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PHILIPPI NE INSTITUTE FOR DEVELOPMENT STUDIES Surian sa mga Pag-aaral Pangkaunlaran ng Pilipinas

Vol. XXV No.5

DEVELOPMENT RESEARCH NEWS September - October 2007

ISSN 0115-9097

A framework for regional and local development*

Editor' Editor'ss Notes Once again, the Philippine Institute for Development Studies (PIDS) successfully led this year’s observance of the 5th Development Policy Research Month (DPRM). And just like in the previous years, the event was highly supported and appreciated by the Institute’s partners and clientele.

Michael R. Cabalfin and Josef T. Yap**

In his message during the opening ceremonies, Ateneo de Manila University professor and Ateneo Center for Economic Research and Development (ACERD) director Dr. Cielito F. Habito underscored the need to have more uses of research other than for purely academic purposes. The DPRM, which was initiated primarily to promote policy research and the critical role it plays in decisionmaking, provides the perfect opportunity for government and academic personalities to engage in meaningful exchange of ideas and sharing of best practices with local government stakeholders who hold the key to development in the countryside.

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What' What'ss Inside 9

NEDA bares guidelines on preparing local investment programs

1 1 Budgeting and expenditure management: some tools and techniques for LGUs 1 2 Revolutionizing local governance through CBMS 1 5 PIDS, partners tackle ways to boost local development 1 9 Boosting SME productivity and competitiveness through the clustering approach 2 1 Every inch a fair to remember 2 3 A home called PIDS

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he objectives of this framework are to assist local governments in understanding the various components of local development and the links among these components; identify the role of local governments in development and specify the needed policies and interventions; analyze the impact of policies on local development; and emphasize the need for rigorous research and relevant, timely, and accurate data for effective planning and decisionmaking.

The concept of nonfarm economy In discussing the framework, we utilize the concept of nonfarm economy. Lanjouw and Feder (2001) define nonfarm economy as the nonfarm “sector,� which includes all economic activities in the rural areas, except agriculture, livestock, fishing, and hunting. It is not, in any sense, a homogenous sector as its composition shows. It includes wholesale and retail trade; manufacturing; transportation, storage, and communication; agro-processing; mining and quarrying; construction; commercial; services; and entrepreneurial activities.

The framework for local development proposed here is not wholly about the nonfarm economy. However, the concept is a very good vehicle in looking at the various aspects of development given the growing contribution of nonfarm income in the economy. In the rural sector, the contribution of nonfarm income is steadily increasing so we should try to look at policies that can enhance or make nonfarm income a more effective tool for poverty reduction or make the benefits of nonfarm economy more equitable. * An excerpt of the presentation during the forum on the Framework for Regional and Local Development, delivered by Dr. Josef T. Yap on September 26, 2007, C.P. Romulo Hall, NEDA sa Makati Building, Makati City.

** Supervising Research Specialist and President, respectively, Philippine Institute for Development Studies (PIDS). The authors would like to thank Dr. Aniceto C. Orbeta, Senior Research Fellow at PIDS, for contributing the section, "The Importance of rigorous research and timely and reliable data," and Dr. Alejandro N. Herrin, Visiting Research Fellow at PIDS, on whose work the case study for this section was based.

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rural areas so it is very important to look at activities that can help reduce poverty incidence by looking at nonfarm incomes.

More importantly, there is a tendency for nonfarm incomes to be polarized: higher earning nonfarm activities are dominated by the upper income classes like retail trade and manufacturing while the lower income classes are dominant in the low-productivity activities of the nonfarm economy. Thus, it is important to look at policies that can correct this imbalance and make nonfarm incomes more equitable.

Figure 1. Framework for sustainable economic development

Using data from randomly selected 447 households in two villages each in Central Luzon and Panay Island (Estudillo et al. 2006), Otsuka and Estudillo (2007) observe that the increase in income is generally brought about by the increase in nonfarm income. In the 1980s, nonfarm income was 45 percent of total income in highpotential agricultural areas. By 2003-2004, it was 70 percent. This significant jump in nonfarm incomes is also evident in marginal agricultural areas (36% in the 1980s and 60% in 2003-2004).

By region, the growing importance of nonfarm income is undeniable. In all the 13 regions, the share of nonfarm income to the total is greater than 50 percent based on the 2000 Family Income and Expenditure Survey (FIES). In the rural areas, the highest share is in Central Luzon (75%), Ilocos (70%), Southern Tagalog (68%), and Central Visayas (68%). The lowest share in nonfarm income is in the ARMM (37%).

Consistent with this trend of rising shares of nonfarm income is the drop in the share of agriculture value added. Data from the National Income Accounts show that as of 2006, the share of agriculture was 19 percent of GDP. In 1985, it was 25 percent. Another related observation is the drop in the employment share of agriculture: from 45 percent in 1990 to 36 percent in 2006 based on ADB figures. That the share of agriculture in 2006 is 19 percent while the employment share of agriculture is 36 percent reflects surplus labor in agriculture. This suggests the need for policies that can enhance the productivity of nonfarm activities in order to absorb the excess employment in the agriculture sector. Poverty incidence is also higher in the

The framework With the foregoing as background, we propose a framework that focuses on the rural nonfarm economy as a vehicle for local economic development (Figure 1). The development outcomes (in ovals) are economic development, poverty reduction, equity, and participation. Meanwhile, the policy areas (those in rectangles) that local governments can look into include human resource development, resource management, infrastructure development, institutional development, and industrial policy, with particular focus on small and medium enterprises.

All the components and aspects of the framework are interrelated. Local economic development depends on and, in turn, affects various factors. These factors also interact with each other and this interaction generates reinforcing effects on local development. For instance, poverty reduction decreases environmental degradation and degradation reduces poverty (World Bank 2003). Institutions may encourage the emergence of markets and enhance social mobility (World Bank 2002).

In terms of infrastructure, decreases in transportation costs increase farm and nonfarm incomes. Low incomes lead to low electricity demand and more costly provision (Lanjouw and Feder 2001). Agricultural investments are necessary to increase productivity that allows labor to be released for and investments to be made in nonfarm activities. High-productivity nonfarm activities increase employment and wages (Haggblade et al. n.d.). In addition, a sound industrial policy leads to faster technological development, stronger backward linkages, and higher employment. However, to be effective, industrial policy has to be shielded from poten-

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tial rent-seeking activities, which in turn requires a certain threshold of institutional development and good governance.

Farm to nonfarm links To reiterate, we are not abandoning the agriculture sector in favor of the nonfarm sector. The nonfarm economy and agriculture are actually linked to each other as Figure 2 indicates. There are four kinds of economic growth linkages between the two (Haggblade et al. n.d.): 1) Production linkages where (a) agricultural outputs are used in nonfarm processes (known as forward linkage), and (b) nonfarm products are used in agricultural production (e.g., farm equipment, fertilizers, water pumps).

2) Consumption linkages where farm households spend on consumer goods and services from the nonfarm economy.

3) Factor market linkages where (a) the supply of labor in the nonfarm economy depends on the cycle of labor demand in agriculture, and (b) agricultural surplus allows investments in nonfarm activities.

4) Productivity linkages where lower food prices improve the nutrition and productivity of nonfarm workers. Knowledge flows also increase productivity in agriculture and in nonfarm activities.

There has been a growing recognition of the reverse linkage from nonfarm to farm. For instance, the development of the packaging industry may stimulate agricultural production. A more productive nonfarm economy also supports agriculture by increasing the demand for agricultural products. Greater agricultural productivity also leads to cheaper inputs for the nonfarm economy. It also releases more labor to the nonfarm economy and vice versa.

Rationale for government intervention Our framework rests on the premise that government intervention is a necessary ingredient for economic development. The rationale for government intervention is related to equity considerations and the issues of public goods and externalities, and imperfect markets. Because some outcomes are inequitable, it is necessary

Figure 2. Farm to nonfarm links

for the government to correct the imbalance.

One example is education. Because the poor cannot afford to send their children to private schools, the government has to put up public schools.

Imperfect markets include monopolies. There are some natural monopolies especially in the case of infrastructure provision so the government needs to regulate these. Another example of an imperfect market is the credit market. No one wants to provide credit to the poor because their stature as borrowers is unknown. We have here a case of a missing or imperfect market because of asymmetric information. Thus, the government can step in to encourage microcredit provision. They can help lenders gather enough information or provide them with enough information or they can stimulate the creation of credit market targeting the poor.

Public goods, on the other hand, are goods that are nonrival or nonexcludable, meaning, consumption by one individual does not reduce the amount of the good available for others, and no one can be excluded from using that good. It would be difficult to exclude people utilizing certain goods, say, road or a public park. Because of the characteristics of nonrivalness and nonexcludabiltiy, people would pay less than the benefit that they can derive from these goods.

They can also take advantage of public goods without contributing to their creation or maintenance (the “free rider problem�). In this regard, provision becomes unprofitable especially for private businesses and thus, they may tend to undersupply the provision of these goods. However, since government has the ability to tax people, it can raise enough funds to produce

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To promote economic development at the grassroots level, there are specific policies and programs that local governments should develop and provide for each of the policy areas in the framework.

