., the tax system is efficient if it yields sufficient reserves to finance government expenditures and if its implementation leads to lower administrative cost.

A number of approaches are adopted in the study's evaluation of the equity effects of the gross income taxation system. These include: (a) measurement of.the degree of progression of the tax; (b) preparation of a profile of tax collection per income bracket, source of income, distribution of tax base by type of income; and.(c) construction of Lorenz curves and measurement of before and after tax income distributions. With respect to tax revenue, tax collections in 1981 and 1982 are made to explain changes in revenue collections on the basis of the shift to gross income taxation, To evaluate the administrative aspect, the study attempts to form a judgment on whether the new system has lowered administrative cost, and ff it has permitted a more efficient and non-arbitrary tax administration. A survey is undertaken to solicit the opinions of tax administrators and

42 taxpayers alike to help determine whether the new system has increased understanding of, and compliance by, the tax paying public.

The findings of the study are: (a)

The new income tax system is intrinsically more •progressive than the previous one. However, it seems that the change has not made a perceptible impact on the distribution of after tax income;

(b)

Revenues for personal income tax declined but levels of progression of the income tax (particularly through a reduction in the tax burden of low income groups) improved;

(c)

The adoption of the gross income tax has permitted efficient and non-arbitrary tax administration; and

a more

(d)

There is very little scope for raising taxes without hurting tax progression as tax rates for the majority (including low income groups)would have to be substantially increased. The study therefore recommends raising tax rates only for: (1) those grossing more than P1.0-M in compensation income; and (2) mixed income earners whose tax liabilities are seen to be much lower than those of salary and wage earners.

The study is circulated as PIDS Working Paper Series No. 85-03 THE DEVELOPMENT BANK OF THE PHILIPPINES AND THE FINANCIAL CRISIS: A DESCRIPTIVE ANALYSIS Mario B. Lamberte

The study reviews the objectives for the establishment of the Development Bank of the Philippines (DBP), and presents a descriptive analysis of its financial profile for 1980-83.

The study notes that the objective of DBP as a supply-leading financial institution to hasten the development process in the country has mandated it to support projects with externalities due to the prohibitive costs incurred in obtaining information. DBP, unfortunate!y, has not engaged itself in conducting rigorous studies to identify projects with externalities.-Moreover, in many cases, political • considerations have been given more weight in determining which

43 projects supported by DBP are failures and economically not viable.

These projects have tended to give DBP more problems instead of solutions to existing underdevelopment problems.

In terms of resources, DBP's rapid growth was due to budgetary and Central Bank support, and foreign borrowings that it was able to avail of. These had been the traditional sources of funds for DBP. However, DBP is now faced with a very immediate problem - the very limited set of choices for raising more funds. Due to the present financial crisis, restrictions have been placed on foreign and Central Bank borrowings_ Hence, the major source of funds left for DBP is government budgetary support: But because the government is currently bent on cutting down its expenditures to keep the budget deficit within a reasonable level, even this may be difficult to obtain.

I

Perhaps due to the presence of these traditional external sources of funds, "DBP had been less serious in generating funds internally, and the capacity to do so has been hindered by the poor quality of its loan portfolio. When the Central Bank started "rescuing" activities, financial difficulties became more pronounced.

Three alternatives from which DBP can choose its future course of action are suggested: (,1) It can adopt a wait-and-see attitude until the economic conditions turn better. What can be done is to implement a certain program that does not necessarily require a restructuring of DBP's lending and fund-raising policies. In line with this, DBP actually came up with a rehabilitation _plan in January 1984.

However, this course of action is premised on the belief that the present crisis caused DBP's financial difficulties. This study points out that the crisis merely exposed DBP'sweaknesses.

(2)

DBP should go dire_ctly to the heart of its weaknesses - the restructuring of its loan portfolio and the manner by which it sources funds. It becomes necessary for DBP to look into its criteria for approving loans in order to f'md out possible areas for improvement. It should acquire adequate information on projects to be able to distinguish the viable ones with externalities from those which are non-viable. Moreover, it should exert more effort to sell its acquired assets and to raise funds through

44 savings mobilization.

(3)

DBP could be phased out. As noted in the study, by granting guarantees and loans at very generous rates to a lot of big nonviable firms, and extending financial help to a number of inefficient firms, DBP has created more market distortions than corrected existing ones. Apparently, it has not been successful in carrying out its objectives despite massive Central Bank and government support. This last alternative must be carefully examined though, since the question of phasing out DBP may be more complex and has effects on the different sectors of the economy.

The study is available as PIDS Staff Paper Series No. 84-07.

FINANCIAL LIBERALIZATION AND THE INTERNAL STRUCTURE.OF CAPITAL MARKETS: THE PHILIPPINE CASE Mario B. Lamberte This study analyzes the Philippine experience with financial repression and liberalization. Specifically, it re-examines the traditional financial policies that repressed financial development. It also evaluates the results of t_mancial liberalization efforts. The study covers the period 1956-84, divided into the following regimes: (I) 195673: rigid and low interest rate policy period; (2) 1974-80: transition period; and (3) 1981-84: floating interest rate period.

The financial policies in the 50s set the ground for a repressed financial system. SpecifieaUy, the low interest rate POlicy, rediscounting policy and some reguiations that led to a higher degree of financial fragmentation, restrained the growth of the financial system.

At the same time, these policies, paved theway for the emergence of family-held corporations highly dependent on debt financing.

The equity markets have long been an insignificant source of medium- and long-term capital. Financial policies are partly to blame for this. So far, recent financial liberalization efforts have not altered this situation at all. In the absence of a well-functioning equity market, the pressure to provide long-term funds for investment falls

4ff heavily on banks. In fact, the Philippine capital market up to the present is still dominated by the banking system. Increasing the flow of loanable funds is, therefore, a necessary condition for banks to carry out this responsibility.

The financial liberalization efforts, especially the recent ones have basically addressed this issue. Although modest successes have been achieved in certain areas, e.g., the realized modest increase in the proportion of medium- and long-term deposits and loans, in general, much remains to be done.

During the transition period, the average M3/GNP ratio, which is a measure of the flow of loanable funds through the banking systern, increased from 23 to 27 percent. This indicated that the move towards a regime in which interest rates were still administratively fixed, but constantly adjusted by the 10Ionetary Board to reflect market, conditions, did produce favorable results. However, the move towards fully flexible interest rate regime did not increase the flow of loanable funds at all.

Why_did the switcb towards a fully liberalized regime fail to produce the desired results?' To answer this question, an examination of the other aspects of the operating financial policy framework was uridertaken. During the period of financial l)b_ralization, the Central Bank had opened a lot 0f rediseounting windows that virtually nullified the selectiveness of its selective credit program. This caused disintennediation in two ways. First, both pri_,ate and governmentowned banks increased their borrowings from the Central Bank. "laaus, they became mainly conduits of Central Bank funds instead of intermediaries mobilizing funds of surplus units. Second, the inflationary impact of this expansionary policy discouraged surplus units from investing their funds in financial assets yielding negative real returns. The study shows that the floating interest rate period was characterized by an average inflation rate substantially higher than those of the previous regimes.

Another aspect that must be examined is the fiscal deficit. The average fiscal deficit for each subperiod has been rising and seem to be positively correlated with the average inflation rate. It should be noted that a significant portion of the budget deficit was financed by the Central Bank. For example, borrowings by government from the Central Bank through the "rediscounting with the government"

46 facility averaged-P2.5B annually between 1980-1982. It already reached I_3.5B during the first half of 1983. So, to help bringdown inflation, fiscal discipline must be instilled. Or at the minimum, the Central Bank should not be called upon to finance budget deficits.

But this becomes difficult in a setting wherein the Central Bank is not entirely independent from the fiscal sector. Perhaps, it is high time to have a Central Bank completely independent of the fiscal sector. On one hand, the fiscal sector will be forced to be extra careful in managing its deficits, On the other hand, the Central Bank can pursue its task of stabilizing theeconomy more effectively.

Finally, the study notes that the period 1981-1984 was replete with bank failures. Relative absence of regulatory controls by the Central Bank over portfolio of banksallowed them to take on more risky assets. The financial crisis that struck in 1983 exposed such weaknesses. Interestingly, the recent collapse of many banks can he traced to questionable loans made by banks to their directors, officers, stockholders and related interests (DOSRI) which were not closely monitored by the Central Bank. This suggests that even if the financial system is deregulated, some form of regulation must be exercised by the Central Bank to reduce riskiness in the portfolio of banks. This is essential to regain people's confidence in the banking system. Perhaps, standard financial ratios or other financial ratios modified to suit the characteristics of the Philippine financial institutions may be adopted to ensure their stability, as the financial system moves from a repressed to a liberalized one.

The main conclusion that can be drawn from the findings of the study is that there are requirements to successful liberalization efforts, and one such requirement is a low inflation rate. Unfortunately, the Central Bank pursued inflationary policies - especially those related to rediscounting and financing the budget deficit-at the time when the financial sector was liberalized. Hence, the libera• lization efforts have failed to produce the desired results. The other requirement pertains to some fbrrn of regulation that must be exercised by the Central Bank to reduce riskiness in the portfolio of banks in order to ensure people's confidence in the banking system.

The study is circulated

aSPIDS StaffPaper

Series No. 85-07.

47 AN ANALYSIS. OF THE INSTITUTIONAL FRAMEWORK OF THE PHILIPPINE SHORT-TEI_ FINANCIAL MARKET Victoria S. Licuanan This paper focuses on the institutions, instruments and financial practices making up the Philippine short-term financial market. A large part of the paper is a description of the way in which the market operate its major borrowers and lenders, the instruments it uses and the volumes and nature of money market flows.

The period covered .is 1977-82, during which money market transactions increased by 12 percent annually to reach'P463 billion by 1982. The market is concentrated on the very short-term portion of the maturity spectrum, the weighted average maturity of transactions being only slightly over a month. Also, it is largely a wholesale market with 70 percent of all transactions valued at "P'2million or over.

The major instruments used in the money market are deposit substitutes, especially dealer promissory notes. In 1977-82, these instruments averaged roti.ghly 75 percent of all transactions. Deposit substitutes are particularly important for investment houses and finance companies with quasi-banking licenses, for whom these instruments made up a very high portion of their money market transactions. Interbank call loans, however, have been increasing rapidly, and by 1982, these comprised 29 percent of the market.

Other instruments including outfight sales of commercial paper, averaged less than b percent of the money market.

The importance of commercial paper in the money market goes beyond its relatively small share in total money market transactions.

If one were to include deposit substitute instruments using commercial paper. (namely repurchase agreements and certificates of assignment and participation), the share of commercial paper in total money market transactions would be roughly 15 percent.

This instrument is also an important source of funds for nonfinancial corporations (especially for manufacturing firms) and financial institutions without quasi-banking licenses. However, difficulties in maintaining the quality of commercial paper issues led to major problems in the commercial paper market in early 1981 which

48 resulted in the virtual disappearance money market in 1982 and 1983.

of commercial paper ,'from the

Because of its relatively riskier nature, commercial paper commands higher interest rates than dealer promissory notes; with notes issued by financial institutions without quasi-banking licenses having higher rates than those issued by nonfinancial concerns. Beyond this, however, there appears to be no interest differentials to indicate the broad range of risk categories arhong commercial paper issuers.

Dealer promissory notes generally command a lower interest rate, although here, there also appears-to be some quality distinctiort.

Promissory notes of commercial banks ger!erally command lower interest rates than those of investment houses and finance companies with quasi-banking licenses.

The most active intermediaries in the money market are commercial banks. They account for an average of 66 percent of all transactions in 1977-82, largely in the form of interbank sall loans and deposit substitutes. The former is used largely for resg_e adjustment while the latter forms part of commercial banks' general fund sources. Reliance on deposit substitutes as sources of bank funds has, however, been declining. Their share in total bank funds have declined from 14 percent in 1977 to only 7 percent by 1982.

Investment houses and f'mance companies without quasi-banking licenses account for the balance of money market transaction_ with shares of 20 percent and 12 percent, respectively, in 1977-82.

In comparison to commercial banks, however, these two institutions are very highly dependent on the money market as a source of funds for their operations. For investment houses, deposit substitutes supplied an average, of 80 percent of total funds, while for finance companies with quasi-banking licenses, an average of 70 percent of total funds came from deposit, substitutes. Thus, the primary activity of these institutions was quasi-banking, with loans comprising an increasing share of total assets for both institutions. As a result of their dependence on the money market as a source of funds for lending or quasi-banking, these institutions suffered major liquidity problems in the aftermath of the liquidity crisis in early 1981, and again in late 1983 and 1984.

From the survey of institutions,

instruments

and financial prac-

49 tices in the short-term market, two major implications on the stability and efficiency of the system may be noted. The nature of the short-term market is largely one of quasi-banking, with deposit substitute instruments making up the bulk of transactions. The high dependence of two types of institutions, namely, investment houses and finance companies with quasi-banking licenses, on "bought funds" on the liability side, and lending on the asset side of their balance sheets, expose them to problems of mismatching, Aside from their short maturities, the money market is a fickle source of funds.

On the lending side, many companies rely on continuously renewed money market borrowings to fill a semi-permanent need for capital.

Thus, reliance on quasi-banking as a major activity poses questions on the stability of these institutions.

A more general question is whether there is an economic rationale for institutions whose major activity is quasi-banking (despite their being established for other reasons, e.g. underwriting).

Corollary to the dominance of quasi-banking in the short-term markets, dealership, open market operations and a ladder of inferest rates, indicative of the range of credit risks in the market have not been developed to a great extent. Open market operations would do much to improve the efficiency of the market in the sense of narrowing spreads, as wel! as widening the scope for open market operations as a tool of monetary policy. This would be a desirable development in the short-term markets.

The Philippine money market is continuously evolving in response to the requirements of the economy and the regulatory framework. With the current concern on the stability and efficiency of the system, given the market's current nature, operations, merits and their implications, it is recommended that there be a major restudy of quasi-banking, and financial practices in the money market, for a possible redirection of policies towards less quasibanking, the development of a dealership system and a true open market in short-term debt instruments.

The study is circulated as a special publication

of PIDS.

$0 A STUDY OF PHILIPPINE REAL PROPERTY TAXATION Cayetano W. Paderanga, Jr_ The study aims to: (1)provide a systematic description of the administration and role of property taxation in the country; (2) describe ahd analyze the major problem areas of property taxation; and (3) analyze tile revenue performance of the property tax, with emphasis on factors affecting its growth, and tile variation of the performance of local governments Within the nation.

The main findings are: (1)

The present system of real property taxation differentiates between uses, especially of land. However, the implications of the differences in rates and assessment ratios have not yet been explored exhaustively and discussed sufficiently;

(2)

The standard of "actual use" value instead of market value arti_ ficially prolongs the shifting of real property to its best use and thus should be reviewed;

(3) The presence of numerous special levies with funds earmarked for special purposes erodes the taxing power of local governments; (4)

The absence ot adequate tools of the tax assessor like tax maps and trained staff is being remedied and should be monitored closely;

(5)

Previous hterature shows that substantial improvement can be generated through an increase in administration efficiency; and

(6)

Most of the previous literature concentrated on the administration of the real property tax, with a few exceptions like Bahl and Schroeder, 1983. There has been an absence of empirical studies which incorporate the behavioral reactions of people to specific property taxes. As a result, it is difficult at present to predict the final incidence and yield of any tax even to a very rough degree of approximation.

The effect on the allocation of resources, can neither be predicted. The inability to foresee incidental effects of taxes could lead to distortions that are un-

51 desired.

Among the recommendations

of the study are:

(a)

The estimation of coefficients measuring behavioral reactions of people to property taxes. These are important for the computation of tax incidence and for predicting spatial implications of differential property tax rates;

(b)

The exploration of the possibility of building a model for simulating the effects of real property taxes which will be closely linked with the broader tax-revenue model being developed at the Institute.

(c)

The examination and discussion at policy level of hidden biases against certain uses and ownership of land and other real properry (like the bias against commercial and industrial property coming from higher tax rates). This will have important implications on the designs of future tax systems.

This study is circulated as PIDS Staff Paper Series No. 84-0'!.

ESTIMATING THE SHADOW EXCHANGE RATE, THE SHADOW WAGE RATE AND THE SOCIAL RATE OF DISCOUNT FOR THE PHILIPPINES Erlinda M. Medalla The paper reviews existing methodologies in the estimation of major national parameters; namely; the shadow price of foreign exchange or the shadow exchange rate, the shadow price of labor or the shadow wage rate, the social rate of discount and shadow price of capital. The paper provides more recent estimates of these national parameters.

The paper is divided into three parts. The first part deals with the shadow price of foreign exchange. In the estimation of the shadow exchange rate (SER), the study employed three methodologies.

These are: (I) the UNIDO method which measures the marginal social value of the last unit of foreign exchmge given the present protection structure; (2) the Bacha-Taylor method which derives the free trade equilibirum exchange rate as the shadow exchange rate;

52 and (3) the Optional Intervention System (OIS) exchange rate. The difference in the three approaches lies mainly in their respective assumptions regarding the function of trade policy. Additionally, implicit tariffs and their corresponding weights for averaging are used in all the three above-wientioned approaches. For all these three estimates of the SER, the ideal weights to use are the values of marginal imports and exports.

The second part deals with the shadow price of saving and the social rate of discount. This shadow price of capital (SPK) is the net present value of the aggregate income stream generated by'P1.00 of marginal investment. On the basis of previousestimates, the paper suggests an innovation in the estimate of shadow prices for use in project evaluation. Accordingly, there ought to be adjustment differences since their values will differ depending on the number of people who share them. A convenient way to do this is to adjust thg value with the social discount rate, i, by adding to it population growth rate, n, plus i(n). Such a method yields as it should, a value of appropriate social rate of discount, i, equal to the marginal product of capital, and a shadow price of saving equal to unity under an optimal saving program. Otherwise, there is a need for estimates for shadow price of saving and social rate of discount not equal to the marginal product of capital.

The third section of the study deals with the shadow price of labor. In particular, the paper presents systematically the determination of shadow price of labor or the shadow wage rate (SWR). In addition, the paper provides an innovation in estimating SWR when all incomes are adjusted for saving and income distribution, and by estimating the additional consumption of the cost of hiring labor.

However, a number of difficulties are apparent with regard to the former but these are avoided if saving and income distribution considerations are completely incorporated i.e. all income, not just wage _income. The result is an appropriate social rate of discount equal to the marginal product of capital, q, and the SWR equal to the direct opportunity cost of hiring skilled labor for project employment (denoted as L/N). The paper notes that this would be true if saving and income distribution parameters were disregarded. Another possibility would be a case where the said parameters were incorporated completely as indicated above. The latter represents a real innovation in project evaluation / and the paper recommends that it

53 be carefully considered.

SeriesNo. 84433.

The study is circulated

as PIDS Staff Paper

A SURVEY OF INTERNAL COORDINATION AND CONTROL SYSTEMS IN SELECTED PUBLIC ENTERPRISES Amelia C. Ancog The study aims to present a perspective of the practices of selected public enterprises in internal coordination and control, Specifically, the research seeks to: (1) assess the effectiveness of the dual role of the policy-maker who concurrently performs the functions, of a supervising official; (2) assess the scope and effectiveness of budgetary systems; and (3) assess the scope and effectiveness of internal audit and accounting systems.

The findings of the study are as follows: (a)

The survey of Farm Systems Development Corporation (FSDC), Local Water Utilities Administration (LWUA), Home Financing Corporation (HFC)and Philippine Virginia Tobacco Administration (PVTA) yielded considerable insights on coordination . and control as well as on the value of the dual role of the ad: ministrator and policymaker. While there are differences in structural arrangements and location of control units among the 4 public enterprises, as well as differences in the approaches on controls, all of them, however, are devoting part of their resources for the improvement of operations through the creation of control units, and the development and updating of manuals to guide their operations.

Co) The presence and operation of control units facilitate the effective use of reSources. Indicative of their impact, as shown by the results of this study, is the reduction of operating expenses, reasonable profits from investments, and the selection of appropriate projects with wide economic and social.impact to the beneficiaries, and innovations in the review of project performance. This is typified by the monitoring and evaluation of the water districts by the LWUA, and the implementation of farm projects with a strong marketing componenet by the FSDC. In this connection, it is also worth mentioning that the presence of the control units and the implementation of control systems, have likewise been influenced to a considerable degree by the reforms initiated by the Commission on Audit (COA).

The twin reforms thewithdrawal of rate management internal control systems.

of the withdrawal of resident auditors and pre-audit Of transactions provided the corpowith impelling reasons to organize their units and install the appropriate controJ

(c)

The effective hnplementation of fiscal measures, some of which have been initiated by the national government, has been actively and effectively pursued .by the finance departments of these public enterprises. An example of this is the policy of mandatory savings effected through a national budget policy. Inthe cases of LWUA and FSDC, the close coordination among the staff offices in handling, planning, monitoring and auditing activities, through the leadership of the administrator or general manager, resulted in a well synchronized control sytem in the whole organization.

(d)

The internal control .evaluation reports of COA, following an assessment of the internal control systems of the corporations, generally indicate the need for strengthening internal control and the creation of a unit (or the appointment of personnel) to undertake the function of developing and installing the control System. Similarly, the express mandate of the law Stating that full fiscal responsibility rests with management, can only be realized through the exercise of the accountability expected of public officers and personnel.

(e)

A significant observation which this study brought out is the positive response of the management officials of these enterprises to the recommendations and advice of the Commission on Audit. This has resulted ir_ reforms which the corporations adopted in their accounting and managerial controls, many of which have been implemented after the internal control evaluation report of COA has been.acted upon by top management.

This leads us to conclude that the COA's role in its relationship with public enterprises has. indeed changed from that of a "watchdog" then prevailing in the fifties, to that of a. facilitative and assistive partner in public enterprise management..It is not overly optimistic to assume that in the years ahead, such a helping and healthy relationship between the COA and public enterprises will be fostered and enhanced further.

On the basis of the findings of this survey, recommendations are proposed with a view of improving public enterprise management

S$ such as:

(1)

The creation of an internal audit unit which will undertake review of systems and internal controls in the organization;

a

(2)

Emphasis on the monitoring and performance functions of the corporate planning office as regards departmental or corporate wide performance vis-a-vis targets;

(3)

Establishment of a strong linkage between the internal audit units of the public enterprises and the Commission on Audit to provide exchange of information and technical assistance training; and

(4)

Establishment of a. viable information system within public enterprises as an important prority project to facilitate decisionmaking.

These proposals are interrelated in the sense that essentially, corporate planning and monitoring are integral parts of the control system. However. the most crucial is the systematic information system to facilitate the effective operation of the control units.

While some public enterprises have stalled and successfully implemented central systems with the creation of the abovementioned offices, there are others which have yet to deliberately incorPorat e the necessary control units in their organizational systems.

Since the effective use of resources and the proper exercise of managerial, legal and social accountability of public officers and personnel hinge to a large extent on the viability of the control systems, consideration of the above-mentioned proposals may lead to a most satisfactory situation, where controls are not only structural arrangements but self-imposed discipline in the discharge of one's official functions.

The study appears as a seminar paper.