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these public goods. Other examples of public goods are farm-to-market roads, disease control (dengue fumigation, malaria control), and public safety. These goods affect many but are nonexcludable giving the private sector little incentive to provide them. This is why the government should step in to produce these public goods.

Specific policies and interventions To promote economic development at the grassroots level, there are specific policies and programs that local governments should develop and provide for each of the policy areas in the framework.

Externalities are the benefits or costs to other people arising from the activities of one person or firm that are not included in the price or cost of goods and services. The presence of these externalities results in either an undersupply of the “goods” or an oversupply of the “bads.” A key example, of course, is pollution. If a firm is dumping waste into a river and if it is not penalized or the government is not aware of the impact of its activity, then there will be an oversupply of pollution.

Infrastructure development

The role of the government therefore is to make them aware of the negative effects of their activities through appropriate taxes (the so-called “Pigovian tax”) and penalties. Natural resource depletion is another example. People in the uplands may not be aware that their activities are affecting people in the lowlands. The government therefore can come in and try to intervene and regulate their activities.

Some key principles in infrastructure development are noteworthy (Llanto 2002).

One is that tariff setting should not be politicized; an independent regulator must be set up. This allows balancing between the viability of private enterprise and public welfare. Another is appropriate risk sharing between public and private sector. The government should encourage private sector participation and, at the same time, rationalize the provision of government guarantees as these may unnecessarily raise its contingent liabilities and threaten its fiscal stability.

Another example is research and development.

This is usually undersupplied because private entities are only looking after their own interests. Or the products of research and development may not be disseminated as widely as possible. The government can therefore step in and subsidize research and development.

An example of a nonfarm activity that we can look at is coco coir. Coco coir is the fiber between the husk and the outer shell of the coconut. It can be manufactured into different products, including coconet, which was selected as a finalist in a BBC-world challenge contest for best grassroots project. To develop the coco coir industry, the government can intervene by organizing cooperatives or promoting cooperative development; providing electricity for the decorticating machine; providing credit for the purchase of equipment; providing support to the metal-works sector; providing training for fiber processing, operation and maintenance; marketing support; and export subsidy.

• • •

Promotion of public-private partnership (based on the principle of appropriate risk sharing between the public and the private sector) Improvement of the incentive structure Water safety and pricing regulation (tariff setting should not be politicized; there should be an independent regulator)

Microcredit development

• •

Credit market support (encourage private/NGO microcredit schemes) Regulation and supervision of microcredit institutions

Certain key principles in microcredit are also notable (Llanto 2003). First, government should not be a lender but should simply ensure an environment conducive for the development of microcredit. Experience has shown that government-directed credit has not reached the intended recipients and has led to large losses for the government. The market-oriented credit program, on the other hand, resulted in more poor people reached, more sustainable lending institutions, and fiscal relief for the government.

Second, the government should not mix up

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welfare transfers and loans. This is to delineate the distribution of public goods and services for equity purposes and the market-oriented support for business.

Human resource development

•

Education improvement targeted to the poor

−

• • •

Targeted tertiary education subsidies

Research and development Streamlining of state colleges and universities and aligning them to regional development thrust.

Resource management

• • •

Tourism development Upland resource development - some strategies in upland resource development have been featured during the 4th DPRM. These are as follows: Adoption of "social fence" theory Converting squatter into forest manager Joint watershed management between DENR and LGUs Granting ownership of trees to planters

Industrial clustering and SME development

•

•

Promotion of biofuel

The common outcomes of these strategies include reduced incidence of forest fires, reduced timber poaching, reduced squatting, revival of mountain springs, and improved livelihood opportunities.

• •

Figure 3. Research, planning, and budgeting process.

Source: NEDA-ADB (2005)

Technical/vocational training based on demand

Investment coordination Investment subsidies in nontraditional activities/technologies and performance monitoring1 Technology vouchers (The government provides poor entrepreneurs technology cards for which they can avail of technology

assistance from technology center/ incubators. The government then pays these technology centers for services provided to the card holders.)2 Support for subcontracting systems, standard setting, and quality inspections

Institutional development

• • • •

Provision of market information Logistics improvement Enforcement of property rights and contracts Control of corruption

Research, planning, and budgeting To operationalize policies and develop programs under the different areas, local governments need to be able to develop plans, prioritize and evaluate projects, and finance these. To help them achieve this, the National Economic and Development Authority (NEDA) has developed a guidebook for local government units in Planning, Investment Programming, Budgeting and Expenditure Management, and Project Evaluation and Development (see Figure 3 for a diagram of the process). The following is a brief description of the various sections of the guidebook.

The Planning guidelines are aimed at helping local governments identify development issues or problems, set goals and objectives, identify strategies, and specify programs, projects, and activities based on an analysis of the physical, demographic, and economic environment. The

1 See Rodrik (2004) 2 Courtesy of Director Bernie Justimbaste, Department of Science and Technology.

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Investment Programming guidelines aim to assist LGUs in the identification of capital investment projects over a six-year period. This entails the prioritization of projects identified in the development plan based on multiple criteria. It also involves the analysis of LGUs’ capacity to finance the investment projects and the appraisal of potential funding for investment projects. LGUs can explore various modes of financing projects under the different programs, such as improving taxation and collection of usercharges, and utilization of alternative modes such as borrowing / bond floatation, income generation, and partnership with the private sector.

The importance of rigorous research and timely and reliable data3 Planning and policy making critically depends on rigorous research. Through rigorous research, issues and actors that need to be considered in planning and policymaking are identified. Research also reveals what works and what does not work in regional and local government planning and policymaking. Research, however, is critically dependent on timely collection, analysis, and use of reliable data. Let us look at the case of local governance for health as an example.

The Budgeting and Expenditure Management guidelines aim to strengthen the link between planning and budgeting by promoting “fiscal discipline,” “allocative efficiency,” and “operational efficiency” in spending through the introduction of various tools and techniques in the different stages of the budget process. The budget process consists of pre-budget preparation, budget preparation, budget legislation, budget review, budget execution, and budget accountability.

Decisions are eventually reflected as policies, budgets, systems, and services, which together influence health sector performance and outcomes. LGU decisions are enriched by research results, use of evidence from a timely and effective management information system, and greater stakeholder consultations.

The Project Development and Evaluation guidelines aim to improve the effectiveness and allocative efficiency of LGUs through the proper evaluation of projects. Project evaluation entails knowing the good or service as well as understanding the relationships among inputs, outputs, outcomes, and impacts. It also involves market, technical, financial, economic, externality, and risk and sensitivity analyses.

Figure 4. Strengthening local governance for health through evidence-based participatory local decisionmaking process

Thus, the key elements of evidenced-based participatory local decisionmaking process are (a) letting data and analyses undergird decisions on resource allocation and (b) allowing meaningful participation of stakeholders (see Figure 4).

The framework behind, as in the previous illustrative analyses, takes the health sector approach to define what pieces of information are required and who are the relevant stakeholders.

The health sector covers (a) public and private sectors, (b) preventive and curative services, (c) consumers and providers of care, and (d) local and national concerns and institutions. The DOH’s FOURmula ONE for Health (F1) uses this approach and identifies four key elements for achieving health sector reform: (a) service delivery, (b) regulation, (c) finance, and (d) governance. These decisions are systematically organized in a province-wide investment plan for health (PIPH) using locally generated data on health sector performance and analysis based on a health sector reform perspective. The PIPH integrates various subcomponents, e.g., the LGU plans such as the investment plan for health (IPH), contraceptive self-reliance plan (CSR), specific 3 This section is contributed by Dr. Aniceto C. Orbeta, PIDS Senior Research Fellow, and draws on the work of Dr. Alejandro N. Herrin (Herrin 2007) and Dr. Alejandro N. Herrin and Earl Enrico L. Alcala (Herrin and Alcala 2007).

4 Nelson (2007).

DEVELOPMENT RESEARCH NEWS plans for achieving universal health insurance coverage, development of systems to support plan implementation, etc. The implementation of an evidence-based plan generates better policies, appropriate budgets, and more effective systems, and results into more accessible highquality health services that will lead to improved health sector performance and health outcomes.

Concluding remarks Microlevel studies have pointed to the increasing importance of nonfarm incomes in the country. This finding has been confirmed by national data showing the decline in the share of agriculture in value added as well as in employment.

The transition to nonfarm activities appears to be more rapid in rural areas. In terms of sources, nonfarm salaries and wages and entrepreneurial income from nonfarm activities have risen substantially over the last two decades and now constitute the bulk of total household income.

The rise in entrepreneurial income has been largest in trade and construction.

As suggested in earlier studies, nonfarm incomes contribute greatly to the growth of rural incomes. Based on FIES data from 1985 to 2003, we find that rural incomes increase by 5 percent for every 10 percent increase in nonfarm incomes. Poverty has been described as a rural phenomenon. By increasing rural incomes, nonfarm activities may also be expected to reduce rural poverty. Indeed, nonfarm households are almost six times less likely to be poor than farming households. However, this seems to be due more to formal employment rather than to enterprise.

The bipolar nature of nonfarm incomes cited in the literature is also borne out by national survey data. Poor households undertake nonfarm activities that yield very little while the rich are engaged in highly lucrative businesses. This is due to the disparity in assets such as education; each additional year of schooling for the household head substantially increases household income. Moreover, nonfarm incomes contribute significantly to the disparity in total incomes. In light of the foregoing, a comprehensive view of development is essential to enhance the positive impact of nonfarm incomes and mitigate its negative effects. This entails careful analysis of the links between economic development (such as the growth of rural nonfarm incomes) and

7 policy inputs on one hand, and between economic development and other social development goals on the other. Understanding these links is essential in informing government policy and action. For instance, contrary to initial expectations, the development of the nonfarm economy depends much on agricultural investment. The development of rural infrastructure, apart from providing equitable access to basic facilities, also spurs the development of markets essential for the nonfarm economy. Human (resource) development, apart from being an end in itself, also promotes economic development.

Education, for instance, enhances nonfarm incomes, and therefore provides an important way out of poverty. It also provides access to more productive nonfarm activities, which otherwise would be limited to the rich. Sustainable management of natural resources, fostered by improved human capital which decreases reliance on physical resources, ensures that economic growth is sustained.

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The Philippines’ development experience in the last half century reveals that despite its ample physical, natural, and human resource endowment, economic development has been largely elusive, especially in comparison with its neighboring Asian Tigers.

The Philippines’ development experience in the last half century reveals that despite its ample physical, natural, and human resource endowment, economic development has been largely elusive, especially in comparison with its neighboring Asian Tigers. This has prompted a rethinking about the determinants of economic development. A qualitative assessment4 points to history and culture, particularly the Spanish colonial heritage, as a major impediment to the country’s economic development. This has spawned corruption, resistance to change, rebellion, and mediocrity in Philippine society, traits that are anathema to the development of the market and the economy in general. It is in this respect that institutional development takes on a critical role in the framework for development. The development of institutions is essential in the development and operation of markets, and in the efficient provision of public goods and services. With regard to the latter, this refers to good governance.

The interrelations among the various aspects of development point to the varied roles of local governments. To promote human capital development and equity, local governments play a critical role in enhancing public education and health services in their respective localities to catch/keep up to/with leading provinces/municipalities. To further enhance local labor productivity, they may also provide targeted subsi-

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dies for tertiary education including technical and vocational training. LGUs should also enhance rural infrastructure in their localities by promoting private investment/partnerships with the private sector. They should also encourage the market for microcredit. Sustainable resource management can be promoted with the development of property rights, by facilitating equitable access to/ownership of land. Small and medium enterprises (SMEs) may be developed by subsidizing new activities/technologies and ensuring performance through monitoring. Across these areas, the development of institutions is essential. Competitive procurement and regulation systems, for instance, must be established for public services/infrastructure. A system of property rights and organizations may be developed for sustainable resource management. An effective incentive structure needs to be established to promote SMEs. Finally, in all these policy areas, participation is essential, to ensure that the institutions developed are appropriate, effective and sustainable.

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for Regional and Local Development Forum held in celebration of the 30th PIDS Anniversary, 26 September 2007, NEDA sa Makati Building, Makati City.

Herrin, A. and E. Alcala. 2007. Enhancing local government capacities for evidence-based planning and policymaking. Presentation at the Framework for Regional and Local Development Forum held in celebration of the 30th PIDS Anniversary, 26 September 2007, NEDA sa Makati Building, Makati City.

Lanjouw, P. and G. Feder. 2001. Rural non-farm activities and rural development:from experience towards strategy. Rural Strategy Background Paper No. 4. Washington, DC: World Bank.

Llanto, G. 2002. Infrastructure development: experience and policy options for the future. Discussion Paper Series No. 2002-26. Makati City: Philippine Institute for Development Studies.

Llanto, G. 2003. A microfinance promise: to provide the poor access to finance services. Policy Notes No. 2003-06. Makati City: Philippine Institute for Development Studies.

With the foregoing, local governments clearly have great elbowroom to devise policies and strategies appropriate to their local situations.

It therefore requires deftness on the part of local governments to implement policies and programs that have the greatest impact on their local economic and social development.

For this reason, the importance of research must be emphasized. This entails analyses of issues and stakeholders, and analysis of successful and failed policy experiments.

Research is a critical input to planning programs and projects aimed at generating the desired development outcomes. A local government determined to make a difference is well advised to start with an honest-to-goodness research. Needless to say, this requires a competent human resource complement, and technical and logistical support. DRN

Nacional Economic and Development Authority/Asian Development Bank (NEDA/ADB). 2005.

Proceedings of the NEDA-ADB Review Workshop with LGUs on Draft Guidelines on Provincial/Local Planning and Expenditure Management, Holiday Inn, Clark, Pampanga, 1214 December 2005.

References Asian Development Bank (ADB). 2007. Key indicators 2007. Manila: ADB.

Rodrik, D. 2004. Industrial policy for the twentyfirst century. Paper prepared for the United Nations Industrial Development Organization. Working Paper Series No. RWP04-047. John F. Kennedy School of Government. Cambridge, MA: Harvard University.

Haggblade, S., P. Hazell and T. Reardon. n.d. The rural nonfarm economy: pathway out of poverty or pathway in? Paper presented for the seminar "The Future of Small Farms." Wye, UK, 26-29 June 2005.

Herrin, A. 2007. Enhancing local capacities for evidence-based planning and policymaking: an update. Presentation at the Framework

Nelson, R. 2007. The Philippine economic mystery.

Quezon City, Philippines: School of Economics, University of the Philippines.

Otsuka, K. and J. Estudillo. 2007. Changing sources of household income and poverty reduction in rural Asia, 1985-2004. Paper presented at the Policy Forum on Agricultural and Rural Development for Reducing Poverty and Hunger in Asia: In Pursuit of Inclusive and Sustainable Growth, organized by the International Food Policy Research Institute and the Asian Development Bank, ADB Headquarters, Manila, Philippines. August 9–10, 2007

World Bank. 2002. World development report 2002. New York: Oxford University Press, Inc. World Bank. 2003. World development report 2003. New York: Oxford University Press, Inc.

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NEDA bares guidelines on preparing local investment programs

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he passage of the Local Government Code of 1991 decentralized government operations and dispersed greater authority to the local governments in delivering basic services, planning economic development, and implementing poverty reduction strategies for their constituents. However, it cannot be denied that the additional mandate for local government units (LGUs) to prepare, finance, and implement local development plans had made their responsibilities heavier.

It is in this context that the PIDS has chosen to center its research thrust to the LGUs in order to assist them in improving their capacity for better governance and sustaining development.

Thus, in celebration of the 5th Development Policy Research Month, the Institute, for the second consecutive year, highlighted the crucial role that local governments play in helping achieve sustainable national progress for the country by conducting a series of seminars under the theme, “Enhancing grassroots development: a framework for local governance.”

The Briefing on the Guidelines on Provincial/ Local Planning and Expenditure Management (PLPEM) held on the first day of the three-day seminar series discussed the guidelines the National Economic and Development Authority (NEDA) has developed with the technical assistance of the Asian Development Bank to help provinces prepare their investment programs and source financial resources for their projects.

Dr. Benjamin V. Cariño of the UP School of Urban and Regional Planning expounded on the importance of focusing on the provinces as this would strengthen the linkage of and further harmonize local development goals with regional and national priorities. He added that development planning involves assisting intermunicipal networks and cooperation and since the provinces are in the best position to conduct better and cost-effective delivery of goods and services, their capacities should be harnessed. The provinces also create “multiplier effects” through strengthening the capacities of municipalities.

The guidelines are thus created to aid in the preparation of provincial development plans.

Various agencies have provided numerous guidelines and manuals in the past, which only resulted in ambiguities due to differing formats and contents. They also failed to establish the linkage among the plans in the provincial, city, and municipal levels as well as the regional and national development plans. As a consequence, the guidelines have become complicated and only made development planning a cumbersome task.

The Guidelines on Provincial/Local Planning & Expenditure Management (PLPEM) were developed by the National Economic and Development Authority (NEDA) with the technical assistance of the Asian Development Bank.

Moreover, the sectoral priorities recognized in the Provincial Development Plan (PDP) and the spatial priorities identified in the Provincial Physical Framework Plan (PPFP) do not show clear linkages between them. Due to this shortcoming, both are weak sources of project ideas for the Annual Investment Program (AIP) that serves as the operational plan in terms of the planning-budgeting linkage for the provinces.

Projects in the AIP are mainly from different political actors in the province who receive the

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allocation from the Local Development Fund.

These consist, however, of projects that are unrelated and do not lead to a long-term development strategy for the provinces.

The new set of guidelines offers an updated, integrated, and comprehensive design to improve the horizontal linkages among the planning, investment programming and revenue generation, budgeting and expenditure management, and project evaluation and development activities in the LGUs. It also gives greater consideration for external linkage, demographic and demand and market/competitive conditions, private sector roles, and opportunities for local economic development and poverty reduction.

According to CariĂąo, the PLPEM guidelines are very simple that users can learn them on their own with little or no supervision. The technologies as well as the techniques discussed in the guidelines are relevant for the agriculture, infrastructure, and other sectors. They also merge the PDP and the PPFP into one plan known as the Physical Development and Physical Framework Plan (PDPFD).

Director Susan Rachel Jose of the NEDA Regional Development Coordination Staff, underscored the main considerations of the PLPEM guidelines, foremost of which is the key role of leadership in the success of the PDPFP. The local chief executives, particularly the governors and mayors, should exert active support by attending the Provincial Development Council meetings where crucial PDPs are deliberated on.