A SHORT-RUN MONEY MARKET MODEL Baldomero

V. Regidor

This study attempts to develop a short-run model in order to provide insights into the short-run behavior of the money market

S6 and forecast various monetary aggregates and monetary Two "demand f'mancial to reflect form part

base.

models have been developed. The first is based on the approach" to money stock determination.

The different. assets offered by banks to the public have been modelled the public_ desire to hold such assets. These money assets of the monetary aggregate.

The second model is based on the "supply approach" to money stock determination. The different financial assets supplied by the Central Bank and other banks have been modelled to reflect their holdings of such liabilities. The monetary base represents the net liabilities issued by the Central Bank while deposit liabilities (less bank reserves) which are issued by banks form the other side of the monetary aggregate.

Both models have been estimated using the OLS procedure.

Validity and stability tests of the models have been performed • reflecting satisfactory .performance of the models -- both within and outside the sample period. It was, however, revealed that the first model outperformed the second one.

The study's historical

experiments

with interest

rates showed

that: (1)

With increasing interest rates, it could be expected that liquidity in the system would decrease, that is, the monetary aggregates and monetary base would decrease; and

(2)

With decreasing interest rates, liquidity would increase, that is, increases in the monetary aggregates and monetary base would be expected.

Finally, with respect to the forecasting ability of the model, the two models have been tested using ex-ante forecasts for two months, (January and February 1985) on the different monetary aggregates and monetary base. The interaction of the public, Central Bank, banks and government led to the ex-ante forecasts for the different monetary aggregates.

This study is available as a seminar paper.

57 AN ANNUAL MODEL OF THE MONETARY SECTOR IN THE PHILIPPINE ECONOMY Rolando

Z Delfino

The development of the model is guided by the need to forecast • aggregate monetary variables and to trace their effects on other sectors of the economy. Quite distinct from other existing models which mainly focus on the money creation process, the model developed in this paper emphasizes the importance of the credit market as channel for the transmission of monetary impulse.

In the credit market approach, money is assumed to substitute in all directions over the whole spectrum of assets, in particular, over real assets. This assumed substitutability implies that the credit market has significance beyond a mere mirror image market and this is important in describing the money supply process. Operationally, three kinds of asset markets, viz., credit market, money-market and capital market, are specified.

There are nine behavioral equations and four identities in the system.

The first stage of the analysis consists of estimating these equations.

Results show that equations depicting the Central Bank and the commercial banking system perform better in tracking down its behavioral patterns than equations related to public demand for assets.

Moreover, the insignificance of foreign rate of interest in each of the equations does not confirm the hypothesis that domestic and foreign assetsare substitutes of one another. This suggests that the domestic financial market is not fully integrated into the global f'mancial system, perhaps due to the shortage of instantaneous information up to the level of individual asset holders, and to institutional rigidities restricting the movement of assets into and out of the economy.

The other results of the model generally conform to a prior expectation.

The second stage of the analysis consists of validating the tracking ability of the system by performing both static and dynamic simulations. Performance of the system indicates that mild gyrations of the endogenous variables are traced satisfactorily by the model.

However, a wild fluctuation in certain years by endogenous variables is not immediately tracked down. Once extraordinary movements of

58 tile endogenous variables stabilizes to their normal course, the model immediatelSe regains its good tracking ability.

The third stage of the analysis consists of investigating the stability of the model by introducing an impulse change in an exogenous variable in the first period. Results show that the effect of an impulse change in the exogenous variable disappears suggesting the stability of the model.

THE IMPACT OF THE FINANCIAL REFORM PROGRAM ON RURAL FINANCIAL INSTITUTIONS AND MARKETS Severino B. Vergara The objective of the Study is to analyze the market structure and performance relatio_sh'ip in the commercial banking industry, determine its implications on market structure-related financial reform program policies, and on the performance of the rural financial institutions.

Phase I of the study which has been completed confirms the soundness of financial reform policy which encourages growth in the size of banks to enhance bank profitability. The study ,also provides evidence that the market can be relied upon to influence bank behavior based on the estimated impact of market structure on bank profitability.

Banks with market power trade-off some of their potential profits for less risk but as their market power increase, they appear to place decreasing weight in risk. This suggests that while government policies aimed at increasing bank concentration, through mergers and consolidation may not endanger public interest, as far as the commercial banks' loan output is concerned, the same policies may serve to undermine the stability of the banking system, a major goal of these policies. The government, should, therefore, adopt an extremely cautious posture towards bank mergers and consolidation.

This should only be allowed in cases where bank failures can no longer be avoided. Likewise, utmost vigilance in the exercise of CB regulatory and supervisory functions over these banks can not be overemphasized.

The above projected behavior

of commercial

banks also has far

S9 reaching implications for rural financial institutions and markets, and hence, for rural and agricultural development as well. While commercial banks may be expected to have more risky and longer maturity assets in their portfolio, they may tend to be allocated more to the urban-industrial areas than to the rural-agricultural _eas. This results from less desirable limited opportunity sets available to the commercial banks in the rural areas.

To support its risky assets, commercial banks may tend _;o accelerate the mobilization of more rural deposits, thus posing increased competition: for rural financial institutions. While this. may be beneficial to rural savers, this may come at the expense of.,investors in the rural areas. Also, another problem is whether rural financial institutions, .which used to be pampered by the CB with inexpensive rediscount funds, cheap special time deposits, and other special privileges, can effectively compete with commercial banks _for rural deposits.

To what extent rural financial institutions are able to survive increasingly stiffer competition from commercial banks, the specific measures they have adopted or could adopt to improve their efficiency, including ,governmentpolicies needed.to foster the 'T.continued -. viability of the rural fir_ncial institutions, and the development of the rural financial market, are the subjects of a future study to be conducted.

The results of the Phase I study is available as a seminar paper. tI

;

_,

THE RURAL BANKING, SYSTEM: NEED FOR REFORMS Mario B. Lamberte The study reviews important monetary and credit policies affecting the performance of rural banks, examines the possible roles of rural banks, under an entirely different policy environment, and suggests some measures to _rehabilitate the. rural banking system. ,The _rural :banking system has been badly affected by the current economic crisis. Majority of their borrowers are unable to repay their maturing loans, and they in turn are piling up arrearages with the Central Bank. The switch to market-related rediscount

6O rate, sharp reduction in the volume of rediscounting with the Central Bank_ and sudden withdrawal of tax exemptions are market surprises not fully anticipated by rural banks. Adjustments to this new policy environment would certainly be more difficult than if they were predicted and properly discounted by rural banks.

The case for rehabilitating the rural banking system is quite convincing. In the short-run, other banking institutions are not in a position to substitute for rural banks which played a big role in agricultural credit, especially to small farmers. In the long-run, rural banks still have important roles to play under the new policy environment. They may be directly competing with other financial institutions by being subsidiaries/branches of commercial banks, specializing in servicing small clients, while bigger financial institutions are catering to big clients. The rural bank's continued presence in the rural areas can thus assure an uninterrupted flow of intermediated funds to the agricultural sector.

To rehabilitate suggested:

the rural

banking system,

the following

are

(1)

Restructuring of arrearages. A ten-year restructuring scheme is proposed. However, it has to• be applied selectively. The set of criteria for restructuring a rural bank should include the following: (a) integrity of bank management; (b) agricultural output potentials of the area where the rural bank is operating; (c) deposit growth potential; (d) fulfillment of the required minimum net worth to risk assets ratio; and (e) potentials for broadening the bank's capital base.

(2)

Tax Exemptions.

A gradual withdrawal of tax exemptions is suggested. In addition, tax credits may be given to rural banks which are exerting efforts to broaden their capital base.

(3)

Capital Build-up: (a)

Internal Capital Build-up. The 20 percent ceiling on individual/family group stock-holding in a rural bank may be increased to 50 percent, provided that it is accomplished through infusion of new money, not through the buying of shares of other stockholders. In addition, tax credits may be given to rural banks ploughing back profits.

(b)

(c)

61 Attracting External Funds. Rural banks may sell preferred or common shares to commercial and thrift banks. The investment of commercial and thrift banks on those shares may qualify as part of the mandatory requirements stipulated in P.D. 717.

MergerConsolidation.

Perhaps, the experienceof the First Consolidated Rural Bank of Bohol with regard to consolidation may be studied and shared with other rural banks.

This is an important step for encouraging small rural banks in other regions to consolidate.

This study was presented at the Sixth National Agricultural Credit Workshop, 20 - 2'2 June 1985 at the Development Academy of the Philippines (DAP), Tagaytay Staff Paper Series NO. 85-08.

City, and is available as PIDS

SOURCES OF PHILIPPINE ECONOMIC GROWTH, 1948.-78 AND PROSPECTS FOR THE 1980's AND 1990's Harry T. Oshima This study is along the lines of Robert Lampman's growth accounting study for 1947-19.65 (reported in the Philippine E.conomicJournal, Second Semester, 1967). The 'statistical portion of Lampman's study needs to be revised and updated.

In this study, more attention is paid to the long-term analysis of the growth of GNP per capita, product per worker, and total factor productivity (conventional) than Lampman's 1967 study.

The scope of analysis used covers a series of 30 years. In addition, the types of growth accounting analysis carried out by Abramovitz and Denison (in which labor and capital contributions are oartitioned off and an over-all residual obtained), and estimates of labor productivity by each of the nine major industries are worked out to see in which industries labor productivity has risen and by how much. The latter entails work on employment statistics by industries.

A second type of analysis that is attempted is the use of the Chenery-Syrquin method of decomposing the sources of growth and structural changes into domestic demand, exports, import-subs-

62 titution, and technological changes, which emphasize the demand size of growth. A third type of analysis is to work out industrial structural changes in the Kuznets fashion and compare these norms with those established by Chenery and Taylor. The results are subsequently compared with those of other Asian countries for which the above computations have been •made, in particular, South Korea, Taiwan and Japan.

A major purpose of the analysis is to determine to what extent the postwar growth of Philippine GNP, (5.7% per year, 1950-1977) and of per capita GNP (2.S%) was due to forces more or less permanent (or sustainable), and to what extent these are transitional and, therefore, not likely to continue into 1980s. Moses Abramovitz has attempted this kind of analysis for the industrialized countries •and came out.with the conclusion that the high growth of a dozen industrialized countries in the postwar decades (5 percent of aggregate GNP)is not expected to continue into the 1980 s because a significant part of the growth was due to transitional forces peculiar to the 1950s and 1960s, and originating in the depression decade of the 1930 and the military decade of the 1940s. In short, the 1950s and the 1960s were the rising phase of the long swing with the 1970s and the 1980's representing the following phase.

In the Philippines, the extent to which the growth of import. substituting industries, the expansion of public construction of infrastructure after independence, the rise in yields and acreage with the "Green Revolution", etc., are expected to be ascertained. The study should Contribute to a better assessment of the prospects for the 1980s and 1990s.

This study appears in the Journal of Philippine Development, Vol. X No. 1 (1983).

ECONOMETRIC MODEL OF THE PHILIPPINE ECONOMY Dante B. Canlas, Rolando A. Danao and Manuel F. Montes The models's objective is primarily short- to medium-term forecasting and policy analysis of key macroeconomie variables.

This means a medium-sized model whose time frame is shorter than that of an annual model.

63 Construction of the model is guided by established theoretical foundations but moderated by considerations of data availability, statistical fit, and model simulation performance. The model is also structured on the accounting framework of the Philippine national income and product accounts.

The model constructed determines income from the demand side. Gross National Product (GNP) is therefore built up from its various demand components - consumption, investments, imports, exports and government spending. The five main sectors contained in the modelindude thereal, balance of payments, monetary, government, and price sectors.

The inclusion of the external sector obviously recognizes the influence that global events e.g., increase in energy prices and interest rates, have on the Philippine economy. This also shows that foreign trade shares a significant part of the economy.

The different sectors in the model interact in this way: Imports and exports come from the balance of payments. Imports on the balance of payments are partly determined by real GNP. Some investment items are affected by total liquidity which comes from the monetary sector. Local inflation from the price sector feeds back to the real sector directly through exports and imports via the relative inflation between the Philippines and the United States.

To improve the forecasting performance of the model, equations were estimated using series data. Each equation was estimated by ordinary least squares and where deemed necessary, the CochraneOrcutt. procedure was used to minimize the effects of serial correlation. Additionally, each of the behavioral equations underwent extensive testing related to its specification.

The full-model static and dynamic simulations were performed to find out how well the model as a whole fits the historical data.

Many such historical simulations were made on two experimental versions of the model. These simulations helped identify variables and equations that _needed modifications. The end product of this is Model 1984C of the study.

The paper notes that static simulation errors are uniformly smaller than dynamic errors. This is not surprising since under

64 static simulation, actual values of the predetermined variables are used while under dynamic simulation, the estimated values of lagged endogenous variables are used. In the latter case, errors got transmitted to the other parts of the model.

A, multiplier analysis was also carried out on the model to determine if: (1) changes m exogenous variables affect the endogenous variables in the direction suggested by economic, theory as the "shocks" are worked through the whole model; and (2) shocks to the model do not include explosive movements away from an initial solution (stability). In general, the model exhibits the expected direction of the effects of the exogenous variables that have been shocked. However, the stability of the whole model is still in doubt on the basis of the multiplier analysis. The oscillatory movements of some variables, notably imports and investment, all seemed to be damped but simulation periods have not been extended long enough which also becomes an issue that seeks how long is "long enough".

On the whole, the analysis of simulation errors led to a prescription for further work. The sector that obviously needs a reworking is the capitalaccount sector. It is envisioned that an improved capital account-model will eliminate the errors and biases that currently originate from it and propagate, to the rest of the model. It is recommended that efforts should be made to improve further the performance of other behavioral equations by respecifications such as the introduction of the refined lag structures.

Moreover, the model's capability may be expanded by: (a) the introduction of the supply side; Co) the disaggregation of the exports, imports, and money sectors; and (e) the determination and introduction of the appropriate form of interest rates. All these, however will entail more testing to validate the model.

EXPLICIT BUDGETARY CONTRIBUTIONS OF NATIONAL GOVERNMENT TO PUBLIC CORPORATIONS Juanita D. Amatong The .studio determines

the magnitude of budgetary contributions

65 to government corporations from 1975-1984. It determines the allocation of budgetary contributions to the different sectors and traces the budgetary flows from the time contributions axe appropriated to the tiine cash disbursements are made. It also attempts to analyze empireally the relationships of explicit budgetary contributions on the activities of government corporations.. The activities of government corporations in this paper are manifested in financial ratios.

The focus of the study is limited to two types of budgetary contributions; namely, current and capital contributions.

The other limitation is the inability of the study to sift through budgetary documents of National Government current and capital contributions included in lump sum appropriations (customs duties fund, special activities fund, economic support fund, etc.). It is worth noting that these types of transfers, although not explicitly stated in budgetary documents as subsidies and equity contributions, axe budgeted and programmed under other budgetary headings. These types of transfers therefore understate the magnitude of National Government contributions in this study.

The study concludes that the rapid growth of tile government corporate sector was accompanied by a similarly rapid growth of National Government contributions to this sector. Such contributions had a significant impact on the National Government's fiscal position raising the overall fiscal deficit by as much as the equivalent of 2.0 percent of GNP. Although the sectoral and corporate allocation of contributions adhered closely with the priorities mentioned in development plans and annual budget programs, the allocation system had various shortcomings which need to be corrected; First, there are substantial discrepancies between amounts appropriated, amounts programmed, and amounts disbursed. During the ten-year period, only 86.4 percent of the contributions appropriated by the legislative body were programmed. Likewise, the contributions actually disbursed exceeded the amounts originally prograxnmed by 9'3.2 billion.

Second, contributions are not allocated on the basis of f'mancial viability. On average, the government corporate sector posted rates

66 of-return

on investment

below the opportunity

cost of capital and

the average commercial lending rate. Government corporations with negative rates of return on investment received almost half of total contributions.

Third, contributions are not allocated on the basis of the government corporations' need for investment funds. Despite the fact that capital contributions constitute a bulk of total National Government contributions, investment ratios and contribution ratios are poorly correlated. The study concludes that investments are financed primarily by profits and borrowings rather than by capital contributions which, in turn, are used to finance operating expenditures.

In addition, the study concludes that contributions expand rather than reduce the need for borrowing. Likewise, borrowing increases the need for contributions. Inasmuch as,government corporations have low rates of return on investments and the National Government gives guarantees to government corporate debts, the expanding level of contributions•is accompanied by a growing level of government corporate debt being assumed by the National Government.

Likewise, contributions allow government corporations to price their output below production costs. The effective consumer subsidy arising from budgetary contributions is estimated at 8 percent or 20 percent of total output price.

These findings indicate that if the National Government intends to improve its fiscal performance, reduce the dependence of government corporations on National Government contributions, and enhance the efficiency of government corporations in contributing to the attainment of the country's development objectives, it should introduce reforms in its subsidy policies. It is proposed that: First, the National Government should streamline its resource • allocation system to minimize discrepancies between appropriations, programs, and disbursements. Except in critical circumstances which were not foreseen by the legislative body, programs and disbursements should stick closely to the appropriations. The reduction of the discrepancies from one step of the allocation process to another ensure that National Government resources are used in thepriorities

67 identified by the representatives

of the people.

Second, the National Government should allocate contributions on the basis of financial performance. It may use contributions as a leverage to encourage managers of government corporations to improve their financial performance.

The National Government should also consider establishing• a policy which requires change of top management in government corporations which fail to attain a set of minimum financial standards to be set by an appropriate government authority. Certain adjustments may, however, _be_nee.d_l in financial standards to consider operating conditions, e.g., monopolistic position and social orientation of projects under implementation, peculiar to some government corporations.

Third, the National Government should devise means to ensure that capital contributions are used in investmentundertakings rather than operating expenditures.

The investment program, s and investment performance of government corporations should be reviewed before requests for capital contributions are acted upon.

Fourth, government policy on government corporations and subsidies shoold be re-studied to determine its consistency with policies that strengthen the role of the private sector and bolster productivity.

The faster growth of the government corporate sector vis-a-vis that of the private sector seems to contradict government objectives • embodied in the development plans that the private sector will remain the prime-mover of economic development in _e country.

Likewise, the poor financial position of government corporations renders somewhat ironic these frequent government pronouncements that the private sector should improve its efficiency and competitiveness to hasten economic recovery.

The study is available as a seminar paper.

FINANCIAL MANAGEMENT IN SELECTED PUBLIC UTILITY/INFRASTRUCTURE GOVERNMENT CORPORATIONS Leonor M. Briones The study focuses on financial management issues and problems

68 in five infrastructure/public utility corporations; namely, the National Power Corporation (NPC), Metropolitan Waterworks and Sewerage System (MWSS), National Irrigation Administration (NIA), Philippine Ports Authority (PPA), and Philippine National Railways (PNR). The five corporations .__ represent 29 percent of the total number of state corporations classified as. infrastructure/public utility sector.

This exploratory study employed a very simple methodology, and used the traditional methods of financial analysis, with the exception that subsidies were not considered as income. Common ratios were used. Nevertheless, in the process, the study has uncovered issues and problems with far-ranging implications, such as: (1)

Liquidity. Three of the five corporations, namely PNR, NPC and NIA are facing liquidity problems. As of 1986, PNR has the lowest liquidity ratio and is clearly in a "crisis situation". However, NPC is more problematic, considering its size and its leading role in the development strategies of the government.

As was pointed out in the study, the dangerous liquidity position of NPC has serious implications on the overall financial position of the national government which has no recourse but to bail it out.

(2)

Heavy Debt-servicing Requirements.

All five enterprises engaged in heavy external borrowing to finance their capital requirements. Massive borrowing has resulted in heavy debt-servicing requirements.

This is particularly true of NPC whose interest payments for the nuclear plant alone are estimated at _100 million annually. It was pointed out that cash generation has not matched debt servicing requirements, forcing these emerprises to turn to the national government for advances. As a result, national government resources were transferred to the corporate sector on a massive scale, thereby adversely affecting in turn the cash position of the former. It cannot be denied that the heavy debt servicing requirements of utility enterprises have constituted a terrible burden not only on themselves but on the national government as well.

(3)

Large Accounts Receivables. Another common problem among public utility enterprises is that of accounts receivables which are difficult to collect. While accounts receivables of the public

69 sector are notoriously difficult to collect, the problem is much more acute in public corporations. Because their.activities tend to be complementary, their accounts and their inability to pay each other are interconnected.

An example of this is the case of the Meralco and NPC. The former being the largest debtor of NPC, and at the same time the largest creditor of several other public utility enterprises. Thus, the inability of these enterprises to pay Meralc0 will affect the latter's capacity to pay NPC, and so on. Another problem which complicates collection of accounts receivables is what NPC describes as "inability to disconnect due to political intervention" and inability to discount due to -restraining order from local courts." Above all, public utilities cannot easily resort to disconnection of services to pressure debtors into paying since "public interest" is affected.

However, it remains to be seen if there is a need to continuously exert efforts to collect these large accounts receivables which, are peculiar to public utility corporations, and to monitor the size of the accounts to prevent growth into politically unmanageable proportions.

(4)

Problems in Accounting Practices. Although they vary in size, activities and extent of operations, the five corporations have " '_ similar problems related to accounting. The common problems are reconciliation of reciprocal accounts and the matter of inventories. These problems cause serious concern on the part of monitoring agencies. Laxity in this areas can easily open the door to fraud and even plain thievery. It must be pointed out, though, that these problems are also endemic to other government corporations and even in regular government agencies and local government.

(5)

Equipment Management. The problem of equipment management, i.e., ineffective inventory control and management, exists in varying degrees in five corporations, although the problems were specifically identified in the case of the NIA. The study points out that all the five corporations depend on heavy equipment and sophisticated machineries to maintain operations.

Losses in ope.rations due to ill-maintained, inadequate or broken down equipment may be significant and should be minimized.

(6)

Problems In internal Control. Only PPA was given an unqualifted opinion by the auditor in so far as presentation of the

70 financial statements was concerned. All the other four corporations received qualified opinions from their respective auditors.

The study identified the inadequacy of the internal control system of PPA and recommends that loopholes need to be plugged and tighter control measures be instituted especially at a time when utility corporations are sustaining losses.

This study is available as a seminar paper.

POLICY ISSUES IN THE COORDINATION AND CONTROL OF PUBLIC ENTERPRISES IN THE PHILIPPINES Gabriel U. Iglesias The study aims to evaluate the existing structure and process in the coordination and control of Philippine public enterprises and propose measures that will ensure public accountability and responsiveness of these enterprises to national development goals and priorities. It employed the case study approach and focused on the experiences of four enterprises; namely the National Power Corporation (NPC), Philippine National Oil Company (PNOC), Metropolitan Waterworks and Sewerage System (MWSS), and Southern Philippine Development Authority (SPDA).

It completed lowing: (1)

a number of major outputs which include the fol-

an integrating/overview paper on "The Philippine Experience the Coordination and Control of Public Enterprises";

(2). case studies on the coordination PNOC, the MWSS and the SPDA;

and control

on

of the NPC, the

(3)

background papers on the Civil Service Commission (CSC), the Commission on Audit (COA), Office of Budget and Management (OBM), and the Investment Coordination Committee (ICC), as well as a directory of Philippine public enterprises by sectoral specialization and tYpe of creation, and a profile on the financial involvement of the Philippine government on public enterprises; and

(4)

a summary table on the mechanisms and schemes for coordinating and controlling public enterprises in the Philippines from past to present.