This helps PDPs to become a policy document that can influence project implementation and not just a technical paper. The guidelines are also built on other guidelines as basis so as to ensure that no duplication of terms exists.

The PDPFD also works on a long-term vision of attaining sustainable development in the provinces in the medium term from three to six years of implementation of investment plans. It also emphasizes the analytic approach in processing PDPs where concrete plans are created based on data gathered. Significant consideration is given to the analysis of trends and growth rates for more effective projections. The evaluation process is also strengthened by means of enforcing linkages between the situation analysis and the identification of objectives, strategies, and

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programs in order to effectively address problems and issues and ensure project success. A fundamental factor, according to Dir. Jose, is to focus on the development of the people, which undoubtedly requires material resources for economic activity. Thus, a sound PDPFD based on local knowledge and state inputs is important to meet the ultimate national objective of eradicating poverty and improving the quality of life of the people.

The PDPFP follows various phases encompassing visioning; situation analysis of organization and initial analysis; situation analysis of the plan environment; development of goals, objectives, targets, and strategies; creation of draft PDPFP ; and PDPFP approval.

The PLPEM initiative elicited positive response from local government officials like Quirino Province Govenor Dakila Carlo Cua and Mayor Nancy Grey of San Jorge, Samar, as well as city and provincial planning staff who attended the seminar. The Office of the City Planning and Development of Olongapo City and the Cagayan Region Provincial Planning Development Office also expressed their readiness to allocate part of their budget for the training programs on how to use the PLPEM. The guidelines in the PLPEM also use illustrative case studies so that users can better understand and appreciate their practical application.

The Joint Memorandum Circular issued by the NEDA, the Department of Interior and Local Government, the Department of Finance, and the Department of Budget and Management on the harmonization of local planning, investment programming, revenue administration and budgeting and expenditure management will answer the issue on different budget allocation orders coming from different national agencies, according to Dir. Jose.

She added that within the context of the said memorandum, the NEDA will assist provinces in creating actual provincial outputs under the project’s Phase 2, which will start in 2008. This will further advance governance at the provincial level, specifically the provinces’ choices in public spending and supervision over cities and municipalities.

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Box 1. Budgeting and expenditure management: Some tools and techniques for LGUs

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he lackluster performance of our local government units (LGUs) is linked to their deficient resource allocation. This was pointed out by Dr. Rosario Manasan, Senior Research Fellow at PIDS, in her presentation on “Tools and techniques on budgeting and public expenditure management” held during the first day of the seminar series organized by PIDS to celebrate the 5th Development Policy Research Month.

Given this weakness of our LGUs, Manasan underscored the importance of a clearly defined set of policies, processes, and procedures that the LGUs can follow in their conduct of raising, allocating, and spending resources. According to her, if LGUs are to be effective in their functions, their resources need to be spent in a way that meets the needs of the local community. This, however, can only be possible if their budget has a strong link with their plans and investment programs.

The failure of provincial leaders to work within realistic resource limitations in the early stage of planning and budget formulation results in poor expenditure control by the units delivering the services to the local communities. This problem is compounded when policymakers are not well informed of the effects of policy changes in the budget as well as their consequence to new investment projects that may have recurrent cost in the future.

Manasan’s paper is meant for all LGU officials engaged in local government finance—governors, mayors, members of the Sanggunian, local budget officers, planning and development officers, local treasurers, and other LGU department heads. Its goal is to equip LGUs with the needed tool and techniques to be successful in their budget processes and public expenditure management.

Manasan’s prescribed tools and techniques for effective budgeting and public expenditure management are divided into four critical stages: budget preparation, budget legislation, budget execution, and budget accountability. These stages encompass the allocation and use of all local government resources, including those accruing to the General Fund and the Special Education Fund (SEF). The expenditure side covers current expenditures that include personal services expenditures and capital expenditures. The revenue side, meanwhile, incorporates the local sources of the LGUs as well as external sources that cover even the IRA. Budget preparation starts with the resource envelope that reflects the clear amount of resources available. According to Manasan, local officials should ensure that resource allocations are in harmony with the objectives and priorities of their LGUs as they also serve as benchmark of their performance.

The budget document itself will be measured in the budget accountability phase.

Budget legislation commences when the local chief executives present their proposed executive budget to the Sanggunian’s Committee on Appropriations for deliberation.

The Committee then checks whether or not the proposed budget complies with the Budgetary Requirements and General Limitations prescribed by Sections 324 and 325 of the Local Government Code. The proposed budget is also assessed on its consistency with approved local development plans.

The budget execution phase involves the release and actual disbursement of funds. Manasan developed a spreadsheet model to help LGUs prepare a table showing historical monthly flows, analyze monthly cash flow in the past, forecast monthly cash flow at the start of the budget year, estimate adjusted annual income estimate based on actual year-todate collections, and interpret results or implication for release or nonrelease of allotments. These are simple tools for cash flow forecasting and analysis that will help local officials adapt their budget to changes in the economic development of their provinces and manage their resources efficiently and effectively.

Lastly, the budget accountability phase involves the LGUs’ performance review through accurate reporting and recording of their income and expenditure. It also entails assessment of their physical and financial accomplishments against their specific objectives and strategies. This is made possible by way of mechanisms that allow LGUs to report the budget implementation to their constituents and, at the same time, provide a venue for the people to give their feedback on the performance of their local government in delivering public services. Specific examples of these, mostly culled from the innovative approaches of the Naga City Local Government, are the following:

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Well-publicized description of services provided by the LLGU with their corresponding standard response time (e.g., Naga City NetServe and Naga City Citizens Charter) System that citizens can use to provide feedback to the LGU on service delivery of the various departments/ offices (e.g., Naga City TextServe) so that stakeholders can see to it that the standards of service delivery are rightly observed Development of an LGU report card system showing how well the LGU has performed in delivering its Major Final Outputs (MFOs), the gaps in LGU outcomes, and budget appropriation and actual spending on various sectors vis-à-vis actual outputs delivered and actual results attained (e.g., Naga City Local School Board experience) Widespread dissemination of LGU report card to the public. CSM

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September - October 2007

Revolutionizing local governance through CBMS

P

olicymaking and program implementation at the provincial and municipal levels has taken on a new level. With the aid of software programs and intensive training, delivery of basic social services to the most needy is now made a little easier.

This has been achieved by several local government units (LGUs) that have decided to adopt the Community-Based Monitoring System (CBMS), an organized process of data collection and processing at the local level. The data generated through this system are then integrated in local planning, program implementation, and impact monitoring. More than that, CBMS-generated data are being applied for various purposes, including the monitoring of our commitments to the Millennium Development Goals (MDGs).

Photo courtesy of the Office of the Mayor, Cabucgayan, Biliran

To showcase the experiences of some of the local governments that have already implemented it, a seminar on CBMS was held on September 25 as part of the 5th Development Policy Research Month (DPRM) celebration. The said seminar was jointly organized by the Philippine

The Community-Based Monitoring System (CBMS) promotes evidence-based policymaking and program implementation while empowering communities to participate in the process.

Institute for Development Studies (PIDS) and the CBMS Coordinating Team based at the Angelo King Institute of De La Salle University, with funding support from the United Nations Development Programme (UNDP).

PIDS President Dr. Josef T. Yap welcomed the participants composed mainly of provincial, city and municipal planning officers, local chief executives, and representatives from national government agencies, academe, private sector, and NGOs. He emphasized how CBMS relates with the DPRM theme “Enhancing grassroots development: A framework for local governance” and provided some information on the background and status of the system.

CBMS progress One of the fundamental objectives of the CBMS is to help in the poverty alleviation program. As such, it is being fully supported and endorsed by the National Anti-Poverty Commission (NAPC), the country’s lead agency and coordinating secretariat for poverty reduction. In his keynote address, NAPC Lead Convenor Sec. Domingo Panganiban said that the decade-long effort toward macroeconomic reforms, fiscal discipline, and economic stability have yielded fruits, and the high and sustained economic progress required for substantial reductions in poverty are well within reach.

Citing the UN Midterm Report on the MDGs, Sec. Panganiban said that the country’s recent economic progress has helped in achieving a 15.3 percent decrease in the incidence of extreme poverty among Filipino families, a 10.8 percent reduction in the number of households surviving below the subsistence threshold, and a 10 percent decline in the number of underweight children five years old and below as of July this year. Along this line, he acknowledged the vigor and sincerity of local government units and their strong partnership with the national government. However, he noted that while this is something to be proud of, there is still a need to reach

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September - October 2007

out to more areas and families. Hence, the NAPC embarked on an endeavor to ensure the nationwide use of the CBMS. Likewise, the Department of Interior and Local Government (DILG) has adopted the CBMS as a vital instrument for the various phases of local governance. Director Manuel Q. Gotis of the Bureau of Local Government Development reported that the department is using the CBMS to monitor the impact and track progress of poverty reduction efforts including the country’s commitments to the MDGs. Moreover, it is being used in development planning and budgeting, resource allocation and program targeting, and drafting of evidencebased legislation. Specifically, the use of CBMS in various phases of local governance builds the capacity of community members to participate in the development planning and monitoring process; enhances the preparation of socioeconomic profiles, development and investment plans; aids in diagnosing poverty at the local level and identifying eligible beneficiaries; aids in formulating appropriate interventions and resource allocation; and helps in monitoring the impact of projects and programs.