71 The integrating/overview paper weaves into one the Philippine experience in public enterprise coordination and control, based mainly on the experiences of the four enterpiises studied.,It describes the Philippine model structures for coordinating and controlling public enterprises and comparatively assesses their effectiveness as experienced in NPC, PNOC, MWSS, and SPDA. It likewise offers alternative systems for some of the ineffective mechanisms and suggests a number of policy measures to improve the coordination and control of public enterprises in the country.

The case studies, meanwhile, are in-depth reports on the nature, process and dynamics of coordination and control in the four enterprises studied. Each case represents a sector in the Philippine public enterprise, classification, i.e., NPC for the infrastructure sector; PNOC for the industrial sector; MWSS for the utility sector; and SPDA for the area development sector. The final number though falls short of the envisioned eight case studies covering two other sectors, e._, financial, socio-cultural and scientific.

Each case focused on six policy areas of coordination and control, namely, (1) plans and programs; (2) investments and loans; (3) budgeting; (4)auditing and performance evaluation; (5) personnel; and (6) pricing. In concentrating along these six major •policy areas, each case study attempted to generate issues as well as offer policy r_ommendations related to the effectiveness of several state controling and coordinating bodies like CSC, COA, OBM, ICC, NED.&, Central Bank and others.

In reviewing the experiences of the four public corporations, it would appear that the supervising ministries do not generally pro_ide institutional coordination so that attached corporations have not fully _benefitted from the technical expertise and services which the ministry, and not just the minister, could provide. Since the central feature of sectoral attachment is the representation of the • Ministry in the governing boards of the corporations, through the Minister or any.official not lower than that of bureau director, policy and program coordination of attached corporations is not as effective as expected.

The study also cited a number of reports wherein'raany ministers- serve as chairmen or members of so many goverfiing boards. In view of this, the study recommends the need to reexamine the individualistic approach to coordination and to replace it with a more effective arrangement.

72 Furthermore, there is a need to impose certain common standards of, say, civil service qualification before, appointment to a permanent position to ensure both the need to professionalize the public service, including public corporations-and the notion that no part of the public service system is exempted from this provision.

Finally, there is a need tO synchronize and rationalize policies, programs, and projects of various public corporations with those of ministries and other agencies of government through planning, monitoring, and evaluation activities of national, regional and local bodies. This matter of monitoring the investments and foreign exchange requirements of key corporations became urgent after the financial crisis which gripped the government in the 1980s.

This study is available as a seminar paper.

IMPACT OF BOI INCENTIVES ON RATE OF RETURN, FACTOR PRICES AND RELATIVE FACTOR USE: A COMPARATIVE ANALYSIS OF INCENTIVES UNDER THE OMNIBUS INVESTMENT CODE OF i981 (P.D. 1789) AND THE INVESTMENT INCENTIVE POLICY ACT (B.P. 391 ) Rosario G. Manasan The study looks into the various legislative incentives passed by the government since the start of the post-war era, and how such incentives affect the rate of return of industries, factor prices and relative factor use.

The study makes a historical review of the various investment incentives undertaken by the Philippines from the post-war era, beginning with the new and necessary industries act (RA 35). This was followed by RA 901 which supplants RA 35 and broadens tax exemptions for favored industries; and subsequently by RA 3127, the basic industries law bf 1961; RA 5186, the investment incentives act of 1967; and its complimentary measure, the export incentives act of 1970. Major emphasis was made on the last twe'packages of incentives namely, P.D. 1789 and B.P. 391.

To estimate the impact of incentives or rate of return, relative factor prices and factor use, the following a_umptions are initially

73 held: (1) investment decisions are based on some measure of profitability and on perceived additional profitability due to the incentive; (2) for a given rate of return and a given level of investment cost, the impact of any given incentive on profitability is measured by computing for the change in the before-tax profit arising from availment of the incentive; (3) relative factor prices and factor use essentially reflect the influence of various incentives on employment generation; and (4) evaluation of a given incentive on factor prices can be done through noted changes in the user cost of capital and wage rates, translated as changes in the labor-capital ratio.

The study also makes a comparative analysis of the package of incentives contained in P.D. 1789 and B.P. 391. On the basis of this, the study yielded the following findings: (1)

P.D. 1789 relied heavily on incentives with a capital cheapening effect, i.e., accelerated depreciation, credit/exemption/ reduction of taxes and duties on capital equipment and expansion reimbursement allowance. B.P. 391, on the other hand, abolished accelerated depreciation and expansion reinvestment provisions; •

•

(2)

P.D. 1789 and B.P. 391 have a bias for foreign loans as a source of capital because of the provision on tax credit for taxes paid on interests on foreign loans;

(3)

A double deduction of direct labor and local raw material costs under P.D. 1789 could have countervailing effects on the capital bias. However, other provisions of the bills themselves limit these, i.e., only a limited number of registered firms can benefit from this deduction;

(4)

B.P. 391 has instituted incentives that are relatively factor neutral and cost effective such as tax credit on net value earned, and tax credit on net local content, which are largely different from the tax holiday provided for by P.D. 1789; and

(5)

The impact of the packages of incentives on the rate of return is substantial. These incentives have about the same impact on firm profitability, notably on pioneer, expansion exporting enterprises. P.D. 1789, however, resulted in higher rates of return for non-exporting firms.

74 Among the recommendations

of the study are:

(a)

A thorough reexamination of previous investment incentives policies as there is a wide room for reform under the present administration. For example, there is a need to examine whether it was necessary in the first place to grant incentives to non-exporting industries, even if this lasted for only five (5) years;

(b)

There is a need for reexamination of BOI policies and procedures with regards to setting up the investment priorities plan.

Apart from the set of desirable economic indicators currently being considered by BOI on finn level evaluations, i.e., employment generation, foreign exhange rate, foreign exchange earnings, internal rates of return, etc., there is also a need to come up with a criteria for prioritization on a sectoral and industry level. Once priorities are set, some difficulties in granting permission to invest may be overcome;

(c) An interesting study would be the determination, of the number of investors who proceeded with their plans to invest" in a particular area without proper knowledge of the incentives available. This could be done through examination of petitions to the BOI. There is also a need to determine whether investors would have invested any way without the government granting them incentives; (d) As for revenue losses due to B.P. 391, there is a need to come out with an estimate of the amount shouldered by government for future investment decisions in this regard in order to guide future policy and plan formulation; and (e)

The tariff reform program may alter some of the provisions of investment incentives especially those designed for export firms.

The study is circulated as PIDS Staff Paper Series No. 86-01

75 A MACROECONOMIC OVERVIEW OF PUBLIC ENTERPRISES IN THE PHILIPPINES, 1975 - 1984 Rosario G. Manasan and Corazon R. Buenaventura The purpose of this paper is to provide an overview of the macroeconomic role and impact of public enterprises in the Philippines. More specifically, the study attempts to address the following points: (1) the number and sectoral distribution; (2) the economic (value-added) contribution of public enterprises; (3) their impact on employment, investment, borrowings and fiscal budget; and (4) factor productivity and other characteristics of the sector.

The Commission on Audit reported that there were 70 government-owned and/or controlled corporations in 1973. In a decade, this number more than tripled, In mid-1985, the Philippine Commission on Reorganization (PCR) inventory of government corporations includes 245 corporations.

In terms of gross value added, the public enterprises sector is growing faster than the total economy at 24.6 percentper annum on the average over the period compared to 14.1 percent per year for gross domestic product.

The contribution of government corporations to total employment in the economy is very small. Meanwhile, the impact on investmen-t (using the 15 major non-financial government corporations) indioates that in 1978-1984, fLxed investment of this group of government corporations represents 15.6 percent of gross domestic capital formation. The study pointed out, though, that the sector's real contribution to investment is not as large as the above number indicates since only 10 percent of the expenditure was internally f'manced. _"Likewise, the study observes that overall deficit of the public sector in 1975-1984 is large. To finance these deficits, government corporatigns have relied v_ry heavily on foreign borrowings and on national government support.

The large size of the government corporations on the national government budget, given the sluggish growth in tax collection in the: period, has resulted in: (1) a reduction in the relative share oT other expenditure items like those on personal services; maintenance and

76 operating expenses, etc.; and (2) increased national government rowings, both from the banking system and the Central Bank.

bor-

On the other hand, the sizable demand for foreign borrowings by government corporations in the last decade is now seen as a major cause of the present day fiscal budget and balance-of-payments difficulties as the foreign debt burden of the public enterprise sector imposes a heavy demand on both foreign exchange and on national government resources/budget.

Finally, the study observes that the public enterprise sector has not been an efficient user of scarce resources. Productivity estimates indicates that the sector is a drag on the economy.

The study appears as PIDS Staff Paper Series No. 86-03.

PHILIPPINE BALANCE OF PAYMENTS: A MODEL AND AN ANALYSIS OF TIlE PAYMENTS POLICY Ponclano S. Intal, Jr. The study aims at the articulation and formulation of a payments adjustments framework in which unwarranted adjustment and/or financing costs ate not expended. Specifically, the project examines: (1) the impactof exchange rate and financial policies oft the economy and the balance of payments; and (2) the payments policy directions for the future. The study reviews the Philippine payments adjustment and financing experience, mainly during the 1970s, examines the structuralist perspective, and analyzes currency devaluation in terms .of i tradable-nontradable models. In summary, the study highlights the following: (a)

Review of the Philippine balance of payments and balance of payments policy, 1965-1982.

This paper presents the basic analytics of the balance of payments problems, describes the compositaon and trends of the Philippine balance of payments, and discusses the changes and developments in the internatmnal payments system and the international economy, as they impinge on the Plailippme balance of payments. It also considers the role of the International Monetary Fund (IMF) and the nature of conditionality, and provides an overview of the issues of payments adjustment and financing.

(b)

Analysis of the impact of devaluation. This study examines the impact of currency devaluation on the economy based on a synthesis of the approaches suggested in recent economic literature.

77 In particular, it examines the effects of currency devaluation on key economic variables such as domestic prices, real output, and the trade balance in foreign and domestic currencies.

Emphasis is given to the question of whether currency devaluations in the Philippines have helped improve the balance of trade (and payments) at the expense of stagflation. The macro level analysis is supplemented by in-depth sectoral and industry studies in the following produc_on sectors: import competing consumer and producer goods_ agricultural and manufactured exports, and nontradable goods. (c)

Examination of the structuralist perspective.

Perhaps the most cogent criticisms of the orthodox (and IMF) view of payments adjustment have been provided by the so-called structuralist school. While the orthodox view emphasizes demand factors underlying payments disequilibria, the structuralist school emphasizes supply factors. Consequently, while payments adjustment from the orthodox view focuses on demand management, the structuralist view emphasizes removal of supply bottlenecks, This paper presents the structuralist perspective', i.e., its assumptions, prescriptions, and world view. It also explores its applicability to the Philippine case in the light of the results of the study on devaluation.

(d)

Policy directions. It is expected that the policy simulations (including the analysis of policy rules) and tke study on the impact of devaluation will help illuminate the design of an adequate (and appropriate) balance of payments policy for the Philippines. Consideration will be given to the criticisms of the structuralist school., as against the standard prescriptions for balance adjustment, as well as their alternative policy recommendations.

The final report of the research project will consist of three major parts. Part One will consist of the review of the Philippine balance of payments' and balance of payments policy, the policy analyses, and the discussion of policy directions. Part Tw6 will consist of the study of the'impact of the devaluations and the examination of the structuralist arguments and prescriptions. The statistical appendix will comprise Part Three.

The Project is being implemented in phases, of which phases i and II have been completed. Phase I reviews the Philippine balance of payments and balance of payments policy from 1965-82. It also specifies a framework for the analysis of the effect of devaluation.

Phase II, on the other hand, examines Philippine export and import

78 performance, terms of trade stability and import stabilization and dependence during the 1965-79. Phase III which is ongoing will look into aspects through which the government, directly or indirectly, affects the balance of payments, i.e., the nexus of government expenditures, revenues, monetary expansion, public borrowing and the macroeconomic role of government enterprises.

Seven working papers have been produced under the completed phases of the Project. These are: (a) Anatomy of the Philippine BOP Problems; (b) The Effects of Devaluation on Prices, Output, and Trade Balance: The Philippine Performance; (c) The Balance of Payments: Factors and Payments Adjustment; (d)Export Supply and Impact Demand Regressions of the Philippines, 1960s and 1970s; (e) A Decomposition Analysis of Philippine Export and Import Performance, 1974-82; (f) Philippine Exports and Terms of Trade Stability_ 1965-82; and (g) A Note on Import Substitution and Import Dependence in the Philippines, 1959-79.

Papers (e) and (f) above are available as PIDS Staff Paper Series Nos. 85-02 and 85-03, respectively.

EVALUATION MEASURES FOR PUBLIC ENTERPRISE PERFORMANCE Carolde los Santos-Guina The study aims at defining and applying a framework for evaluating the performance of public enterprises in the Philippines. It is composed of three parts: Part 1 presents the conceptual framework for public enterprise assessment_ Parts II and III apply the conceptual framework to selected government corporations; namely, the Metro Manila Transit Corporation (MMTC) ancl the Food Terminal, Incorporated (FTI).

The conceptual framework uses the criteria of efficiency and effectiveness in assessing public enterprise performance. The efficiency criterion is operationalized in both the economic/managerial and allocative sense. The measure of efficiency include private and public profitability indicators, present values and external rates of return. Effectiveness is assessed by determining the congruence between official and operative goals, and the extent of goal accomplishment. Both efficiency and effectiveness assessmenthave quantitati.ve and qualitative elements.

Parts 1I and III apply the conceptual

framework

in Part I to

79 case studies of two government corporations, MMTC and FTI, to serve as illustrative examples. The case studies are intended to show the relationship among the various indicators within the context of a dynamic setting covering both institutional factors and policy environments. The case studies also demonstrate the nature of the policy recommendations that could be evolved by using the framework.

On the MMTC case study, the paper reccmmends the following: (1) fnrther enhancing of profitability by a faster disposal of nonoperating rolling stock and non-moving spare parts; better maintenance of MMTC rolling stock, and minimizing the time lag between bus acquisition and actual field operations; (2) improving operating policies through a more frequent review of actual versus targetted performance levels, the adoption of contingency planning techniques, clarification of its mandate with its supervising ministry, i.e., the trade-off between the objectives of financial viability and its developmental orientation, the conduct of training programs for office personnel, redesigning of performance evaluation criteria and the setting up of mechanisms for greater participation of drivers and conductresses in the design of operating policies and procedures; and (3) redefining MMTC's sale. The MMTC's case raises the issue as to whether a different treatment can be accorded to public enterprises not receiving regular explicit subsidies from the national government in terms of the application of Civil Service rules and COA audit requirements.

Part III of the study which covers the FTI case study is currently being reviewed and validated by FTI.

ECONOMIC CONTRIBUTIONS OFPUBLIC CORPORATIONS IN TIlE PHILIPPINES Rosario G. Manasan This study deals with a macro-level seetoral overview of the public enterprise sector in the Philippines. Estimates of the economic contributions of public enterprises, in terms of value_added, employment ,and investment are made. Measures of productivity (like Q]L, Q/K and K]L) are also estimated for the Philippine public enter-

80 prise sector. These estimates are then compared with those of their counterparts in the private sector. Analysis are undertaken using data from the NCSO Census of Establishments, supplemented by COA data and firm-level interviews. Value added estimation are based on the methodology/framework developed by Jones and Sakong for Korea. Aside from satisfying a purely academic interest in fact finding it is hoped that the study can help solve structural problems.

AN ANNUAL MODEL OF THE PHILIPPINE,ECONOMY Winifrida M. Constantino, Mario B. Lamberte, Roberto S. Mariano, Celia M. Reyes ana Josef T. Yap The study involves the development of an econometric model of the Philippine economy. Specifically, the study aims to specify, estimate, validate and simulate an annual macroeconometric model of the Philippine economy. The model is intended for medium-and long-term forecasting and policy simulation for key macroeconomic variables.

The basic features of the model are: (1)

Incorporation of the demand and supply side;

(2)

Inclusion of sectoral production functions;

(3)

The external sector is treated via national income accounts; and

(4) The exchange rate and government expenditures ized.

are endogen-

For the ce.lendar year 1984, the study has generated the following outputs: (a)

An annual macroeconometric model used to project Philippine economic aggregates in the medium-term under alternative policy scenarios; and

(b) Semestral and annual data for macroeconomic and other related variables such as population' size, etc., to be used in the economy-wide models for the Philippines.

81 AN EVALUATION OF THE PERFORMANCE OF THE PHILIPPINE TAX SYSTEM Rosario E. Querubin This study includes the following: (1)

Reestimation and update of existing estimates of buoyancy and elasticity of taxes from 1960-1983_ including a partitioning of the tax to GNP/income relationship into tax to base and base to GNP/income relations;

(2)

Identification of the determinants of taxable capacity along the lines developed by Bahl, Chelliah, others; and

(3)

Construction of a fiscal policy model for estimating public revenue needs. Tax revenue data comes from the Commission on Audit (COA) and the National Tax Research Center (NTRC).

INDICATORS OF SECTORAL OUTPUT Benvenuto

N. Icamina

The study involves the construction of leading indicators which would adequately reflect the trends in overall Gross Domestic Product (GDP) and sectoral comoonents of output (value-added components of GDP) from the regular and existhlg economic data.

The indicators which will predict in advance the movements in GDP and its sectoral components are developed on a quarterly basis.

The indicators capture the movements in GDP and this in effect, measures the pace of economic activity as it affects business plans and government policies.

In particular, leading indicators are identified for each valueadded component of GDP in the study. (Potential indicators are chosen from a universe .of regularly, available short-term data for empirical testing.) An examination of the sectoral value-added estimates in the national income accounts is then made to ensure that the indicators identified fit the data peculiarity of the former.

The indicators chosen become either a single variable or a mix-' ture of several variables depending on the outcome of statistical tests. Likewise, proxies for m_jor seCtoral groups---agriculture,

82 industry, and service -could be-based on independent composite of derived indicators for individual sectors.

tests or a

Finally, the .study derives GDP as a composite indicator - the weighted average of sectoral output indices. The weights are based on the most recent share of the respective sectors' value-added to GDP (in real terms).

83

III. TRADE EXPANSION, AGRICULTURAL AND INDUSTRIAL DEVELOPMENT AND ENERGY

INDUSTRIAL

PROMOTION POLICIESIN

THE PHILIPPINES

Romeo M. .Sautista, John H. Power and Associates This study deals with a quantitative description of recent economic policies affecting the performance of Philippine manufacturing industries and recommends certain modifications on the country's industrial promotion policies.

A comparative study of economic policies and industrial development from the 1950s through the 1960s focuses on industrial promotion policies and manufacturing performance.

On the basis of this comparative analysis, the study recommends the implementation of more permanent industrial promotion policies in the country, among which are tariff reforms, to bring about a strong correlation between domestic resource costs and effective rates of protection. Moreover, fiscal incentives to encourage investments without a bias on employment, favorable financial policies, encouragement of small-scale enterprises and regional-based industries, and in-depth studies on industries and shadow prices are also needed.

This is the first study to be published in book form by PIDS.

'84 SOURCES OF PHILIPPINE INDUSTRIAL GROWTH, 1956-1978 Jesus P. Estanislao This paper examines sources of industrial growth based, on a study of sixteen specific manufacturing industries for the period 1958-1978. Of the sixteen industries, four are "base industries", six are "consumer-oriented", two are "intermediate product indnstries", and four are "investment related", The study uses demand and supply analysis as a guide to identify theprobable elements that contribute to the growth of Philippine industry. Thus, domestic final demand, intermediate use, import-substitution, export expansion, and technological Change are probable demand elements. On the other hand, supply elements include factors .of production e.g., labor, capital, and raw materials.

On the whole, 50 percent of output growth in manufacturing from the demand side'can be traced to an increase in domestic demand_ 25 percent to increase in intermediate demand, 15 percent to import substitutiofi, and 10 percent to export expansion. On the supply side, 6 percent of growth is traced to labor input and 35 percent or less for capital. Raw materials registered a variable but high percentage of contribution.

The study recommends a conscious export expansion and promotion policy, together with appropriate use of natural resources to generate income and productivity increases. Likewise, it supports the emphasison labor-intensive industries to boost the contribution of this sector to overall industrial growth.

This study 81-07.

is cixculated

INVENTION

as PIDS Working Paper

Series No.

IN PHILIPPINE INDUSTRY

Erlinda M. Medalla, Kent Mikkelsen, and Robert E. Evenson The Study describes the state of patenting activity in the Philippines and examines its level of activity in various industries.

On the whole, inventive activity does not appear to be a severe limiting factor that would prevent the Philippines from moving into the open export-based rapid growth phase. Other factors and policy

85 changes are called for in order to achieve this growth, although a more aggressive program to stimulate invention would contribute toward achieving this goal.

Industry specific data presented in this study indicate that Philippine firms have a comparative advantage in the utility model type of inventions or inventions which are adaptive in nature. This type stimulates inventions in the light engineering industries, espedally agricultural machineries, leather and footwear, furniture manufacturing, electrical equipment, musical and professional instruments, and structural metal industries.

In contrast, Philippine patenting in most chemical industries (except fertilizer, paints, and varnishes) and pharmaceutical induktries is low relative to foreign patenting, suggesting a real comparative disadvantage for Philippine firms in these industries. One reason for this is the breadth of foreign patent protection "blocks" local adaptive invention. This raises the question of whether the Philippines should consider limiting the patent protection granted to foreigners in certain fields, necessitating a careful evaluation of the costs and benefits involved.

Since the utility model system is producing tions, the following should be considered:

significant inven-

(1)

Expansion of the scope and breadth of the utility model system;

(2)

Faster and

(3)

Making available low cost legal services for utility model applications.

evaluation

and processing

of utility model applications;

THE IMPACT OF ECONOMIC .POLICIES ON • AGRICULTURAL DEVELOPMENT Cristina C. David and Associates The study evaluates the impact of general policies i.e., trade and foreign exchange, financial, fBcal, and employment policies,, and specific policies relating to subsectorsin agriculture e.g., price

86 policies, supervised credit programs, etc. on agricultural output, efficiency, balance of payments, and other measures of equity or welfare.

Among

the major findings and recommendations

of the study

are:

(1)

Almost all of the agricultural activities studied appeared to enjoy a comparative advantage, as indicated by domestic resource costs and foreign exchange savings below the shadow price of foreign exchange. Evidence indicates a strong economic potential in agriculture which perhaps has yet to be fully realized.

(2)

Price" intervention policies that affect the relative prices of agricultural outputs and inputs vis-a-vis non-agriculture and world prices, on the whole, have been adverse to agriculture.

Most importantly, the industrial protection system (mainly protective tariffs), by defending an undervaluation of foreign exchange, depresses the peso prices of internationally traded agricultual products and raises the prices of "the industrial goods that agriculture buys. Also important are export taxes, price controis, and government marketing policies, which generally have adverse effects on .price incentives to farmers. Subsidies from irrigation, extension, research, and credit provide some offsetting effects, but except for irrigated rice farming, these are not sufficient to counter the overall adverse effects of policies.