Dir. Gotis reported that as of September 2007, CBMS is being implemented in 35 provinces (20 of which are province-wide), 24 cities, and 408 municipalities (Figure 1). He added that by 2010, CBMS is envisioned to be implemented in all 81 provinces.

Setting up a national repository for CBMS also forms part of the team’s vision. In terms of support to the institutionalization of the CBMS, national agencies such as the NAPC, DILG, National Statistical Coordination Board (NSCB), and the National Economic and Development Authority-Social Development Committee (NEDA-SDC) have issued policy issuances and memorandum circulars calling for the adoption of the 13 core local poverty indicators and use of the CBMS as an MDG monitoring tool, among others.

Revolutionizing local governance Speakers representing officials from the provincial, municipal and city levels took center stage and shared their experiences in implementing the CBMS. They automatically turned themselves into “CBMS advocates,” urging the par-

Figure 1. Coverage of CBMS implementation in the Philippines as of September 2007 Source: Department of Interior and Local Government

ticipants to embrace the CBMS way of knowing where the poor are so they can plan for a more focused local poverty reduction program, as what they have done.

The use of CBMS in the province of Eastern Samar revolutionized local governance, according to Governor Ben P. Evardone. He noted that his biggest challenge was to overcome the resistance of municipal mayors in his province during the initial stages of implementation. Most of them were hesitant to cooperate because using the CBMS would mean reduction in their powers especially in the allocation of resources. But as they went along, some mayors realized the importance of CBMS, particularly when they learned that a fifth-class municipality like San Julian (first to finish the CBMS in the province) was able to avail of foreign funding for its projects based on CBMS data. This then paved the way for the full implementation of CBMS in the whole province.

On the other hand, the Peace and Equity Foundation (PEF), through the UNDP, granted the municipality of Cabucgayan in Biliran province PhP200,000 to finance its barangay-based poverty reduction programs identified through the CBMS-generated data. According to Mayor Arnelito S. Garing, these projects include corn and banana planting, mud crab production, carabao dispersal, and microfinancing. So far, 18 farmers tending 22 hectares of agricultural land have benefited from the said projects.

Mayor Garing noted that apart from the economic benefits, the use of CBMS has encouraged the social participation of farmers in projects that they themselves identified.

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The first and the only LGU in the Metro Manila area that has implemented the CBMS is Pasay City. Since implementing the system, the city has earned several distinctions, including the special citation on local capacity innovations for MDGs given by the Galing Pook Foundation. City Planning and Development Officer Engr. Merlita Lagmay said that just like any other urban centers in the country and throughout the world, Pasay City is beset with problems caused by urbanization, crowding, and poor delivery of basic social services. According to her, when the concept of CBMS was introduced, it only took five minutes for the city's chief executive to accept it because he immediately saw the huge potentials of the CBMS in improving the situation in the city. She emphasized that the implementation of CBMS was not an easy task, but the benefits definitely outweigh the difficulties.

In the course of implementation, Pasay City introduced an innovation, the Fact-Based Intervention Exchange (FBIEx), wherein CBMS-generated data are presented and disseminated to different LGU line agencies and NGO partners.

This way, decisionmakers are being provided factual information that enable them to immediately match the identified needs to the list of solution providers based on the development indicators. To date, CBMS-generated data have been used by various organizations such as the UNICEF Sixth Country Program, OWWA Groceria Cum Botica project, UNESCAP outof-school youth program, and Philhealth, among others.

September - October 2007

reduction programs of both national government agencies and local government units. She cited as examples the Philhealth-sponsored program wherein the poor are enrolled by LGUs so they can avail of free health insurance benefits.

She also cited the Tindahan Natin and Food-forSchool Programs, the latter of which has children in selected grades in public schools receiving one kilo of rice each day that they go to school.

Dr. Reyes emphasized that all of these programs, including many other development programs, require some form of targeting to be able to direct the benefits to the poor. Evaluation of these programs, for instance, has indicated significant leakages and exclusion, meaning a large portion of the benefits are going to the nonpoor and a large number of the poor are excluded from the program. These are primarily because these programs had to rely on available data from national statistical agencies that are not disaggregated down to the household level. She recommended the use of household level data from the CBMS to be able to improve the targeting performance of these poverty reduction programs. She added that CBMS repositories have been established at the NAPC and the League of Municipalities of the Philippines (LMP) precisely to assist national and local governments in improving the delivery of basic social services to the poor.

Engr. Lagmay aslo shared some lessons learned such as the need for pilot testing and allocation of reasonable pay for field workers and encoders. The next step is to encourage the private sector community to directly link with the local government in the implementation of their social responsibility programs. Finally, she emphasized that the key to a successful CBMS implementation is to build strategic alliances with local stakeholders and harness local resources for the people to gain ownership of the program.

Finally, Ms. Erlinda Capones, Director of the NEDA-Social Development Staff, provided a synthesis of the discussions. She mentioned that the UNDP will finance the CBMS rollout in the provinces of Zamboanga Sibugay, Sarangani, and Zamboanga del Norte, and acknowledged the assistance extended by the UNDP for the provinces of Agusan del Norte and Zamboaanga del Sur in the previous year. On their part, she reported that NEDA is advocating the use of CBMS in target-setting of ODA projects and is pursuing the CBMS promotion and institutionalization especially through policies, programs, and projects.

Reaching the poor Following the presentations of CBMS experiences, Dr. Celia Reyes, CBMS Network Leader, presented some of the targeting schemes that are being developed using CBMS data. She said that these schemes can be applied to poverty

Indeed, the CBMS has come a long way, from a microdata tool to what it has become now as an expanding database that is very useful for local development planning and budgeting, particularly in identifying and targeting the poor.

MAAG

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September - October 2007

PIDS, partners tackle ways to boost local development

L

ike dedicated scientists who are ever so patient and determined to search for solutions, the speakers and the local officials and staff that attended the PIDS forum on Framework for Enhancing Regional Development all exhibited seriousness of intent and determination to help improve the quality of life in the countryside.

The seminar on September 26, the third and last in the three-day seminar series, was one lively and highly informative exchange of ideas and insights on the various strategies local government units (LGUs) can pursue for the development of their provinces, cities, and municipalities.

Ms. Li-anne de Leon, Executive Director of the League of Municipalities of the Philippines, set the tone by congratulating the DPRM organizers for their choice of theme, noting that if we really pay serious attention to the needs of the local governments, they will become indispensable driving forces in nationbuilding. She thus shared the League’s thrust of transforming the quality

of local governance in the country by assisting local officials become development managers who are effective service providers to their customers, the Filipino people.

In 1991, the landmark Local Government Code was passed. The Code decentralized decisionmaking powers and authority to the local levels, giving them greater autonomy in governing their localities, including taxing and other revenue-raising powers. It also highlighted the wisdom of people participation in the decisionmaking process and espoused greater inclusiveness of the different sectors of society.

Decentralization: did it work?

With the Code’s implementation running on its 16th year, Undersecretary Austere Panadero hailed the DPRM organizers' choice of theme. It is about time, he said, to know whether the country’s decentralization experiment has been successful or not in facilitating economic development. In his insightful welcome message, Usec. Panadero first commented on the positive outcomes

The PIDS seminar on Framework for Enhancing Regional Development was a timely and relevant gathering of local government officials and frontline workers and the proponents of the framework, for further clarification of issues and a more indepth discussion of the crucial role that local governments play in pushing forward economic growth and sustainable development. Photo shows (from left) Tarlac Governor Victor A. Yap, former PIDS Boaard Member Dr. Ledivina Cariño, PIDS Supervising Research Specialist Ms. Mari-Len Macasaquit, PIDS Senior Research Fellow Dr. Rafaelita M. Aldaba, and PIDS President Dr. Josef T. Yap.

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that may be attributed to decentralization.

Among these are the increase of economic activities outside of the National Capital Region (NCR) and the improvement in poverty areas outside of the NCR, especially in Luzon and the Visayas. Human development indicators in these areas have also generally improved with the reduction in child mortality, improved access to safe water and safe toilets, and better elementary cohort survival rates.

But while some regions have prospered, others have been left behind, Panadero noted.

Disparity in progress across regions and provinces continues to exist. This regional imbalance, he said, has been indirectly or directly associated with governance issues both at the national and local levels.

Finance and administrative issues are one of the most glaring, exemplified by the lack of resources, weak fiscal and expenditure management, unclear expenditure assignment, overlapping service delivery mandates, and ineffective performance management. If many LGUs are still heavily dependent on their internal revenue allotments, this can be traced to their inadequate own-source revenues and inefficient tax collection. Inconsistencies in planning and budgeting requirement of oversight agencies likewise constraint the formulation of more effective programs and projects related to service delivery. Problems related to IRA releases and refusal to share information between the Bureau of Internal Renuve and the LGUs have made revenue forecasting, budgeting, and investment programming more difficult.

With PIDS focusing its efforts on improving local governance, Usec. Panadero remarked that this will be a big contribution toward developing and strengthening the capacity of localofficials in planning and decisionmaking. Thus, he posed several questions which he hopes will be answered by the PIDS framework for local development: (1) How can different levels of LGUs be assisted in policymaking?; (2) How can national and local governments be guided in planning the development of regions and subregions in a wholistic manner rather than as isolated modes or along sectoral concerns

September - October 2007

and interests?; (3) What kind of preparation should be put in place for LGUs to anticipate the implications of increasing urbanization and meet the pressure of rising population of cities? How can they be helped to address employment problems associated with increased turnover in the labor market?

How can they address poverty and security problems and, along the way, what kind of partnerships should be developed with the private sector to harness them in addressing urban and development issues like employment and poverty?; and (4) How can the availability and quality of local level data be improved and promoted as basis for local planning and policymaking?

Framework for local development— focus on the nonfarm economy Earnestly acknowledging Usec. Panadero for the ideas and insights he shared, PIDS President Dr. Josef Yap expressed his hope that the PIDS framework would be able to address the questions the undersecretary had earlier enumerated.

Unlike most development frameworks suggested for the Philippines that has the farm economy as its focal point, the PIDS framework proposes, however, to look at the nonfarm economy as the main vehicle for local development. This is in view of its high potential to reduce poverty, especially in the rural areas. Studies have confirmed the increasing importance of nonfarm incomes in the country as indicated by the declining shares of agriculture both in terms of value added and of employment, and the rising nonfarm salaries and wages from nonfarm activities. Increasing rural incomes by increasing nonfarm activities may significantly reduce rural poverty, enhance equity in the distribution of rural incomes, and promote wider participation in development.

These, according to Dr. Yap, are the intended outcomes of the rural nonfarm economy-led development framework proposed by PIDS. Completing the framework are the policy areas that local government can look into like human resource development, resource management, infrastructure development, institutional development, and industrial policy, with particular focus

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SMEs play an important role in addressing regional imbalance by boosting local and regional economies. SMEs can serve as potential suppliers of outsourced parts and thus can help to link the economy to the export sector and to global production networks. on small and medium enterprises. Dr. Yap also discussed the specific policy and interventions that local governments can undertake for each of these policy areas in order to stimulate the development of the nonfarm economy.

In addition, he underscored the need for local officials to have adequate knowledge skills in planning, prioritizing, financing, and evaluating so they could craft relevant and timely policies and programs. He briefly discussed the guidebook prepared by the National Economic and Development Authority for LGUs in planning, investment programming, budgeting, and expenditure management. As a final note, Dr. Yap emphasized the role of rigorous research and timely and reliable data for effective planning and policymaking. Taking the case of local governance for health as an example, he stressed that “LGU decisions can be enriched by research results, use of evidence from a timely and effective management information system, and greater stakeholder participation.” A more detailed discussion of the framework is given in the banner article.

Partnerships as a tool for development The next presenter, Ms. Juliana Hinterberger, project manager at the German Development Cooperation (GTZ) office in the Philippines which funded the conduct of this third seminar, tackled the GTZ’s prescription for enhancing local development. This is by promoting development partnerships as shown in the GTZ-supported Integrated Resources Management Project in the Bohol and Negros Occidental provinces. A project to improve water governance at the local level, it follows a multisectoral approach that includes the involvement of various stakeholders such as the provincial and local governments, private sector, national government agencies,

civil society groups, academe, religious sector, media, women’s group, nongovernment organizations, and indigenous groups.

Promoting and supporting partnerships between and among local development actors is part of GTZ’s development strategy in carrying out its core development agenda in the 130 countries where it operates. Said agenda consists of three components: sustainable development, capacity development, and management for development results. Focusing on GTZ’s concept of sustainable development and its close connection to the development concept earlier presented by Dr. Yap, Ms. Hinterberger tackled each of the elements in the concept that makes development truly sustainable: good governance, social equity, economic growth, and ecological balance. Toward these ends, she underscored the role of development cooperation agencies like the GTZ as partners of local agencies in the pursuit of development programs.

Clearing the way for SMEs to develop Another approach to accelerating local development, which fits nicely into the nonfarm economy-focused PIDS development framework, is strengthening small and medium enterprises (SMEs). The presenter, PIDS Research Fellow Dr. Rafaelita Aldaba, noted in her introduction that the Philippine Medium Term Development Plan acknowledges the development of key urban centers outside the NCR as alternative investment locations. A more detailed strategy in relation to this is SME promotion and development.

SMEs play an important role in addressing regional imbalance by boosting local and regional economies. SMEs can serve as potential suppliers of outsourced parts and thus can help to link the economy to the export sector and to global production networks.

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September - October 2007

velopment; and complex and unnecessarily expensive business registration/licensing/ permit procedures.

Figure 1. LGUs, SMEs and Globalization Framework

They can also provide nonfarm opportunities through manufacturing using local inputs thereby strengthening the industrial structure.

SMEs account for nearly 70 percent of total employment in the country, about one-third of the aggregate value-added, and 25 percent of the total export value. Sectors with the highest export orientation include food processing, textiles, garments, electrical machinery, leather, glass, furniture, rubber, nonferrous metal, wood and cork, and professional and scientific equipment, among others.

While SMEs comprise a large bulk of the economy, they are still concentrated in the NCR (43%) and nearby cities, in particular the CALABARZON area (11%). This unbalanced growth is quite alarming considering that there are already a lot of legislations, policies, and programs being implemented for SME development (e.g., Magna Carta for Small Enterprises, MTPDP, SME Development Plan, Export Development Plan, DOST Enterprise Technology Upgrading Program, National Competitiveness Program).

According to Dr. Aldaba, the sluggish development of SMEs may be attributed to factors such as information gaps (lack of information on opportunities in multinational corporations and vice versa and on available sources of credit); difficulties with product quality, finance, marketing, technology, and skills; absence of credit for research and de-

To boost SME development, Dr. Aldaba offered a framework that can serve as input to planning and policymaking (Figure 1). As her framework suggests, SME development is affected by both the external environment (i.e., globalization, increasing trade and investment liberalization) and the internal environment or overall business climate (i.e., macroeconomic conditions such as the political situation, existing resources, infrastructure, peace and order, economic policies, and rules and regulations), which is very important to investors.

Her framework takes cognizance of the different institutions that formulate and implement policies and programs as well as regulations. In particular, she stressed that LGUs are highly crucial in improving the internal environment. Making business registration process more efficient, ensuring peace and order, and providing basic infrastructure like roads and electricity are areas that LGUs could aspire to improve, in coordination with the national government.

SMEs in Dr. Aldaba’s framework are not treated as a homogenous group. She classified them based on their market orientation and level of exposure or level of international activity. The first group is composed of the domestic-oriented SMEs. The main challenge for the government is to help firms in this group improve their competitiveness to enable them to survive in an environment of increasing trade liberalization. The next group is composed of the suppliers and subcontractor firms. For this group, the main challenge for the government is how to help these firms link up with multinationals and for them to become part of regional or global production networks. The last group is composed of the exporting firms. These firms export either directly or through intermediaries as they are already part of global production networks. For this group, the main challenge for the government is how to help them maintain their competitiveness and identify and take advantage of opportunities.

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The clustering approach Complemeting Dr. Aldaba’s presentation is a detailed strategy for SME development and promotion known as clustering. The objective of this approach is to make SMEs more productive and innovative so they can compete in the global market. This approach has been around for some time although its popularity has increased in the last five years in many countries. The Box article provides excerpts of the presentation on the clustering approach given by Ms. Mari-len Macasaquit, a research associate at PIDS. Frameworks are for LGUs, too As a whole, the day’s seminar focused on local approaches for addressing local issues that impinge on sustainable local development and for dealing with the challenges of globalization.

To help local chief executives see the big picture and how the different programs and activities all hang together, the resource persons have used frameworks. And this, Dr. Ledivina Cariùo said, is one noteworthy feature of the seminar and this year’s DPRM theme. In her closing remarks and synthesis, the former member of the PIDS Board of Trustees and former dean of the UP National College of Public Administration and Governance noted that while frameworks are an academician’s tool, even local government practitioners need them to go forward with their vision.

Dr. Cariùo acknowledged the seminar’s effort to look at local governments as part not only of the national picture but also of the global picture. The usual approach, she said, in political science is to divide the functions of national and local government and to say that foreign affairs are a national function.

Foreign affairs, however, are not exactly a national function, she explained, because they come also from the activities of local governments and when local governments enter into the idea of globalization, they actually enter into foreign affairs. Mayors and governors, therefore, should be advised to start expanding their horizons so that they will realize that what they do locally is going to push them forward not only in the local area but also in the global arena. SVS

September - October 2007

Box 1. Boosting SME productivity and competitiveness through the clustering approach*

F

or SMEs to reach their full potential as vehicle for economic growth, it is imperative that they can compete globally. Clustering—a not-sonew concept in industrial policy—offers an innovative approach for assisting SMEs improve their productivity and increase their capacity to innovate so they can become dynamic. In promoting this approach, national and local governments, the private sector, and other institutions all have an important role to play.