(3)

The policies under consideration are unquestionably geared to promote various development goals, but such goals have to be pursued by mechanisms that do not adversely affect production and investment incentives, nor unfairly tax the poorest _gment of the-population.

In the long-run, positive incentives to agricultural production will result in a growing supply of food at reasonable prices.

.(4)

Be'cause of excessively capital-intensive investments in industrial sectors that could not compete in the world market, agriculture has had to absorb more than its natural growth of labor, with consequent ad_,erse effects on agricultural productivity and real incomes.

(5)

Productivity

gains in rice farming

in recent years have subs-

87 tantially improved the Philipp!nes' comparative advan'tage, permitring a transformation from net importer to net exporter, Exports have not been sufficient, however, to prevent domestic prices from being below world prices. Growth of rice exports is hampered because the domestic market is shielded from the quality premiums in the world market by the government export monopoly. .: (6)

Recent studies indicate a comparative advantage in both traditional and the new high yield hybrid varieties of corn in the Philippines.

(7)

Hog and beef production appear comparatively advantageous, but not poultry despite a 50 percent tariff protection, making it the only highly protected agricultural product found in the study. Nex/ertheless, there issome evidence of improvement in the efficiency of poultry raising in recent years, along with substantial promotion via BOI incentives. This raises the question of whether such high protection is still justified.

(8)

The end of the Philippine sugar quota in the U.S. market in 1974 brought government monopoly of the sugar trade. Government marketing policy aims to improve the country's bargainLugposition in world trade and stabilize prices at levels "reasonable" to both producers and consumers. Results, however, hav_ been mixed. Before 1974, producers received and consumers paid considerably above world prices. On the other hand, beivceen 1974 and 1.980, producers' prices were about 23 percen.t below world prices_ Since 1980, however, the situation has reversed because of favorable long,term export contracts negotiated prior to the plunge in world prices. In any case, it is doubtful whether the Philippines can affect world prices to any significant degree. In the long run, producer prices can be raised only at the expense of domestic consumers, and the latter can enjoy low prices only at the expense of producers. The best that government monopoly can do is try to negotiate more favorable export contracts over what private trading can accomplish.

(9)

The most serious problem in the forestry industry isthe failure of forest management programs to prevent a rapid decline in the resource base, creating serious problems of soft erosion, flooding,, and clogging of irrigation systems, and la continuing

88 decline in forest output. Price interventlon policies have compounded the industry's problems with penalties from export taxes and quotas added to the substantial implicit tax from undervaluation of foreign exchange. There appears to be no justification for export taxes on lumber and veneer. An export tax on logs could serve as a second-best measure to encourage wood processing, and is superior to quotas or a ban on log exports. It would be desirable to rationalize the collection of economic rents from fol-estry I_y means of competitive bidding for cutting rights. Finally, there is a need to mobilize the activities of the upland population in a manner that will both protect the forests and enable the upland poor to share in the benefits of forest activities.

The Study is circulated as PIDS Working Paper Series No. 83-02.

AN ANALYSIS OF FERTILIZER IN THE PHILIPPINES

POLICIES

Cristina C. David and Arsenio M. tlalisacan This paper focuses on the impact of government policy on domestic fertilizer prices from 1973 when price controls, quantitative import allocations and cash subsidy to fertilizer producers were instituted. From 1973 to 1981, farmers generally paid a price 10 percent higher than cost, insurance, and freight (CIF) import unit value, the price which would have prevailed without government intervention. Except for the 1973-75 crisis period when fertilizer policy clearly subsidized farmers, the fertilizer policy package has served to increase revenues of domestic producers-importers, mostly through the cash subsidies or through the price margin allowed on their imports. Moreover, in the choice of policy instruments/guidelines, there was no attempt to relate the distribution of protection to efficiency of firms. Indeed, protection is highest to firms with the largest import allocation and the least to efficient firms, since the cash sflbsidy i._ determined by the losses incurred, rather than by some objective measure of efficiency. The burden of the growing inefficiency of the domestic fertilizer industry is borne by the farmer and the general public.

The study is circulated

as.PIDS

Staff Paper Series No. 82-01.

89 CREDIT AND PRICE POLICIES IN PHILIPPINE AGRICULTURE Cristina C. David The study analyzes the relationship between credit policies in the Philippines _ind economic incentives in agriculture. It also examines the extent to which cheap credit may be used as an effective way to offset various taxes on agriculture. The author states that interest rate subsidies have not significantly altered the unfavorable economic incentives in agriculture caused by government policies. She notes that despite goverment-instituted credit quotas and special credit programs, loanable funds to agriculture in real terms have declinedWorse, the impact of the low interest rate policy on income distribution teads to be regressive. ._ The choice of credit policies to compensate for the other policies adverse to agriculture fails to achieve the equity or efficiency objective. It appears that cheap credit does not overcome production disincentives caused by low prices. The author therefore argues for long-run solutions in achieving the objectives of food self-sufficiency, increased exports, and improved income distribution. These include correction of price distortions in real and financial markets and increased investments in infrastructure, research, and extension.

The study is circulated as PIDS Staff Paper Series No. 82-02.

GOVERNMENT POLICIES AND FARM MECHANIZATION IN THE PHILIPPINES Cristina C David In a labor surplus economy like the Philippines, farm mechanization is a controversial issue. This study describes the pattern and growth of farm mechanization and examines its effects. The conclusion.reached is that government economic policies have indirectly, and perhaps unintentionally, promoted farm mechanization by artifiemlly lowering user cost of capital in agriculture, due mainly to the overvaluation of the peso and the interest rate subsidy.

Factor

price

distortions

which

promoted

capital-inteh_ive

9O technology in manufacturing, therefore, also exist in the agricultural sector. If equity is an important concern in development, then correcting government price interventions, which artificially cheapen capital, is called for.

The study appears as PIDS Staff Paper Series No. 82-03,

RESEARCH ON FOREST POLICIES FOR PHILIPPINE DEVELOPMENT PLANNING: A SURVEY Marian Segura de los Angeles Tli/s paper concentrates on public and private forest management issues as they relate to the timber industry. It shows the need for limited wood exports as the growing variance between timber supply and local need for wood becomes apparent. The best alternative, though, appears to be reforestation. There is also a need for a more systematic reforestation plan, in-depth market analysis for processed wood products to determine supply and demand conditions in the domestic and international markets, and better planning of location sites for processing firms. Forms of government intervention in the local market for wood products also need to ,be explored.

The study is contained in a PIDS Special Publication, of Philippine Development Research II.

Survey

RESEARCH ON MINERALS FOR PHILIPPINE DEVELOPMENTPLANNING: A SURVEY Teodoro M. Santos

Studies on the mineral industry, specifically on metallic minerals, have dealt with the generation of geologic information, considered a vital input in the various stages of the mineral industry. This paper notes, however, that there is uneven distribution of research on the mineral indistry vis-a-vis its developing state in the country.

Thus, the study points to inadequate research on institutional and human resources in the industry, mining technology, and global developments as they affect local industry, environmental, social and political conditions induced by the industry.

91 Future research should then strive to deal with issues on mineral research and policy priorities, factor endowments, technology, investments, and the global economic and domestic environment.

The study is circulated as PIDS Working Paper No. 81-02.

THE PHILIPPINE NATIONAL ENERGY ACCOUNTS:.

A METHODOLOGICAL NOTE :

Leander J. Ale/o

The note presents a summary of the methoaology used in the construction of the Phdippine Nlat_onal Energy Accounts (PNEA) for 1970-1979. It includes a step-by-step detail of the methodology used in deriving the estimates of the energy accounts, with particular emphasis on consumption.

The study is circulated as PIDS Working Paper Series No. 81-04.

A STUDY OF ENERGY-ECONOMY INTERACTION IN THE PHILIPPINES Leander J. Ale/o This study constructs a macroeconometri_ model with an explicit energy sector. The model incorporates a number of instruments related to fiscal, monetary, balance of payments, and energy policies that can be manipulated in practice.

Among the major findings are: (1)

The estimates of the structural equations conf'mn, the. author's hypothesis that significant changes in parameter values of the behavioral equations of the macroeconometric energy policy simulation (MEPS) model have occurred; thus, the need for the construction of a new model.

(2)

With the use of recent semestral data, significant lagged variables as well as seasonal, slope, and intercept dummy variables are appropriately introduced, making possible the estimation of short-run and long-run elasticities, seasonal, and structural shifts.:

92 (3)

The quantification of the economic effects of the energy crisis in the 1970s was shown in the policy simulation experiments, where the cost to the economy is depicted as a substantial decrease in gross domestic product and its Components.

(4)

The impact of energy taxes and tariff is also presented as well as the economic trade-offs involved in a policy of taxing energy products highly. The results tend to show that the economic cost is higher than the benefit to be derived from such policy. It is to be noted, howe_/er, that high energy costs and taxes were shown to be quite effective in reducing energy consumption, resulting therefore in higher energy eftlciency ratios for the economy.

(5)

If the direct effects are the only ones considered, the effect on inflation of high-cost imported energy seems to be overstated.

The simulation experiments show that the economy has builtin anti-inflationary factors that counteract such cost-push increases. Moreover, the study contends that controlling the growth of domestic liquidity is a stronger anti-inflationary factor.

(6)

The model can be utilized for economic forecasting and planning in fllture applications. In order, however, for the model to be more useful for energy planning, it should be extended by further disaggregating energy demand for specific refined petroleum products. Sectoral demand by households ana industries can also be modelled. In this regard, future work can be done by using the accounting framework of the Philippine National Energy Accounts.

The study is circulated as PIDS Monograph

Series No. 1.

STUDIES ON THE WOOD-BASED FURNITURE, LEATHER PRODUCTS, AND FOOTWEAR MANUFACTURING INDUSTRIES IN THE PHILIPPINES Niceto S. Poblador and Associates The studies aim to develop both micro and macro data on the entire range of socio-economic, managerial, and technical issues faced

93 by the wood-based furniture, footwear, and leather products manufacturing industries, along with the leather tanning industry.. The studies are intended to provide an initial base for policy formulation and implementation, and to evolve a set of relevant guidelines for managerial and technical decisions.

The major findings of the studies are: (1)

The Philippine wood-based furniture industry is characterized by relative ease of entry that allows manufacturers to operate with little, if any; capital investment. The industry is highly labor-intensive, notwithstanding recent indications that more and more firms are introducing equipment/machinery in at least some operations.

Lack of capital/financing, inadequate supply of raw materials, and fluctuating domestic demand for furniture, are the major problems commonly cited by respondents. These, particularly for small firms, along with fluctuating demand and the absence of a standard level of production, may have led to a significant degree of underutilization of capacity (which is primarily labor-based) and, accordingly, have relatively more inefficient operations than larger firms.

In spite of the seemingly formidable barriers to success that plague the smaller firms, they have continued to exist, and in large numbers. This probably indicates that somehow, the small firms are able to gain a sufficient return on investments.

Data for the survey, however, suggest a direct relationship between size and age of firms. Moreover, a somewhat high percentage of firms in the population have ceased operations for some time or other. This would seem indicative of a situation where many small firms close down after some time, with the exception of a few which manage to survive and grow. To infuse these firms with collateral-free, low-interest medium-to long-term financing, with the expectation that they would perform creditably, be able to repay their loans and make sub5 stantial profits, may prove to be not viable over the long-run, unless the government is prepared eventually to treat such a scheme as a subsidy.

(2)

The domestic demand

for furniture

i_ low and the export mar-

94 ket seems to hold the key to the growth of the industry. Market research and development appears to be a must in pushing for exports of wood furniture. Identification of products and markets is ..critical, as well as the technological requirements for tapping such markets, -(3)

A principal problem of footwear firms servicing the domestic market, particularly small establishments, is the dominant position of wholesalers and large retailers. Thbre appears to be a need to examine closely whether more efficient distribution systems can be developed. This will necessitate detailed studies on a product-by-product level, the size and location of consumer market, the various distribution measures and practices, and the cost structure of distribution.

(4)

The leather footwear industry is cost-competitive and therefore offers much potential as an export industry. Not much progress can take place, however, in exporting leather footwear unless a rationalization of the supply sector takes place. There is also the problem of limited capacities of individual firms. Finally, marketing skills are required to obtain and evaluate market informa. tiofi, design, standardization and quality conitrol. IThese skills are also important in order to effectively penetrate the foreign market, and to set up channels of distribution and sales organizations. Moreover, the provision of credit facilities may require some form of government assistance.

(5)

The major problems of the leather industry are the inadequacy and poor quality of hides and skins. The solution to these problems are long-term and technological. In the meantime, the export and employment-generating potentials of the domestic leather-using industries cannot be ignored. It is therefore suggested that importation of raw or semi-processed hides and skins, or even finished leather be permitted at minimal or zero tariff, especially if the end-product is destined for the export market.

(6)

The domestic market for leather products may be a stagnant, if not shrinking, market. As price becomes more important to const/mers, the shift to cheaper synthetic materials will heighten.

The high cost of leather products stems from the high cost of

q

,

95

leather. Rebuilding the domestic tanning industry is a long process which is not expected to yield immediate results.

(7)

The export of Philippine' leather products requires considerable effort in several fronts, and the government may have to take the lead, barfing a concerted effort by the industry. These are in the areas of product development, market penetration, and financing.

The study is circulated

as PIDS Working Paper Series No. 83-01.

AUSTRALIAN DIRECT INVESTMENT IN ASEAN _ Chia Slow Yue and Hal Hill This study aims to: (1) provide an overview of foreign investment policies of ASEAN and Australia; (2) examine trends and patterns of Australian investments in ASEAN; (3) pinpoint determinants of bilateral investment flows; and (4) describe some characteristics and performance of Australian investments in ASEAN. A study on Australian foreign investments in ASEAN represents a useful contribution to knowledge in the areas of foreign investments as well as in Australian-ASEAN economic relations. The ASEAN countries are keen on diversifying the sourcing of their foreign investments, and Australian investments can help reduce the dependence and possible "overpresence" of American, Japanese, and European investments. A study of the motivation of Australian investments in ASEAN, as well as the characteristics and performance of such investments, will hopefully assist in improving both the quantity and quality of such investment flows.

In this study, certain specific issues pertaining to Australian foreign investments in ASEAN were rigorously examined. Examples of such issues are: (a)

The role of foreign investments in national development of ASEAN countries;

(b)

Australian policies toward investment with respect to the ASEAN region;

outflows,

plans

particularly

• 96 (c)

Magnitude countries;

of Australian

(d)

Investment tries;

motivations

(e)

Relative attraction center; and

(f)

Technology

investments

in individual

ASEAN

of Australian investors in ASEAN coun-

of each ASEAN country

as an investment

transfer and research and development

activities.

Analysis is based on data from two main sources, i.e., published and unpublished data of official government agencies, supplemented by interviews with a sample of Australian firms in each country to obtain micro data on investment motivations of firms and their characteristics and performance in host countries.

This study Series No. 4.

is available as ASEAN-Australia

Economic

Paper

RESEARCH PROJECT ON TRADE AND SERVICES Greg Seow and Glor_ M. drroyo The first part of the paper, describes and examines the pattern of trade in services in the Philippines for the period 1960-1980. It points out that: (1)

The share of services in Philippine international trade last two decades has been constantly increasing; and

for the

(2)

The direction of Philippine trade in services •shows that the Australian and ASEAN share of this account is very minimal,

The second part of the study analyzes the links between the Philippine domestic economic structure and the trade in services sector. Specifically, it starts with a discussion of the size of the country's services sector, the proportion of the services traded, the linkages of the service sector with the other sectors of the economy, the determinants of demand for services, and the supply conditions.

The Philippine services sector is quantitatively

the second most

97 important producer of final goods. In terms of gross output, it is also the second largest after the manufacturing sector. In terms of the composition of the domestic services sector, the wholesale and retail trade sectors have been determined to be its most important component, composing over a third of all services. Trade seems to be the most important service industry in the Philippines from the point of view of export potential, final demand or gross output.

For purposes of determining the proportion of services traded, the study divides the average between exports and imports by the value-added.

This is found to be 13 percent of the vahie added.

Among the traded services, trade and transportation dominate Philippine trade in services making up nearly half of all traded services.

The study also looks into linkages of the services sector by using the Philippine input-output table for 1978. The 1978 I-O table shows that the total output of the service industries amounts to US$12.4 billion, of which US$7.7 billion is attibuted to final demand and US$4.7 billion is consumed by various sectors for further ,production of goods and services in the economy. Percentage-wise, this means that out of the total percent output of the services sector, 63 percent goes to consumption, investment, government expenditures, and exports. On thd other hand, the remaining 37 percent goes to industrial consumption by all sectors.

The study also looks at the structure of demand for services in thc Philippines. As a whole, the largest component of the demand for services is intermedlate demand. To a large extent, therefore, the demand for services is a derived demand depending on the demand for the commodities to which services are inputs. This is especially true for finance and insurance, communication, storage and transportation because intermediate demand makes up more than half of the total demand for these services. On the other hand, consumption demand constitutes the bulk of the demand for real estate, hotels and restaurants.

The third part of the study deals with the regulation and protection by the government of the services sector. These include border restrictions meant to control the flow of service imports into the Philippines; regulatory barriers which aim to control the flow of service imports into the country on the basis of the regulation of the sale of foreign exchange; factor market barriers; barriers to invest-

98 ment flows: and government restrictions. Various roles, regulations, and statutes governing the conduct of traded services are presented in this section. They are also analyzed in terms of government policies, levels of protection, costs of protection and economic implications.

Finally, the last part of this study presents the prospects for policy cooperation ill traded services between the Philippines and other ASEAN countries as well as Australia. The researchers' position in thls regard is that cooperatidn within tile ASEAN extends over a broad spectrum. Meanwhile, the Philippines continues to be greatly dependent on developed countries, !_articularly the lTnited States.

Policy cooperation in traded Services should therefore be geared towards lessening this dependence on tile United States, and improving trade relations with the other ASEAN nations.

This study is circulated as ASEAN-Australia 1 and 2.

Working Paper Nos.

WELFARE ISSUES AFFECTING LANDLESS COCONUT FARMERS: A CRITICAL REVIEW OF THE CURRENT RESEARCH PROBLEMS Sylvia H. Guerrero From the review of studies on the coconut industry, it is evident that welfare problems and concerns are inextricably linked with issues of power and structure.

Some of those who have examined the problems of the industry at both macro and micro levels have strongly urged a politico-economic historical-sociological research approach. riglao (1981), for instance, highlighted the visible contraclitions in the industry ....that is, while the industry "generates .substantial profits for the landlord and capitalist classes as well as revenues for the state", it has not made a significant impact on the lives of the majority of small coconut farmers. The incomes of tenant farmers and farm workers have rerrrained at subsistence levels and tlmir conditions continue to deteriorate. David (1977), likewise, focused on the "feudal and exploitative" socioeconomic structure in coconut farming and the landlord-dominated coconut organizations. He stressed that these two are the main structural barriers in the *development of the industry. The affluent and influential elite landlords and industry leaders occupy

99 the top positions in farmers' organizations which were primarily established to promote and protect the interest of smhll farmers.

Cornista (1982), on the other hand, concentrated on micro-level studies of coconut villages, examining in depth the different occupational groups/tenurial classes, as well as functional practices within the production and marketing systems to help understand the problems faced by the coconut farmers.

The historical, sociological and empirical analyses by the different investigators of the main problems and issues in the industry thus suggest at least two types of clusters of research that need to be undertaken. The first set would include studies that address issues of power and structure which are extremely important in understanding the root causes of the underemployment crisis in the industry_ These are, problems of monopolistic control of the industry, industrialized power and inequalities, the dynamics of power in the coconut sector and related structural and organizational questions.

Related to these issues are basic socio-economic concerns of the coconut farmers, deemed crucial to any effort designed to protect them and promote their interests.

Research on the real conditions of small coconut farmers requires more micro-level surveys.

Research on the structures and functions of the key organizations in the industry, particularly the Coconut Federation of the Philippines and the Philippine Coconut Authority is likewise imperative to determine how these affect the distribution of benefits to farmers.

Since a number of alternative farmers' organizations have emerged in recent years, a study of these regional/national organizations, such as Asosasyon Pagpanghikawas sa Industriya sa Lubi, Friends of Coconut Farmers and Workers, the Bunawan Coconut Planters and Copra Producers Association, Inc., is essential. The purpose of such a study is to determine the farmer organizations' effectiveness as channels for programs and services for small farmers, as well as potential "checkpoints" in the enforcement of laws and regulations formulated to protect small Coconut farmers.

Another set of studies is recommended to address glaring research gaps on welfare issues in the industry. These are research studies that would assess the impact of the various industry programs.

100 Likewise, a systematic study of the mechanisms and procedures for implementing the welfare programs reveals specific problem areas, bottlenecks and other implementationdifficulties which would have important implications to program planners and administrators.

To answer the question as to who benefits from the scholarship program, insurance scheme, credit and replanting programs, etc., necessitates an analysis of beneficiaries by region/ province, tenurial status, and occupational categories. Similar relevant variables provide planners with important data for redirecting policies and programs.

In general, an empirically-based and systematic assessment of program implementation and impact is necessary to pinpoint areas of reforms and probably industry restructuring.

This study is circulated as PIDS Working Paper Series No. 85-01.

ECONOMIC EVALUATION OF THE PHILIPPINE ALCOGAS AND COCODIESEL PROGRAMS Armando

C Armas, Jr.

The study attempts to examine the economic viability of the alcogas and cocodiesel programs. It aims to identify scenarios that would make the programs cost competitive and socially profitable.

The study adopts the concept and measure of economic rate of return (EROR) and the domestic resource cost (DRC) coefficient, respectively, to determine the social attractiveness and cost effectiveness of the alcogas and cocodiesel programs.

With respect to alcogas, six distillery' model types are selected for analysis. Of these, three are molasses-based while the other three are sugar cane-based.

Social profitability estimates of the six alcogas models indicate that molasses-based distilleries have positive net benefits for distillery operations. On the other hand, the sugar cane-based distilleries register large negative net benefits from distillery operations. It follows from the feedback distinction that the large positive net benefits are greatly explained by lower raw material cost of molasses compared to sugar cane.

101 To determine the sensitivity of the social profitability indicators, ERORs of the 6 distillery model types are estimated by varying: (1) crude oil import prices; (2) export prices of molasses and raw sugar; and (3) foreign exchange rates. A 2 percent per annum increase in the _realprice of crude 0j_l!_¢_a_d__s to 235 percent EROR for model I of the molasses-based distilleries, and a -119 percent EROR for model III autonomous sugar-based plant. The ERORs under the 2-5 percent per annum crude oil price increase suggest that the social profitabilities of sugar-based distilleries are not satisfactory even with the more realistic crude oil price increase of up to 5 percent per annum for the next 15-20 years. Similarly, in terms of raw material price inceases, the ERORs vary among distille_ types. At 2 percent per annum increase in raw material price, only two distillery types register positive ERORs, both of the molassesbased plants. The non-profitability of sugar-based distillery types is further expressed under different foreign exchange scenarios. Not unexpectedly, the social profits of the selected six distillery types are directly related to the foreigri exchange premium. For molassesbased distilleries, the EROR increases from 6.6-132 percent to 14.6-175 percent as the loc_ currency is devalued by I0 to 30 percent. In contrast, the negative ERORs of the three sugar-based distilleries are not at all reduced by a higher foreign exchange premium. !

DRC estimates for the varying plant types conform to the similar estimates of ERORs for the respective'distillery types and argue in favor of small-scale annexed distillery based on molasses.

An evaluation of the eocodiesei program similarly suggests that it is economically unattractive due to: (a)

foreign exchange loss arising from use of the coconut oil in the cocodiesel program; and

(b)

reduction in government ciated with the program.

revenues due to foregone taxes asso-

This study is circulated as Monograph Series No. 3.

102 A COMPUTABLE GENERAL EQUILIBRIUM MODEL OF THE PHILIPPINE ECONOMY: SPECIFICATION, CALIBRATION AND USE

Ramon L. Clarete The study aims to design a general equilibrium model of a small open economy and to calibrate that model. The model is flexible to incorporate an arbitrary number of sectors and consumers. By satisfying Walra's Law, the model can be solved using any fixed point computer algorithm (e.g., Scarf, 1983; Broadie, 1983). Calibration is a technique popularly used in applied general equilibrium studies to specify numerically an assumed theoretical model in such a way that the model can replicate a "benchmark data set." This method jis an alternative to stochastic estimation of the model, deemed "infeasible" in the literature.

The output of this research is a theoretical paper specifying general equilibrium model of a small open economy. The paper lays down the structural equations and shows that the model is indeed a Walrasian model. Secondly, the paper discusses the data requirement and adjustments done in the process of calibrating the model.

TRADE IN MINERALS, ENERGY, AND PROCESSED MINERAL PRODUCTS Praipol Koomsup and Teodoro M. Santos

The study is composed of two (2) parts. The first part deals with the development of the Philippine mineral industry, while the second part examines a number of critical issues and policies affecting the mineral industry.

The tollowing are the major findings: (1)

The Philippine:mineral industry is divided into two (2) segments, the crude mineral industry and the processecl mineral industry.

Since the Philippines is still relatively tlnderdeveloped but possesses considerable mineral resource endowment, its crude

mineral industry is relatively more important mineral industry.

1/13 than the processed

(2)

Crude minerals imported into the country are mostly petroleum with some amount of fertilizer.

(3)

The Phdippines has a good chance to trade with ASEAN and Australia in processed minerals. It can import crude oil and coal, although it cannot hope to export crude minerals to these countries.

(4)

As regards the role of minerals in development, it must be realized that minerals have much to contribute beyond the traditional foreign exchange earnings, employment creation, and tax revenues. However, the role of minerals must be viewed in relation to the country's mineral resource endowment, level of development, and the stages of mineral production.

Although there seems to be some flaws in the country's mineral policies, such policies in general appear conducive to the seetor's development.

(5)

THE PItILIPPINES IN ASEAN-AUSTRALIA TRADE IN MANUFACTURES Casimiro II. Miranda, Jr. The paper is divided into three (3) parts namely, overall perfomance of the Philippines' external trade; manufacturea imports from ASEAN and Australia; and intra-industry trade of the Philippines with other ASEAN eount_es and Australia.

In the first section, the growth of the county's foreign trade is traced. The decline in the country's terms of trade is attributed to its strong dependence on a few traditional export items and concentration on a few traditional markets.

In the second part of the study, the performance of the Philippines' total trade is examined vis-a-vis the other ASEAN countries and Australia. The main finding of the study reveals that the Philippine balance of trade has continuously deteriorated, although trade With other ASEAN countries shows an upward growth. Indonesia showed the biggest surplus followed by Malaysia, Singapore and

104 Thailand. the other three (3) a balance

The Philippines' total bilateral trade with Australia, on hand, showed an even more extensive growth. In all the years considered, however, Australia has always enjoyed of trade surplus.

The sources of Philippine manufactured imports are characterized by a strong dependence on a single market, at least in the ASEAN and Australia region, that is, Australia.

Philippine external trade in manufactured products with the other ASEAN countries and Australia indicates that most of the products imported by the Philippines from the region are not the types of products being exported by the Philippines to the ASEAN countrie_ and Australia.

Though small in volume, the prevalence of one-way trading of the Ptiilippines with ASEAN countries indicates that the country's intra-industry trade with other ASEAN countries may be moving away from one of competitiveness to one of complementarity.

The smallness in the volume of trade may be due to the fact that the Philippines has an almost identical industrial structure and level of economic development with other ASEAN countries.

The Philippines' external trade with Australia, on the o__'er hand, indicates a high degree of complementarity than that _ith the other ASEAN countries. The Philippines has more commodities bilaterally traded with Australia than with other ASEAN countries but it shows that the Philippines has deficits in the majority of these product trades with Australia. In addition, there are more manufactured goods not bilaterally traded by the two countries.

This study is circulated Series No. 20.

FORESTRY

POIJCIES

as ASEAN - Australia Economic Paper

FOR ECONOMIC DEVELOPMENT Wilfrido D. Cruz

The _tudy alms to: (1) consolidate available knowledge in formulating a model of the forest sector to include major users and external influences; (2) derive an optimal management program -for the sector; and (3) evaluate its implications for development

(macroeconomic) policy to arrive at a comprehensive oriented program for forestry.

development-

The study covers four major activities. The first activity is the consolidation of existing information on the resource base (an updated resource inventory) and the technology of resource exploitation, focusing on four topics; namely, commercial forest management, the informal forest sector, watershed management, and the. international trade aspect of forestry. The description of technologies are made within the context of the forest sectoi-, (including commercial firms and forest dwellers) and its interactions with conditions of the watershed. A review of potential technologies, e.g., technically efficient harvesting schemes and agro-forestry systems, is also presented.

A second activity involves the description of the economic organization of the forest sector. A detailed classification of commercial firms and forest communities is then made. Their differing economic and institutional environment is discussed in terms of the economics of access to the resource, rules on employment and distribution, and conditions of change.

The third activity involves the evaluation of current forest management or development programs. This entails an in-depth economic assessment of these programs by sectors.

Finally, sector specific policies and implementation strategies that can be integrated with the development perspective of the program are studied.

A COMPREHENSIVE AND CRITICAL SURVEY OF TARIFF POLICY RESEARCH Victor Marcos S. Venida • This research project aims to formulate a conceptual framework for evaluating the economic rationale and consequence of tariff policies, and to identify existing research gaps for future studies.

The project is, by and large, a survey of available literature on Philippine tariff policies from 1976 to the present. Papers on spect

106 fic topics are evaluated. These include the analytic framework used in the analysis of the effects of tariff policy, the methodology used in the measurement of these effects, and finally, identification and discussion of non-tariff means of protection.

The findings of the study are: (1)

The common analytic framework was a partial equilibrium model which identified among these studies the effects of tariff policies on production, consumption, linkage, employment, competition, productivity, redistribution, revenue and balance of payments. The most widely examined were production, revenue and to some extent, the employment and balance of payments effects. The analysis of the other aspects needs further conceptualization.

(2)

As a consequence, the available methodologies of estimating these effects are again partial in nature. The most popular has been the effective rate of protection (EPR) which measures the production effect of the tariff system. Others which have been estimated are the shadow exchange rate and revenue effect.

(3)

As for non-tariff measures, the few that have been identified have been classified as fiscal,measures, financial regulations, or bureaucratic rules. In general, the effects _3f these have been considered as negligible. No methodology for estimating their effects have been presented although they have been included in the extension and modification of the EPR. PHILIPPINE PRODUCTIVITY GROWTH: PAST PERFORMANCE AND FUTURE POTENTIAL Richard Hooley and Erlinda M. Medalla

In the Philippines, there is a growing interest in the potential role of productivity growth in development and its significance for a broad range of development policies. There is also, however, a consensus that Philippine productivity growth has not been as rapid as in some other LDCs. The broad purpose

of this research is to measure the rate of

107 industrial productivity advance and to assess its impact on other economic variables. There is also a need to determine what micro and macro policies are appropriate to improve performance. The interface between productivity improvefiaent on one hand, and fiscal and monetary policy on the other hand, receives particular attention.

The findings of the study are as follows: (1)

Record of Sectoral Productivity Growth. Total factor productivity increased at the rate of 0.3 percent per annum for the aggregate manufacturing sector between 1956 and 1980. This modest improvement would virtually disappear if our labor input data were adjusted for improvements in age and educational dimensions of labor quality. On balance, the rate of growth of total factor productivity (TFP) after accounting for the dysfunctional affects of interventionist policies was not high enough to warrant the reliance of policy makers on a "laissez-faire" strategy exclusively. In other words, the productivity peformance of the manufacturing sect,of would have been sufficient to produce a large sustained rate "of TFP improvement capable of providing a significant ' development thrust.

(2)

Inter-Industry Performance. There was considerable variation in the productivity performance among industries. Of the industries that performed better than average, some are in importsubstitution and some are export-oriented.

The net upshot of the experience of individual industries, therefore, is that some export industries peffornied better than average in regard to productivity performance; some of both also performed poorly.

(3)

Distribution of Productivity Gains. Productivity gains are distributed through the price system in the form of lower prices to consumers. That is to say, in those industries experiencing more rapid TFP advance, prices fall or rise less than average.

The reverse is the case for the lagged industries in regard to productivity change. There are important exceptions to this rule, One is when the industry produces predominantly for export. In these cases, prices are set in the export market, and most if not all of the TFP gain is passed on to entrepreneurs in the form of windfall profits. Industries with above average

108 rate of TFP improvement also exhibit correspondingly larger increases in production - via the decline in prices just noted.: There are two important exceptions here. One is the case of industries exporting most or all of their output where shipments are under a quota - as in the case of sugar. The second Concerns industries with high rates of protection. This has the effect of allowing the entrepreneurs to restrict output and yet retain a dominant position, and a substantial share of the TFP dividend. The market situation here is similar to that in monopolistic competition. No relationship was found between real wage rates and TFP changes. Actually, this is expected in view of the large volume of surplus labor existing in the economy.

The study concludes that the distribution process for productivity gains is being disrupted partly by the interplay of unstable international markets, and partly by_the intervention of govern,ment industrial.protection and promotion policies.

(4)

Impact of Tariffs on Industrial Growth and Productivity. The adverse impact of industrial protection policies on the mechanism of distributing productivity gains is but one of several impacfs of tariffs. Other effects include the following: (a)

The value-added is estimated in real terms by the use of single deflation. This occurs because tariff protection affects the price of.both final output and intermediate inputs - i.e. it raises final prices and lowers intermediate food prices than otherwise would be and this_is due to the "cascading" nature of these protection systems. Where single deflation is used, the implicit tariff increase, due to increased selling prices of final goods, is eliminated but the reduction in intermediate .goods prices (due to reduced prices and sometimes negative protection) is not. It is estimated that the resulting overstatement of value-added in the Philippine case, amounts to,35 percent in 1980 as compared to 1956. Manufacturing value-added is therefore overstated in tile national accounts.

(b)

Where the industrial sector is a substantial part of national economic activity, growth will also be overstated, both for the sector and for the national income aggregate. The overstatement in the Philippine. case is estimated to be 35 percent cumulative for 25 years, or about one and one-

109 fourth percent per year for the manufacturing sector.

Naturally the growth rates of individual industries will also be over or understated, and probably to a larger degree than aggregate manufacturing because of the high de .gl"eeof variability of tariff rates by individual industry. (c)

Deoending on how tariff is structured with regard to inputs of capital and intermediate goods, and the price movements(ex tariffs) for these inputs, the tariff will influence directly, the input structure of industries. In the Philippine case, decreasing effective protection rates on intermediate inputs, coupled with a constant EPR for capital goods and a rapidly rising interest rate, shifted production towards substitution of intermediate goods for both capital and labor. The result in many industries was a voracious demand for intermediate production, much of it imported, which created a foreign exchange bottleneck for all industries. This in turn created disruptions anff discontinuities in input supply transmitting dysfunctional impacts on industry output growth across the board and therefore on productivity change throughoutthe sector.

(d)

The interruptions of the distribution of productivity gains reflect the unfortunate fact that the resulting windfall was not coupled with any requirement for directing the proceeds to research and development to help raise productivity for the next period. Naturally, the windfall had no positive effect on productivity growth. This is not the result of any "backward bending; '_ entrepreneurial effort curve as implied by so many writers. It stems from _overnment intervention of a poorly designed type. In every case examined, the Philippine entrepreneurs reacted rationally to the signals they received from the tariff seructure.

Unfortunately, they were the wrong signals. In all eases, iÂź was seen that the orice of the policy error was I_ald for effher by: consumers, in the form of higher prices and/or restrketed output; or labor in the form of slower growth of employment and decline in real wage rates. Also, supPlying industries would have been able to expand their deliveries had the demand of their customers grown more rapidly. This last point deserves emphasis: slow productivity growth has greatly weakened the backward linkage

1111 effects of the manutactunng

sector.

(5)

Determinants of lntra-industry Productivity Change. A number ot variables proved to be promising in explaining inter-industry differences in performances. EPR emerged as negatively associated• with TFP per,formance, lending further empirical support to the above analysis. There appears to be both significant internal and external economies of scale for these industries. Energy cost is a drag on TFP, i.e. those industries that are more dependent on energy inputs generally have inferior records of TFP improveme.nt. The ratio of females to the total workforce - proxy for age and education - shows that the latter is closely associated with TFPgrowth.

Variation in salary levels -- which tavot _operators is helpful in improving productivity.

Researcfi and development activity appears positively related to TFP changes, though the evidence at this stage is not easy to interpret.

(6)

Rate of Return and Capital Utilization. Evidence on the rate of return on capital indicates a significant drop from about 15 percent in the late fifties to around 7,9 percent in the sixties. After the 1972 devaluation, the figure stood between 5 and 7 percent and was sustained until the late seventies, finally settling to 5 percent in 1980. These declines indicate a drop in the quality of capital services, including capital utilization rate design of capital installation, etc. Utilization rate was responsible for about four percentage points of the overall .decline from 1•960.

The impact of falling capital utilization rate have been oarticularly apparent since 1975. The remaining decline of six percentage points is unexplained. This is probably a reflection of the impact of increased government intervention • in the economy, since the early seventies as well as the increased po/iticization of economic decision-making.

(7)

Productivity, Prices and the Balance of Payments. As long as TFP growth is virtually zero or negative, it is going to be extremely difficult to stabitize prices of manufactured commodities. It has been shown that the rate of TFP growth is inversely related to industry price movements, so that negative TFP rates are associated with a rise in manu-

III factured goods" prices. If domestic prices rise Faster than international prices, (and non-manufactured domestic prices are assumed constant), a deterioration of the foreign exchange rate will be required to equilibrate the balance of payments. COntinued negative TFP rates in the manufacturing sector will have the effect of raising prices and weakening both the balance of trade and the foreign exchange rate.

Negative rates of TFP in manufacturing may also have important adverse effects on the balance of payments by triggering a capital outflow. To the extent that negative TFP growth rates are the result of misallocation of capital and intermediate good inputs_ the rate of return on capital will decline. Unless offset by a rise in the rate of return in another sector of he equivalent size in the economy, this in itself Will cause an outflow ot funds_iin the capital account of the balance of payments. Clearly, if the estimates of return on capital are correct or even nearly accurate, then the rise in the real rate of interest in the developed countries since 1976 to levels well above the real rate of return on capital in Philippine manufacturing must have been a factor of significance in the dramatic outflow of capital from the Philippines that occured since the midseventies.

The study is circulated as PIDS Monograph Series No. 9.

MARKET SURVEY,. AND COMPETITION David Lim and Casimiro V. Miranda, Jr. This study evaluates the competitiveness of ASEAN manufactures in the Australian market. A survey of the market for manufactured goods of special interest to both ASEAN and Australia is made to gather information relevant to the competitiveness of ASEAN products in the Australian market.

The study of market three parts, namely:

survey and competition

(1)

Market share analysis;

(2)

Estimation

of import demand functions;

is divided

and

into

112, (3)

.MaNet survey

The market share analysi s starts by examining the pattern of imports of Australia from each individual ASEAN country, including Australia's export to the ASEAN countries. It enables one to see how the structure ot exports of ASEAN countries to the Australian market has been able to capture increasing shares, and vice-versa.

In the second part, import demand functions are estimated bilaterally, between Australia and each ASEAN country, and by product categories. The estimates aid in making conditional projectiolas on future trade patterns between ASEAN and Australia.

As regards the market survey, the objectives are to examine more closely the nature of manufactured products, exported from each ASEAN country to Australia, and to describe the characteristics of the exporting firms, together with the problems .and prospects of increasing manufactured exports from ASEAN to Australia. The content of the market survey includes the following: (a)

nature of the study;

(b)

facts about exporting;

(c)

input situations;

(d)

competitiveness

(e)

comr0ents of institutional and policy suggestions for improvements.

of the products; and issues and

The produqts covered in this study are confined to manufactured goods; specificall3_ textiles, clothing, footwear, rubber-based and wood-based products, handicrafts, and motor vehicle compo-nents. The exact time period may be varied somewhat according to data availability in each country.

113 PHILIPPINE TRADE IN. MANUFACTURES: STRUCTURAL CHANGE ADJUSTMENT Florian A. Alburo The study looks into the recent experience in manufactures exports, specifically the non-traditional manufactures, and identifies elements that would indicate structural changes in industry and trade behavior. Adjustment patterns arising from, or in respoose to trade performance are also analyzed and from the results, broad policy implications are drawn.

The analysis in this paper' shows that structural

change in the

Philippine manufacturing industry has been quite insignificant especially when compared with other developing countries, or the newly industrialized countries (NICs), to which the country's export performance is linked. Nevertheless, it is important to emphasize that the amount of structural change that occurred in the seventies was more than what took place in the sixties. This has been due largely to the outward-looking thrust of the Philippine economy during this decade which eventually increased the country's trade in manufactures.

The study, moreover, indicates that those industries which are rboted deeply in terms of factor endowments:are the ones which have maintained strong rev.ealed comparative advantage such as handicraRs, footwear, textile f_abrics, woo¢l manufactures and nonmetallic mineral manufactureS. To the extent that these _roctuets are accorded less trade barriers or protectionist policies in partner countries, these would seem where the growth lies.

To create the proper conditions that would gain a momentum in industrial restructuring, the study suggests the following policy thrusts: (1)

reassessment of export promotion schemes which encourage low value-added processing and discourage backward or verticaJ linkages;

(2)

provision of explicit support to allow optimal use of labor and capital resources. These could be in terms of modermzation programs, skills training and financial re_urce_ for actual production activities;

114 (3)

reinforcement of the impetus from trade in manufactures through the creation of a domestic mass base. Because the larger segment of employment remains in agriculture, improvement in productivity within this sector is necessary. With this base beefed up, wage adjustments and better distribution can lead to dynamic industry linkages especially in simple capital goods industries.

The trade in manufactures in the seventies may not have led to a dramatic structural change but the seeds of it appear to be there, capable of momentum and sustainabllity.

PROTECTION Ross Garnaut and Norma A. Fan This project analyzes the system of protection, both tariff and non-tariff, for domestic production of manufactured goods in Australia and in ASEAN countries; and studies changes in the structure of protection over time, and the causes and effects of protection.

The study of structure, causes, and effects of protection have two comparative dimensions. First, the Australian experience is compared with the protectionist regimes of other industrial countries.

Second, the experience of the ASEAN countries in the 1970s is compared with a country in the Western Pacific region which is considered more advanced industrially than most ASEAN countries, and another which, at an early stage of development, is an exporter of manufactured goods.

The research project is divided into two parts. Part 1 describes the system of protection, estimates the effective rates of protection over time, assesses causes of changes m protection, and calculates impQrt penetration rates. In-depth statistical analysis Is made for this purpose. Whenever possible, the effect of the tothl system of protection, and of recent changes in protection, on the level of imports by 9ommoaity is st/ldied.

In Part II, l_he effects of changes in industrial countries' protection levels on the ASEAN countries' share of domeshc consumption,

115 and share of imports is investigated. There is, however, a need to disentangJe the tmpact of changing relative costs from Nat of changes in protection in studying ASEAN's penetration of industrial countries' markets.

Special attention is also given to practices which blunt the effectiveness of protection, such as moving up the market into higher value differentaatlon of the commodity, and commodity and market diversification.

This study is a section in the ASEAN-Australia Working Paper Series No. 5.

PmLIPPINE SHIPPING INDUSTRY AND POLICIES: CURRENT DEVELOPMENTS Joselito A. Supangco The study is part of an ASEAN-Australia joint research project on shipping. In particular, the study provides a background concerning the Philippine shipping industry, and the government policies relating to it.

Shipping has been and continues to be a major support for international trade and a source of foreign exchange for the Philippines. Value-wise, the Philippine flag vessels' share in Philippine foreign traae has, on the aggregate, increased at an annfial average rate of 2.5 percent from 1976 to 19150. However, shipping participation m foreign trade declined by 15 percent and 12 percent in 1977 and 1980 respectively.

The study found out that majority of Philippine-registered overseas vessels are deployed for chartering and other related purposes, and not for regular liner trade. In fact, only five (5) shipping lines are actually engaged in the liner trade, serving various ports of the Philippines. These are Aboitiz, Overseas, Cresta Monte, Eastern, and the Galleon and Maritime. Company of the Philippines. Overseas shipping operation data indicate that Filipino shipowners prefer the chartering market rather than the liner trade t)ecaus¢ of the higher rates of return on investment in the former. In addition, trends in ship acquisition was observed to be towards pure cargo ships.

116 With regard to Philippine overseas shipping policies, the study pointed out that objectives are geared towards the accumulation of integrated development of the maritime industry. These objectives, accordingly center around: (1) the provision for the economical, safe, adequate and efficient shipment of materials, products, commodities and people; (2) the enhancement of the competitive position of Philippine flag vessels in the carriage of foreign trade; and (3) the strengthening of the balance of payments position of the country by minimizing the outflow of foreign exchange and increasing dollar earningS. For the attainment of these objectives, the Maritime Industry Authority (MARINA) was created to: (a) adopt and implement a practicable and coordinated Maritime Industry Development Program, focusing on improvement of vessels and the enhancement of domestic capability, including manpower development; (b) provide Iinancial and technological assistance to the industry; and (c) supervise, regulate and rationalize the organization, management, ownership and operations of all water transport facihties.

Moreover, government assistance to the shipping industry has come in the form of fiscal incentives, mainly tax exemptions and incentives which are all geared towards accelerating expansion and modernization of the fleet. However, due to the heavy capital requirement involved in such an endeavor, the pace of the expansion has been unimpressive. So far, the active participation of the government has been by way of creating, through P.D. 900, the Philippine . National Lines. Still, the study discloses, the operation of a national shipping line has been more to augment rather than to compete with the overseas sector.

In terms of upgrading and developing further the manpower skills of the industry, the Study identified a number of educational institutions that cater to the needs of the industry, both foreign and _local. These institutions are believed to be offering sufficient training courses and hands-on opportunities for seamen, and have tie-ups with domestic ships. An example is the National Maritime Polytechnic which has tie-ups with the world's largest training vessels that can provide actual training because of the limited vessels of Philippine flags plying routes for overseas trade.__The study cited the MARINA which is currently pressing for the passage into law of the Overseas Shipping Act. The proposed act offers a package of

117 incentives for foreign shipping lines to encourage them to register their vessels here and invest in the country, either directly or through joint ventures.