As defined by Michael Porter1, clusters are physically adjacent concentrations of interrelated companies (producers, specialized suppliers, service providers, firms in related industries) and associated institutions (government entities, universities, standards agencies, research institutions, trade associations) that compete but also cooperate. The members of a cluster are linked by commonalities such as raw materials, skills, technologies, information, and institutional affiliation. There are around 75 countries undertaking cluster development at present. The specific merits of clustering may be discerned by looking at its productivity and innovation effects.

Clustering enhances productivity by helping small firms overcome their limitations. Being a part of a cluster allows them to access specialized factor inputs (components, machinery, business services, trained, skilled, and experienced resources) that are of better quality and at lower cost. Firms in cluster can also save by sharing the cost of equipment purchase. Greater and easy access to information pertaining to markets, technical know-how, and management techniques is another productivity-enhancing benefit of clustering. This is made possible by the proximity of firms to other firms and knowledge-based institutions and supply linkages.

Clustering also fosters complementarities among its participants in terms of providing matching products to buyers (a computer company may advise its buyers to bring their personal computers to a service center that is not a part of the firm but a cluster participant), joint marketing effects (trade fairs, road shows), and better coordination (logistics, service delivery, after sales service). And because comparison among firms in a cluster is easier, this motivates firms to perform better and come out with better quality products.

Clustering also helps firms to innovate through the impact of knowledge spillovers. With repeated interactions and exposure to each other’s operations as a result of their common location, firms learn from each other.

This knowledge sharing helps them to innovate and improve on their existing technological capabilities. The competitive pressures owing from operating side by side with other firms stimulates cluster participants to improve on their operations and enhance their production outcomes. Educational and research institutions also supply information and technology updates thereby helping firms to continuously innovate. Government agencies provide guidance in terms of regulations and standards, and serve as a source of financing to augment funds made available by private financing entities.

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* Culled from the presentation of Ms. Marilen Macasaquit, Supervising Research Specialist, titled “Go Local, Compete Global: The Clustering Approach to SME Development.�

1 Porter, Michael. 2000. Location, competition and economic development: local clusters in a global economy. Economic Development Quarterly 14(1):February 2000.

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In the Philippines, clustering has been one of the key elements of the Philippine Export Development Plan since 2002. A National Clustering Management Team (NCMT) has been created to sustain the program of SMEs through the clustering approach. The 2002-2004 Plan also defines the role of relevant government agencies in operationalizing the strategy and calls for coordination among them to highlight the fact that clustering is not the sole responsibility of the Department of Trade and Industry (DTI).

The Plan advocates the involvement of the private sector as champions in forming and sustaining the cluster. It also advocates for better information management, enhancement of education, science and technology programs, and promotion of investments by developing a “brand name” for Philippine products, among others.

A key feature in the Plan is the creation of national clusters that shall serve as models of this strategy. National clusters are selected on the basis of their impact on the economy particularly in terms of revenue and employment generation. Currently, the national clusters are microelectronics; motor vehicle parts and components; wearables (including fine jewelry and footwear); coconut and coconut products; aquatic and marine products; food products; home furnishings; holiday décor and giftwares; organic and natural products; biotechnology; and machinery parts and engineered parts.

These clusters aggregated at the national level have local bases into what are called subclusters.

As an example, the wearables cluster is comprised of the fine jewelry subcluster (Bulacan, Baguio), costume jewelry (Cebu), leather goods (Bulacan) , and footwear (Marikina, Laguna). Of late, the emphasis has been on the creation and strengthening of local clusters via the One-Town, One-Product (OTOP) initiative. A flagship program of Pres. Arroyo, the OTOP is envisioned to promote entrepreneurship and jobs creation in the countryside by supporting SMEs to produce, offer, and market distinctive products and services using local raw materials, skills, and talents. Local government heads play a critical role in this initiative: they are expected to take the lead in identifying, developing, and promoting a specific product or service in their locality that has a competitive advantage. The chosen product or service will then be part of the value chain of the provincial or regional clusters.

Table 1 shows that as of 2005, there are 15 model OTOPs in the country drawn from a total of 1,177 identified products. It is interesting to note that these industries are nonfarm activities. Reportedly selected using a participatory process that involves the DTI, local governments, and national government agencies, these model OTOPs passed the criteria of having the highest potential for growth based on export market potentials, competitive human resource skills, raw materials availability, and support of the local community.

Table 1. Model One-Town-One-Product (OTOP) Region

Province

Town

Product

CAR

Kalinga

Tabuk

Roasted coffee

I

La Union

Rosario

Wood furniture

I

Tuguegarao

Bagao

Home furnishing

III

Nueva Ecija

Gapan

Giftware and holiday décor

IV-a

Laguna

Paete

Wood carving and paper mache

IV-b

Marinduque

Torrijos

Woven buntal

V

Albay

Tiwi

Ceramics

VI

Iloilo

Maasin

Bamboo

VII

Bohol

Inabanga

Woven raffia

VIII

Samar

Jiabong

Mussel

IX

Zamboanga del Sur

Pagadian City

Seaweed

X

Bukidnon

Impasug-ong

High value vegetables

Davao City

Banana chips

XII

North Cotabato

Makilala

Banana

CARAGA

Agusan del Sur

La Paz

Oil palm

XI

Source: DTI-ROG

DEVELOPMENT RESEARCH NEWS

21

September - October 2007

Every inch a fair to remember

A

fair could mean many things depending on how it is used and for which occasion.

For instance, either one is “fair” because he is just and objective or it could also mean an exhibit or a show and perhaps a gathering or promotion for business or charities.

All of these definitions though apply to the recently concluded Research Fair hosted by the Philippine Institute for Development Studies (PIDS). Students, educators, government officials, business people, and those that are just plain curious came to take a peek, get free copies, or even buy various books and CD-ROMs containing researches and studies of the most significant issues of the day. The three-day Research Fair showcased the research programs and research outputs of many academic institutions, government agencies, nongovernment organizations, and even the private sector.

Board and sociology professor at the University of the Philippines Diliman; and the Institute's president, Dr. Josef T. Yap. In addition to the wide array of development outputs exhibited by PIDS, 23 other institutions participated in the Fair, namely: Asian Institute of Management Policy Center, Ateneo de Manila University – Center for Economic Research and Development – Economic Policy Reform Advocacy Project, Ateneo School of Government – Center for Social Policy, De La Salle University – Angelo King Institute, De La Salle University – Yuchengco Center, German Technical Cooperation, IBON Foundation, Inc., Institute for Labor Studies, League of Cities of the Philippines, League of Municipalities of the Philippines, Local Government Development Foundation, National Economic and Development Authority,

The Research Fair also proved to be an appropriate supplement to the seminars and discussions on local government initiatives that the Institute has lined up in celebration of PIDS’ 30th anniversary. While speakers presented their papers to local government leaders, staff of national and regional offices from various agencies, and representatives from schools and offices, the Fair, on the other hand, exhibited the researches and studies that are ready for utilization.

Held on September 24-26, 2007 at the Salas Hall of the NEDA sa Makati Building, the 4th Research Fair was one of the highlights of the 5th Development Policy Research Month, which centered on the theme, “Enhancing grassroots development: a framework for local governance.” The ceremonial ribbon cutting that signaled the opening of the Fair was led by Mayor Benhur Abalos, National President of the League of Cities of the Philippines; Sec. Augusto B. Santos, Officer-inCharge, NEDA; Dr. Cielito F. Habito, Executive Director, Center for Economic Research and Development, Ateneo De Manila University; Dr. Cynthia Rose Bautista, member of the PIDS

League of Cities of the Philippines national president Mayor Benhur Abalos (right) led the ceremonial ribbon cutting together with (from left) Dr. Cielito F. Habito, Executive Director, Center for Economic Research and Development, Ateneo De Manila University; Sec. Augusto Santos, Officer-in-Charge, National Economic and Development Authority; Dr. Cynthia Rose Bautista, member of the PIDS Board and sociology professor at the University of the Philippine Diliman; and PIDS president, Dr. Josef T. Yap.

DEVELOPMENT RESEARCH NEWS

22

National Statistical Coordination Board, Philippine Academic Consortium for Latin American Studies, Philippine Apec Study CenterNetwork, Social Weather Stations, UP Center for Integrative and Developmental Studies, UP National College of Public Administration and Governance, UP Los Banos College of Economics and Management – Department of Economics Institute of Strategic Planning and Policy Studies, College of Public Affairs, UP School of Economics, and UST Social Research Center. It is by far the most successful research fair hosted by the Institute owing to the big number of participating institutions from the academe, private and government sectors, as well as nongovernment organizations. This year’s fair, however, is not the first that the Institute has organized.

In 1999, in celebration of the 22nd founding anniversary of PIDS, the 1st Research Fair was held, with the theme “Research for development” that underscored the research works crafted by “think tanks” in the country. Fourteen institutions took part in the momentous event, which included the Development Academy of the Philippines, National Tax Research Center, and PHILEXPORT, among others.

Then, in 2000, to highlight the Institute's current research efforts, the 2nd Research Fair was held, this time with “Providing the infrastructure for research and networking” as theme. The occasion served as the focal point for introducing the Institute’s various online initiatives such as the Electronic Resource Base for Legislation Project, SocioEconomic Research Portal for the Philippines, Online Public Acess Catalog, Social Science and Policy Research Network for Agriculture, and the GIS-based Socioeconomic Profile of the Philippines databases—all of which are intended to electronically link various research studies to PIDS’ vast clienteles.