PHILIPPINE AND AUSTRALIAN PERCEPT.IONS ON ISSUES RELATED TO THE NEW INTERNATIONAL ECONOMIC ORDER: FOOD SECURITY AND COMMODITY TRADE Tereso S. Tullao, Jr. and Wilfrido V. Villacorta The study documents the country positions of the Philippines and Australia as weU as the common position of ASEAN with respect to the New International Economic Order (NIEO), in general, and the issues of commodity trade and food security, in particular.

It reviews literature on Philippine, Australian and ASEAN perspectives, to compare and analyze the divergences and convergenees among these different positions.

Among the f'mdings of the study are: (1) On the establishment of the New International Economic Order, Australia's wasons for her support is evidently similar to those posited by Northern countries. Australia views the NIEO as a package of proposals intended to strengthen the global economic system as well as to enhance political and strategic stability. She perceive s the causes of.global problems to be internally generated, and appreciates the importance of assistance from developed countries in removing obstacles to development. Although some of Australia's interests overlap with those Of developing countries, her emphasis is on providing for the improvement of basic human needs rather than on massive structural change.

(2) The Philippines, on the other hand, has always been identified with developing countries in seeking for a new world order. As an active member of the Group of 77, she has echoed the Third World's demand for structural changes in order to correct the imbalance in international economic relations. However, her support for an integrated approach to global economic ills is balanced by her realistic inclination to seek compromises. The Philippines has worked on conciliation rather than confrontation in areas where _ere are mutual gains and cooperation. She recognizes the difficulty of

118 attaining an integrated solution and recommends sectoral approaches to global problems as practical steps towards global and integrated solutions.

ASEAN countries generally believe that the current economic crisis renders several of the demands of developing countries impracticable. However, these demands could be tackled on a bilateral or regional basis. The Treaty of Concord in 1976 is employed by ASEAN as a framework for coordinating their country positions on various economic issues through regional consultations.

However, the ASEAN approach of seeking solutions on a sectotal level could lead to regionalism and divisiveness among Third World countries. The concessions made by regional blocs like ASEAN may prove disastrous to other, developing countries which do not have strong regional unity and support. The very idea of the Group of 77 is to forge a unified bloc bargaining for all developing countries. When many other blocs are seeking the same concessions, developed countries will now have the upperhand in choosing which bloc to support. These regional concessions would not only reduce the bargaining power of the group of 77 but may lead, to hostility and division among developing countries.

In the area of commodity trade, the study discerns Australia's conciliatory attitude towards'a resolution of .conflict. As a producer and consumer of various commodities traded internationally, Australia recognizes the problem of commodity stabilization. Although she is supportive of programs for commodity stabilization, she cautions that any arrangement should be reasonable for both consumers and producers. The solution that Australia offers is improved compensatory financing available from the International Monetary Fund.

In the establishment

of a Common Fund, Australia has shown

political will to achieve solutions to international problems. She agreed to direct government subscription and the expansion of the Fund's uses. This growing accommodation indicates Australia's intention to find practical approaches.

In contrast to the oualified position of _Australia, the Philiopines strongly supports the Integrated Program for Commodities.

She calls for its immediate implementation in order to stabilize

119 prices and export revenues. On financing the Common Fund, the Philippines has taken a conciliatory position by integrating both the demands of developed countries and developing countries.

In an effort to attain realistic solutions to commodity problems, ASEAN focused in particular on-a third-country dialogue in expanding the market access of ASEAN products and stabilizing the region's export earnings. Because of the slow progress in the Integrated Program for Comrr.odities, the Association places heavy reliance on producer associations as well as bilateral and regional cooperation.

On food security xssues, both Australia and the Philippines share convergent views on longer-term solutions to the problems.

They both stress technological innovation for increased agricultural productivity; the correction of domestic policies to enhance domestic production and the liberalization of international trade. Their emphasis on lasting solutions does not,. however, negate the positive importance which they give to short-terra food aid in cases of emergency.

The study recommends

further research on the following:

(1)

The extent to which differences in the positions of Australia and the Philippines, as far as the concept of NIEO and commo,dity issues are concerned, should be examined through an investigation of domestic factors shaping their country positions.

In particular, the political economy of public policy that influence their country positions could be analyzed.

(2)

In the light of the apparent convergence of views on food security, an analysis of the reasons for the current stalemate in the negotiation for an International Grain Agreement is necessary.

The participation of Australia and the Philippines in international negotiations must likewise be investigated.. Specifically, studies could be conducted on negotiations pertaining to the International Sugar Agreement. and the International Tin Agreement, where Australia and some ASEAN countries have participated.

(3)

Lastly, there is a need to explore further the implications of some ASEAN initiatives in working out regional and sectoral solutions as pragmatic steps towards global and integrated

120 programs, The study should focus on the acceptability of these sectoral mechanisms to other developing countries and how it would affect Third World solidarity.

POLICY IMPERATIVES FOR THE AGRICULTURAL Center for Policy and Development

SECTOR

Studies

The research project focuses on immediate policy concerns for the agricultural sector. The fundamental task of the study is to rationalize existing agricultural policy in the light of the current economic crisis. The main thrust here is the need to review existing policy to identify the obstacles to productivity prior to defining new policies for development.

In particular, five (5) papers, which evaluate the sources anO effects of the current crisis in the agricultural sector, comprise the output of the project: (!)

Irrigation and Rice Productivity.

This paper reviews irrigation development in the Philippines and the consequent improvements in rice yields and production during the period of irrigation expansion. This paper also identifies a number of.problems besetting the country's irrigation machinery. These 'problems inter-alia relate to the design and planning of systems, operation and maintenance,, water management, collection of irrigation service fees, and the current economic environment.

(2)

Rice Price and Marketing Policy. The _aper analyzes the trend in domestic and world rice prices during deficit and surplus years, and the role of government in rice trade. Results of the study suggest that the g6vernment needs to reconsider its domestic marketing trade earefuUy and set more explicit intervention goals. In defining a domestic market strategy, the government needs to decide whether subsidizing marketing costs is desirable or feasible. An explicit budget allocation to cover the stated goals of intervention could then be made, rather than financing operations from implicit capital subsidies and monopoly rent_ Additionally, the study recommends that the government needs to use its scarce resources to promote domestic marketing efficiency, instead of creating a segmented and

121 inefficient market.

(3)

Issues. in Irrigation Water Management.

This paper focuses on the two policy issues apparent from the responses of the National Irrigation Administration (NIA) to cutbacks in irrigation budget and to the rising costs of irrigation operation. The first issue deals with the case of subsidizing irrigation development, and with the potential impacts of subsidy on agricultural production and income distribution. The second issue deals with the need to make water charges correspond more realistically to actual irrigation delivery services. In addition, the paper identifies the problems associated with poor irrigation water management namely: (a) incompatibilities •between irrigation system design and actual operation (which is reflected, for example, in the problem of intensive vis-a-vis extensive water distribution); (b) problems of water timing relative to crop needs (such as the under-estimation of duration of land preparation); (c) prevalence of unequal access to water within a system e.g., between upstream versus downstream users; and (d) inadequate organization for operation and maintenance (O & M). On the basis of these, the study recommends the following policy prgposals: (i) creation of alternative pricing strategies which include, for example, differential water charges between regions and within irrigation systems, and provision of price supports to agricultural produce to increase ability-topay of farmer irrigators; (ii) improvement,of O & M of national systems; (iii) maintenance of NIA financial viability and (iv) transition from a construction-oriented agency to an O & M oriented a_enc_¢.

•(4)

Policy Issues on Rice Crop Protection. This paper presents and evaluates important issues involved in the problem of protecting rice crop from pests. Attention is focused on two topics: (a) on pesticide use and (b) on pest management in the Philippines.

With regards to pesticide use, the paper addresses four issues namely, the problems with pesticides; efficiency productivity issue; regulation of pesticide use and its implementation; the need for confidentialitY, versus the fight to know of some proprietory data; and local manufacture of pesticides and nationalism in trade. As regards pest management, this paper reiterates the need of the pest management system for expansion of its research and development programs, training and support for personnel who can help in the implementation of its pro-

122 grams, and the development of a pest management approach that provides a focus of filling the gap between research and extension.

(5)

Coconut Replanting Program. This paper reviews 'and analyzes a number of researches on several coconut hybrid alternatives for replanting. Accordingly, it was found that a number of institutions are prevented from testing their hybrids and cultivators under varied environmental conditions by the lack of adequa.te financial support. Among these institutions are the University of the Philippines at Los Baflos, Philippine Coconut Authority, Visayas State College of Agriculture and Twin Rivers Research Center (TRRC).

It should be noted, though, that these institutions have already qualifie d personnel to conduct crop improyement work.

A. highly coordinated, inter-agency breeding program would definitely facilitate the speedy development of alternative planting materials if adequate financial support were available. The paper points out that existing data indicate the relatively better performance of the foreign hybrids given optimum cultural management practices. Additionally, the paper recommends that should the government proceed with replanting using the foreign hybrids, a mechanism to support the input needs e.g., fertilizers, pesticides, etc, i of the hybrids must be instituted.

However, in the final an_llysis the paper notes that this might be very difficult to provide under the present tight economic situation.

INDUSTRIAL REGULATION IN THE PHILIPPINE CONTEXT Remedios

C. Balbin

The study describes the system of industrial regulation in the Philippine context with-the view of determining the basic substance of these regulations and their objectives, the stability of the regulations, and their efficiency in attaining the stated objectives.

Industrial regulation in the Philippine context is viewed as those form of controls exerted on business entities engaged in the manufacture and/or processing of raw materials into its final or

123 finished forms, i_. the semi-processing or assembling of material components, including those exerted upon them by entities engaged in providing support services.

Among the observations/findings (1)

of the study are:

Viewed in the light of the constitutional and statutory provisions cited in the study, the Philippine legal system is definitely comparable to those obtaining in other countries. Hence, ideally, the goyernment structure is expected to attain the same development levels as those countries with similar structures: However, this had not been the situation and the study attributed this to certain factors, namely: (a)

The President (Ferdinand Matcos) continues to exercise vast powers assumed during the emergency situation of September 1972 when he declared Martial Law. Until the latter part of the Marcos regime, he continued to promulgate "antedated" presidential decrees purportedly issued before Martial Law was lifted. For some, it created problems in the sense that the presidential decrees so issued were not studied or evaluated vis.a-vis the overall plan of the National Economic and Development Authority (NEDA);

(b)

There was too much flexibility granted to the exercise of "national interest" by executive officials, especially the President. The phrase "national interest" tended to be used rather loosely, affording too much discretion;

(c)

The parliamentary system introduced by the 1973 constitution has not been able to remove partisan politics, influence peddling, and the undue use of public office by certain members of the Assembly;

(d)

The government's takeover of distressed ,private enterprises and the establishment of government-controlled business pose a danger to free enterprise by creating an atmosphere of unfair competition to the private sector.

As pointed out in the 8th Philippine Business Conference, these corporations are granted special privileges such as

124 exemption from payment of taxes, duties, fees and assessments which are not enjoyed by private business sector.

In addition, this has served as a breeding ground for government monopolies and/or fairly large conglomerates, both of which are dislocative of truly private industry.

The Philippine National Oil Company (PNOC), for example typifies the government-owned giant which also engage in shipyards, tires and batteries, aside from being a supplier of oil to the Philippines.

(2)

Viewed in the light of applicable constitutional provisions, regulato_ agencies are under the direct supervision and control of the Prime Minister as the Chief Executive (Art. IX, Sections 1 & 2, 1973 Constitution of the Philippines). In reality, however, regulatory agencies like the Securities and Exchange Commission째 the Board of Investments and its attached agencies, and the Human Settlements Regulatory Commission, among others, remain under the authority of the President who continues to be the chief executive. Accordingly, the intended integration of economic planning and implementation are done, not through the Office of the Prime Minister and the NEDA but through the Office of the President.

(3)

Most of the comments and observations made in connection with the performance of the constitutional bodies and officials involved in industrial regulation can also be said of the administrative regulatory bodies. The basic criticism of the entire regulatory system, according to the study, is addressed to government bureaucracy. There is too much "red tape" and onerous requirements in doing business with government agencies. The proliferation of agencies doing similar functions has been criticized time and again by various industry groups.

In general, it is deemed progressive if the government pursues a consistent policy towards certain business activities, especially in the implementation and enforcement of regulations. The undue duplication of functions, inefficiency, graft and col:ruption that prevail in the regulatory agencies should be minimized, if not entirely removed. Additionally, nationalization as it is being applied - a policy of state-ownership and control has taken a sudden turn inconsistent with private enterprise. Given the option, the study foresees that industry may well thrive under a situation of less regulation and more freedom.

125

PHILIPPINE-AUSTRALIAN ECONOMIC RELATIONS Hal Hill The study examines recent developments in bilateral relations, focusing especially on the pattern, composition and trends in Philippine-Australian, trade. Two points are emphasized in the study.

The In'st eOeerns trade, the most important economic component in a bilateral relationship. Aid, tourism, and migration and remitatances axe not considered explicitly, although the implications of increasing investment and aid for trade are briefly assessed. The second point concerns the main source of trade statistics beLug used, the Australian National University's trade data bank, which is based on United Nations trade statistics. These data do not necessarily correspond to published Australian and Philippine statistics because the former uses a consistent commodity classification which facilitates long-term comparison of trade flows despite commodity reclassification.

Three main points emerge from the study. First, bilateral trade has increased quite rapidly during the last two decades, from a small base. The growth has occurred despite the fact that both countries have become relatively less important in international trade flows.

In the ease of Australian exports, the primary source of growth has been increased complementarity.

Much of this growth has occurred because, of changes in the structure of Philippine imports. An examination of the composition of Australian exports to the Philippines reveals how little it has changed between 1,9.62 and 1980. In both years, they consisted primarily of iron and steel and related products, several primary commodities, and machinery and other products.

However, the composition of Philippine exports has altered significantly, reflecting t'he increased importance of manufacturers.

The main source of growth in this case has b_en a sharp increase in country bias, particularly during the decade i 965-75.

This leads to the second point. Although trade has not been large in aggregate, it has been characterized by high levels of country bias, especially during the 1970s for Philippine exports and up to the mid-1970s for Australian exoorts. The low level of resistante may appear surprising in view of the presence of high objective resistance in the form of Australian protection of certain labour-

126 intensive manufactures, which, as already noted, particularly affect the Philippines, and of high subjective resistance arising out of the two countries' past political associations.

As regards the factors that account for the low level of resistances, the first and most important is relative proximity. This has manifested itself primarily in shipping cost advantages, especially in the case of certain bulky items, including lead and zinc in the past and more recently, coal. But proximity also had the effect of lowering information costs for traders seeking new markets. As bothcountries have become increasingly integrated in Western Pacific economy, improved information flows, commercial contacts and transportation systems have lowered the costs of international trade.

A second factor of some importance for Australian tradersis that the Philippines is regarded as having a relatively "familiar" commercial environment - English is widely used, and the legal and commercial environment is largely based on the American system. Thirdly, trade-investment interrelationships have resulted in reduced resistances. One aspect of this is intra-regional trade flows under the umbrella, of multinational firms. Another is improved commercial networks developing from Australian investments in the Philippines.

Trade-aid interrelationships are also evident, although they are far less important.A final point in the study concerns future trade prospects.

Bilateral trade is unlikely to be as important as, for example, Australia - Northeast Asia trade, where a powerful economic complementarity exists between a resource-rich country and a resource-poor region. But the study contends trade is likely to continue expanding.

Australia is already developing substantial energy exports to the Philippines, and it is likely to maintain its sales of agricultural and' other primary commodities (but steel exports are likely to contract).

Additionally, Philippine exports have grown quite rapidly since 1970, and the study sees that their future growth will depend largely on the success of its current industrialization strategy and on trends in Australian protection policy.

127 MARKET PROSPECTS AND TRADE PROMOTION FOR RATTAN FURNITURE , LEATHER PRODUCTS AND FOOT' WEAR IN AUSTRALIA AND THE ASEAN COUNTRIES Felicitas U. Evangelista The study was undertaken as part of the ASEAN-Australia Joint Research Project. Its main objectives are: (1)-tO evaluate the market potential of major product lines of Philippine rattan furniture, footwear and leather products in Australia and the ASEAN countries; (2) to determine the trade practices and problems experienced by exporters and Australian buyers alike; and (3) to suggest appropriate strategies for export development through improving existing marketing or industrial set-ups.

The assessment of the market potential for Philippine rattan furniture, footwear and leather products in Australia and other ASEAN countries was undertaken from a marketing standpoint.

The general trend and pattern of consumption and imports as well as the performance of the said Philippine products in the markets being studied vis-a-vis those of other exporting countries were analyzed to reach some conclusion about the relative responsiveness of each market to future export marketing efforts.

Meanwhile, in determining trade practices and problems experienced by exporters, a survey was done among firms producing rattan furniture, footwear and leather products. The export marketing practices of the survey respondents was analyzed in the context of what has been identified as the stages of export marketing development, a framework which L.H. Wortzel and H.V. Wortzel developed in their study entitled "Export Strategies for NIC and LDC Based Firms."

Based on the assessment of market potential and survey results, indicative strategies for exportdevelopment were formulated. The following highlights some of the study's findings: On Rattan Furniture.

Given the environment faced by the industry, i.e., competition and raw material supply problem on one hand, and improved market prospects and adequate knowhow and production capacity on the other, Philippine exporters of rattan

128 should further develop the Australian market with a more focused marketing strategy. Improvement of rattan supply conditions and distinctive designs could be the answer to the competition posed by said environment and other countries. Distinctive and innovative designs could only be achieved if there is an organized and continuous research and development effort for the industry. Financing support may also have to be provided by the go,gernment for the industry to become technologically up-to-date; On Footwear.

Between the leather and non-leather footwear categories, the latter appears to have brighter prospects for foreign suppliers to the Australian market. Being a major supplier of leather, hides and skins, Australia has a strong domestic leather footwear industry which is complemented by a quota system that encourages imports of non-leather more than leathe_r types of footwear. In generaI, however, the market for non-leather footwear is. increasingly becoming more price competitive as Well as fashion conscious.

Considering that the problem of leather supply has been adversely affecting the production and export of leather footwear, certain measures have to be adopted to remedy the situation such as joint ventures, subcontracting and bilateral trade relations.

On Leather Products.

Of the three industries included in this study, the leather products industry (primarily leather travel goods) has the least volume of exports to the world and to Australia. Supply of the finished product appears to be small and may not warrant aggresive promotional activities. The lack of raw materials in terms of the desired quality and quantity is said to be the major factor hindering the development of th e industry. As to whether market prospects are adequate to support increased production or not, a number of evidences cited in the study indicate that a market does exist for these products. Future prospects are limited to a large extent by how fast the industry could expand its export supplies.

The market for Philippine rattan furniture, footwear and, leather products in ASEAN countries are engaged in the development of exports for said commodities and are, therefore, increasingly being less dependent on imports of said products. Despite this, the ASEAN countries .can still engage in joint effort towards export development. Joint or collaborative strategies can be undertaken in the areas of rattan furniture as well as leather products to include footwear.

129 THE OUTPUT AND GOVE_MENT OF THE TARIFF REFOP_

REVENUE PROGRAM

EFFECTS

Manuelito C. Mabida One of the major objectives of the Tariff Reform Program is to make domestic industries more internationally competitive. This was done by rationalizing the structure of protection across industries which saw the general reduction of the rates of duties. The general reduction is expected to weed out high-cost inefficient industries, which are operating under very high protective rates, thus affecting output and at the same time encouraging imports which also affects government revenue. The objectives of this study therefore are: (1)

To quantify

(2)

To analyze mendations;

these effects using Dr. Chung Lee'smethodology; the estimated

results for possible

policy

recom-

Since the application of the methodology depends entirely available parameter, the study is aisoexpected to:

on the

(3)

Define its limitations;

(4)

Specify the data required for future collection data bank for the generation of parameters; and

to serve as

(5)

Provide possible modification ing data.

to suit exist-

to the methodology

To be able to achieve the above-mentioned objectives, the study intends to take the foUowing steps: (a) gather all published and unpublished studies on parameter estimation and evaluate their usefulness to the methodology; (b) develop a method of estimating the parameters that are not available in existing studies; (c)based on the quantified effects, identify the limitations of the methodology, specify data requirements and suggest possible modifications to be able to use the existing data; (d) construct a manageable number of sectorsdepending on the available parameters and variables; (e) do a linear projection to 1985 of the variables based on their historieal figures; (f) estimate the output and revenue effects according to the number of sectors determined; and (g) analyze the results in examining the methodology and formulate recommendations for policy action.

130 FOOD TRADE AND FOOD SECURITY. Muharnmad Arsjad Anwar and Cristina C. David The research project

hopes to accomplish

the following objec-

tives: (1)

Present an overview of recent trends in future prospects for agricultural production; consumption and trade in each of the ASEAN countries; and

.(2)

Analyze in more detail the extent, causes and effects of government intervention over time in the major food product and in-' put markets.

The research project is conducted in three phases. Phase I addresses the first objective as effort is directed towards presenting data on past trends, and estimating future trends for food exports and imports of each of the ASEAN countries and Australia.

Specific topics covered in this phase are : (a)

Economic growth and structural change inthe individual ASEAN countries since 1955;

economy for the

(b)

Changes in agricultural production, productivity, factor use, and shares of production marketed off the farm since 1955, and the major causes of these changes, including market structures and changing wage rates;

(c)

Demand influences and changes in food consumption since 1955 and the major causes of these changes;

(d)

Changes in agricultural Australia in that trade;

(e)

A description of the past and present prices, trade, and other policies affecting incentives to produce, consume, and trade in food products, including public investments in agricultural research and extension and rural infrastructure;

(f)

A summary explanation

trade since 1955 including

patterns

the role of

of the changing trade patterns;

131 (g)

Likely changes in trade patterns over the 1980s, with projections for 1990 under various scenarios, particularly of future agricultural trade, including trade with Australia;and

(h)

Policy implications, and a list of food trade policy issues for the 1980s requiring further research.

The activities in Phase II are geared towards accomplishing second objective.

the

In addition to the country-oriented Phases I and II research, studies are also done on a number of soecific issues. For example, the potential role of ASEAN food reserves, or the scope for boosting food self-sufficiency and profitability, through further public agricultural research investment, might be investigated.

In Phase III, the data from Phase I are updated and revised in the light of Phase II results, and a number of overview papers are prepared. These and other papers from the project are to be presented in an open conference.

RECALCULATION AND ANALYSIS OF TItE EPRs USING THE 1979 143 TABLES Donnie Baldevieso and Zaida B. Pascual This project aims to recalculate the EPRs by industry sector using the 1979 I-O Tables, on the formula introduced by John W. Lowe, in the estimation of effective protection rates. This uses the protected value formula generally used for empirical studies, based on data collected from within the tariff-assisted country.

THE EMPLOYMENT AND TRADE EFFECTS OF THE TARIFF REFORM PROGRAM: AN EMPIRICAL VERIFICATION OF THE CHUNG LEE MODEL Ma. Theresa L. Quinto The project aims to measure the impact of the Tariff Reform Program on employment and trade. The economic model to be tised will be that specified by Dr. Chung Lee in his proposed esti-

132 mation methodology to the Tariff Commission. In view of this, the main area of work is the estimation of the parameters in the Chung Lee model to measure the impact of the Tariff Reform Program on employment and trade.

ECONOMIC ANALYSIS OF RESOURCE CONSERVATION

BY UPLAND FARMERS IN THE PHILIPPINES Marian Segura-de los Angeles The study develops a framework for analyzing the behavior.of upland farmers, particularly shifting cultivators. It examines the conditions under which slash-and-burn .farmers would (not) adopt soil conservation measures; more specifically, it attempts to explain (non) participation in agro-forestation projects, as well as in other upland development activities such as contractual reforestation, forestry-based production (e.g., forestry labor market), and the like.

Various case studies conducted by other researchers on upland development, as well as empirical analysis of data obtained from the Economic and Social _mpact Analysis/Women in Development ESIAAVID study on agro-forestation by the author are employed.

Both private (shifting cultivator's) and societal concerns are addressed.

The study is expected following issues:

to provide important

insights on the

(a)

Complementarity and

among various upland development

efforts;

(b)

The policy tools which would allow a convergence of private and societal concerns of the uplands.

ON TARIFF PROTECTION AND COMPARATIVE ADVANTAGE: THE PHILIPPINE FISHERIES CASE Fe Fidelis C Gentiles With the growing demand for fish as an alternative food in the world and domestic market and the abundant fishery resources in

133 the Philippines, attempts are now being undertaken by the government to develop the fishing industry into a potential dollar earner/ saver sector. However, in embarking on such a strategy, government planners are confronted with several problems. For example, does the Philippines have a promise in the world market? How efficient are fisheries in terms of saving or earning dollars? Have there been attempts made to promote the industry's domestic production, and have these attempts actually encouraged domestic production?

This study is borne from such policies' thrust and issues. Using the nominal and effective protection rate and domestic resource cost criteria, it measures and quantifies the level of protection the fishing industry receives from the government, and determines the relativm efficiency of the industry as a potential foreign exchange earner/saver.

The findings of the study are the following: (1)

Although fisheries on the aggregate receive a high nominal tariff protection, a more detailed investigation indicates that the realized protection has not been effective on shrimps and prawns because of the export tax of 4 percent, and on canned fish, because of price control imposed on canned sardines and mackerel.

(2)

The negative effective rate of protection for fish canning has been the result of high import tariff and restrictive import regulations on raw inputs. The adverse effects of such trade policy are felt largely by the sector. For the past three years, several local canneries have closed shop citing the same problems.

(3)

All sectors exhibit strong comparative advantage as evidenced by the low DRC]SER values. The promotion of the fishing industry should be viewed in the light of conservation policies and iriternational conditions.

134 THE IMPACT OF EXPORT TAXES Tariff Commission The study aims to determine the effects of export taxes on the level of output, employment, exports and government rerevenue, and to modify the methodology developed by Dr. Chung Lee for the Tariff Reform Program. The main change introduced into the methodology involves the modification of the "small country" assumption, where changes in exports and imports are derived from the differential changes in supply and demand. In the Lee model, whenever there is an excess in supply, this is exported, and whenever there is an excess in demand, the country imports. Since this is not applicable to the Philippines because there are lir_tits to what the country can export or import, the alternative approach used to derive changes in exports was to multiply the changes in supply by the historical proportion of exports to output over a period of time.

The results of the study indicate that in the short-run and taking all other policy instruments constant, export taxes have dampening effects on output, employment and exports, although the revenue collected from these taxes is greater than the losses in foreign exchange and government revenue from direct and indirect taxes. It also shows that export taxes are biased against agricultural and primary sectors.

The study was presented in a .workshop held in the Tariff Commission on 11 October 1984. Among the suggestions given by the discussants .to improve the paper were: (1)

Include a detailed technical derivation of methodology;

(2)

Examine the possibility of using the supply elasticity of the specific products like coconut products;

(3)

Look into the transaction

(4)

Clarify tained;

(5)

Use the more recent 1979 Input-Output

the reasons

costs of export taxes;

why export

taxes on logs should

Table;

be re-

135 (6)

Examine the ineidence of export taxes; and

(7)

Examine long-run effects of export taxes.

At present, steps have been taken to use the 1979 I/O Table -while the other suggestions are being studied for inclusion in the revised paper.

BACKGROUND PAPER AND THEORETICAL FRAMEWORK ON TRADE LIBERALIZATION John H. Power This paper presents the relevance of undertaking studies relating to the review of the trade liberalization program. In particular, this paper presents in brief the current Tariff Reform Program (TRP) launched by the government in 1981. The TRP is projected to be completed by early 1986. The study therefore attempts to: (1) assess the effects of the Tariff Reform Program; and (2) determine the extent of additional reform required, how fast and how soon should these be implemented.

AN ASSESSMENT OF THE CURRENT TARIFF REFORM PROGRAM AND OTHER TRADE LIBERALIZATION MEASURES Erlinda M. Medalla The study attempts to assess the current trade liberalization program. At present, the government has initiated efforts toward trade liberalization in the following areas, namely Tariff Reform Program (TRP), liberalization of import licensing, indirect taxes realignment, and incentives structure. Specifically, the present study focuses on the first two areas of reform.

The study identifies the effects of the Tariff Reform Program.

It reviews the existing studies which estimate the effects of TRP on foreign exchange (ROP), revenues, employment and output. It also determines how much has been accomplished in terms of m_ving toward a narrower range of nominal tariff rates, and more importantly, effective protection rates. In particular, the study identifies the industry that demonstrated the most resistance with regard to the implementation of the first phase of the TRP.

136 The study also assesses the extent to which import restrictions (other than tariff and taxes) have been reduced, relative to those initially intended. Finally, the study looks at other measures affecting the protection structure, particularly indirect taxes and BOI incentives.

A STUDY ON COMPLEMENTARY

INDIRECT

TAX REFORM

Rosario G. Manasan The Study analyzes how indirect taxes interact with the tariff system to affect the market for particular goods, and consequently their effective protection rates.

The study considers four types of indirect taxes: the specific "tax, the local sales tax, the advance sales tax and the compensating tax. It points out that the protective effect of the Philippine indirect tax system is due .to one, or a combination of some of the features of the tax system, namely: (1)

Different tax rates applicable produced goods;

to imported

and domestically-

(2)

Difference in timing of the indirect tax payments for imported and domestically-produced goods;

(3)

Differences in the valuation of the tax base of imported domestically-produced goods; and

(4)

Differences in the type of tax credits for inputs.

and

Three different estimates are made and compared in the study.

These estimates _e based on 66 x 66 1979 input-output tables (pending the availability of more disaggregated data). The 1979 I-O tables yield domestic value coefficients converted to free trade value coefficients using the implicit tariff rates for 1979, as estimated in related studies currently being undertaken by the Tariff Commission and PtDS. Two alternative values of the advanced sales tax rate are used, one makes use of the 25 percent mark-up provision while the other does not. Finally, revenue imports of

137 alternative proposals regarding the sales tax rates are estimated.

A SPECIAL STUDY ON NON-TARIFF

BARRIERS

Erlinda M. Medalla The study aims to examine the nature and extent of non-tariff restrictions on imports being used in the Philippines. The study focuses on the period in which the Tariff Reform Program was implemented. The main question the study seeks to answer is whether non-tariff measures affecting imports have negated or complemented the Tariff Reform Program. One reason for such an investigation is that the effect of tariff changes on importations are easily offset by changes in the non-tariff arena, precisely because the latter come in different forms, wide-ranging in applicability and yet not uniformly dispersed, These properties also make quantification of their effects difficult which this study attempts to correct.

The study likewise attempts to assess the major form of nontariff measures namely, import licensing, which was liberalized as part of the Program from 1981 to 1983.

AN IDENTIFICATION OF INDUSTRIES MOST LIKELY TO HAVE MAJOR ADJUSTMENT PROBLEMS AND A GENERAL STUDY OF MEASURES TO FACILITATE ADJUS'I3fENT John H. Power and Erlinda M. Medalla This research project aims to identify industries that are likely to have major adjustment problems in the Tariff Reform Program (TRP). The study also identifies these adjustment problems and determines the factors that give rise to these problems (e.g. elasticity of substitution, capacity utilization, etc.).

The industries to be identified are chosen on the basis of their high tariff and availability of a Tariff Commission industry survey already done. From these industry studies, the authors hope to identify other industries likely to have major adjustment problems, using I43 data and 1985 tariff rates.

138 In the final analysis, the research project seeks to study the measures to facilitate adjustment.

A STUDY OF REVENUE IMPLICATIONS, OUTPUT, EMPLOYMENT AND BALANCE OF PAYMENTS EFFECTS Erlinda M Medalla, Raul F. Fabella and 30hn H. Power The study attempts to estimate the Tariff Reform Program (TRP) effects on output, employment, balance of payments and revenue. The current thrust of the study is concentrated on the revision of the effective protection rate (EPR) estimates, these being •the main input to the calculation of the impact effects of TRP. The revised EPRs are expected to improve the impact effect estimates.

The study uses the Chung Lee Model with some modifications to estimate• the TRP effects on output, employment, BOP and revenue. The modifications to the methodology of Dr. Chung Lee are as follows: (1)

In the absence of historical data of sectoral output, Sj (defined

by Lee as the output produced by sectorj if there were no TRP) cannot be estimated hence the study uses the 1979 data of the I/O Table and express the total changes in terms of output in 1979. The same procedure is done in the case of changes in income, demand and trade.

(2)

The change in employment is estimated using ej as the ratio of the compensation paid by sector j to the value of output of seCtor j in 1979, and not the number of employees per unit value of output as suggested by Lee. The result is expressed in terms of percentage to total compensation paid in 1979.

(3)

The range of the income elasticities to be used are: 0.5 for agricultural and mining products, and a range of 0.5 to 1.5 for manufactured goods.

(4)

To get the exPortable and importable mand, intermediate demand is used.

(5)

Effects in trade are estimated by

components

of final de-

converting the changes in de-

139 mand and supply to world prices, using the appropriate tors for exportables ,and importables.

defla-

A STUDY ON TIMING FURTHER TARIFF REFORM AND APPROPRIATE INTERIM POLICIES BEFORE AND DURING REFORM

I

John 11. Power and Erlinda M. Medalla The study attempts to synthesize the findings of studies assessing _e Tariff Reform Program the industries most likely to have major adjustment problems, and the effects of further reform in revenue, BOP, output and employment.

On the basis of this, the study •identifies what further tariff reforms are needed. It also recommends the timing and scheduling of implementation of these reforms as well as the appropriate interim policies before and during reform.

A STUDY ON POSSIBILITIES OF SECURING TRADE COMMITMENTS OR CONCESSIONS FROM MAJOR TRADING PARTNERS AND ASEAN Erlinda M. Medalla The study aims to draw up possibilities of securing trade commitments or concessions from major trading partners and ASEAN. In particular, the study attempts to come up with a plassible offer list which will be meaningful, both to the Philippines is a buyer, and to the target markets as suppliers. It is expected that guidelines may be established which takes into account: (1)

The essentia.lity of the product;

(2)

The inadequacy of production for local or imported products;

(3)

Government

(4)

The extent of importation, which from the point of view of the Philippines is substantial (a threshold value could be set); and the target markets, as suppliers, which are seen to have prin. cipal/substantial interests in the Philippine market.

levels to meet domestic demand

policies on imports, e.g., C.B., BOI regulations; and

140 Moreover, beating in mind the Tariff Reform Program (TRP) and possible future reforms, the study also attempts to draw the possibility for the Philippines to enter into bilateral agreements regarding tariff and trade.

PROBLEMS AND PROSPECTS OF SELECTED NON-TRADITIONAL MANUFACI'URED EXPORTS Florian A. A lburo The Philippine non-traditional manufactured exports have increasingly taken a large share of total exports, and performance in this area appears to indicate a significant shift in trade composition.

This signals a graduation into continued trade in manufactures. However, a cursory examination of the aggregate figures reveals several dimensions that warrant a detailed analysis. One is the excessive reliance on a few products among non-traditional manufactures, which means a shifting of the past trade patterns of dependency and not really broader diversification or deepening. Another is the import intensity of such exports which places a greater effective constraint effect on foreign exchange than otherwise. Also, there is the finding that many of the non-traditional manufactures are produced and exported on special arrangements, (e.g. consignment) not conducive to a more independent trade structure.

The p_sent study, therefore, aims to address contemporary issues surrounding the appearance and expansion o_ non-traditional manufactures. The specific objectives of the study are two-fold.

The first is to focus on the 'collective and individual problems of the country's non-traditional exports along several aspects international competitiveness (or comparative advantage, interindustry transactions and their distortions, relative importance of different products in the industry, and trade distortions, among others. The second is to suggest specific policy and program agenda to meet the problems of the sector that embraces its growth and stability.

The study is carried out in three phases. Phase I, which is ongoing, covers the complete schedule for data collection and integration. The three distinct outputs _xpected here are an organized data, a summary of relevant literature on non-traditional

141 manufactured exports of the Philippines, and an initial specification of the technical analysis. Phase II involves the technical analysis including empirical specifications. Phase III involves informal interviews to confirm the results of technical analyses, and a study of the actual exchange flows embodied in trade transactions involving non-traditional manufactured exports.

THE SECTORAL INCIDENCE OF THE COCONUT LEVY ON THEMARKET PARTICIPANTS IN THE PHILIPPINE COCONUT INDUSTRY Arrnando C. Armas, Jr. The project attempts a theoretical analysis on the economic incidence of the coconut levy. It focuses on two major issues: (1) the levy burden of coconut farmers; and (2) the levy impact on the different market participants, local and foreign, on the Philippine coconut industry. It involves regional and sectoral analyses Of levy impact on farmers, farm workers, traders, millers, and foreign buyers.

Since. the project mainly deals with the theoretical analysis of the incidence of the coconut levy, the conceptual framework relies substantively on t_eories of taxation and market structures. To begin with, the study ,analyzes the levy issues with the use of the perfect competition market model. As expected of theoretical analysis, significant conditions and their respective implications to important variables are identified. Initially, the study concentrates on the farmgate, millgate, domestic and export prices of copra and coconut oil with the coconut levy vis-a-viswithout levy, Subsequently, the theoretical analysis relaxes the assumptions of the perfectly competitive model. Aecordingly, the implications of the alternative major market models on the relevant variables are examined.

ECONOMIC VALUATION OF ON-SITE AND OFF-SITE EFFECTS OF FOREST AND WATERSHED MODIFICATIONS tCilfrido D. Cruz The study determines the private and social costs of on-and off-site effects of modifications associated with forest and watershed

142 management

schemes.

The study stems from the absence of a sound basis for incorporating important on-site and off-site environmental quality effects in project, benefit-cost analysis, benefit monitoring and evaluation methodologies for watershed and management schemes. Also, there is perceived inability of ecologically_oriented programs to recognize important costs of erosion •abatement which may not be justifiable from the social perspective.

In particular, the study estimates the damage functions due to land productivity losses within sites, and to off-site losses in water supply and energy production.

The specific aspects for the study coincides with the watershed, commercial forestry, and social forestry studies that are carried out.

The abatement costs for alternative management programs and the implied optimal level of soil erosion are also. determined in the study.

These environmental concerns are then related to the role of government in the management of forest lands - with respect to the taxation of forest lands and expenditures for investment in watersheds.

POPULATION PRESSURE AND MIGRATION: IMPLICATIONS FOR UPLAND DEVELOPMENT Ma. Concepcion J. Cruz The study examines the extent of population pressure in Philippine upland communities with respect to conditions affecting population, including the broader elements of demographic stress generated by migration. This. includes the number and distribution of persons in the upland communities, migration patterns (the actual numbers, and distribution, and direction of movement), and the socio-eeonomic determinants of migration. The major concern here is the analysis of 0hanges in production techniques and resource availability as a response to demographic stress on the environment.

Specifically, .the study aims to: (1) arrive at a fairly accurate

143 estimate of the current population in the uplands using available census data; (2) determine the extent of migration to upland areas in terms of the actual number, distribution, and direction of population movements; (3) analyze the socio-economic and environmental determinants of frontier migration; and (4) evaluate thrQugh case studies of particular upland communities the dynamics of migration behavior and the effects of socio-economic and environmental factors influencing population movements.

The project is composed of three studies. The first one deals with demographic analysis of upland migration, while the second depicts a macro aggregative model of upland migration movements.

Case studies focusing on the determinants of upland migration and demographic stress are contained in the third study, The demographic stress models analyzed are expected to provide a formal entry point for rigorously evaluating issues pertaining to population growth, migration and effects of external processes on technical and institutional change in the uplands.

TOWARDS MORE RATIONAL WATERSHED MANAGEMENT POLICIES AND PROGRAMS' Wilfrido P. David The study looks into the present watershed management policies and programs by generating information vital to the planning and implementation of watershed resources development, focusing on the field evaluation of two ongoing watershed management projects in Pantabangan and Magat. It also delves into the problems associated With planning and implementation of watershed management programs. On the basis of these evaluations, the study seeks to formulate more- rational policies and programs for watershed development, control and management.

To generate information fundamental to sound watersheO management, a comprehensive review of ail available information dealing with the interactive components and processes of watershed ecosystems is aone. To evaluate the soundness and effectiveness of the planning and implementation of these policies and programs, the Pantabangan and Magat reservoir watersheds are chosen as test water-

144 sheds. The ongoing management programs in these watersheds are validated for soundness from the environmental, hydrologic, agronomic, engineering and socio-economic viewpoints.

The expected results of the field studies in the two test watersheds and the benchmark information studies are used to validate the soundness of current watershed management practices, from the standpoint of a rational balance between resources conservation and utilization.

ASSESSMENT OF COSTS AND BENEFITS IN COMMERCIAL FOREST MANAGEMENT Ce.remlla A. Cruz In the forestry sector, utilization,

production

and conservation

policies play a significant role in the distribution of resources and outputs. It would be of great interest to the resource owners - the public, for its forest resources, and private individuals, for other resources to find out if they receive optimum returns for what they own. Thus, the present study evaluates alternative management schemes in the operation of natural and plantation forests.

Specifically, the study aims to identify and and costs following the management of natural tions. It also aims to determine the distribution benefits and the government revenues accruing of licenses.

assess the benefits forests and plantaof these costs and from the operation

ASSESSMENT OF THE DISTRIBUTION OF COSTS AND BENEFITS OF SELECTED COMMUNAL TREE FARM PROJECTS Eumelia B. Corpuz The study determines the sharing of costs and benefits among the owners of factors of production in selected communal tree farm projects. A better understanding of the proportion of the cost shared by the government and/or the beneficiaries would help in the design of better plans, strategies and policies for social forestry projects.

The study also analyzes how much of the benefits is channeled

145 back to the project beneficiaries and the community in the project sites. The result of the study is envisioned to provide relevant information on selected communal tree farm projeet_, and whether the_ have realized its objectives of improving the socio-economic conditions of its intended beneficiaries. Likewise, it is envisioned that the study m_y assist policymakers in devising methods for better implementation strategies of communal tree farm projects, or other social forestry projects.

Z

The assessment/evaluation of the communal tree farm projects is based primarily on whether the objectives of the program have been met. Thus, it is important to determine whether: (1)the denuded public forest or brushlands had been reforested; (2)the marginal or sub-marginal forest lands, and idle private lands had. become productive; and (3)increased income and employment had been created.

The efficiency of communal tree farm projects is likewise evaluated through the benefit-cost ratio analysis. Furthermore, the communal tree farm projects are examined :in ter[ns of.imPortant policy variables, such as credit, land area, tenure, inputs, prices and marketing.

COST AND BENEFITS OF GOVERNMENT SUBSIDIES TO AGRICULTURE Ruperto P. Alonzo Effective protection rates and domestic resource_costs give broad indications of how the system of penalties, and incentives to agriculture has spawned distortions, in both input and output prices faced by farmers. It remains to be seen, however, how the various agricultural subsidy schemes have fared in,the aggregate, in terms of their stated goals (e,g. self-sufficieacy in food production, income support .to farmers, etc.), and in terms of their d_rect and indirect effects on other national objectives such as alloeative efficiency, employment generation, balance of payments stability, and a sound lineal position.

The present study therefore examines, the magnitude of the different government subsidy schemes in agriculture, in both fman-

146 cial and economic terms. The direct and indirect effects of these schemes on resource allocation, employment, the balance of payments, and the government budget are identified. In particular, the study synthesizes earlier studies documenting national government expenditures on agriculture by type of policy instrument, and financial flows of current government subsidies, through price support schemes, aids and grants, credit subsidies, tax and tariff exemptions, and price discounts, as compiled by the National Economic and Development Authority.

The study also examines the desirability of, and potentials for, financial cost recovery within government institutions handling the different subsidy programs. Moreover, the study explores alternative institutional arrangements that could better serve the objective for which these agencies have been created. Finally, the study evaluates current agricultural incentive proposals in the light of their possible direct and indirect effects on resource allocation, employment, the balance of payments and the government budget.

A STUDY ON THE IMPLICATIONS OF ALTERNATIVE ELECTRICITY PRICING IN THE PHILIPPINES Margarita R. Songco The study aims to evaluate the economic implications of alternative electricity pricing policies, in view of an ongoing study on power tariff which attempts to propose a tariff structure based on marginal cost pricing. At present, no previous research has been done on the estimation of demand elasticities for electricity.

Although elasticities have been estimated for energy demand, these may not be adequate for the present purpose. Electricity demand studies in the U.S., for instance, have to take into consideration the block pricing of electricity, and short-and long-run considerations.

Since electricity is an important input to economic growth, estimates of these elasticities could provide a basis for evaluating alternative pricing policies, tariff levels, and structures.

The study also attempts to test the well-known "Averch Jonson" effect which argues that the rate-of-return regulation of a public utility (monopoly) could induce firms to operate inefficiently.This meas that a monopolist firm operating under a rate of return regulation overcapitalizes. This seems to be the case with a hum-

147 bet of Philippine power utility firrn_ The relative scarcity of capital and the current financial and economic crisis dramatizes the need for this study.

AGRARIAN REFORM AND RURAL EMPLOYMENT Center for Poficy and Development

Studies

The research study aims to generate knowledge and formulate policies on appropriate measures to increase productive employment and improve rural welfare in Philippine agriculture. The study examines several issues on rural employment and equity. In particu-' lax, the study examines the provision of incentives or the disproportionate attention given to large-scale agricultural enterprises, as indicated in the Agricultural Development and Incentives Bill of 1985.

The study explores the feasibility of implementing agrarian reform in the plantation crop Sector (e.g. sugar and coconut). It also seeks to determine whether land redistribution will be sufficient to achieve the employment and output objectives in the plantation crop sector, and if land redistribution will lead to an improvement in income distribution.

Another issue examined concerns the labor absorptive capacity of the plantation crop sectors (e.g. sugar and goconut) in the light of the present economic crisis. Specifically, the study looks into the extent of how government policies (e.g. wage policies_ have helped the agricultural workers in the plantation crop sectors. In addition, the role of cottage industries, a major non-farm activity, in generating rural employment in the country is investigated. Likewise, policy responses or adjustments (e.g., crop diversification, wage adjustments, etc.) made in the country are evaluafed to identify policy alternatives which offers the most promising way of coping with the current economic crisis.