Two years later, in celebration of its 25th founding anniversary, the Institute gathered together 16 institutions for its 3rd Research Fair, which highlighted the theme, “Quest for researchbased policymaking.” The National Statistics Office, University of the Asia and the Pacific, and other distinguished institutions joined the event.

This year’s fair stood out from the previous ones held not only because of the bigger number of institutions that participated but mainly because of the huge crowd that came. Many of those

September - October 2007

who visited the three-day event were students from universities and colleges not only from the National Capital Region but also from nearby provinces such as Batangas, Rizal, and Laguna.

They came with their professors who can be commended indeed for doing their part in starting their students young, exposing them to various research studies and making them well-informed of the answers to issues besetting the country so they can appreciate the importance of research.

For their part, the exhibitors were more than prepared for their guests. They all came equipped not just with books to sell but with various magazines and pamphlets that they gave away for free. But most importantly, they brought with them their creativity. Each booth stood out because of their distinct and colorful tarpaulins, art decorations, and audiovisual presentations that certainly added to their booth’s uniqueness and appeal.

A thanksgiving cocktail held in the afternoon of the third and last day proved to be a fitting compliment to this momentous event, which was made more memorable with the attendance of former employees of the Institute, the Research Fair participants, distinguished personalities from the academe and government, and the presence of Ambassador Alistair MacDonald from the Delegation of the European Commission in the Philippines.

The highlight of this late afternoon event was the announcement of the “Best Booth” won by the University of the Philippines - Center for Integrative and Developmental Studies by wide margin to its closest rivals, the Ibon Foundation and NEDA. The criteria for the best booth gave importance to the informative/educational and physical arrangement of the booths, the evaluation from the visitors and the Fair exhibitors themselves, and the quality of customer service exhibited by the participating institutions.

In closing, Dr. Yap thanked the institutions that supported the event, citing that the event’s huge attendance mirrors the positive future of promoting research and research utilization, primarily to the young people who will be the next leaders and decisionmakers of the country. With everyone enjoying the rest of the evening's celebration, the 2007 Research Fair was indeed every inch a fair to remember. CSM

DEVELOPMENT RESEARCH NEWS

23

September - October 2007

A home called PIDS

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hirty years ago, the Philippine Institute for Development Studies (PIDS) was created as an independent research organization with a particular focus on policy.

Since then, the Institute has established itself as a widely respected government think tank whose works continue to contribute significantly to policymaking in the country.

Needless to say, behind PIDS’ successes and steady growth through the years are the very people who have contributed not only their time and skills but more so, a commitment to public service--coupled with a passion to build lasting friendships and an extension of their families.

Gallery: The awardees pose for souvenir photos with members of PIDS Management Committee and special guest Prof. Solita C. Monsod.

10 Years: Janet S. Cuenca, Grace B. Ucol, Ronald Anthony Y. Yacat, and Edwin S. Martin (not in photo).

15 Years: Aniceto C. Orbeta, Jr., Lucita M. Melendez, Necita Z. Aquino, Marissa C. Esquivel, Novie D. Salcedo, and Danilo M. Camontoy (not in photo).

20 years: Emma P. Cinco representing Susan I. Pizarro, Jane C. Alcantara, Rossana P. Cleofas, and Valentina T. Tabayoyong.

2 5 y e a r s : A l e j a n d r o P. M a n a l i l i , J e n n i f e r P. T. L i g u t o n , E m m a P. Cinco, Herminio F. Isip, and Delia S. Romero.

So, as PIDS celebrates another milestone in its history, so does its employees who have rendered 10, 15, 20, and 25 years of unrelenting service to the Institute.

More than the citation and tokens of appreciation, the PIDS Thanksgiving and Awarding Ceremony held last September 27 at the Romulo Hall was made tearful, yet colorful, thanks to the emotional and sincere acceptance speeches of the awardees. What’s more, the occasion was graced by a highly esteemed personality from the academic and development communities.

University of the Philippines School of Economics professor, Solita C. Monsod, or Mareng Winnie as she is more popularly known. Prof.

Monsod said that her invitation was to deliver an inspirational message for this occasion. However, she said that she was surprised to realize that she would instead get inspiration from the awardees themselves who have remained steadfast in their commitment to serve the public through their loyalty to PIDS. The awardees were indeed a source of inspiration for the new employees of PIDS who rendered a dance number much to the delight of the crowd. The almost endless photo opportunities were capped by a sumptuous feast, and the PIDS staff went home looking forward to more challenging tasks, worthwhile experiences, and stronger friendships, which they can only find in a home called PIDS. MAAG

PIDS Special Awards Lucita M. Melendez (Masinop Award); Novie D. Salcedo, Alejandro P. Manalili, Juanita E. Tolentino, a n d E m m a P. C i n c o ( Pe r f e c t Attendance Award); Ronald Anthony Y. Yacat (Career and SelfDevelopment Award). Not in photo are Susan I. Pizarro (Perfect Attendance Award); Cristina C. D a v i d a n d A l e j a n d r i n o T. Pa s i o n (Service Award).

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DEVELOPMENT RESEARCH NEWS

STAFF BOX

DEVELOPMENT RESEARCH NEWS Vol. XXV No. 5 September - October 2007

Editorial Board: Dr. Josef T. Yap,

ISSN 0115 - 9097

President; Mr. Mario C. Feranil, OIC Vice-President and Director for Project

September - October 2007

DEVELOPMENT RESEARCH NEWS is a bimonthly publication of the PHILIPPINE INSTITUTE FOR DEVELOPMENT STUDIES (PIDS). It highlights the findings and recommendations of PIDS research projects and important policy issues discussed during PIDS seminars.

PIDS is a nonstock, nonprofit government research institution engaged in long-term, policy-oriented research. This publication is part of the

Services and Development; Ms. Jenni-

Institute's program to disseminate information to promote the use of

fer P.T. Liguton, Director for Research

research findings.The views and opinions expressed here are those of the authors and do not necessarily reflect

Information; Ms. Andrea S. Agcaoili,

those of the Institute. Inquiries regarding any of the studies contained in this publication, or any of the PIDS papers,

Director for Operations and Finance;

as well as suggestions or comments are welcome. Please address all correspondence and inquiries to:

Atty. Roque A. Sorioso, Legal Consultant.

Research Information Staff Philippine Institute for Development Studies

Staff: Jennifer P.T. Liguton, Editor-in-

Fifth floor, NEDA sa Makati Bldg., 106 Amorsolo Street, Legaspi Village

Chief; Sheila V. Siar, Ma.Aileen A. Garcia,

1229 Makati City, Philippines

Issue Editors; Claudette S. Malana,

Telephone numbers 894-2584 and 893-5705

Writer; Jane Alcantara, Ma. Gizelle G.

Telefax numbers (632) 893-9589 and 816-1091

Manuel and Edwin S. Martin, Con-

E-mail address: publications@pidsnet.pids.gov.ph

tributors; Valentina V. Tolentino and Rossana P. Cleofas, Exchange; Delia S.

Reentered as second class mail at the Business Mail Service Office under Permit No. PS-570-04 NCR.Valid until

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scribers.All rates are inclusive of mailing and handling costs. Prices may change without prior notice.

Circulation and Subscription; Ma.Aileen A. Garcia, Layout. ○

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Editor's Notes...from page 1 ○

During the open forum, Dr. Romeo Reyes, a visiting fellow at PIDS, said that the importance of adhering to the PLPEM guidelines will help pave the way for the poor to graduate from poverty.

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Taking off from the previous year’s focus on local governance, the DPRM offered tools , apart from the usual lectures, that local officials can use to better plan and effectively implement their respective development programs. As discussed lengthily in this issue’s banner article, the framework for regional and local development being proposed offers a systematic way of looking at the various aspects of development given the growing contribution of nonfarm income in our economy. Likewise, the National Economic and Development Authority (NEDA) discussed the guidelines that it has developed, with the technical assistance of the Asian Development Bank (ADB), to help provinces prepare their investment programs and source financial re-

On the other hand, Dr. Eliseo Ponce, a former research fellow at PIDS, showed concern on how to institutionalize the structural and management reforms to achieve positive results for the country.

The PLPEM guidelines offer a clear framework in assessing projects proposed and implemented by LGUs. The guidelines can assist them in prioritizing pro-poor projects that are in line with the regional and national socioeconomic development targets. CSM

sources for their projects. Proving that community involvement spells success for any development effort, advocates of the Community-Based Monitoring System (CBMS) took center stage in another seminar. And finally, given the wide spectrum of development issues, sound partnerships lead to a more effective and efficient conduct of development programs; this was tackled in a separate seminar. Another highlight is the clustering approach which details a strategic approach that would help boost the development and promotion of small and medium enterprises so that they can become more competitive .

The DPRM as a whole showed the crucial role that our local chief executives play in the attainment of the country's development goals. It is hoped that with continued support and motivation, they would effectively manage the rich resources that are within their reach and bring the countryside to the fore of national and global development with the help of informed data and analyses.

This edition of the DRN is dedicated to all stakeholders of development especially in the countryside, and to the people behind the success of this year’s DPRM. And to PIDS, happy 30th anniversary! D R N