Finally, the study analyzes existing laws on public land disposition and registration, as well as the mechanics involved in the classification and distribution of public lands,

148 FEEDSTUFF-LIVESTOCK SECTOR OF THE PHILIPPINE ECONOMY Center for Policy and Development The feedstuff-livestock of the country's agricultural dence on imported materials,

Studies

industry is one of the bottlenecks sector because of its heavy depen-

The present study identifies important policy issues]problems facing the industry. An analysis and review of available literature on the feedstuff livestock sector are also undertaken.

In particular, the study calls for the preparation of seven (7) review papers synthesizing the results and findings of existing research, ,and eventually drawing some possible solutions and recommendations geared toward the development of the feed ingredientlivestock sector of the Philippine conomy.

AGRICULTURAL DEVELOPMENT IN THE PHILIPPINES: POLICY MODELLING AND ANALYSIS Cielito F. Habito The study attempts to construct a working multisectoral computable general equilibrium (CGE) model of the Philippine economy, tailored specifically for simulations of various policies affecting the Philippine agricultural sector. The model can be used by anyone with access to computing facilities to simulate and analyze the effects of various policy options with a view towards identifying appropriate courses of action for the country's policymakers.

The model is based On the various models built by the proponent for tax policy analysis. A number of modifications are required to convert the old model into a form suitable for the analyses of agricultural policies envisaged in the present study. With the modified model, various policies can be simulated and analyzed on the basis of their effects on relative prices, efficiency and welfare, income distribution, economic structure, and the behavior and well-being of various economic agents (e.g. health, etc.)

149 The analysis under the general equilibrium framework of various policy options in the study includes, but is not necessarily limited to,, fertilizer pricing policies, agricultural trade policies, output price policies (e.g. price supports and price control), and labor policies: among others. The study in the final context aims to identify appropriate pOlicy directions for the agricultural sector on the basis of analyses of the simulation results."

FOOD CONSUMPTION PARAMETERS, NUTRITIONAL IMPACTS AND PHILIPPINE AGRICULTURAL DEVELOPMENT Ma. Agnes R. Quisumbing The study aims to estimate income-group-specific food demand parameters for use in consumption policy analysis. Income-stratumspecific demand parameters are important in evaluating the differential response of consumers to food market intervention policies, since demand behavior varies across income classes. The study estimates income-group specific demand parameters using a flexible functional form which satisfies the axioms of demand theory such as homogeneity, symmetry and adding-up.

The study also aims to simulate the consumption and nutrition effects of general agricultural and food policies, using a computable general equilibrium model of the Philippine economy. Various food market intervention policies are examined in the study. Emphasis, however, are given to policies which affect the nutritional intake of nutritionally,vulnerable groups.

MULTIFACTOR PRODUCTIVITY IN PHILIPPINE AGRICULTURE: A REGIONAL ANALYSIS Moises L. Sardido The study aims to estimate data set parameters of the producer core for use in productivity analysis. Estimates of the producer core are critical to policy analysis because they establish a link between policy variables of this type, (e.g., research extension, rural electrification, etc.,) and the supply of several agricultural commodities including the demand for several agricultural factors of produc _

150 tion. Moreover, the study estimates producer core which includes data on research and extension, credit, roads, electrification, literac3_, and other infrastructure variables using divisia indexes.

The study is undertaken in phases. Phase I which has been completed involves data base development of selected economic indicators. Phase II is ongoing, and involves an extension of data set development and an estimation of the producer Core.

151

IV. POVERTY, INCOMEAND WEALTB DISTRIBUTION

THE DISTRIBUTION OF INCOME AND WEALTH: A SURVEY OF PHILI]PPINE RESEARCH Mahar K. Mangahas

The study compiles a comprehensive bibliography on income and wealth distribution, synthesizes these studies, and presents suggestions for future policy-Griented research.

Most studies in this area have dealt with inequalities instead of inequities. The distributional data system used to measure income inequality suffers from lack of appropriate coverage, accuracy, frequency, and Promptness. There is also a proliferation of studies focusing on poor families and very few touching on higher income groups.

The study recommends a more comprehensive approach in the distributional data system oriented towards comparisons among social groups. This should also include a limited set of variables for frequent and prompt monitoring.

The study appears in the first volume of the PIDS Survey of Philippine Development Research.

152 AN ANALYSIS AND SYNTHESIS OF POVERTY RESEARCH IN THE PHILIPPINES Florian 4. A lburo and Eduardo L.. Roberto A review of poverty research in the country reveals that poverty standards are often measured in terms of money - the possession or lack of it. Standards of poverty vary depending on the number of the poor. There are also more studies on indicators and presumed poverty conditions than on its determinants. There are more systematic studies on material and economic deprivation employing structural analytical techniques, rather than non-economic poverty analysis.

There is a need to evolve a measurement of household size threshold to detennine the poverty line, as well as a measurement of poverty line on the basis of actual consumption expenditures. The rural poverty line must also be measured more on non-monetary terms in view of the limited market exposure of the rural economy.

The study appears in the PIDS special publication Survey of Philippine Development Research I.

entitled

INTEGRATION, PARTICIPATION AND EFFECTIVENESS: AN ANALYSIS OF THE OPERATIONS AND EFFECTS OF FIVE RURAL HEALTH DELIVERY MECHANISMS Ledivina

V. Cariffo

On the basis of a comprehensive study of five health delivery programs, this paper evaluates and identifies existing mechanisms for the delivery of health and related services to the very poor with concomitant policy and administrative measures needed to bring services closer to intended beneficiaries.

The five programs include the Rural Health Unit (RHU) of Pilar, Bataan; the Comprehensive Community Health Program (CCHP) in Bay, Laguna; Project Compassion of Teresa, Rizal; the Sudtongan Human Development Program (SHDP) in Basak, Lapulapu City; and the MAKAPAWA Health Programin-Liwayway, McArthur, Leyte.

153 In general, the study observes that the programs studied have been effective in delivering health and related services, and in satisfying most of the people in the communities. However, the study also notes that unless the poor are explicitly made. the object of social programs, it is always possible that they will not receive benefits from these programs to a degree that would redress past inequities. This explicit orientation to provide the poor with more services through direct measures is necessary, if one is to reduce the almost automatic advantage of the richer individuals over the poor in benefitting from similar programs.

The study, on the whole, recommends full support for primary health care and other health services that are integrated with other needs of the oeoole in the community. Joint public-private sector efforts are also recommended to avoid duplication of efforts and availability of medicines.

This study has been published in book form by the Institute.

POPULATION AND DEVELOPMENT RESEARCH IN THE .PHILIPPINES: A SURVEY Ale/andre N. Herrin Thisstudy examines empirical findings on (1) mortality, (2) fertility, and (3) internal and international migration, as revealed by social science research studies on population, and its relation to development.

Mortality and fertility rates differ by region; thus, a single national mortality and fertility rate could be deceptive. There are not enough quantitative studies on the impact of public health intervention policies on mortality. Fertility rate appears to continually decline with marked changes in nuptiality customs, mainly due to modernization, educational expansion, and shifting composition of the labor force, while studies on migration reveal that public policies and programs have a significant influence on migration patterns.

There is a need for on health and mortality differences on fertility consequences of internal

more studies on the impact of public policies to emphasize the estimation of regional real levels and to dwell on the determinants and migration.

154 l'hc study appears in the second volume of the PIDS Survey of Philipl_ine Development Research.

DISTRIBUTIVE EQUITY AND PUBLIC POLICY: AN INTEGRATED ECONOMIC ANALYSIS Mahar K. Mangahas This project attempts to assess the effects of various public policies on income and wealth distribution in the Philippines, and provides some insights into how such policies can be modified so as to contribute to the country's goal of more equitable income and wealth distribution. The policy areas to be covered include, among others, growth and incentive policies, education, land reform, and natural resource management policies.

In each broad policy area, there is an attempt following basic questions:

to answer the

(1)

Parameters of the distribution. What is being distributed and howmuch is the total? Who are the eligible recipients and the ineligible ones, and how many are they? Among those with at least some access, how unequal is the distribution? In particular, who are the poor, and who are the rich? How do these basic quantities appear to be affected, over time, by natural (i.e., without government intervention) and socio-economic processes? How reliable are all of these data?

(2)

Inequitable aspects of the distribution. What are the grounds for claiming that there is inequity? Have the distributional objectives been formally and/or_ officially defined? Are there symptoms of inequity, such as peace and order problems, emergence of pressure groups, etc.? What would constitute proof that inequity is narrowing?

(3)

The role of the state in reducing or aggravating inequity. What are the government policies which have been deliberately developed in order to reduce inequity, and how successful has each of them been? What are the policies which have inadvertently affected equity, either positively or negatively? What are the new policies suggested by various quarters, and how promising

155 are they? IS there any experience in other countries which seems pertinent to the Philippine issues? How do all the various policies compare with each other in terms of making favorable changes in the parameters of distribution?

ENHANCING THE EFFECTIVE DELIVERY OF SOCIAL SERVICES THROUGH COMMUNITY - NATIONAL AND LOCAL GOVERNMENT PARTNERSHIPS Ma. Aurora Carbonelt-Catilo The research project examines the role of various factors in.the delivery Of social services at the municipal level, focusing on the office of the mayor.

The research team seeks to identify the problems encountered in the delivery of social services by the field offices of national agencies.

In this context, mayoral roles are identified by way of helping alleviate such problems. The resources and constraints of the mayor are also determined.

Phases I and II of the study have been completed. In Phase II cases, as well as two cases studied in Phase I, it was found out that the delivery of social services is affected by the interplay of various factors. Each of the factors'has implications on service delivery.

However, it was seen that the adoption of national programs to local conditions and exigencies is largely the role of the mayor. In this endeavor, however, he was seen to tap resources available to him but is also constrained by factors that vary from case to case. In the Lian case, mayoral effectiveness is found to be adversely affected by _,ternal conflicts with other municipal officials and by a malversation case against the treasurer that also implicates him..In San Pedro, the dio._'.'.l',cebetween the town proper and the resettlement area, reinforced by economic forces, has critical implications on.,the mayor's as well as in the sectoral agencies' ability to deliver services.

There is also a political slant to this. The town proper, being more affluent, commands a greater leverage than the unorganized settlers who have not, by their recent move to San Pedro, developed political consciousness. This, plus the tendency of offices to locate in the more affluent areas, skews services in favor of the town proper.

!56

V. REGIONAL, URBAN AND RURAL DEVELOPMENT

URBANIZATION

AND SPATIAL DEVELOPMENT PHILIPPINES: A SURVEY

IN THE

Ernesto M. Pernia and Cayetano W. Paderanga, Jr.

The study , which is a survey of the literature on urbanization and spatial concentration of population and economic activity in the Philippines, reveals a useful but largely fragmented research output on the subject in the country.

Studies on the subject are categorized into urban development and primacy, rural-to-urban migration, urban problems, national and regional urbanization, and comparative economic performance of the different regions.

Future research should strive to deal with the historical, social, and demographic forces that shaped the country's urbanization and spatial development. Other than this, macroeconomic and growth policies and their effects on the concentration of population and economic resources must be looked into. Equally important are the regional and rural policies and programs designed to counteract concentration and disperse population and economic activities, as well as urban programs designed to solve current problems in city management.

The study appears in the PIDS special publication Survey of Philippine Development Research i.

entitled

in THE SPATIAL AND URBAN ASPECTS OF PHILIPPINE DEVELOPMENT Ernesto.M.: Pernia and Cayetano I4/.Paderanga, Jr. This paper is a thorough and integrative study of urbanization and spatial concentration as they affect population and economic activity. It investigates the historical, economic, and demographic forces that have shaped the cotmtry's urbanization and spatial development, and studies the effects and biases of macroeconomic and growth policies affecting population and economic resources, as well as regional and rural policies designed to disoer_ population and economic activity. Various urban policies intended for better city management axe also examined.

The study recommends a recasting of regional and urban policies in view of the spatial biases of economic policies designed for macro goals. Conflicts between macro (sectoral) and regional (spatial) objectives will have to be resolved.

The current restructuring of industrial promotion policies is in the right direction. However, greater efficiency in resource allocation is more explicitly designed in these policies while spatial dhnensions seem to be only implicit.

Regional imbalances, city vis,a-vis country development, could be solved through optimal provision of social services to all regions.

Finally, government intervention in the provision of housing services to urban and rural communities is seen to be beneficial at this stage of the nation's urban and spatial development.

This study has been published in book form.

CHANGING RURAL INSTITUTIONS AND PARTICIPATORY DEVELOPMENT: A REVIEW OF THE PHILIPPINE EXPERIENCE Gelia T. Castillo The study is a two-part treatise on: (1)

Changing rural institutions,

e.g., pre-designed rural institutions

158 like Samahang Nayon (SN), Compact Farms and Seldas, Masagana 99; traditional forms of cooperation; and emerging new relationships among various characters in-a rural setting; and (2)

Participatory development

experience in the PhiliPpines.

The first part reviews, organizes and synthesizes available research and experiences on rural institutions. Moreover, it seeks to. identify research gaps in this area.

Part Two, which deals with people participation, looks into various examples of Philippine field experiences as provided by projects initiated or supported by government and non-government agencies. It attempts to define and clarify the basic ingredients of people participation like "Who are the 'people'?" :'What constitutes participation?", etc. The study's short-term interim verdict on these various approaches of participation is that benefits from participatory development have yet to substantially benefit the rural poor.

The study has been published in book form and is now circulated as a PIDS Working Paper Series No. 82-01

PUBLIC POLICY AND URBAN HOUSING MARKET IN THE PHILIPPINES Edna S. Angeles The general objective of the study is to determine and evaluate the effects of government policies on the Philippine urban housing market. Specifically, this study attempts to: (1)

Analyze the major aspects of the demand for, and supply of, urban housing services in the Philippines, and iri the process, identify specific urban housing problems and their causes; and

(2)

Critically review and evaluate the housing policies in the Philippines and their effects on the market, especially in terms of resource allocation; market structure changes, and prices.

IS9 The study's findings are: (a)

A significant amount of backlog in housing remains, and unless a faster rate of construction and improvement activities .is undertaken, an increasingly wider gap between •housing need and supply will occur;

(b)

The incomes that most people earn are low, thereby making it difficult for them to acquire housing, or to borrow to finance housing construction and/or acquisition;

(e)

Housing cost is increasing very rapidly, thereby making, housing less and less affordable especially to low-income families; and

(d)

The, actual operation of the bariking system through Pag-IBIG does not reach the target population. It appears that assistance is provided to high-income families to secure better or mor¢ housing units through subsidized Pag-IBIG loans.

The study recommends that:

(i)

PoliCy should be directed at more efficient and equitable • intrasector allocation of resources presently devoted to housing - thus emphasis in public housing should be placed on a truly low-cost housing scheme; and

(ii)

Regular housing surveys and more research on housing should be undertaken to provide a strong base for planning and policy formulation.

The study is circulated as PIDS Monograph Series No. 7.

FOOD, FUEL AND URBANIZATION IN THE PHILIPPINES Ale

N, Herrin, Manuel F. Montes and Rodolfo F.Florentino

The study ._attempts to systematically and critically review existing ,'literature" on issues focusing on urbanization, patterns of food and fuel consumption, and current policies and programs related to the provision of food and fuel in the Philippines.

160 This paper notes that studies on fuel consumption patterns with disaggregation by socioeconomic groups and by urban-rural location are i'elatively few. Even scarcer are studies in household fuel consumption patterns.

Among the general observations made in the review are: (1)

Food expenditures still account for more than half of total expenditures during the 1957-71 period; the percentage being highest in rural areas (56-6. 0), lower in other urban areas (48-52), and lowest in Metropolitan Manila (40-45). These area differentials may be explained in large part by differentials in mean income associated with different levels of urbanization.

(2)

Based on cross-section studies, the percentage of food expenditures to total expenditures do decline with increasing income_ from 57-69-percent for households with annual incomes under i_500 to around 32 percent for households with annual incomes over P10,000 during the 1957-71 pe_riod;

(3)

While the proportion of expenditures on food to total expenditures decline with increasing income, the total value of food expenditures rises with income. Increasing income may be associated with a shift from low priced to high-priced and better quality food due to changing tastes. If urbanization is related to increasing income levels and changing tastes for higher period (quality) food, then the total demand for food is expected to rise faster with the increasing level of urbanization than otherwise.

(4)

The income/expenditure elasticity for food is less than unity, and its value is generally higher in rural than in urban areas.

(5)

Among urban areas, differentials exist between Metropolitan Manila and other urban areas, strongly stiggesting the need to distinguish these two urban areas for future analysis.

(6)

'Within food categories, differential areas.

(7)

In general, household size elasticity tend to be higher for cereals than for protein foods. When age composition is allowed for,

patterns exist by rural-urban

161 size ,olasticRy is higher for household members aged 10 years or

over. Young children do not have much impact on a_xgate food consumption.

The review also reveals that studiosused different data sets, estimation techniques, level of aggregation o£ study _nits and categories of food items. As such it is difficult 1o cumulate knowledge base regarding pattvvns .of food consumption o_ to validate one_set of estimates against another. m

The difficulty of cumulating knowledge base from the studies reviewed arises from several factors: First, the studies are based on different data sources which differ in reliability. Second, different measuros of variable_, units of analysis, levels of aggregation and analytical techniques have been used by various investigators, making comparisons dfffict_R. Additionally, in the case of energy studies, more information could have been obtained from the basic data had more adequate (and more correct) analyses been made.

In view of these methodological problems, the study has drawn up a re, arch agenda that could be used as a basis for future work and collaborative rese_ch. A major item in the agenda is the reanaly_is of existing data to derive more precise estimates of income/expenditures., and price and household size elasticities, which will•be.t_eful inputs in the construction of anoc<onomic-demographic simulation model. This model can be used to project food and fuel requirements and to assess the implications of various policies related to the :adequate provision of food and fuel in the,course of economic growth and urbanization.

• The .study. also recommends that research be initiated along these.l_l_s among others described in the resea_ch agenda.

The study is circulated as PIDS Staff Paper Se_es No. 85-05,

INFRASTRUCTURE AND SOCIAL SERVICES IN TWO REGIONS OF THE PHILIPPINES Ledivina

II. Cari_o

The study describes and analyzes

the pattern

of public expen-

162 ditures for infrastructures and social services in Regions III and VII of the Philippines for the. period 1979-83. In particular, a simple description of the types of expenditures for both infrastructure and social services, including their size, relative importance as public expenditures, their sources, the kinds of activities they support, and the changes of these over time are discussed. Additionally, it compared inter-regional (and within two case-regions) allocations of public expenditures under study and specifically analyzed the proportions going to the regional center as urban areas to total regional infrastructure and social services expenditures.

Among the findings of the study are: (1)

Infrastructure expenditures, a sulacategory of economic develop_nent services, tended to receive higher funding than the whole social services sector. The facilities it provided â&#x20AC;˘ 'served different functional areas, foremost of which was transportation.

(2)

It was difficult to discern a pattern of expenditures whether for infrastructures as a whole, or any of its main types or for social services. This also went for legal authority for the expenditure. However, it seemed, clear that foreign funding were primarily for major roads and national irrigation systems while domestic funds were distributed to all kinds of infrastructure and social services. Additionally, a great deal of reliance on national sources was observed to be maintained even when local government unitspledged funding for various projects to be located in their jurisdictions.

(3)

New construction receives greater emphasis than repair and maintenance. This is true especially in the case of irrigation, which practically had no biadget for repair and maintenance.

However, regults were more mixed in the case of public highways, where, in some cases, construction/rehabilitation and repair/maintenance split evenly. Construction/rehabilitation tended to .go to national r0ad__-and they also shared a big portion in the repair/maintenance funds..

(4)

There were mixed results in obtaining accounts for regional shares. By.some measures, more funds tended to go to richer regions. However, some other measures suggested the opposite

163 " conclusion (e.g., infant mortality, much weaker correlations.

malnutrition),

though

with

(5)

In general, the provision of government goods and services is not as strong a redistfibutive tool as it can be. There are some evidence that the more one region has, the more it is bound to get, but there are also a few findings in the opposite direction which prevent the study from decrying a lack of equity.

(6)

In terms of redistribution of power, local government units "n general, did not generate enough resources to underwrite public works and social services in their areas, particularly when they had already budgeted to do so. On the other hand, the only public enterprise studied was relying more and-more on corporate funds than on appropriations, suggesting increasing autonomy.

With these limited findings and "the current state of financial reporting and monitoring, the study put forward three modest proposals: (a)

Enhancement of the access to, and use by management of, information generated by its units for assessing implementation of programs and projects;

(b)

Attention to socio-economic features and equitable distribution of benefits in proposing and implementing projects; and

(c)

Practical suggestions to the regional development council as the focal point in inter-sectoral coordination in the regions.

REGIONAL GROWTH AND INTERREGIONAL RESOURCE FLOWS Felipe M. Medalla The objective of this study is to determine how interregional growth differentials and interregional commodity and factor movements are interrelated. The study analyzes how regional growth induces and is induced by the movement of goods and resources

164 between regions.

The first task of the research is to describe historical regional growth trends and the directions of interregional resource and commodity flows. It is expected that it would be harder to draw inferences for the earlier periods when regional income accounts data were not available.

Filling the study's conceptual framework, the frame of the analysis includes: (1)the role of the cities and the centers in explaining regional _rowth; (2) the effect of regional growth on urbanization; (3) the role of natural resources; (4) t_actor movements as effects or causes of growth; (5) the role of transport and infrastructure policy; (6) the effects of broad changes in trade and industrialization movements; and (7)analysis of industrial location decisions.

:

: ___

VI.

,.

L

OTHER PROJECTS

MICROSOFTWARE DEVELOPMENT AT THE PHILIPPINE INSTITUTE FOR DEVELOPMENT STUDIES Roberto S. Mariano, Manuel F. Montes, Josef T. Yap and Samuel S. Chua Since August 1983, PIDS has been developing an Econometric Package for Microcomputers (MICROPEP). There are some statistical and regression software packages (like micro TSP and STATPACK) which are available commercially for microcomputers.

However, none of these has reached the level of sophistication and 0epth of the mainframe packages; none satisfies fully the software requirements of the current and future research activities at PIDS. Hence, PIDS has decided to develop internally its own micro-package for econometric analysis.

MICROPEP i8 a modular user-friendly package with capabilities for statistical data handling, regression analysis, and econometric policy analysis and forecasting. The package consists of the following components: (1) Data

Management

(2)

Ordinary Least Squares for Regression Analysis

(3)

Instrumental

(4)

Correction

(5)

Econometric

Model Simulation

(6)

Box-Jenkins

Procedures for Time-Series Analysis

Variable Estimation

for Econometric

Models

for Serial Correlation and Multiplier Analysis

166 (7) (8) (9)

Estimation of Logit and l_obit Models for Qualitative Response Models Generalized .Least Squares Procedures for the Analysis of T/meSeries Cross-Section Data Significance Tests for Model Validation

The first five components have already been developed and are currently operational. The next four modules will soon be finished.